NEW ISSUES—BOOK-ENTRY ONLY RATING: S&P: …cdiacdocs.sto.ca.gov/2016-3196.pdf · NEW...

NEW ISSUES—BOOK-ENTRY ONLY RATING: S&P: “BB+”

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2016A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986. In the further opinion of Bond Counsel, interest on the Series 2016A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel further observes that interest on the Series 2016B Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986. Bond Counsel is also of the opinion that interest on the Series 2016 Bonds is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2016 Bonds. See “TAX MATTERS” herein.

$8,090,000 CALIFORNIA SCHOOL FINANCE AUTHORITY

SCHOOL FACILITY REVENUE BONDS (VALUE SCHOOLS)

SERIES 2016A

$410,000 CALIFORNIA SCHOOL FINANCE AUTHORITY


SERIES 2016B (TAXABLE)

Dated: Date of Delivery Due: July 1, as shown on the inside cover

This cover page contains information for general reference only. It is not intended as a summary of these transactions. Investors are advised to read the entire Limited Offering Memorandum to obtain information essential to making an informed investment decision.

The California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016A, in the aggregate principal amount of $8,090,000 (the “Series 2016A Bonds” or the “Tax-Exempt Bonds”) and the California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016B, in the aggregate principal amount of $410,000 (the “Series 2016B Bonds” or the “Taxable Bonds” and, together with the Series 2016A Bonds, the “Series 2016 Bonds”) will be issued by the California School Finance Authority (the “Authority”) pursuant to an Indenture, dated as of August 1, 2013 (the “Original Indenture”), and a First Supplemental Indenture, dated as of December 1, 2016 (the “Supplemental Indenture” and, together with the Original Indenture, the “Indenture”), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Authority will loan the proceeds of the Series 2016 Bonds to VSF School Facilities #1 LLC, a California limited liability company (the “Borrower” or the “Lessor”), pursuant to a First Supplemental Loan Agreement, dated as of December 1, 2016 (the “Supplemental Loan Agreement”) and a Loan Agreement, dated as of August 1, 2013 (the “Original Loan Agreement” and, together with the Supplemental Loan Agreement, the “Loan Agreement”), by and between the Authority and the Borrower to: (i) finance or refinance certain costs of the acquisition, construction, improvement, equipping and furnishing of certain public charter school facilities (as more fully described herein, the “Series 2016 Facility”); (ii) fund a debt service reserve account; (iii) fund capitalized interest on a portion of the Series 2016 Bonds; and (iv) pay costs of issuance of the Series 2016 Bonds.

The Series 2016 Bonds are limited obligations of the Authority payable only out of certain revenues and other amounts held in the funds established by the Indenture (except the Rebate Fund and the Repair and Replacement Fund). The Borrower will lease the Series 2016 Facility to Value Schools (“Value”), a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”), for the operation of a charter school pursuant to a Lease Agreement, dated as of December 1, 2016 (the “Series 2016 Lease”), between the Borrower and Value. The obligations of the Borrower under the Loan Agreement are secured on a parity basis with the Series 2013 Bonds (as defined herein) by an assignment of the rent payments received from Value under the Series 2016 Lease and the Prior Leases (as defined herein). See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto.

Interest on the Series 2016 Bonds will be payable semiannually on each January 1 and July 1, commencing July 1, 2017. The Series 2016 Bonds are being issued as fully registered bonds and initially will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Series 2016 Bonds. Purchase of beneficial interests in the Series 2016 Bonds will be made in book-entry-only form (without physical certificates) in denominations of $250,000 and any integral multiple of $5,000 in excess thereof. For so long as DTC or its nominee, Cede & Co., is the registered owner of the Series 2016 Bonds, (i) payments of the principal of and premium, if any, and interest on such Series 2016 Bonds will be made directly to Cede & Co. for payment to its participants for subsequent disbursement to the beneficial owners, and (ii) all notices, including any notice of redemption shall be mailed only to Cede & Co. See “APPENDIX G – BOOK-ENTRY SYSTEM” attached hereto.

The Series 2016 Bonds are subject to optional, mandatory and extraordinary optional redemption prior to maturity as described under “THE SERIES 2016 BONDS – Redemption” herein.

PURCHASERS OF THE SERIES 2016 BONDS MUST BE APPROVED INSTITUTIONAL BUYERS OR ACCREDITED INVESTORS, AS SUCH TERMS ARE DEFINED HEREIN, AND MUST EXECUTE AND DELIVER AN INVESTOR LETTER IN THE FORM OF APPENDIX I HERETO.

THE SERIES 2016 BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE AUTHORITY, AND ARE NOT AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE FAITH AND CREDIT OF THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE SERIES 2016 BONDS, OR THE REDEMPTION PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. THE ISSUANCE OF THE SERIES 2016 BONDS SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWER. NOTHING IN THE INDENTURE, THE ACT OR OTHERWISE IS AN UNDERTAKING BY THE AUTHORITY OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO FUND THE TRANSFERS DESCRIBED IN THE INTERCEPT NOTICE (DEFINED HEREIN) OR TO MAKE STATE APPORTIONMENTS OR OTHER FUNDS AVAILABLE TO THE SCHOOLS IN ANY AMOUNT OR AT ANY TIME.

The Series 2016 Bonds are offered when, as and if issued by the Authority and received by the Underwriter, subject to prior sale, modification or withdrawal of the offer without notice, and subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, the approval of certain matters for the Authority by the Honorable Kamala D. Harris, Attorney General of the State of California, the approval of certain matters for the Underwriter by Stradling Yocca Carlson & Rauth, a Professional Corporation, as Underwriter’s Counsel and the approval of certain matters for the Borrower and relating to the School by Musick, Peeler & Garrett LLP, Los Angeles, California. It is expected that the Series 2016 Bonds in definitive form will be available for delivery through the facilities of The Depository Trust Company in New York, New York, on or about December 29, 2016.

____________________________________

Honorable John Chiang Treasurer of the State of California

as Agent for Sale ____________________________________

Piper Jaffray & Co. Dated: December 15, 2016

2016-3196 & 2016-3197

2016-3196 2016-3197

MATURITY SCHEDULE

$8,090,000

CALIFORNIA SCHOOL FINANCE AUTHORITY SCHOOL FACILITY REVENUE BONDS

(VALUE SCHOOLS) SERIES 2016A

$625,000 5.25% Series 2016A Term Bonds Yield 5.25% due July 1, 2031 CUSIP 13059T DK2 (1)

$1,560,000 5.75% Series 2016A Term Bonds Yield 5.75% due July 1, 2041 CUSIP 13059T DL0 (1)

$5,905,000 6.00% Series 2016A Term Bonds Yield 6.00% due July 1, 2051 CUSIP 13059T DM8 (1)



SERIES 2016B

$410,000 6.00% Series 2016B (Taxable) Term Bonds Yield 6.25% due July 1, 2025 CUSIP 13059T DN6 (1)

(1) CUSIP is a registered trademark of the American Bankers Association. 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 the CUSIP Services. Neither the Underwriter nor the Borrower are responsible for the selection or correctness of the CUSIP numbers set forth herein.

NOTICE TO INVESTORS

The Series 2016 Bonds are to be offered and sold (including in secondary market transactions) only to Approved Institutional Buyers (deemed as a “qualified institutional buyer” under Rule 144A of the Securities Act of 1933 (the “Securities Act”)) or Accredited Investors (deemed as an “accredited investor” as defined in Regulation D promulgated under the Securities Act). The Indenture under which the Series 2016 Bonds will be issued contains provisions limiting transfers (except under certain limited circumstances described herein) of the Series 2016 Bonds to Approved Institutional Buyers or Accredited Investors. In addition, the face of each Series 2016 Bond contains a legend to the effect that such Series 2016 Bond can only be owned by Approved Institutional Buyers or Accredited Investors. In addition, the initial purchasers of the Series 2016 Bonds will be required to submit an investor letter in the form attached hereto as APPENDIX I to the Authority and the Trustee.

BY ITS PURCHASE OF ANY SERIES 2016 BOND, EACH APPROVED INSTITUTIONAL BUYER OR ACCREDITED INVESTOR WHO IS A PURCHASER OF ONE OR MORE SERIES 2016 BONDS WILL BE DEEMED:

1. TO HAVE EXPERIENCE IN THE BOND MARKET, HAVE KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS AND BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF THE SERIES 2016 BONDS, AND ABLE TO BEAR THE ECONOMIC RISK OF ITS INVESTMENT IN THE SERIES 2016 BONDS, INCLUDING A TOTAL LOSS OF PURCHASER’S INVESTMENT;

2. TO REPRESENT THAT IT IS PURCHASING THE SERIES 2016 BONDS FOR ITS OWN ACCOUNT OR FOR THE ACCOUNTS OF ONE OR MORE APPROVED INSTITUTIONAL BUYERS OR ACCREDITED INVESTORS FOR WHICH IT IS ACTING AS A FIDUCIARY OR AGENT, IN EACH CASE FOR INVESTMENT, AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF IN VIOLATION OF THE SECURITIES ACT OR OTHER APPLICABLE SECURITIES LAWS, SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH APPROVED INSTITUTIONAL BUYER OR ACCREDITED INVESTOR BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL AND SUBJECT TO ITS OR THEIR ABILITY TO RESELL SUCH SERIES 2016 BONDS TO PARTIES THAT THE PURCHASER DEEMS IN GOOD FAITH TO BE SUITABLE INVESTORS;

3. TO ACKNOWLEDGE THAT THE SERIES 2016 BONDS (A) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND ARE NOT REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER THE “BLUE SKY” LAWS AND REGULATIONS OF ANY STATE, (B) WILL NOT BE LISTED ON ANY STOCK OR OTHER SECURITIES EXCHANGE, AND (C) MAY NOT BE READILY MARKETABLE; AND

4. ACKNOWLEDGE THAT THE AUTHORITY, THE BORROWER, THE TRUSTEE, THE UNDERWRITER AND OTHERS WILL RELY UPON THE TRUTH AND ACCURACY OF THE FOREGOING ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS.

This Limited Offering Memorandum does not constitute an offer to sell the Series 2016 Bonds or the solicitation of an offer to buy, nor shall there be any sale of the Series 2016 Bonds by any person in any state or other jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale in such state or jurisdiction. No dealer, salesperson or any other person has been authorized to give any information or to make any representation other than those contained herein in connection with the offering of the Series 2016 Bonds, and, if given or made, such information or representation must not be relied upon.

The information set forth herein under the headings “THE AUTHORITY” and “ABSENCE OF MATERIAL LITIGATION – The Authority” has been furnished by the Authority. All other information set forth herein has been obtained from the Borrower and other sources that are believed to be reliable. The adequacy, accuracy or completeness of such information is not guaranteed by, and is not to be construed as a representation of, the Authority or the Underwriter. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Limited Offering Memorandum, nor any sale made hereunder, shall under any circumstances create any implication that there has been no change in the affairs of the Authority, The Depository Trust Company or the Borrower since the date hereof.

The Underwriter has provided the following sentence for inclusion in this Limited Offering Memorandum. The Underwriter has reviewed the information in this Limited Offering Memorandum in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of these transactions, but the Underwriter does not guarantee the accuracy or completeness of this information.

IN CONNECTION WITH THE OFFERING OF THE SERIES 2016 BONDS, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2016 BONDS OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

________________________________________

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS LIMITED OFFERING MEMORANDUM

Certain statements included or incorporated by reference in this Limited Offering Memorandum constitute “forward-looking statements.” Such statements generally are identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words. Such forward-looking statements include but are not limited to certain statements contained in the information under the headings “CERTAIN RISK FACTORS,” and “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” in this Limited Offering Memorandum. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that 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. Neither the Borrower nor Value plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

TABLE OF CONTENTS Page

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INTRODUCTION ....................................................................................................................................................................................... 1

GENERAL ................................................................................................................................................................................................. 1 THE BONDS .............................................................................................................................................................................................. 1 AUTHORITY FOR ISSUANCE ..................................................................................................................................................................... 2 USE OF PROCEEDS.................................................................................................................................................................................... 2 SECURITY FOR THE SERIES 2016 BONDS ................................................................................................................................................. 2 REDEMPTION............................................................................................................................................................................................ 3 CERTAIN RISK FACTORS .......................................................................................................................................................................... 3 MISCELLANEOUS ..................................................................................................................................................................................... 4

THE AUTHORITY ..................................................................................................................................................................................... 4

THE SERIES 2016 BONDS ....................................................................................................................................................................... 4

GENERAL ................................................................................................................................................................................................. 4 BOOK-ENTRY ONLY SYSTEM .................................................................................................................................................................. 5 TRANSFER AND EXCHANGE OF SERIES 2016 BONDS ............................................................................................................................... 5 REDEMPTION............................................................................................................................................................................................ 6 DEFEASANCE ......................................................................................................................................................................................... 10 ADDITIONAL BONDS .............................................................................................................................................................................. 11

TRANSFER RESTRICTIONS ................................................................................................................................................................ 12

ESTIMATED SOURCES AND USES OF FUNDS ................................................................................................................................ 13

THE PROJECT......................................................................................................................................................................................... 13

GENERAL ............................................................................................................................................................................................... 13 CONSTRUCTION AGREEMENT ................................................................................................................................................................ 14 CURRENT DEVELOPMENT & CONSTRUCTION TIMELINE ....................................................................................................................... 15 ENVIRONMENTAL INSPECTIONS ............................................................................................................................................................. 15 APPRAISALS ........................................................................................................................................................................................... 16

DEBT SERVICE SCHEDULE ................................................................................................................................................................ 17

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS ...................................................................................................... 17

LIMITED OBLIGATIONS OF THE AUTHORITY .......................................................................................................................................... 17 PARITY NATURE OF OBLIGATIONS ........................................................................................................................................................ 18 PAYMENTS UNDER THE INDENTURE AND STATE INTERCEPT ................................................................................................................ 18 ALLOCATION OF RENTAL PAYMENTS .................................................................................................................................................... 19 RESERVE ACCOUNT ............................................................................................................................................................................... 21 DEEDS OF TRUST ON THE FACILITIES .................................................................................................................................................... 22

THE LEASES ............................................................................................................................................................................................ 22

PAYMENT OF BASE RENT AND ADDITIONAL RENT................................................................................................................................ 23 CERTAIN COVENANTS UNDER THE LEASES ........................................................................................................................................... 23 THE GROUND LEASE .............................................................................................................................................................................. 26

CHARTER SCHOOLS ............................................................................................................................................................................ 31

GENERAL ............................................................................................................................................................................................... 31 CHARTERING AUTHORITY ..................................................................................................................................................................... 32 ELEMENTS OF A CHARTER PETITION ..................................................................................................................................................... 32 COUNTYWIDE BENEFIT CHARTER SCHOOLS ......................................................................................................................................... 33 STATEWIDE BENEFIT CHARTER SCHOOLS ............................................................................................................................................. 34 CHARTER MANAGEMENT ORGANIZATIONS ........................................................................................................................................... 34 CHARTER REVOCATION ......................................................................................................................................................................... 35 AMENDMENTS TO THE CHARTER SCHOOL LAW .................................................................................................................................... 35 GROWTH IN CHARTER SCHOOLS IN CALIFORNIA .................................................................................................................................. 36

STATE FUNDING OF EDUCATION .................................................................................................................................................... 36

GENERAL ............................................................................................................................................................................................... 36 ALLOCATION OF STATE FUNDING TO CHARTER SCHOOLS .................................................................................................................... 40

TABLE OF CONTENTS Page

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CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING EDUCATION REVENUES AND APPROPRIATIONS ................................................................................................................................................................................. 45

LIMITATIONS ON REVENUES .................................................................................................................................................................. 45 PROPOSITION 30 ..................................................................................................................................................................................... 46 FUTURE INITIATIVES .............................................................................................................................................................................. 47

RISK FACTORS ....................................................................................................................................................................................... 47

GENERAL ............................................................................................................................................................................................... 47 OPERATING HISTORY; RELIANCE ON PROJECTIONS .............................................................................................................................. 48 DEPENDENCE ON STATE AID PAYMENTS THAT ARE SUBJECT TO ANNUAL APPROPRIATION AND POLITICAL

FACTORS ................................................................................................................................................................................................ 49 POSSIBLE OFFSETS TO STATE APPORTIONMENT .................................................................................................................................... 49 NO FEE INTEREST IN CERTAIN FACILITIES ............................................................................................................................................ 50 DEFAULT UNDER A LEASE; NO ASSURANCE REGARDING SUBSEQUENT TENANT ................................................................................ 50 SCHOOLS’ RELIANCE ON VALUE; VALUE NOT LIABLE ON LOAN AGREEMENT. .................................................................................... 50 CALIFORNIA BUDGET DEFICIT ............................................................................................................................................................... 50 TAX RELATED ISSUES ............................................................................................................................................................................ 50 FACTORS THAT COULD AFFECT THE SECURITY INTEREST IN THE PLEDGED REVENUES ...................................................................... 51 CONSTRUCTION RISKS ........................................................................................................................................................................... 52 LIMITATIONS ON VALUE OF THE FACILITIES AND TO REMEDIES UNDER THE DEEDS OF TRUST .......................................................... 52 BANKRUPTCY ........................................................................................................................................................................................ 53 KEY MANAGEMENT ............................................................................................................................................................................... 54 FACTORS ASSOCIATED WITH THE SCHOOLS’ OPERATIONS ................................................................................................................... 54 STATE FINANCIAL DIFFICULTIES ........................................................................................................................................................... 54 BUDGET DELAYS AND RESTRICTIONS ON DISBURSEMENT OF STATE FUNDS DURING A BUDGET IMPASSE .......................................... 55 OTHER LIMITATIONS ON ENFORCEABILITY OF REMEDIES ..................................................................................................................... 56 SPECIFIC RISKS OF CHARTER SCHOOLS ................................................................................................................................................. 56 RISK OF REDUCTIONS IN FUNDRAISING ................................................................................................................................................. 58 CLAIMS AND INSURANCE COVERAGE .................................................................................................................................................... 58 PURCHASES AND TRANSFERS OF BONDS RESTRICTED TO APPROVED INSTITUTIONAL BUYERS AND ACCREDITED

INVESTORS ............................................................................................................................................................................................. 58 FAILURE TO PROVIDE ONGOING DISCLOSURE ....................................................................................................................................... 58 USE OF FACILITIES ................................................................................................................................................................................. 59

ABSENCE OF MATERIAL LITIGATION ........................................................................................................................................... 59

THE AUTHORITY .................................................................................................................................................................................... 59 THE BORROWER .................................................................................................................................................................................... 59 VALUE ................................................................................................................................................................................................... 59

TAX MATTERS ....................................................................................................................................................................................... 59

THE SERIES 2016A BONDS .................................................................................................................................................................... 59

APPROVAL OF LEGALITY .................................................................................................................................................................. 64

RATING .................................................................................................................................................................................................... 65

LIMITED OFFERING OF BONDS ........................................................................................................................................................ 65

CONTINUING DISCLOSURE ................................................................................................................................................................ 65

UNDERWRITING .................................................................................................................................................................................... 66

MISCELLANEOUS .................................................................................................................................................................................. 67

APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS .............................................. A-1 APPENDIX B – AUDITED FINANCIAL STATEMENTS OF VALUE FOR THE FISCAL YEAR ENDED JUNE 30, 2016 ............................... B-1 APPENDIX C – AUDITED FINANCIAL STATEMENTS OF THE BORROWER FOR THE FISCAL YEAR ENDED JUNE 30, 2016 ................. C-1 APPENDIX D – SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS ........................................................ D-1 APPENDIX E – SUMMARY OF THE LEASES ....................................................................................................................................... E-1 APPENDIX F – FORM OF CONTINUING DISCLOSURE AGREEMENT .................................................................................................. F-1 APPENDIX G – BOOK-ENTRY SYSTEM ............................................................................................................................................ G-1 APPENDIX H – FORM OF OPINION OF BOND COUNSEL ................................................................................................................... H-1 APPENDIX I – FORM OF INVESTOR LETTER ..................................................................................................................................... I-1 APPENDIX J – THE GROUND LEASE ................................................................................................................................................. J-1

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SERIES 2016A




INTRODUCTION

General

This Limited Offering Memorandum, including the cover page and Appendices hereto (the “Limited Offering Memorandum”), is provided to furnish information with respect to the sale and delivery of $8,090,000 aggregate principal amount of School Facility Revenue Bonds (Value Schools) Series 2016A (the “Series 2016A Bonds” or the “Tax-Exempt Bonds”) and $410,000 aggregate principal amount of School Facility Revenue Bonds (Value Schools) Series 2016B (the “Series 2016B Bonds” or the “Taxable Bonds” and, together with the Series 2016A Bonds, the “Series 2016 Bonds”) of the California School Finance Authority (the “Authority”).

The Bonds

The Series 2016 Bonds will be issued pursuant to Chapter 18 (commencing with Section 17170) of Part 10 of Division 1 of Title 1 of the Education Code of the State of California (the “Act”), an Indenture, dated as of August 1, 2013 (the “Original Indenture”) and a First Supplemental Indenture, dated as of December 1, 2016 (the “Supplemental Indenture” and, together with the Original Indenture, the “Indenture”), by and between the Authority and The Bank of New York Mellon Trust Company, N.A., Los Angeles, California, as successor trustee (the “Trustee”). The Series 2016 Bonds will bear interest on January 1 and July 1 of each year, commencing July 1, 2017 (each, an “Interest Payment Date”) and will be subject to optional, mandatory and extraordinary redemption prior to maturity as set forth under “THE BONDS – Redemption” herein. The proceeds of the Series 2016 Bonds will be loaned to VSF School Facilities #1 LLC, a California limited liability company (the “Borrower”), pursuant to a First Supplemental Loan Agreement, dated as of December 1, 2016 (the “Supplemental Loan Agreement”) and a Loan Agreement, dated as of August 1, 2013 (the “Original Loan Agreement” and, together with the Supplemental Loan Agreement, the “Loan Agreement”), between the Authority and the Borrower. The proceeds of such loan will be used, along with other available funds, to: (i) finance or refinance certain costs of the acquisition, construction, improvement, equipping and furnishing of certain public charter school facilities; (ii) fund a debt service reserve account; (iii) fund capitalized interest on a portion of the Series 2016 Bonds; and (iv) pay costs of issuance of the Series 2016 Bonds. The facilities being financed with the proceeds of the Series 2016 Bonds (as more fully described herein, the “Series 2016 Facility”) will be leased to Value Schools (“Value”), a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”). See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto, and “PLAN OF FINANCE” and “THE FACILITIES” herein.

The Series 2016 Bonds will be issued in initial minimum denominations of $250,000 and any integral multiple of $5,000 in excess thereof and in fully registered form only and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), and beneficial ownership interests in the Series 2016 Bonds are to be sold (including secondary market transactions) only to Approved Institutional Buyers or Accredited Investors. Pursuant to the Indenture, “Approved Institutional Buyer” means a “qualified institutional buyer” as defined in Rule 144A promulgated under the Securities Act. Pursuant to the Indenture, Accredited Investor means an

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“accredited investor” as defined in Regulation D promulgated under the Securities Act. The Indenture and the Series 2016 Bonds contain provisions limiting transfers of the Series 2016 Bonds and beneficial ownership interests in the Series 2016 Bonds to Approved Institutional Buyers or Accredited Investors. In addition, each initial purchaser of the Series 2016 Bonds must execute a letter in the form of “APPENDIX I – FORM OF INVESTOR LETTER” in connection with its initial purchase of the Series 2016 Bonds. The face of each Series 2016 Bond will contain a legend indicating that such Series 2016 Bond is subject to the transfer restrictions set forth in the Indenture. See “TRANSFER RESTRICTIONS” and “CERTAIN RISK FACTORS – Purchases and Transfers of Series 2016 Bonds Restricted to Approved Institutional Buyers and Accredited Investors” herein.

Authority for Issuance

The Series 2016 Bonds will be issued by the Authority pursuant to the Act, a resolution of the Authority, and the Indenture. See “THE AUTHORITY” herein.

Use of Proceeds

The proceeds of the Series 2016 Bonds will be used to (i) finance certain costs of the acquisition, construction, improvement, equipping and furnishing of the Series 2016 Facility; (ii) fund a debt service reserve account; (iii) fund capitalized interest on a portion of the Series 2016 Bonds; and (iv) pay certain costs of issuance of the Series 2016 Bonds. The Series 2016 Facility will be used by Value for the operation of University Prep Value High School (“University Prep”). See “THE PROJECT” herein and “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto.

Security for the Series 2016 Bonds

The Series 2016 Bonds will be payable out of Payments (as defined below) under the Indenture, consisting primarily of Loan Repayments under the Loan Agreement. The obligations of the Borrower under the Loan Agreement are secured on a parity basis with the School Facility Revenue Bonds (Value Schools) Series 2013 of the Authority (the “Series 2013 Bonds” and, together with the Series 2016 Bonds, the “Bonds”) by: (i) the rent payments received under the Series 2016 Lease (which are expected to be made pursuant to the terms of an Intercept Notice delivered in connection with the delivery of the Series 2016 Bonds) and the Prior Leases (as defined herein) (ii) real property described in the Deeds of Trust (as defined below) on the Facilities (as defined herein) and (iii) if necessary, the Reserve Account. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS” herein.

Parity Obligations; Prior Bonds. The Series 2016 Bonds are payable on parity with the Series 2013 Bonds, issued on August 8, 2013, in the aggregate principal amount of $12,870,000, of which an aggregate principal amount of $12,635,000 is currently outstanding, issued by the Authority pursuant to the Original Indenture, dated as of August 1, 2013.

A portion of the proceeds of the Series 2013 Bonds were used to finance the acquisition and renovation of certain public charter school facilities (the “Prior Facilities” and, together with the Series 2016 Facility, the “Facilities”), which Prior Facilities are leased to Value pursuant to certain leases (the “Prior Leases” and, together with the Series 2016 Lease, the “Leases”) by and between Value and the Borrower for the purpose of operating Downtown Value School (“Downtown Value”) and Central City Value High School (“Central City Value” and, together with University Prep and Downtown Value, the “Schools”). The terms of each Lease are substantially identical except for the amount of rent payable and the property subject to each Lease.

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Additionally, Value has previously entered into that certain California School Finance Authority Charter School Revolving Loan Fund Program Loan Agreement Number 15-21, by and between Value, on behalf of the School, and the Authority, dated June 25, 2015 (the “Revolving Loan Agreement”), pursuant to which the Authority made a loan to the School in the amount of $250,000. Pursuant to the terms of the Revolving Loan Agreement, the Authority will intercept a portion of the School’s state apportionment funds in September, October, November, December, January and March of each year, through March 2020, in equal installments of $8,333 principal amount, plus interest accrued to date, such interest accruing at the annual rate of 0.30%, which intercept is expected to be on parity with the intercept of apportionment in connection with the Bonds described below. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS – Operating and Financial Data – Outstanding Debt.”

State Intercept Program. As additional security for the Bonds, in connection with the issuance of the Series 2016 Bonds, Value will provide instructions to the State Controller’s Office (the “State Controller”) to make an apportionment (the “Intercept”) to the Trustee with respect to the School, in amounts and on dates provided in a written notice (the “Intercept Notice”) sufficient, in the aggregate with Intercepts made in connection with the issuance of the Series 2013 Bonds, to repay the Bonds and pay necessary and incidental costs. Funds received by the Trustee pursuant to such Intercept will be held in trust and will be disbursed, allocated and applied solely for the uses and purposes set forth in the Indenture, including if necessary, the payment of debt service on the Bonds. Under the laws of the State of California (the “State”), no party, including Value, the Borrower or any of their respective creditors will have any claim to the money apportioned or to be apportioned to the Trustee by the State Controller pursuant to the Intercept. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS” and “CERTAIN RISK FACTORS – Bankruptcy” below.

Cross-Collateralization; Additional Rent. Value will pay Rent under each Lease solely from revenues derived from or attributable to the charter school identified therein. A shortfall in payment of Base Rent when due from revenues of any such charter school will result in additional Rent payments (“Additional Rent”) becoming due under the other Leases. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Payments Under the Indenture and State Intercept – Cross-Collateralization; Additional Rent” and “THE LEASES” herein.

Limited Obligations. The Series 2016 Bonds are limited obligations of the Authority. The Authority is not obligated to advance any moneys derived from any source other than Payments (as defined below) and other assets pledged under the Indenture, whether for the payment of the principal or redemption price of or interest on the Series 2016 Bonds. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS” herein.

For information regarding the Borrower, see “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOL” attached hereto.

Redemption

The Series 2016 Bonds will be subject to extraordinary optional redemption, optional redemption, and mandatory sinking fund redemption as described below under “THE BONDS – Redemption.”

Certain Risk Factors

The Series 2016 Bonds may not be a suitable investment for all investors. Prospective purchasers of the Series 2016 Bonds should read this entire Limited Offering Memorandum, including the

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appendices and the information under the section “CERTAIN RISK FACTORS” before making an investment in the Series 2016 Bonds.

Miscellaneous

This Limited Offering Memorandum contains brief descriptions of, among other things, the Series 2016 Bonds, the Indenture, the Loan Agreement, the Leases, the Borrower, and the Schools. All references in this Limited Offering Memorandum to documents are qualified in their entirety by reference to such documents, and references to the Series 2016 Bonds are qualified in their entirety by reference to the form of the Series 2016 Bonds included in the Indenture. Value maintains a website providing additional information about itself and its operations. The information on such website is not included as part of, or incorporated by any reference in, this Limited Offering Memorandum. Any capitalized terms in this Limited Offering Memorandum that are not defined herein will have such meaning as given to them in the Indenture.

PURCHASERS OF THE SERIES BONDS MUST BE APPROVED INSTITUTIONAL BUYERS OR ACCREDITED INVESTORS AND MUST EXECUTE AND DELIVER AN INVESTOR LETTER IN THE FORM ATTACHED AS APPENDIX I HERETO.

THE AUTHORITY

The Authority is a public instrumentality of the State of California created pursuant to provisions of the Act. The Authority is authorized to issue the Series 2016 Bonds under the Act and to make the loan contemplated by the Loan Agreement and to secure the Series 2016 Bonds by a pledge of payments received by the Authority pursuant to the Loan Agreement and certain other sources of payments as provided in the Indenture.

THE SERIES 2016 BONDS

The following is a summary of certain provisions of the Series 2016 Bonds. Reference is made to the Series 2016 Bonds for the complete text thereof and to the Indenture for all of the provisions relating to the Series 2016 Bonds. The discussion herein is qualified by such reference.

General

The Series 2016 Bonds are being issued pursuant to the Indenture securing the Bonds in the aggregate principal amount set forth on the cover of this Limited Offering Memorandum. The Series 2016 Bonds will be issued as registered bonds in denominations of $250,000 and any integral multiple of $5,000 in excess thereof. The Series 2016 Bonds will be dated the date of issuance and will bear interest at the rate set forth on the inside cover page hereof from their dated date. Interest on the Series 2016 Bonds will be calculated on the basis of a 360-day year of twelve 30-day months and will be payable in arrears on each Interest Payment Date. The Series 2016 Bonds will mature in the amounts and in each of the years as set forth on the inside cover page hereof.

The Series 2016 Bonds, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”), and will be evidenced by one Series 2016 Bond for each maturity in the total aggregate principal amount of the Series 2016 Bonds of such maturity. Registered ownership of the Series 2016 Bonds, or any portion thereof, may not thereafter be transferred except as set forth in the Indenture. So long as Cede & Co. is the registered owner of the Series 2016 Bonds, as nominee of DTC, references herein to the bondholders, holders or registered

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owners will mean Cede & Co. as aforesaid and will not mean the “beneficial owners” of the Series 2016 Bonds.

The principal of and interest on the Series 2016 Bonds will be payable in lawful money of the United States of America upon surrender at the principal corporate trust office of the Trustee. The interest on any Series 2016 Bond will be payable to the person whose name appears on the registration books of the Trustee as the registered owner thereof as of the close of business on the fifteenth day of the calendar month next preceding the Interest Payment Date, whether or not such day is a Business Day, (the “Record Date”), such interest to be paid by check mailed by first class mail, postage prepaid, on the Interest Payment Date, to the registered owner at his or her address as it appears on such registration books. Notwithstanding the foregoing, however, any holder of all the Series 2016 Bonds and any holder of $1,000,000 or more in an aggregate principal amount of the Series 2016 Bonds will be entitled to receive payments of interest on the Series 2016 Bonds held by it by wire transfer of immediately available funds to such bank or trust company located within the United States of America as such other Bondholder will designate in writing to the Trustee by the first Record Date for such payment. So long as Cede & Co. is the registered owner of the Series 2016 Bonds, principal of and interest on the Series 2016 Bonds are payable in same day funds by the Trustee to Cede & Co., as nominee for the Depository.

Any interest not punctually paid or duly provided for will thereafter cease to be payable to the Bondholder on such Record Date and will be paid to the person in whose name the Series 2016 Bond is registered at the close of business on the date established by the Trustee pursuant to the Indenture as a record date for the payment of defaulted interest on the Series 2016 Bonds (each, a “Special Record Date”). The Special Record Date will be fixed by the Trustee, notice thereof being given to the Bondholders not less than 10 days prior to such Special Record Date.

Book-Entry Only System

DTC will act as securities depository for the Series 2016 Bonds. The Series 2016 Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for the Series 2016 Bonds set forth on the inside cover of this Limited Offering Memorandum, and will be deposited with DTC. For additional information regarding DTC and its book-entry only system, see “APPENDIX G – BOOK-ENTRY SYSTEM” attached hereto.

Transfer and Exchange of Series 2016 Bonds

The registration of any Series 2016 Bond may, in accordance with its terms, be transferred, upon the books required to be kept pursuant to the provisions of the Indenture, by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Series 2016 Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee, duly executed. The Trustee will require the payment by the holder requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer, and there will be no other charge to any holder for any such transfer.

Series 2016 Bonds may be exchanged at the principal corporate trust office of the Trustee for a like aggregate principal amount of the Series 2016 Bonds of the same maturity of other authorized denominations. The Trustee will require the payment by the holder requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange, and there will be no other charge to any holder for any such exchange.

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Redemption

The Series 2016 Bonds are subject to redemption prior to stated maturity as noted below.

Extraordinary Optional Redemption from Insurance and Condemnation Proceeds. The Series 2016 Bonds are subject to redemption prior to their stated maturity, at the option of the Authority (which option will be exercised as directed by the Borrower) as a whole or in part on any date from moneys required to be transferred from the Insurance and Condemnation Proceeds Fund to the Special Redemption Account at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium.

Extraordinary Optional Construction Related Redemption. The Series 2016 Bonds are subject to redemption in part prior to their stated maturity, at the option of the Borrower from Loan prepayments made by the Borrower from amounts transferred from the Project Fund following Completion of the Project, at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium.

Optional Redemption. The Series 2016A Bonds maturing on or after July 1, 2027 are also subject to redemption prior to their respective stated maturities, at the option of the Borrower in whole or in part on any date on or after July 1, 2026, at a redemption price equal to 100% of the principal amount of Series 2016A Bonds called for redemption, plus accrued interest to the date fixed for redemption, without premium.

The Series 2016B Bonds are not subject to optional redemption prior to their respective stated maturities.

Mandatory Sinking Account Redemption. The Series 2016A Term Bonds maturing July 1, 2031 are also subject to redemption prior to their stated maturities in part, by lot, from Mandatory Sinking Account Payments established pursuant to the Indenture on each July 1 on or after July 1, 2025, at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. The Series 2016A Term Bonds will be redeemed (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the following amounts and on the following dates:

Series 2016A Term Bonds Maturing July 1, 2031

Principal Mandatory Redemption Date Amount

July 1, 2025 $25,000 July 1, 2026 90,000 July 1, 2027 90,000 July 1, 2028 100,000 July 1, 2029 105,000 July 1, 2030 105,000 July 1, 2031† 110,000

__________ † Maturity Date.

The Series 2016A Term Bonds maturing July 1, 2041 are also subject to redemption prior to their stated maturities in part, by lot, from Mandatory Sinking Account Payments established pursuant to the Indenture on each July 1 on or after July 1, 2032, at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. The Series 2016A Term Bonds will

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be redeemed (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the following amounts and on the following dates:



July 1, 2032 $120,000 July 1, 2033 125,000 July 1, 2034 135,000 July 1, 2035 140,000 July 1, 2036 150,000 July 1, 2037 160,000 July 1, 2038 170,000 July 1, 2039 175,000 July 1, 2040 185,000 July 1, 2041† 200,000


The Series 2016A Term Bonds maturing July 1, 2051 are also subject to redemption prior to their stated maturities in part, by lot, from Mandatory Sinking Account Payments established pursuant to the Indenture on each July 1 on or after July 1, 2042, at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. The Series 2016A Term Bonds will be redeemed (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the following amounts and on the following dates:



July 1, 2042 $210,000 July 1, 2043 225,000 July 1, 2044 235,000 July 1, 2045 250,000 July 1, 2046 265,000 July 1, 2047 280,000 July 1, 2048 300,000 July 1, 2049 1,300,000 July 1, 2050 1,380,000 July 1, 2051† 1,460,000


The Series 2016B Term Bonds maturing July 1, 2025 are also subject to redemption prior to their stated maturities in part, by lot, from Mandatory Sinking Account Payments established pursuant to the Indenture on each July 1 on or after July 1, 2020, at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. The Series 2016B Term Bonds will be redeemed (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the following amounts and on the following dates:

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Series 2016B Term Bonds Maturing July 1, 2025


July 1, 2020 $60,000 July 1, 2021 65,000 July 1, 2022 70,000 July 1, 2023 75,000 July 1, 2024 80,000 July 1, 2025† 60,000


Notice of Redemption. The Borrower will give notice of redemption in connection with extraordinary optional redemption or optional redemption to the Trustee (with a copy to the Authority) not less than thirty (30) days prior to the redemption date. Notice of redemption of any Series 2016 Bonds will be given by the Trustee upon such written request of the Borrower. Notice of any redemption of Series 2016 Bonds will be mailed postage prepaid by the Trustee, not less than twenty (20) nor more than sixty (60) days prior to the redemption date (i) by first class mail to the respective holders thereof at the addresses appearing on the bond registration books described in the Indenture, and (ii) as may be further required in accordance with the Continuing Disclosure Agreement. Each notice of redemption will contain all of the following information: (a) the date of such notice; (b) the name of the Series 2016 Bonds and the date of issue of the Series 2016 Bonds; (c) the redemption date; (d) the redemption price, if available; (e) the dates of maturity of the Series 2016 Bonds to be redeemed; (f) (if less than all of the Series 2016 Bonds of any maturity are to be redeemed) the distinctive numbers of the Series 2016 Bonds of each maturity to be redeemed; (g) (in the case of Series 2016 Bonds redeemed in part only) the respective portions of the principal amount of the Series 2016 Bonds of each maturity to be redeemed; (h) the CUSIP number, if any, of each maturity of Series 2016 Bonds; (i) a statement that such Series 2016 Bonds must be surrendered by the Holders at the principal corporate trust office of the Trustee, or at such other place or places designated by the Trustee; (j) a statement that such redemption is conditioned upon the receipt by the Trustee, on or prior to the redemption date, of moneys sufficient to pay the redemption price or upon the happening of such other event as shall be specified therein, and if such moneys shall not have been so received said notice shall be rescinded and the redemption shall be cancelled; (k) a statement that any such redemption notice can be rescinded as provided in the Indenture; and (l) notice that further interest on such Series 2016 Bonds, if any, will not accrue from and after the designated redemption date.

Such redemption notices may state that no representation is made as to the accuracy or correctness of the CUSIP numbers provided therein or on the Series 2016 Bonds. If money is not received as described in item (j) above, the Trustee, within a reasonable time after the date on which such redemption was to occur, give notice to the persons and in the manner in which the notice of redemption was given, that such moneys were not so received and that there will be no redemption of the Series 2016 Bonds pursuant to the notice of redemption. Failure of the Trustee to give such notice or any defect therein shall not in any way impair or affect the validity of the proceedings for redemption.

Effect of Notice. A certificate of the Trustee or the Borrower that notice of call and redemption has been given to Holders and as may be further required in the Continuing Disclosure Agreement as provided in the Indenture will be conclusive as against all parties. The actual receipt by the Holder of any Series 2016 Bond or any other party of notice of redemption will not be a condition precedent to redemption, and failure to receive such notice, or any defect in the notice given, will not affect the validity of the proceedings for the redemption of such Series 2016 Bonds or the cessation of interest, if any, on the date fixed for redemption.

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Notice of redemption having been given, and the redemption price of the Series 2016 Bonds called for redemption being on deposit or otherwise available to the Trustee, the Series 2016 Bonds designated for redemption will become due and payable on the specified redemption date and interest, if any, will cease to accrue thereon as of the redemption date, and upon presentation and surrender of such Series 2016 Bonds at the place specified in the notice of redemption, such Series 2016 Bonds will be redeemed and paid at the redemption price thereof out of the money provided therefor. The Holders of such Series 2016 Bonds so called for redemption after such redemption date will look for the payment of such Series 2016 Bonds and the redemption premium thereon, if any, only to the escrow fund established for such purpose. All Series 2016 Bonds redeemed will be cancelled therewith by the Trustee and will not be redelivered.

Right to Rescind Notice. In the event the Borrower has cured the conditions that caused the Series 2016 Bonds to be subject to extraordinary optional redemption, the Borrower may rescind any extraordinary optional redemption and notice thereof on any date prior to the date fixed for redemption by causing written notice of the rescission to be given to the Holders of the Series 2016 Bonds so called for redemption, with a copy to the Trustee. Notice of rescission of redemption will be given in the same manner in which notice of redemption was originally given. The actual receipt by the Holder of any Series 2016 Bond of notice of such rescission will not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice will not affect the validity of the rescission.

Funds for Redemption. Prior to or on the redemption date of any Series 2016 Bonds there will be available in the Redemption Fund, or held in trust for such purpose as provided by law, monies for the purpose and sufficient to redeem, at the premiums payable as in the Indenture provided, the Series 2016 Bonds designated in said notice of redemption. Such monies so set aside in the Redemption Fund or in the escrow fund established for such purpose will be applied on or after the redemption date solely for payment of principal of and premium, if any, on the Series 2016 Bonds to be redeemed upon presentation and surrender of such Series 2016 Bonds, provided that all monies in the Redemption Fund will be used for the purposes established and permitted by law. Any interest due on or prior to the redemption date will be paid from the Redemption Fund, unless otherwise provided for to be paid from an escrow fund established for such purpose. If, after all of the Series 2016 Bonds have been redeemed and cancelled or paid and cancelled, there are monies remaining in the Redemption Fund or otherwise held in trust for the payment of redemption price of the Series 2016 Bonds, said monies will be held in or returned or transferred to the Redemption Fund for payment of any Outstanding Series 2016 Bonds of the Borrower payable from said fund; provided, however, that if said monies are part of the proceeds of refunding Series 2016 Bonds of the Borrower, said monies will be transferred to the fund created for the payment of principal of and interest on such Series 2016 Bonds. If no such refunding Series 2016 Bonds of the Borrower are at such time Outstanding, said monies will be transferred to the general fund of the Borrower as provided and permitted by law.

Selection of Bonds for Redemption. When any redemption is made pursuant to any of the provisions of the Indenture and less than all of the Outstanding Bonds are to be redeemed, the Trustee will select the Series 2016 Bonds to be redeemed pro-rata among maturities and the Mandatory Sinking Fund Payments will be reduced pro-rata. In no event will Series 2016 Bonds be redeemed in amounts other than whole multiples of authorized denominations. For purposes of redeeming Series 2016 Bonds in denominations greater than minimum authorized denominations, the Trustee will assign to such Bonds a distinctive number for each such principal amount and, in selecting Series 2016 Bonds for redemption by lot, will treat such amounts as separate Bonds. The Trustee will promptly notify the Authority in writing of the numbers of the Series 2016 Bonds selected for redemption. “Outstanding” under the Indenture means all Series 2016 Bonds theretofore, or thereupon being, authenticated and delivered to the Trustee under the Indenture except: (a) Series 2016 Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Series 2016 Bonds with respect to which all liability of the

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Authority will have been discharged in accordance with the Indenture; and (c) Series 2016 Bonds for the transfer or exchange of which, or in lieu of or in substitution for which, other Series 2016 Bonds will have been authenticated and delivered by the Trustee pursuant to the Indenture.

Defeasance

Discharge of Indenture. (a) Bonds may be paid in any of the following ways, provided that any other sums payable under the Indenture have also been paid or caused to be paid: (i) by paying or causing to be paid the principal of and interest on the Bonds Outstanding as and when the same become due and payable; (ii) by depositing with the Trustee, in trust, at or before maturity, money or securities in the necessary amount to pay or redeem Bonds Outstanding; or (iii) by delivering to the Trustee, for cancellation by it, all Bonds Outstanding.

(b) If all Bonds then Outstanding are paid or caused to be paid as provided above and all other sums payable under the Indenture shall also be paid or caused to be paid, then and in that case, at the election of the Borrower (evidenced by a Certificate of the Borrower, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Indenture), and notwithstanding that any Bonds will not have been surrendered for payment, the Indenture and the pledge of Payments made under the Indenture and all covenants, agreements and other obligations of the Authority under the Indenture will cease, terminate, become void and be completely discharged and satisfied, except as provided in the Indenture. In such event, upon request of the Borrower, the Trustee will cause an accounting for such period or periods as may be requested by the Borrower to be prepared and filed with the Borrower and will execute and deliver to the Borrower all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee will pay over, transfer, assign or deliver to the Borrower all moneys or securities or other property held by it pursuant to the Indenture which are not required for the payment of Bonds not theretofore surrendered for such payment and which are not required for the payment of fees and expenses of the Trustee.

Discharge of Liability on Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount to pay any Outstanding Bond, whether upon or prior to its maturity, then all liability of the Authority in respect of such Bond will cease, terminate and be completely discharged, except only that thereafter the holder thereof will be entitled to payment of the principal of and interest on such Bond, and the Authority will remain liable for such payment but only out of the money or securities deposited with the Trustee as aforesaid for its payment; provided further, however, that the provisions of “Payments of Bonds after Discharge of Indenture” hereof will apply in all events.

The Bonds may at any time be surrendered to the Trustee for cancellation by the Authority or the Borrower, which may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, will be deemed to be paid and retired.

Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the amount necessary to pay any Bonds, such amount (which may include money or securities held by the Trustee in the funds established pursuant to the Indenture other than the Grant-Funded Reserve Subaccount) will be equal (taking into account income which will accrue from the investment thereof on the date of deposit of such funds but without taking into account any income from the subsequent reinvestment thereof) to the principal amount of such Bonds and all unpaid interest thereon to maturity, and will be: (a) lawful money of the United States of America; or (b) noncallable Bonds, bills and Bonds issued by the Department of the Treasury (including without limitation (1) obligations issued or held in book-entry form on the books of the Department of the Treasury and (2) the interest component of Resolution Funding Corporation

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strips for which separation of principal and interest is made by request to the Federal Reserve Bank of New York in book-entry form), United States Treasury Obligations State and Local Government Series and Zero Coupon United States Treasury Bonds; provided, in each case, that the Trustee will have been irrevocably instructed (by the terms of the Indenture or by request of the Borrower or the Authority) to apply such money to the payment of such principal of and interest on such Bonds and provided, further, that the Authority and the Trustee will have received (i) an Opinion of Bond Counsel to the effect that such deposit will not cause interest on the Bonds to be included in the gross income of the holder thereof for federal income tax purposes and that the Bonds to be discharged are no longer Outstanding; and (ii) a verification report of a firm of certified public accountants or other financial services firm acceptable to the Trustee verifying that the money or securities so deposited or held together with earnings thereon will be sufficient to make all payments of principal of and interest on the Bonds to be discharged to and including their maturity date.

Payment of Bonds after Discharge of Indenture. Notwithstanding any provision of the Indenture, and subject to applicable escheat laws, any moneys held by the Trustee in trust for the payment of the principal of or interest on any Bonds and remaining unclaimed for one year after the principal of all the Outstanding Bonds has become due and payable (whether at maturity or by declaration as provided in the Indenture), if such moneys were so held at such date, or two years after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, will be repaid to the Borrower free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys will thereupon cease; provided, however, that before the repayment of such moneys to the Borrower as aforesaid, the Trustee may (at the cost of the Authority) first mail to the holders of Bonds which have not yet been paid, at the addresses shown on the registration books maintained by the Trustee, a notice, in such form as may be deemed appropriate by the Trustee, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Borrower of the moneys held for the payment thereof.

Additional Bonds

The Indenture provides that the Authority may at any time issue Additional Bonds pursuant to a Supplemental Indenture, payable from the Payments as provided in the Indenture and secured by a pledge of and charge and lien upon the Payments as provided in the Indenture equal to the pledge, charge and lien securing the Outstanding Bonds theretofore issued under the Indenture, but only subject to the following specific conditions, which are made by the Indenture conditions precedent to the issuance of any such Additional Bonds:

(i) The Authority shall be in compliance with all agreements and covenants contained in the Indenture.

(ii) The Borrower shall be in compliance with the Loan Agreement.

(iii) No Event of Default shall have occurred and be continuing under the Indenture, under the Loan Agreement, and under any Lease.

The Loan Agreement provides that:

(a) The Borrower agrees that it is organized and operated for the sole purpose of owning the Facilities owned by it and that it shall not engage in any other business activity or incur any obligations or liabilities other than those associated with the Leases.

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(b) The Borrower shall not incur, or cause any School to incur, any additional Indebtedness secured in whole or in part by Liens on the Facilities and the Gross Revenues of the Schools, that are senior to the Deeds of Trust and the security interest in the Gross Revenues.

(c) The Borrower shall not incur, or cause any School to incur, any additional Indebtedness secured on a parity with the Bonds and in whole or in part by Liens on the Facilities or the Gross Revenues (with the exception of (i) annual lease payments not to exceed $50,000 or (ii) the securing of alternate financing that contemporaneously pays in full all obligations of the Borrower under the Loan Agreement and the Schools under the Leases); provided that the Borrower may incur additional parity Indebtedness, including the issuance of Additional Bonds pursuant to the Indenture, if the Borrower has delivered evidence to the Trustee that the Debt Service Coverage Ratio for the preceding Fiscal Year was equal to or greater than 1.20 to 1.00 and that the projected Debt Service Coverage Ratio for the Fiscal Year in which the additional parity Indebtedness will be incurred and for one subsequent Fiscal Year, taking into account the additional Indebtedness, will be equal to or greater than 1.20 to 1.00.

TRANSFER RESTRICTIONS

The Series 2016 Bonds are to be offered and sold (including in secondary market transactions) only to Approved Institutional Buyers or Accredited Investors. The Indenture contains provisions limiting transfers of the Series 2016 Bonds and beneficial ownership interests in the Series 2016 Bonds only to Approved Institutional Buyers or Accredited Investors and requiring that the Authorized Denominations of the Series 2016 Bonds be $250,000 and any integral multiple of $5,000 in excess thereof. In addition, the face of each Series 2016 Bond will contain a legend indicating it can only be registered in the name of, or transferred to, Approved Institutional Buyers or Accredited Investors, and that by acceptance of such Series 2016 Bond the Holder represents that it is an Approved Institutional Buyer or Accredited Investor. See “RISK FACTORS – Purchase and Transfers of Bonds Restricted to Approved Institutional Buyers and Accredited Investors” herein. In addition, the initial purchasers of the Series 2016 Bonds will be required to submit an investor letter in the form attached hereto as APPENDIX I to the Authority and the Trustee. Pursuant to the Indenture, “Approved Institutional Buyer” means a “qualified institutional buyer” as defined in Rule 144A promulgated under the Securities Act. Pursuant to the Indenture, “Accredited Investor means an “accredited investor” as defined in Regulation D promulgated under the Securities Act.

The foregoing limitation will cease to apply (without notice or consent by any Bondholder) upon and after receipt by the Trustee from the Borrower of a rating letter by Fitch, S&P or Moody’s indicating that the Series 2016 Bonds are rated “A-“ or “A3”, as applicable, or better. The Trustee will as soon as practicable, but in no event more than ten calendar days after receipt by the Trustee, notify each Bondholder of the Series 2016 Bonds that such restrictions set forth in the Indenture requiring that the beneficial owners of the Series 2016 Bonds be Approved Institutional Buyers or Accredited Investors will be of no further force or effect.

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ESTIMATED SOURCES AND USES OF FUNDS

The following table sets forth the estimated sources and uses of funds related to the Series 2016 Bonds.

Series 2016A Series 2016B Total Sources: Bond Principal $8,090,000.00 $410,000.00 $8,500,000.00 Net Original Issue Discount -- (6,687.10) (6,687.10) Total Sources: $8,090,000.00 $403,312.90 $8,493,312.90 Uses: Project Fund $7,031,758.51 $2,981.69 $7,034,740.20 Deposit to Reserve Account(1) 535,870.18 27,157.82 563,028.00 Capitalized Interest Subaccount 360,571.31 18,273.70 378,845.01 Costs of Issuance(2) 161,800.00 354,899.69 516,699.69 Total Uses $8,090,000.00 $403,312.90 $8,493,312.90

————————— (1) In addition to this amount, approximately $988,427 of proceeds of the Series 2013 Bonds is on deposit in the Reserve

Account. (2) Includes legal, printing, underwriting discount and other professional fees and other miscellaneous costs of issuance.

THE PROJECT

General

Currently, University Prep operates out of leased facilities located at 700 Wilshire Boulevard in Los Angeles, California. The Project involves the development of a facility (the “Series 2016 Facility”) located on a site of approximately 0.73 acres at 1929 West Pico Boulevard in Los Angeles, California (the “Series 2016 Site”). Following the completion of the Project, University Prep will relocate and beginning operating out of the Series 2016 Facility.

The Series 2016 Site is located on land leased from Byzantine LLC pursuant to a ground lease (as defined herein, the “Ground Lease”). See “THE LEASES – The Ground Lease”) herein and “APPENDIX J – THE GROUND LEASE” attached hereto.

In total, the unimproved Series 2016 Site consists of approximately 0.73 acres of land area, one two-story building, and paved parking areas. The existing facilities at the Series 2016 Site will be converted into a school to accommodate University Prep. Construction of the improvements at the Series 2016 Site is expected to take approximately eight months to complete. The Project entails the complete renovation of the existing two-story building to accommodate a total of 22 classrooms, a community room, an indoor lunch/gathering area, an administrative office and a teacher’s lounge. Once completed, the Series 2016 Facility will a have total gross building area of approximately 34,214 square feet.

The Borrower received a building permit for the Project on December 6, 2016. Value expects the Series 2016 Facility to be substantially completed by July 2017, and to move students from its existing location at 700 Wilshire Boulevard in Los Angeles, California, into the permanent Series 2016 Facility at the beginning of the 2017-18 school year.

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The following graphics show the preliminary conceptual designs for the Project.

The Series 2016 Facility will provide capacity to serve a total of approximately 480 students in grades 9 through 12. See “APPENDIX A – CERTAIN INFORMATION ABOUT THE BORROWER, VALUE AND THE SCHOOLS” attached hereto for a more detailed description of the Series 2016 Facility.

Construction Agreement

Value has entered into a guaranteed maximum price contract (the “GMP Contract”), dated as of November 29, 2016, with Del Amo Construction (the “Contractor”) for the construction of the Series 2016 Facility, including construction, site preparation and onsite improvements, and landscaping, which provides for total compensation to the Contractor of $4,585,541. Payment and performance bonds are required to be provided by the Contractor in connection with the GMP Contract.

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Current Development & Construction Timeline

The following table indicates the anticipated construction timeline for the Project.

Milestone Event Date Hire architect Completed Sign GMP Contract for site and building work Completed Obtain conditional use permit December 2016 Begin site preparation December 2016 Begin building construction December 2016 Complete site improvements, including landscaping and asphalt June 2017 Final inspections and cleaning of building June 2017 Completion of Project July 2017 Beginning of school year August 2017

Environmental Inspections

Partner Engineering and Science, Inc. (“Partner”) performed a Phase I Environmental Site Assessment of the Series 2016 Site. In that connection, Partner prepared a report dated March 6, 2015 (the “Environmental Report”). The Environmental Report states its purpose was to identify Recognized Environmental Conditions affecting the subject property that (1) constitute or result in a material violation or a potential material violation of any applicable environmental law; (2) impose any material constraints on the operation of the subject property or require a material change in the use thereof; (3) require clean-up, remedial action or other response with respect to Hazardous Substances or Petroleum Products on or affecting the subject property under any applicable environmental law; (4) may affect the value of the subject property; and (5) may require specific actions to be performed with regard to such conditions and circumstances.

Partner’s assessment consisted of (1) a property and adjacent site reconnaissance, (2) interviews with key personnel; (3) a review of historical sources; (4) a review of regulatory agency records; and (5) a review of a regulatory database report provided by a third-party vendor. Partner also contacted local agencies, such as environmental health departments, fire departments and building departments in order to determine any current and/or former hazardous substances usage, storage and/or releases of hazardous substances on the subject property. Additionally, Partner researched information on the presence of activity and use limitations at these agencies. The Environmental Report is subject to a number of limitations and disclaimers.

The Environmental Report did not identify any Recognized Environmental Conditions or Controlled Recognized Environmental Condition during the course of its assessment. The Environmental Report identified a Historical Recognized Environmental Condition relating to two underground storage tanks, however based on the removal of the tanks in 2010, prior analytical testing and the issuance of a No Further Action letter by the Los Angeles Regional Water Quality Control Board, no further action is considered necessary in connection therewith. Overall, Partner recommended no further investigation of the subject property at the time of the Environmental Report.

The Environmental Report speaks only as of its date, and Partner has not been asked to perform any additional assessment since the time of the assessment described in the Environmental Report. Further, the Environmental Report is subject to the limitations specified in such report. Potential investors may refer to the complete Environmental Report for a full understanding of such limitations, and for additional information pertinent to the assessment. Copies of the Environmental Report are

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available upon request from the Underwriter. Costs incurred by the Borrower or Value with respect to environmental remediation or liability could adversely affect their respective financial conditions. See “CERTAIN RISK FACTORS – Limitations on Value of the Facilities and to Remedies Under the Mortgages.”

Appraisals

No Appraisal for Series 2016 Facility. No appraisal has been obtained for the Series 2016 Facility or for the value of the leasehold interest of the Borrower in the Ground Lease. See “CERTAIN RISK FACTORS – Limitations on Value of the Facilities and to Remedies Under the Deeds of Trust” herein.

Appraisals for Prior Facilities. The following table summarizes the appraised values of the Prior Facilities.

Facility

Property Interest and Size of Site

Appraised Value

Date of Value

Downtown Value School Fee simple, 0.606 acres $4,000,000 July 31, 2012 Central City Value School Fee simple, 1.1 acres 7,700,000 February 15, 2013 Total Appraised Value $11,700,000

Source: Value.

Limitations on Appraisals. Real estate appraisals estimate the fair market value of property at one point in time based on a number of assumptions and limiting conditions described therein. The appraised values of the Central City Value School Facility and the Downtown Value School Facility are over three and four years old, respectively. There can be no assurance that the Trustee could realize the estimated values set forth above upon the foreclosure of a Deed of Trust following an event of default.

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DEBT SERVICE SCHEDULE

The annual debt service payment requirements of the Series 2016 Bonds and the Series 2013 Bonds are set forth in the table below.

Period Ending July 1

Series 2013 Bonds Series 2016A Bonds(1) Series 2016B Bonds(1) Total Bonds Debt Service Debt Service Principal Interest Principal Interest

2017 $983,767.50 -- $241,055.21 -- $12,436.67 $1,237,259.38 2018 986,392.50 -- 476,812.50 -- 24,600.00 1,487,805.00 2019 988,427.50 -- 476,812.50 -- 24,600.00 1,489,840.00 2020 984,872.50 -- 476,812.50 $60,000.00 24,600.00 1,546,285.00 2021 986,022.50 -- 476,812.50 65,000.00 21,000.00 1,548,835.00 2022 986,582.50 -- 476,812.50 70,000.00 17,100.00 1,550,495.00 2023 986,552.50 -- 476,812.50 75,000.00 12,900.00 1,551,265.00 2024 985,932.50 -- 476,812.50 80,000.00 8,400.00 1,551,145.00 2025 983,297.50 $25,000.00 476,812.50 60,000.00 3,600.00 1,548,710.00 2026 984,997.50 90,000.00 475,500.00 -- -- 1,550,497.50 2027 985,700.00 90,000.00 470,775.00 -- -- 1,546,475.00 2028 985,405.00 100,000.00 466,050.00 -- -- 1,551,455.00 2029 984,112.50 105,000.00 460,800.00 -- -- 1,549,912.50 2030 986,822.50 105,000.00 455,287.50 -- -- 1,547,110.00 2031 988,202.50 110,000.00 449,775.00 -- -- 1,547,977.50 2032 983,252.50 120,000.00 444,000.00 -- -- 1,547,252.50 2033 987,305.00 125,000.00 437,100.00 -- -- 1,549,405.00 2034 984,695.00 135,000.00 429,912.50 -- -- 1,549,607.50 2035 984,855.00 140,000.00 422,150.00 -- -- 1,547,005.00 2036 983,290.00 150,000.00 414,100.00 -- -- 1,547,390.00 2037 985,000.00 160,000.00 405,475.00 -- -- 1,550,475.00 2038 984,640.00 170,000.00 396,275.00 -- -- 1,550,915.00 2039 987,210.00 175,000.00 386,500.00 -- -- 1,548,710.00 2040 987,365.00 185,000.00 376,437.50 -- -- 1,548,802.50 2041 985,105.00 200,000.00 365,800.00 -- -- 1,550,905.00 2042 985,430.00 210,000.00 354,300.00 -- -- 1,549,730.00 2043 982,995.00 225,000.00 341,700.00 -- -- 1,549,695.00 2044 987,800.00 235,000.00 328,200.00 -- -- 1,551,000.00 2045 983,450.00 250,000.00 314,100.00 -- -- 1,547,550.00 2046 985,950.00 265,000.00 299,100.00 -- -- 1,550,050.00 2047 984,600.00 280,000.00 283,200.00 -- -- 1,547,800.00 2048 984,400.00 300,000.00 266,400.00 -- -- 1,550,800.00 2049 -- 1,300,000.00 248,400.00 -- -- 1,548,400.00 2050 -- 1,380,000.00 170,400.00 -- -- 1,550,400.00 2051(2) -- 1,460,000.00 87,600.00 -- -- 1,547,600.00 Totals $31,534,430.00 $8,090,000.00 $13,604,892.71 $410,000.00 $149,236.67 $53,788,559.38

(1) Totals may not add due to rounding. Also, debt service is shown gross of interest earnings on the Reserve Account. (2) Debt service in the year ended July 1, 2051 is expected to be paid from funds on deposit in the Reserve Account.

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

Limited Obligations of the Authority

The Bonds are limited obligations of the Authority. The Authority is not obligated to advance any moneys derived from any source other than Payments and other assets pledged under the Indenture, whether for the payment of the principal, redemption price or interest with respect to the Bonds.

THE BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF,

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OTHER THAN THE CALIFORNIA SCHOOL FINANCE AUTHORITY, AND ARE NOT AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE FAITH AND CREDIT OF THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE REDEMPTION PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWER. NOTHING IN THE INDENTURE, THE ACT OR OTHERWISE IS AN UNDERTAKING BY THE AUTHORITY OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO FUND THE TRANSFERS DESCRIBED IN THE INTERCEPT NOTICE (DEFINED HEREIN) OR TO MAKE STATE APPORTIONMENTS OR OTHER FUNDS AVAILABLE TO THE SCHOOLS IN ANY AMOUNT OR AT ANY TIME.

Parity Nature of Obligations

The Series 2016 Bonds are issued and secured on a parity basis with the Series 2013 Bonds issued pursuant to the Original Indenture and any Additional Bonds hereafter issued under the Indenture.

Additionally, pursuant to the terms of the Revolving Loan Agreement, the Authority will intercept the School’s state apportionment funds in September, October, November, December, January and March of each year, through March 2020, in equal installments of $8,333 principal amount, plus interest accrued to date, such interest accruing at the annual rate of 0.30%.

Payments Under the Indenture and State Intercept

The Authority has executed and delivered the Indenture and absolutely assigns to the Trustee all of its rights, title and interest in and to the Payments (as defined below), the Loan Agreement, the Deeds of Trust, the Leases and all moneys and investments in the funds established thereunder (except the Rebate Fund and the Repair and Replacement Fund, as established by the Indenture) for the equal and proportionate benefit, security and protection of all present and future registered owners of the Bonds. The Bonds are payable equally and ratably solely from the Payments under the Indenture. “Payments”, under the Indenture, means (i) all moneys (except any money received to be used for payment of Administrative Fees and Expenses) received by the Trustee with respect to the Intercept; (ii) all moneys, if any, received by the Trustee directly from or on behalf of the Borrower pursuant to the Loan Agreement (excluding Additional Payments); and (iii) all income derived from the investment of any money in any fund or account established pursuant to the Indenture. “Rental Payments” under the Indenture means the amounts payable pursuant to the Leases by the Schools to the Borrower for the use and occupancy of the Facilities, excluding Expenses (as defined in the Leases). “Loan Repayments” under the Indenture means the amounts due and payable from the Borrower to the Authority pursuant to the Loan Agreement that are not Additional Payments. See “APPENDIX D – SUMMARY OF PRINCIPAL BOND DOCUMENTS – SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE” attached hereto.

The Borrower will pay, or cause to be paid, the Loan Repayments from the Gross Revenues of the Borrower, including the Rental Payments, or from any other legally available funds of the Borrower, without any further notice thereof except as may be specifically required by the Loan Agreement. “Gross Revenues,” under the Indenture, means for any Fiscal Year, all of the revenues, income, cash receipts and other money received by the Borrower, or received by the Trustee on behalf of the Borrower pursuant to

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the Indenture, that are legally available for payment of the obligations of the Borrower under the Loan Agreement.

Simultaneously with the issuance of the Series 2016 Bonds, Value will deliver the Intercept Notice (as defined below) to the State Controller, including a schedule of transfers to the Trustee for certain amounts due and payable under the Indenture, including Additional Payments, and identifying the Trustee as the recipient. “Intercept” means the apportionment from the State Controller, pursuant to Section 17199.4(a)(4) of the Education Code and the Intercept Notice, of amounts specified in the Intercept Notice and payable directly to the Trustee. “Intercept Notice” means any notice from the Borrower to the State Controller, pursuant to Section 17199.4(a)(1) and (4) of the Education Code, specifying a transfer schedule for the payment from State Apportionments directly to the Trustee of one or more of the following: (x) principal of the Bonds, (y) interest on the Bonds and (z) other costs necessary or incidental to financing pursuant to the Act relating to the Bonds, including Additional Payments, in substantially the form attached to the Loan Agreement, as the same may be amended, supplemented or restated from time to time. “State Apportionment” means the State aid portion of Value’s general purpose entitlement. “State School Fund” means the fund established and maintained in the general fund of the State pursuant to Articles 1 and 2 of Chapter 1 of Part 9 of Division 1 of Title 1 of the Education Code. “Additional Payments” include, among other things, to the extent not paid from Loan Repayments, ordinary administrative fees and expenses of the Trustee and the Authority (including fees and expenses of their counsel and consultants) and fees and expenses of the Rating Agency.

Value will, not later than the twentieth (20th) calendar day of any month in which payment is scheduled, amend, supplement or restate the Intercept Notice and deliver such to the State Controller from time to time as necessary or appropriate (including without limitation as a result of redemption prior to maturity or cessation of the Subsidy Payments) to indicate transfers to the Trustee to pay a portion of the amounts due under the Loan Agreement and other costs necessary or incidental to the financing pursuant to the Act, as they come due and to cure any delinquency in payment of such amounts. If at any time the Intercept Notice is amended, supplemented or restated for any reason, Value will promptly provide the Authority and the Trustee with a copy of such amended or supplemented Intercept Notice. The Intercept Notice may provide additional amounts payable to the Trustee for purposes set forth in the Indenture; provided Value will not grant preference or any prior right of funding access or security in respect of the State Apportionment to any other payment indicated in the Intercept Notice or any other notice delivered pursuant to Section 17199.4 of the Education Code.

There is no assurance given to Bondholders that the State Apportionment will be provided in amounts sufficient and at such times as would provide for the Loan Repayments. The State is undertaking no obligation to provide any level of State Apportionment in respect of Value. The State may delay, alter, amend or eliminate State Apportionment funding at any time.

Cross-Collateralization; Additional Rent. Value will pay Rent under each Lease solely from revenues derived from or attributable to the charter school identified therein. A shortfall in payment of Base Rent when due from revenues of any such charter school will result in additional Rent payments (“Additional Rent”) becoming due under the other Leases. See “THE LEASES – Payment of Base Rent and Additional Rent” herein.

Allocation of Rental Payments

Promptly upon receipt, the Trustee shall deposit the Payments into the Revenue Fund. On or before March 25th, June 25th, September 25th and December 25th of each year, the Trustee shall transfer from the Revenue Fund and deposit into the following respective accounts (each of which the Trustee shall establish and maintain within the Revenue Fund) and then to the Repair and Replacement Fund and

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the Rebate Fund, the following amounts, in the following order of priority, the requirements of each such account or fund (including the making up of any deficiencies in any such account resulting from lack of Payments sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account or fund subsequent in priority; provided, however, no moneys deposited in the Revenue Fund pursuant to the Intercept shall be deposited to the Repair and Replacement Fund or the Rebate Fund:

(1) To the Ground Rent Account, all Ground Rent amounts due and payable directly to the lessor under the Ground Lease;

(2) To the Interest Account, one-half of the aggregate amount of interest becoming due and payable on the next succeeding Interest Payment Date on all Bonds then Outstanding, until the balance in said account is equal to said aggregate amount of interest, taking into account any amounts to be transferred from the Capitalized Interest Subaccount;

(3) To the Principal Account, one-fourth of the aggregate amount of principal becoming due to redeem or pay, until the balance in said Principal Account is equal to said aggregate amount of such principal and Mandatory Sinking Account Payments; provided that from the date of delivery of the Bonds until the first Principal Payment Date with respect to the Bonds (if less than twelve months), transfers to the Principal Account shall be sufficient on a monthly pro rata basis to pay the principal becoming due and payable on said Principal Payment Date;

(4) To the Grant-Funded Reserve Subaccount of the Reserve Account, (a) the greater of (i) the amount designated for deposit to the Grant-Funded Reserve Subaccount of the Reserve Account in a written direction of the Borrower, and (ii) one-half of the aggregate amount of each prior withdrawal from the Grant-Funded Reserve Subaccount of the Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account (until deposits on account of such withdrawal are sufficient to fully restore the amount withdrawn), and (b) in the event the balance in said subaccount shall be less than the amount deposited in such subaccount pursuant to the provisions of the Indenture due to valuation of the Eligible Securities deposited therein in accordance with the provisions of the Indenture, the amount necessary to increase the balance in said account to an amount at least equal to the amount deposited in such subaccount pursuant to the provisions of the Indenture (until deposits on account of such valuation deficiency are sufficient to increase the balance in said account to said amount);

(5) To the Bond Reserve Subaccount of the Reserve Account, (a) the greater of (i) the amount designated for deposit to the Bond Reserve Subaccount of Reserve Account in a written direction of the Borrower, and (ii) one-fourth of the aggregate amount of each prior withdrawal from the Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account (until deposits on account of such withdrawal are sufficient to fully restore the amount withdrawn), provided that no deposit need be made into the Reserve Account if the balance in said account is at least equal to the Reserve Account Requirement, and (b) in the event the balance in said account shall be less than the Reserve Account Requirement due to valuation of the Eligible Securities deposited therein in accordance with the provisions of the Indenture, the amount necessary to increase the balance in said account to an amount at least equal to the Reserve Account Requirement (until deposits on account of such valuation deficiency are sufficient to increase the balance in said account to said amount);

(6) To the Repair and Replacement Fund, (a) the greater of (i) the amount designated for deposit in the Repair and Replacement Fund in a written direction of the Borrower, and (ii) one-sixth of the aggregate amount of each prior withdrawal from the Repair and Replacement Fund, provided that no deposit need be made into the Repair and Replacement Fund if the balance in said account is at least equal to the Repair and Replacement Requirement, and (b) in the event the balance in said account shall

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be less than the Repair and Replacement Requirement due to valuation of the Eligible Securities deposited therein in accordance with the provisions of the Indenture, the amount necessary to increase the balance in said account to an amount at least equal to the Repair and Replacement Requirement (until deposits on account of such valuation deficiency are sufficient to increase the balance in said account to said amount); and

(7) To the Rebate Fund, such amounts as are required to be deposited therein by the Indenture (including the Tax Certificate).

Moneys remaining in the Revenue Fund after the foregoing transfers shall be transferred on January 1 and July 1 of each year, commencing July 1, 2017 by the Trustee to the Borrower free and clear of the lien of the Indenture. See “APPENDIX D – SUMMARY OF PRINCIPAL BOND DOCUMENTS – SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT” attached hereto.

Reserve Account

(a) Within the Reserve Account, the Trustee will establish and maintain the Bond Reserve Subaccount and the Grant-Funded Reserve Subaccount. All amounts in the Reserve Account will be used and withdrawn by the Trustee solely for the purpose of making up any deficiency in the Interest Account or Principal Account that exists on the date when monies on deposit in the Interest Account or the Principal Account are required to be applied, as provided in the Indenture, or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding; provided, however, that monies and securities held by the Trustee in the Grant-Funded Reserve Subaccount will not be used for the redemption of all Bonds then Outstanding pursuant to the Indenture; provided, further, however, that monies and securities held by the Trustee in the Grant-Funded Reserve Subaccount shall not be used to make up any deficiency in the Interest Account or Principal Account relating to any Additional Bonds. The Trustee will draw from the Bond Reserve Subaccount until exhausted prior to drawing from the Grant-Funded Reserve Subaccount.

(b) The Trustee will notify the Authority and the Borrower immediately of any withdrawal from the Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account, which notice will specify the amount of such withdrawal from each of the Bond Reserve Subaccount and the Grant-Funded Reserve Subaccount, if any. The Trustee will notify the Authority immediately of the final maturity, earlier redemption in full of the Bonds or the date on which no Bonds are Outstanding under the Indenture.

(c) Immediately following the earlier to occur of the final maturity, earlier redemption in full of the Bonds or the date on which no Bonds are Outstanding under the Indenture, the Trustee will transfer to the Authority any amounts remaining on deposit in the Grant-Funded Reserve Subaccount. Thereafter the Trustee will close the Grant-Funded Reserve Subaccount.

(d) Amounts on deposit in the Reserve Account will be valued by the Trustee at their fair market value each January 1, April 1, July 1 and October 1, and the Trustee will notify the Borrower of the results of such valuation. If the amount on deposit in the Reserve Account on the first (1st) Business Day following such valuation is less than one hundred percent (100%) of the Reserve Account Requirement, the Borrower has agreed in the Loan Agreement to make the deposits to the Reserve Account required by the Indenture. If the amount on deposit in the Reserve Account on the first (1st) Business Day following such valuation is greater than the Reserve Account Requirement, then (i) the amount of money on deposit in the Grant-Funded Reserve Subaccount greater than $945,000 shall be paid to the Authority free and clear of the lien of the Indenture and (ii) any additional excess will be withdrawn from the Bond Reserve Subaccount of the Reserve Account and transferred to the Revenue Fund.

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“Reserve Account Requirement” means as of any date of calculation, an amount which shall be equal to the least of (a) ten percent (10%) of the proceeds of the Bonds; (b) maximum annual debt service with respect to the Bonds Outstanding, (c) one hundred twenty-five percent (125%) of average annual debt service with respect to the Bonds, or (d) for the last Bond Year only, the total debt service with respect to the Bonds Outstanding. Annual debt service and average annual debt service, for purposes of this definition, shall be calculated on the basis of twelve-month periods ending on July 1 of any year in which Bonds are Outstanding.

Deeds of Trust on the Facilities

In connection with the issuance of the Series 2013 Bonds, the Borrower entered into that certain Deed of Trust, dated as of August 1, 2013, by the Borrower, as trustor (the “Original Deed of Trust”), creating a lien on the Prior Facilities that the Borrower owns in fee simple for the benefit of the Trustee, as trustee for the Holders of the Bonds. In connection with the issuance of the Series 2016 Bonds, the Borrower will enter into a Leasehold Deed of Trust (the “Series 2016 Deed of Trust” and, together with the Original Deed of Trust, the “Deeds of Trust”), creating a lien on the Borrower’s leasehold interest in the Series 2016 Facility, that is rented pursuant to the Ground Lease, for the benefit of the Trustee, as trustee for the Holders of the Bonds. The Deeds of Trust will secure the payment and performance of the Borrower’s obligations with respect to the Loan Agreement.

The Borrower will obtain, at its own cost and expense, an ALTA policy or policies of title insurance regarding the Facilities, or an endorsement to such policy at the time of and dated as of the date of issuance of the Series 2016 Bonds in an aggregate amount not less than the aggregate principal amount of the Bonds to be Outstanding after the issuance of the Series 2016 Bonds, payable to the Trustee, insuring the title of the Borrower to the Facilities, subject only to Permitted Liens, issued by a title insurance company qualified to do business in the State. See “RISK FACTORS — Limitations On Value of the Facilities and to Remedies Under the Deeds of Trust” herein.

THE LEASES

Under the Series 2016 Lease, the Borrower will lease the Series 2016 Facility to Value until June 30, 2040 (the “Initial Lease Term”). In addition, the Series 2016 Lease provides for two 5-year renewal options (each, a “Renewal Option”) to extend the Series 2016 Lease for additional periods (each, a “Renewal Term”), at the Rent and upon and subject to all of the terms, covenants and conditions set forth in the Series 2016 Lease. Collectively, the Initial Lease Term and the Renewal Terms are referenced herein as the “Lease Term.” Pursuant to the Series 2016 Lease, Value has covenanted that, so long as the Borrower has any obligations under the Loan Agreement, Value will exercise each Renewal Option available under the Series 2016 Lease.

The Borrower leases the Prior Facilities to Downtown Value and Central City Value (the “Prior Schools”), pursuant to those certain leases dated as of August 1, 2013, until July 1, 2048 (the “Initial Prior Leases Term”) (or such other later date if extended pursuant to the Prior Leases), at the Rent and upon and subject to all of the terms, covenants and conditions set forth in the Prior Leases.

The terms of the Leases are further described in “APPENDIX E – SUMMARY OF THE LEASES” attached hereto.

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Payment of Base Rent and Additional Rent

Value, as Lessee under each Lease, is obligated to pay Base Rent, Expenses and Additional Rent. Base Rent, and certain Additional Payments will be allocated between the three Schools and will equal the combined Intercept Payments from the Schools. Included in the definition of Additional Rent in each Lease is all amounts owed by the Borrower under the Loan Agreement, including principal and interest on all of the Bonds. Each Lease also obligates Value to amend amounts payable under the Intercept Notices as necessary or appropriate to indicate transfers to the Trustee to pay the amounts due under the Leases as they come due and to cure any delinquency in payment of such amounts. Included in the Rent payable by Value under the Series 2016 Lease are amounts sufficient to pay the Ground Rent.

Pursuant to each Lease, Value pledges the Gross Revenues of the School for the payment of the Rent, but the Borrower, as lessor thereunder agrees that under no circumstances shall Value be required to advance any moneys derived from, nor shall the Borrower have recourse to, any revenues or assets attributable to, or designated by any third party for, any other schools operated by Value or pledged by Value to secure loans to or financings or leases for such other schools.

As used in each Lease, “Gross Revenues of the School” means all income and revenues directly or indirectly derived by Value’s operation of the School identified in such Lease, including without limitation, per pupil revenues and other funding received from the State of California or by virtue of the Charter granted to Value for the School and all gifts, grants, bequests and contributions (including income and profits therefrom) specifically restricted by the donor or maker thereof to the School or the premises, to the extent not specifically restricted by the donor or maker thereof to a particular purpose inconsistent with their use for the payments required under such Lease. Gross Revenues of the School also includes net insurance or condemnation proceeds received or payable to Value on account of damage or destruction of the premises or other loss incurred by Value with respect to its operation of the applicable School or the premises.

Certain Covenants under the Leases

The following financial covenants under the Series 2016 Lease are substantially identical to those found in the Prior Leases.

Covenants. Lessee covenants and agrees:

(a) School’s Charter. To take all reasonable actions to maintain its Charter with a sponsoring entity and to take or cause to be taken any and all actions required to renew or extend the term of its Charter with a sponsoring entity. As soon as practicable, Lessee covenants to provide Lessor with a copy of any notice received with regards to any sponsoring entity’s intent to renew or extend the term of any such Charter or any notice of any issues which if not corrected or resolved, could lead to termination or nonrenewal of any such Charter. If such Charter is terminated or not renewed, Lessee shall use its best efforts, and shall cooperate with Lessor, to assign the Lease to an entity that maintains a Charter with a sponsoring entity. Further, Lessee shall maintain accreditation status under the Charter Schools Act of 1992, as amended (constituting Part 26.8 of Division 4 of Title 2 of the California Education Code) and related administrative rules and meets the student performance accountability standards stated in its Charter petition.

(b) Limitation on Disposition of Property, Plant and Equipment. Without the consent of the Authority, not to dispose or transfer any property, plant and equipment consisting of all or any part of the Premises, except for disposition or transfers:

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(i) of property, plant and equipment no longer necessary for the operation of the Premises;

(ii) of property, plant and equipment replaced by property, plant and equipment of similar type and/or of substantially equivalent function with a substantially equivalent value; or

(iii) of property, plant and equipment sold or disposed of at a price equal to their fair market value.

(c) No Additional Debt. Except in connection with the issuance of Additional Bonds under the Indenture, not to incur further or additional Indebtedness of Lessee payable out of the Gross Revenues of the School or to encumber any of the assets attributable to and necessary for the operation of the School.

As used in Exhibit D to the Lease, “Indebtedness of Lessee” means any indebtedness or obligation of the Lessee (other than accounts payable and accruals), as determined in accordance with generally accepted accounting principles, including obligations under the Lease, installment purchase contracts, conditional sales contracts or other title retention contracts or rental obligations under leases which are considered capital leases under generally accepted accounting principles, payable from the Gross Revenues of the School; provided, that “Indebtedness of the Lessee” shall not include nonrecourse indebtedness or indebtedness in a principal amount of up to $1,000,000 that is subordinate to the obligations of Lessee under the Lease.

Financial Reporting.

Lessee agrees to provide Lessor, and upon written request, the Issuer, the following information:

(a) quarterly unaudited financial information of the School not later than 60 days from the end of each quarter,

(b) annual budgets of the School within 60 days of their adoption,

(c) financial information of the School within 30 days of receipt by the School of audited financial statements of School approved by the governing board of the School, which audited statements shall include calculations of Cash on Hand and Debt Service Coverage Ratio for the fiscal year, as described below,

(d) the results of any federal or State of California testing within 60 days of receipt by the governing board of the School,

(e) within 14 days of receipt, any notification or report of any potential or alleged violation of the Charter for the School, and

(f) such other information as may be reasonably requested by Lessor or Lessor on behalf of the Authority.

Assignment to Trustee; Deposit of Rental Payments. Lessee acknowledges and consents in the Lease to the assignment by Lessor of Lessor’s rights hereunder to the Trustee under the Indenture and covenants and agrees to deposit all Base Rent and Additional Rent hereunder with the Trustee under the Indenture. Lessee covenants to pay to the Trustee the Base Rent and Additional Rent due hereunder on or before the fifteenth (15th) day of each month. Lessee also agrees to provide an Intercept Notice to the

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State Comptroller requesting that the State Comptroller deposit quarterly directly with the Trustee amounts sufficient to pay debt service on the Bonds.

Limitation on Liens on Gross Revenues of the School. Except as set forth in Exhibit D to the Lease, Lessee covenants and agrees that it will not create, assume or suffer to exist any lien upon the Gross Revenues of the School and that, if a subordinate security interest is created or assumed upon the Gross Revenues of the School by Lessee, Lessee will make or cause to be made effective a provision whereby the obligations of Lessee under the Lease will be secured prior to any such indebtedness or other obligation secured by such security interest and that the revenues required by the Intercept Notice to be deposited with the Trustee under the Indenture will continue to be so deposited. A security interest in Gross Revenues of the School on a parity with the lien created by the Lease may only be created in connection with the issuance of Additional Bonds under the Indenture.

Financial Covenants. Cash on Hand. Lessee covenants and agrees to comply with the following Days Cash on Hand requirement. “Days Cash on Hand” means: (i) the sum of Cash and Cash Equivalents of the Lessee, as shown on the Lessee’s audited financial statements for each Fiscal Year, and any State payments accrued to such Fiscal Year and scheduled to be received within the two months following the end of such Fiscal Year (“Cash on Hand”); divided by (ii) the quotient of Operating Expenses, as shown on the audited financial statements for the preceding Fiscal Year, divided by 365.

“Operating Expenses” means fees and expenses of the School, including maintenance, repair expenses, utility expenses, administrative and legal expenses, miscellaneous operating expenses, advertising costs, payroll expenses (including taxes), the cost of materials and supplies used for current operations of the School, the cost of vehicles, equipment leases and service contracts, taxes upon the operations of the School, charges for the accumulation of appropriate reserves for current expenses not annually recurrent, but which are such as may reasonably be expected to be incurred in accordance with Generally Accepted Accounting Principles, all in such amounts as reasonably determined by the School; provided, however, “Operating Expenses” shall not include depreciation, amortization or other non-cash expenses nor those expenses which are actually paid from any revenues of the School which are not Gross Revenues of the School, nor payment for improvements to the Project which are capitalized for accounting purposes.

The Cash on Hand requirement will be tested as of June 30 in each Fiscal Year, commencing June 30, 2017, and shall be equal to or greater than 45 days for such test date and every year thereafter. The Lessee will employ its auditor to provide the Lessee and Trustee for Lender by no later than December 31 of each year, commencing December 31, 2017, with a certification that the Days Cash on Hand requirement has been met as of the preceding June 30 test date. The foregoing is subject to the qualification that if applicable state or federal laws or regulations, or the rules and regulations of agencies having jurisdiction, shall not permit the Lessee to accumulate such level of Cash on Hand, then Lender shall conform to the then prevailing laws, rules or regulations.

If the Cash on Hand for any testing date is less than 45 days, then, upon the written direction of a majority of the Beneficial Owners of the Bonds, Lessee will promptly employ an Independent Consultant acceptable to the Beneficial Owners of a majority in principal amount of the Bonds to review and analyze the operations and administration of Lessee, submit to the Lessor and Lender written reports, and make such recommendations as to the operation and administration of the Lessee as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation of Lessee; provided, that, in the event that the Beneficial Owners of a majority in principal amount of the Bonds object to the selection of the Independent Consultant within 10 days after being notified of such selection, the Borrower shall select another Independent Consultant acceptable to the Beneficial Owners of a majority in principal amount of the Bonds. Lessee agrees to consider any recommendations by the

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Independent Consultant and, to the fullest extent practicable and allowed by law and consistent with its covenants under the Lease, to adopt and carry out such recommendations.

Debt Service Coverage Ratio. Pursuant to the terms of the Loan Agreement, Lessee covenants and agrees to budget for and maintain a Debt Service Coverage Ratio for each Fiscal Year of not less than one point one times (1.10x), commencing with the Fiscal Year ended June 30, 2017. Lessee shall employ its auditor to provide the Trustee by no later than December 31 of each year, commencing December 31, 2017, with a certification of the Debt Service Coverage Ratio as of the end of the preceding Fiscal Year. As used in Exhibit D to the Lease, “Debt Service Coverage Ratio” means, for any Fiscal Year, the ratio obtained by dividing the Net Income Available for Debt Service (as defined below) for such Fiscal Year by the Base Rent under the Lease, as such ratio is certified to by an accountant of Lessee. “Net Income Available for Debt Service” means, for any period of determination thereof, the Gross Revenues of the School (as defined in the Lease) for such period (not including any insurance recoveries), plus the interest earnings on moneys held in the Bond Reserve Subaccount established under the Indenture (but only to the extent that such interest earnings are transferred to the Revenue Fund) minus the total Operating Expenses of the School for such period but excluding (i) interest paid on indebtedness, (ii) any profits or losses which would be regarded as extraordinary items under Generally Accepted Accounting Principles, (iii) gain or loss in the extinguishment of indebtedness of Lessee, (iv) proceeds of the Bonds and any other indebtedness permitted by the Loan Agreement, and (v) proceeds of insurance policies, other than policies for business interruption insurance, maintained by or for the benefit of Lessee, the proceeds of any sale, transfer or other disposition of the Premises or any other of the School’s assets by Lessee, and any condemnation or any other damage award received by or owing to Lessee.

If the Debt Service Coverage Ratio for any testing date is less than 1.10x, then, upon the written direction of the Beneficial Owners of a majority in principal amount of the Bonds, Lessee will promptly employ an Independent Consultant acceptable to the Beneficial Owners of a majority in principal amount of the Bonds to review and analyze the operation and administration of Lessee, submit to the Lessor and the Authority written reports, and make such recommendations as to the operation and administration of the Lessee as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation of Lessee; Lessee agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable and allowed by law and consistent with its covenants under the Lease, to adopt and carry out such recommendations.

Lessor covenants to maintain a Debt Service Coverage Ratio for each Fiscal Year of not less than 1.00x, commencing with the Fiscal Year ended June 30, 2017.

The Ground Lease

The Borrower holds a leasehold interest in the property subject to the Series 2016 Lease. The following section briefly describes certain provisions of the Ground Lease. The following discussion does not purport to be a complete summary of the terms of the Ground Lease and is qualified in its entirety by reference to the Ground Lease, which is attached hereto as Appendix J.

Value (as the “Ground Lessee”) and Byzantine LLC (the “Ground Lessor”) entered into that certain Standard Industrial/Commercial Single-Tenant - Lease Net dated January 16, 2015, as amended by that certain First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, Third Amendment to Lease dated May 8, 2015, Fourth Amendment to Lease dated December 14, 2015, Fifth Amendment to Lease dated February 29, 2016, Sixth Amendment to Lease dated May 5, 2016, Seventh Amendment to Lease dated August 15, 2016, and Eight Amendment to Lease dated August 22, 2016 (as amended, the “Ground Lease”). Concurrently with the issuance of the Series 2016 Bonds, Value will assign its interest in the Ground Lease to the Borrower.

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Term of the Ground Lease. The Ground Lease provides for an initial term of 25 years and five months, commencing on February 1, 2015 and expiring on June 30, 2040. Pursuant to the Ground Lease, the Ground Lessee has two five-year renewal options, which could extend the term to June 30, 2050. Use of the Series 2016 Site is limited to the operation of University Prep and other ancillary and related uses. Under the Ground Lease, the Ground Lessee has agreed to pay rent in the amount of $22,222.23 per month for the first year of the lease term, increasing annually at a rate of 2.25% (the “Ground Rent”), however rent will be abated for two months each year during years two through five of the Ground Lease. Pursuant to the Ground Lease, the Ground Lessor shall not sell the Series 2016 Site to any person or entity without first giving the Ground Lessee the opportunity to purchase the Series 2016 Site upon terms agreeable to the parties.

Assignment and Sublease. The Ground Lessee shall not assign or sublet any part of its interest in the Ground Lease without the Ground Lessor’s prior written consent. For purposes of the assignment provisions of the Ground Lease, an assignment requiring consent includes a change in control of the Ground Lessee and the involvement of the Ground Lessee or its assets in any transaction or series of transactions which results or will result in a reduction of the Net Worth of the Lessee (as defined in the Ground Lease) by an amount greater than 25% of such Net Worth at the time of execution of the Ground Lease, at the time. An assignment or subletting without the consent of the Ground Lessor shall, at the Ground Lessor’s option, be a curable default or a noncurable breach. If the Ground Lessor elects to treat such an assignment or sublease as a noncurable breach, the Ground Lessor may either terminate the Ground Lease or, upon 30 days’ notice, increase the Ground Rent by 10%.

Notwithstanding the provisions above, the Ground Lessee has the right, without first obtaining the Ground Lessor’s written consent, to (a) assign the Ground Lease to an entity that is formed as a result of an Approved Reorganization (as such term is defined in the Ground Lease), and (b) sublease a portion of the Premises to third parties that conduct related educational services, after school enrichment programs and summer day camp activities.

Leasehold Mortgage. The Ground Lessee is entitled, without the prior consent and approval of the Ground Lessor, to subject its leasehold estate and all of its rights, titles and interests in and to the Series 2016 Site pursuant to the Ground Lease to a mortgage(s) or deed(s) of trust (each, a “Leasehold Mortgage”) from time to time for the benefit of, and to secure financing from, any mortgage lender(s) (each, a “Leasehold Mortgagee”) providing construction, interim, or permanent financing or refinancing for the equipment, personal property, fixtures and improvements installed on the Series 2016 Site or the business of the Ground Lessee being conducted on the Series 2016 Site, provided that no such Leasehold Mortgage shall impair or abridge the rights of the Ground Lessor under the Ground Lease. There may be one or more Leasehold Mortgages or Leasehold Mortgagees, at the Ground Lessee’s discretion. Ground Lessee shall provide Ground Lessor with prompt written notice of the creation of any Leasehold Mortgage, and failure to provide such written notice shall excuse Ground Lessor from complying with the notice requirements to the Leasehold Mortgagee contained in the Ground Lease (as described herein) until such written notice is provided.

A Leasehold Mortgage and any other documents entered into for the benefit of a Leasehold Mortgagee shall be subject to the terms of the Ground Lease, and nothing in the Ground Lease shall be construed as consent by the Ground Lessor that any Leasehold Mortgage granted or permitted to exist shall encumber the Ground Lessor’s fee interest in the Series 2016 Site or affect the Ground Lessor’s rights under the Ground Lease, except as specifically provided in the Ground Lease.

Forbearance by Ground Lessor. So long as any Leasehold Mortgage remains in effect, the Ground Lessor will provide notice to each such Leasehold Mortgagee prior to exercising its remedies under the Ground Lease.

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No Changes to Lease. The Ground Lessor will not make or accept any voluntary surrender, cancellation, modification or amendment of or to the Ground Lease at any time while the Leasehold Mortgage is in effect without first notifying each Leasehold Mortgagee, nor will the Ground Lessor convey all or any part of the property subject to the Ground Lease to the Ground Lessee, or the Ground Lessee accept such conveyance without first notifying each Leasehold Mortgagee. In no event will any assignment of the leasehold interest by the Ground Lessee to the Ground Lessor result in a merger or termination of the Ground Lease so long as any Leasehold Mortgage shall be in effect, and in the event of any such assignment, the Ground Lessor, Ground Lessee and Leasehold Mortgagee shall remain bound by the provisions of the Ground Lease.

New Lease. In the event that, for any reason, the Ground Lease terminates prior to satisfaction of all indebtedness and obligations secured by any Leasehold Mortgage, and subject to the Ground Lease, the holder(s) of any such Leasehold Mortgage shall be entitled to enter into a new lease with the Ground Lessor, for the balance of the term of the Ground Lease (including rights to all extension or renewal options that have not been exercised), and on the same terms as set forth in the Ground Lease. In no event shall Lessor be required to enter into any lease of the Premises pursuant to the above provision to the extent any other lease of the Series 2016 Site is in full force and effect. Upon execution of any such new ground lease, the tenant thereunder shall be required to cure outstanding defaults of the Ground Lessee under the Ground Lease in the same manner, and within the same time period, as required under the provisions of the Ground Lease, provided any monetary default and any other sum that may be due from Ground Lessee to Ground Lessor under the Ground Lease or by reason of Ground Lessee’s default thereunder shall be cured and/or paid at the time Leasehold Mortgagee, its affiliate or nominee executes the new ground lease.

Notices by Lessor. Ground Lessor’s obligations pursuant to the Leasehold Mortgage provisions of the Ground Lease are conditioned upon each Leasehold Mortgagee promptly providing Ground Lessor written notice of when the Leasehold Mortgage is made or released. Until such time as the Leasehold Mortgage whose Leasehold Mortgage is most senior in priority (unless otherwise directed in writing by such senior Leasehold Mortgagee and delivered to Ground Lessor) is released or canceled of record, Ground Lessor agrees that it will provide such Leasehold Mortgagee whose Leasehold Mortgage is most senior in priority (unless otherwise directed in writing by such senior Leasehold Mortgagee and delivered to Ground Lessor) with a copy of any notices sent to Ground Lessee under the Ground Lease, including any default notices, within three (3) business days of delivery of such notices to Ground Lessee. No grace or cure periods for Ground Lessee’s cure of a default of its obligations under the Ground Lease or the time permitted to a Leasehold Mortgagee to cure such default shall be deemed to commence unless and until such notice is so delivered.

Leasehold Mortgagee Performance and Cure Rights. The Ground Lessor agrees to accept from any Leasehold Mortgagee any and all payments and performance of Ground Lessee’s obligations under the Ground Lease, whether before or after default, with the same force and effect as if paid or performed by Ground Lessee. In the event that Ground Lessee shall not cure or remedy any default or breach of covenant under the Ground Lease within the curative period provided for therein, then Leasehold Mortgagee shall have the right, at its sole option, to exercise any one or more of the following rights:

(i) to cure or remedy, or cause to be cured or remedied such default or breach of covenant, during the following curative periods, during which Ground Lessor shall not terminate the Ground Lease, commence eviction proceedings or accelerate rent. For monetary defaults, Leasehold Mortgagee shall have ten (10) business days following the Leasehold Mortgagee Curative Commencement Date (as defined below) in which to cure such default. For non-monetary defaults, Leasehold Mortgagee shall have thirty (30) days following the Leasehold Mortgagee Curative Commencement Date in which to cure such default, provided that if such default cannot reasonably be cured within such thirty (30) day period

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and that Leasehold Mortgagee has commenced efforts to cure such default within such period, Leasehold Mortgagee shall have an additional reasonable period of time within which to cure such default, and so long as Leasehold Mortgagee shall be diligently pursuing its efforts to cure, Ground Lessor shall accept such cure or remedy when effected. In no event shall any Leasehold Mortgagee be required to cure any defaults by Ground Lessee that by their nature are not susceptible to cure by Leasehold Mortgagee, and with respect to such defaults, the same shall be deemed cured by Leasehold Mortgagee if Leasehold Mortgagee has commenced efforts to exercise remedies under its Leasehold Mortgage. The time permitted to the Leasehold Mortgagee to cure defaults shall (i) be extended by the time required to pursue any remedies necessary to enable Leasehold Mortgagee to effect such cure, and (ii) be extended by any period in which Leasehold Mortgagee is prevented from curing by reason of any stay in any bankruptcy of Ground Lessee or other stay of enforcement proceedings to which Leasehold Mortgagee may be subject; and

(ii) to require Ground Lessor to terminate Ground Lessee’s rights under the Ground Lease and to substitute Leasehold Mortgagee as lessee of the Series 2016 Site for the balance of the term of the Ground Lease by entering into a new ground lease and upon payment to Ground Lessor of Ground Lessor’s reasonable attorneys’ fees in connection therewith and payment of Rent, damages and other sums due under the Ground Lease at the time of execution of the new ground lease by Leasehold Mortgagee; and

(iii) to acquire pursuant to a foreclosure the leasehold interest and Ground Lessee’s rights under the Ground Lease and assume the obligations of Ground Lessee thereunder. In such event, Ground Lessor shall not exercise its right of termination with respect to such default, provided that Leasehold Mortgagee shall cure any and all defaults within the curative periods provided above other than payment of Rent, damages and other sums due under the Ground Lease at the time of execution of a new ground lease, which shall be paid by Leasehold Mortgagee, its affiliates or nominees no later than ten (10) days following such acquisition.

“Leasehold Mortgagee Curative Commencement Date” means (a) in the case of monetary defaults, upon receipt of written notice from Ground Lessor of the lapse of Ground Lessee’s curative period; or (b) in the case of non-monetary defaults for which a curative period is provided under the Ground Lease, when both the following have occurred: (x) Leasehold Mortgagee’s receipt of notice of such default, and (y) receipt of written notice from Ground Lessor of Ground Lessee’s failure to cure such default within the applicable curative period provided in the Ground Lease. Leasehold Mortgagee may cure any monetary default under the Ground Lease by payment of the Rent and other sums or damages then due and owing thereunder, but Ground Lessor will not require Leasehold Mortgagee to pay any accelerated or future rents in curing such a payment default and will accept such payment as full satisfaction and cure of the outstanding default with respect to the payment of Rent, damages or other sums due under the Ground Lease.

Recognition of Leasehold Mortgagee. Upon any foreclosure on a Leasehold Mortgage and resulting transfer of the Ground Lessee’s leasehold interest under the Ground Lease, Ground Lessor will recognize (i) Leasehold Mortgagee, (ii) any affiliate or nominee of Leasehold Mortgagee, or (iii) any other person, firm or corporation acquiring the leasehold interest as lessee under the Ground Lease pursuant to any foreclosure, deed or assignment in lieu of foreclosure, or similar transfer pursuant to any exercise of remedies under any Leasehold Mortgage. Ground Lessor will recognize such parties’ interest on the same terms and provisions for the remaining term of the Ground Lease, including any unexpired option periods, and with all of the rights and privileges of Ground Lessee, provided such acquiring party (i) agrees to assume and be bound by all of the terms, covenants and conditions of the Ground Lease pursuant to an assumption agreement in a form reasonably acceptable to the Ground Lessor, and (ii) shall cure all defaults under the Ground Lease as required under the provisions therein.

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Exercise of Options. No option granted to Ground Lessee to extend or renew the Ground Lease shall be exercisable without the prior, written consent of Leasehold Mortgagee, and in the event of any exercise thereof without such consent, (i) Leasehold Mortgagee shall not be bound thereby and (ii) the option shall not have been validly exercised and Ground Lessee shall be a holdover tenant. If Ground Lessee has failed to exercise any option to extend or renew the Ground Lease within the time required thereunder, Ground Lessor shall give Leasehold Mortgagee written notice of such failure, and at the written request of Leasehold Mortgagee, (i) Ground Lessor shall extend the period for such exercise by a period of up to sixty (60) days, and (ii) during such 60-day period, if the Leasehold Mortgagee shall cure all defaults that Leasehold Mortgagee is capable of curing and, as to any other defaults, commences the exercise of remedies against Ground Lessee and thereafter diligently pursues the same to completion within the applicable time periods set forth in the Ground Lease, the right to exercise such option shall continue throughout the curative periods described above, and upon succeeding to the leasehold interest from Ground Lessee, Leasehold Mortgagee or other assignee thereof shall be entitled to exercise such option within fifteen (15) days.

No exercise of any right or option by Ground Lessee to purchase Ground Lessor’s interests in and to the Series 2016 Site shall be effective without the prior, written consent of Leasehold Mortgagee, and in the event of any exercise thereof without such consent, Leasehold Mortgagee shall not be bound thereby and Ground Lessee shall be deemed to have failed to exercise such option. In connection with any conveyance to Ground Lessee of Ground Lessor's interests in and to the Series 2016 Site pursuant to Ground Lessee's exercise of such right or option, Ground Lessor agrees to cooperate with Leasehold Mortgagee to ensure that the lien and provisions of the Leasehold Mortgage encumber the Ground Lessor's interests in and to the Series 2016 Site upon conveyance thereof to Ground Lessee upon Leasehold Mortgage's payment of Ground Lessor's reasonable attorney's fees in connection with such cooperation, including the review or revision such documents.

Leasehold Mortgage as Beneficiary. Each Leasehold Mortgagee is an express third party beneficiary of the leasehold mortgage provisions of the Ground Lease and shall be entitled to enforce the same directly against the Ground Lessor.

Bankruptcy of Ground Lessor. In the event that the Ground Lessor shall become subject to any bankruptcy or insolvency proceeding and subject to applicable law, any rights, elections, or actions available to Ground Lessee therein shall be subject to the rights of Leasehold Mortgagee under the Leasehold Mortgage to consent to, or to exercise on behalf of Ground Lessee, such rights, elections, or actions. Without limiting the foregoing but subject to applicable law, no consent or acquiescence by Ground Lessee to any rejection of the Ground Lease by Ground Lessor or any successor or trustee in such proceeding shall be binding or effective without the prior, written consent thereto by each Leasehold Mortgagee, and the rights, liens, and claims of Leasehold Mortgagee shall extend to, encumber, and include all rights to damages for any such rejection and all rights to continued possession of the Series 2016 Site.

No Encumbrances by Ground Lessor. Ground Lessor agrees not to mortgage or otherwise encumber its interests in the Series 2016 Site and Ground Lease unless all holders of any such mortgage, deed of trust, or other encumbrance (each, a “Lessor Mortgagee”) expressly agree to be subject to and bound by the terms of the Ground Lease and that no foreclosure or other enforcement of such mortgage, deed of trust or other encumbrance in and of itself will disturb or effect the Ground Lease or the rights of Leasehold Mortgagees thereunder. At Ground Lessor's request and to the extent reasonably required by a Lessor Mortgagee, Ground Lessee shall cause all Leasehold Mortgagees to enter into a commercially reasonable form of subordination, nondisturbance and attornment agreement with respect to any Leasehold Mortgage.

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Casualty and Condemnation. In the event of any casualty or condemnation affecting the Series 2016 Site, and notwithstanding any other provision of the Ground Lease to the contrary, no election by Ground Lessee to terminate the Ground Lease upon any such casualty or condemnation shall be effective without the prior written consent of each Leasehold Mortgagee.

CHARTER SCHOOLS

General

This section provides a brief overview of California’s system for funding charter schools. Prospective purchasers of the Series 2016 Bonds should note that the overview contained in this section and the summary of relevant law noted by cross-reference in the sections that follow are provided for the convenience of prospective purchasers but are not and do not purport to be comprehensive. Additional information regarding various aspects of charter school funding in California is available on numerous State-maintained websites and through other publicly available sources.

Under State Law, charter schools are largely independent schools operating as part of the public school system under the exclusive control of the officers of the public schools. A charter school is usually created or organized by a group of teachers, parents and community leaders, or a community-based organization, and is usually sponsored by an existing local public school district or county board of education. Specific goals and operating procedures for the charter school are detailed in a “charter” granted by the sponsoring board to the charter organizers.

A charter school is generally exempt from the laws governing school districts, except where specifically noted in the law. Charter schools in the State are created pursuant to Part 26.8 (beginning with Section 47600) of Division 4 of Title 2 of the State Education Code (the “Charter School Law”). The law also requires that a public charter school be nonsectarian in its programs, admission policies, employment practices and all other operations, and prohibits the conversion of a private school to a charter school. Public charter schools may not charge tuition and may not discriminate against any pupil on the basis of ethnicity, national origin, gender or disability. State public charter schools are required to participate in the State Testing and Reporting Program.

According to the Charter School Law, the purpose of a charter school is to: (1) improve pupil learning; (2) increase learning opportunities for all pupils, with special emphasis on expanded learning experiences for pupils identified as academically low achieving; (3) encourage the use of different and innovative teaching methods; (4) create new professional opportunities for teachers, including the opportunity to be responsible for the learning program at the school site; (5) provide parents and students with expanded choices in the types of educational opportunities that are available within the public school system; (6) hold schools accountable for meeting measurable pupil outcomes and provide schools a way to shift from a rule-based to a performance-based system of accountability; and (7) provide competition within the public school system to stimulate improvements in all public schools.

Anyone may write a charter. However, for a new charter school (not conversion of an existing traditional public school), charter developers must present a petition to the governing board of the local school district (or other chartering authority) containing the signatures of either: (1) a number of teachers meaningfully interested in teaching at the school equal to at least 50 percent of the number of teachers the charter school estimates will be employed, or (2) a number of parents representing at least 50 percent of the number of pupils expected to enroll at the school in its first year. For conversion schools, Charter School Law requires signatures of at least 50 percent of the permanent status teachers at the school to be converted. Pupils may not be required to attend a charter school nor may teachers be compelled to teach

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there. Charters are granted for a maximum term of five years, and may be renewed for new five-year terms without limitation upon satisfaction of certain criteria described below.

Generally, each charter school is funded to its statutory entitlement after the local contribution is taken into account. Local funding comes from the chartering school district or other sponsoring local education agency in lieu of property taxes (generally funded from the school district’s own property tax receipts), while the State funds the balance directly through the county office of education. The proportion coming from the State will vary from district to district depending on the amount of local property taxes collected. In addition, charter schools receive certain State funding and lottery funds based upon pupil attendance, and may be eligible for other special programmatic aid from State and federal grants. Charter schools are prohibited from charging tuition under the Charter School Law.

For additional information regarding funding of education in the State and information relating to certain risks and other considerations relevant to a decision to invest in the Bonds, see “STATE FUNDING OF EDUCATION” and “CERTAIN RISK FACTORS – Specific Risks of Charter Schools” herein.

Chartering Authority

Under the Charter School Law, the local school district governing board serves as the primary chartering authority. A petitioner may seek approval of a charter from a county board of education if the pupils to be served are pupils that would normally be provided direct education and related services by the county office of education. A petitioner may also seek approval from a county board of education for a countywide charter school, which may be granted only if the county board finds that the proposed countywide charter school will offer services to a pupil population that will benefit from those services and that cannot be served as well by a charter school that operates only in one school district in the county. See “— Countywide Benefit Charter Schools” below. A petitioner may seek approval directly from the State Board of Education only if the State Board of Education finds that the proposed state charter school will provide instructional services of statewide benefit that cannot be provided by a charter school operating in only one school district or county. See “— Statewide Benefit Charter” below. Petitioners may request the county board of education or the State Board of Education to review a charter petition if the petition has been previously denied by the local school district governing board. If the petitioners elect to submit a petition for establishment of a charter school to the county board of education and the county board of education denies the petition, the petitioners may file a petition for establishment of a charter school with the State Board of Education.

For information concerning the charters granted with respect to the Schools, see “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS – Value – Charter Schools Operated by Value” attached hereto.

Elements of a Charter Petition

Each charter petition, at a minimum, must contain reasonably comprehensive descriptions of each of sixteen required elements. They are:

1. A description of the educational program of the charter school.

2. The measurable pupil outcomes identified for use by the charter school.

3. The method by which pupil progress in meeting those pupil outcomes is to be measured.

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4. The charter school’s governance structure, including parental involvement.

5. The qualifications to be met by individuals employed by the charter school.

6. Procedures to ensure health and safety of pupils and staff.

7. The means by which the charter school will achieve racial and ethnic balance among pupils, reflective of the general population residing in the chartering district.

8. Admission requirements, if applicable.

9. The manner in which annual, independent financial audits will be conducted, and the manner in which audit exceptions and deficiencies will be resolved to the satisfaction of the chartering authority.

10. The procedures by which pupils may be suspended or expelled.

11. Provisions for employee coverage under the State Teachers’ Retirement System, the Public Employees’ Retirement System, or federal social security.

12. The public school attendance alternatives for pupils residing within the district who choose not to attend charter schools.

13. A description of the rights of any employee of the school district upon leaving the employment of the school district to work in a charter school, and of any rights of return to the school district after employment at a charter school.

14. The procedures to be followed by the charter school and the entity granting the charter to resolve disputes relating to provisions of the charter.

15. A declaration of whether or not the charter school will be deemed the exclusive public school employer of the employees of the charter school for purposes of the Educational Employment Relations Act.

16. A description of the procedures for closure of the school and disposition of assets.

Under the accountability requirements of Assembly Bill 1137 (“AB 1137”), signed into law in October 2003, districts or other agencies that grant charter authority must identify a contact person for charter schools, visit each charter school at least once a year, and ensure that charter schools submit all required reports (including fiscal reports that must be sent four times a year to the district and local county office of education). In addition, the district must monitor the fiscal condition of its charter schools and notify the State Department of Education whenever a charter is granted, denied, revoked, or the charter school will cease operation. AB 1137 also required that charter schools show a certain level of academic performance to have their charters renewed.

Countywide Benefit Charter Schools

Education Code Section 47605.6 provides for the creation of countywide benefit charter schools to operate at one or more sites within the geographic boundaries of a county and that provide instructional services that are not generally provided by a county office of education. A county board of education may approve a countywide charter only if it finds, in addition to the other requirements of the Charter

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School Law, that the educational services to be provided by the charter school will offer services to a pupil population that will benefit from those services and that cannot be served as well by a charter school that operates in only one school district in the county.

The provisions governing denial of a charter petition for school district governing boards, also apply to the denial of petition to countywide benefit charters. A county board of education will deny a petition if it finds one or more of the following: (i) the charter school presents an unsound educational program for the pupils to be enrolled in the charter school, (ii) petitioners are unlikely to successfully implement the program set forth in the petition, (iii) the petition does not contain the number of required signatures, (iv) the petition does not contain an affirmation of each of the enumerated conditions, and (v) the petition does not contain comprehensive descriptions of the educational program of the school, measurable pupil outcomes and certain other factors, as required by State law.

The Schools do not operate pursuant to countywide benefit charters. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS – Value – Charter Schools Operated by Value” attached hereto.

Statewide Benefit Charter Schools

Education Code Section 47605.8 provides for the creation of statewide benefit charter schools to operate at multiple locations throughout the State of California. A petition for the operation of a state charter school may be submitted to the State Board of Education (“SBE”) and the SBE has the authority to approve a charter for the operation of a state charter school. The SBE may not approve a petition for the operation of a state charter school unless it finds that the proposed state charter school will provide instructional services of statewide benefit that cannot be provided by a charter school operating in only one school district, or only in one county. As a condition of charter petition approval, the SBE may enter into an agreement with a third party, at the expense of the charter school, to oversee, monitor, and report on, the operations of the charter school.

The provisions governing denial of a charter petition for county boards of education, also apply to the denial of a petition to statewide benefit charters. Petition denials include: (i) the charter school presents an unsound educational program for the pupils to be enrolled in the charter school, (ii) petitioners are unlikely to successfully implement the program set forth in the petition, (iii) the petition does not contain the number of required signatures, (iv) the petition does not contain an affirmation of each of the enumerated conditions, and (v) the petition does not contain comprehensive descriptions of the educational program of the school, measurable pupil outcomes and certain other factors, as required by State law. The Schools do not operate pursuant to statewide benefit charters. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS – Value – Charter Schools Operated by Value” attached hereto.

Charter Management Organizations

As the number of charter schools operating pursuant to the Charter School Law has increased over time, nonprofit organizations have been established, referred to as charter management organizations (“CMOs”), to manage the operations of several charter schools for the purpose of achieving certain economic and operational efficiencies. CMOs centralize or share certain functions and resources among multiple charter schools, including but not limited to accounting, human resources, marketing, purchasing, property management and administration. CMOs may operate at the regional or statewide level. Value functions as a CMO for the Schools. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto.

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Charter Revocation

A charter may be revoked if the charter granting authority finds, based on substantial evidence, that a charter school (i) has committed a material violation any of the conditions, standards or procedures set forth in its charter, or (ii) has failed to meet or to pursue any of the student outcomes identified in its charter, or (iii) has failed to meet generally accepted accounting principles, or engages in fiscal mismanagement, or (iv) has violated any provision of law. Prior to revoking a charter, the charter granting authority must notify the charter school of the violation, afford the charter school a reasonable opportunity to remedy the violation, and, upon failure to do so, give written notice of intent to revoke and notice of facts in support of revocation to the charter school and hold a public hearing on the matter. An adverse decision by a school district governing board may be appealed to the county board of education and an adverse decision by the county board, directly or on appeal, may be appealed to the SBE. See “CERTAIN RISK FACTORS – Specific Risks of Charter Schools – Non-Renewal or Revocation of Charters” herein.

In addition, the SBE, whether or not it is the charter granting authority, may take action based on the recommendation of the State Superintendent of Public Instruction, including but not limited to revocation of a school’s charter, upon a finding of (i) gross financial mismanagement that jeopardizes the financial stability of the charter school, (ii) illegal or substantially improper use of charter school funds for the personal benefit of any officer, director or fiduciary of the charter school, or (iii) substantial and sustained departure from measurably successful practices such that continuing departure would jeopardize the education development of the school’s pupils. Regulations promulgated by the SBE that became effective February 13, 2011 require the California Department of Education to identify and notify the SBE of each charter school that is determined to warrant action pursuant to clause (iii) of the immediately preceding sentence by December 1 of each year. Under these regulations, charter schools so notified are required to be given an opportunity to submit written information as to why its charter should not be revoked. Any resulting action to revoke a charter is effective at the end of the fiscal year in which the action is taken, unless the SBE identifies departures at the school that are so significant as to be cause for immediate revocation and closure of the charter school. The regulations require the SBE to hold a public hearing to consider action including but not limited to charter revocation not later than March 31. See “CERTAIN RISK FACTORS – Specific Risks of Charter Schools – Non-Renewal or Revocation of Charters” herein.

The Schools have not received any notice from the SBE or their chartering authority regarding any violation or proposal to revoke the Schools’ charters or of any other violation requiring corrective action. In addition, as noted above, any future adverse decision by a school district governing board authorizer may be appealed to the County Board of Education of the applicable County and any adverse decision by such a County Board of Education, directly or on appeal, may be appealed to the SBE.

Amendments to the Charter School Law

The Legislature has amended the Charter School Law frequently since its initial adoption in 1992, and legislative and public attitudes are still evolving. Neither the Borrower nor any Charter School has any control over State legislative or regulatory decision making that could affect the operations or ongoing funding sources for the School. For example, Senate Bill 1290, signed into law by the Governor on September 26, 2012, requires the chartering authority to consider increases in pupil academic achievement for all groups of pupils as the most important factor in determining whether to grant a charter renewal or revoke a charter; and Assembly Bill 948, signed into law by the Governor on September 30, 2014, expanded eligibility for the Charter School Facility Grant Program.

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Neither the Borrower nor Value makes any representation as to whether any proposed amendments to Charter School Law will be enacted into law. For legislative updates see www.calcharters.org/advocacy/statewide/current-legislation.html. The parties to this transaction take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by such reference.

Growth in Charter Schools in California

California has the largest concentration of charter schools in the nation with more than 572,000 students enrolled in charter schools for the 2015-16 school year, according to the California Charter Schools Association. The California Charter Schools Association also reported that 86 new charter schools opened in the State of California in the 2015-16 school year, bringing the total number of charter schools in California up to 1,228.

TOTAL CHARTER SCHOOLS IN CALIFORNIA Fiscal Years 1998-99 Through 2015-16

Fiscal Year Number of Charter Schools

2015-16 1,228 2014-15 1,182 2013-14 1,130 2012-13 1,063 2011-12 982 2010-11 912 2009-10 809 2008-09 746 2007-08 682 2006-07 585 2005-06 560 2004-05 502 2003-04 443 2002-03 408 2001-02 349 2000-01 299 1999-00 235 1998-99 177

Source: California Charter School Association.

STATE FUNDING OF EDUCATION

General

The Charter School Law provides that the State legislature intended “each charter school be provided with operational funding that is equal to the total funding that would be available to a similar school district serving a similar pupil population . . .” As is true for school districts in the State, charter schools’ revenue is derived primarily from two sources: a State portion funded from the State’s general fund and a locally generated portion derived from each sponsoring school district’s share of the local ad valorem property tax. Decreases in State revenues, or in the legislative appropriations made to fund education, may significantly affect charter schools’ operations.

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Adoption of Annual State Budget. According to the State Constitution, the Governor of the State is required to propose a budget to the State Legislature no later than January 10 of each year, and a final budget must be adopted by the State Legislature no later than June 15, although this deadline has been breached in previous years. Historically, the budget required a two-thirds vote of each house of the State Legislature for passage. However, on November 2, 2010, the State’s voters approved Proposition 25, which amended the State Constitution to lower the vote requirement necessary for each house of the State Legislature to pass a budget bill and send it to the Governor. Specifically, the vote requirement was lowered from two-thirds to a simple majority (50% plus one) of each house of the State Legislature. This lower vote requirement also applies to trailer bills that appropriate funds and are identified by the State Legislature “as related to the budget in the budget bill.” The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. Under Proposition 25, a two-thirds vote of the State Legislature is still required to override any veto by the Governor. School district budgets must generally be adopted by July 1, and revised by the school board within 45 days after the Governor signs the budget act to reflect any changes in budgeted revenues and expenditures made necessary by the adopted State budget. The Governor signed the fiscal year 2016-17 State budget on June 27, 2016.

Failure by the State to adopt a budget may restrict the State Controller’s ability to disburse State funds. Under the rule of White v. Davis (also referred to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002 and later refined by a California Supreme Court decision in 2003, the State Controller may be able to disburse State funds after the beginning of the fiscal year prior to the adoption of the State budget bill or emergency appropriation if the expenditure, among other things, is (i) authorized by a continuing appropriation found in statute, (ii) mandated by the State Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federal law (such as payments to State workers at no more than minimum wage). The State Controller has consistently stated that basic State funding for schools is continuously appropriated by statute, but that special and categorical funds may not be appropriated without an adopted budget. Should the State Legislature fail to pass a budget or emergency appropriation before the start of any fiscal year, the Borrower might experience delays in receiving certain expected revenues. See “CERTAIN RISK FACTORS.”

State income tax and other receipts can fluctuate significantly from year to year, depending on economic conditions in the State and the nation. Because funding for education is closely related to overall State income, as described in this section, funding levels can also vary significantly from year to year, even in the absence of significant education policy changes. A brief description of the adopted State budget for fiscal year 2016-17 is included below; however, no prediction can be made as to how State income or State education funding will vary over the entire term to maturity of the Bonds, and neither the Borrower nor the Authority takes any responsibility for informing Beneficial Owners of the Bonds as to any such annual fluctuations. Information about the State budget and State spending for education is regularly available at various State maintained websites. Text of proposed and adopted budgets may be found at the website of the Department of Finance, www.dof.ca.gov., under the heading “California Budget.” An impartial analysis of the budget is posted by the Office of the Legislative Analyst at www.lao.ca.gov. In addition, various State of California official statements, many of which contain a summary of the current and past State budgets and the impact of those budgets on school districts in the State, may be found at the website of the State Treasurer, currently located at www.treasurer.ca.gov., and the Electronic Municipal Market Access (“EMMA”) website of the Municipal Securities Rulemaking Board, currently located at http://emma.msrb.org. The information referred to is prepared by the respective entities maintaining each website and not by the Borrower or the Authority, and neither the Borrower nor the Authority can take any responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references. The information referred to above should not be relied upon in making an investment decision with respect to the Bonds.

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Aggregate State Education Funding. Under Proposition 98, a constitutional and statutory amendment adopted by the State’s voters in 1988 and amended by Proposition 111 in 1990 (now found at Article XVI, Sections 8 and 8.5 of the Constitution), a minimum level of funding is mandated for school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs, including charter schools.

The Proposition 98 guaranteed amount for education is based on prior year funding, as adjusted through various formulas and tests that take into account State proceeds of taxes, local property tax proceeds, school enrollment, per capita personal income, and other factors. The State’s share of the guaranteed amount is based on State general fund tax proceeds and is not based on the general fund in total or on the State budget. The local share of the guaranteed amount is funded from local property taxes. The total guaranteed amount varies from year to year and throughout the stages of any given fiscal year’s budget, from the Governor’s initial budget proposal to actual expenditures to post year end revisions, as additional information regarding the various factors becomes available. Over the long run, the guaranteed amount may increase as enrollment and per capita personal income grow.

If, at year end, the guaranteed amount is calculated to be higher than the amount actually appropriated in that year, the difference becomes an additional education funding obligation, referred to as “settle up.” If the amount appropriated is higher than the guaranteed amount in any year, that higher funding level permanently increases the base guaranteed amount in future years. The Proposition 98 guaranteed amount is reduced in years when general fund revenue growth lags personal income growth, and may be suspended for one year at a time by enactment of an urgency statute. In either case, in subsequent years when State general fund revenues grow faster than personal income (or sooner, as the State Legislature may determine), the funding level must be restored to the guaranteed amount, the obligation to do so being referred to as “maintenance factor.”

In recent years, the State’s response to fiscal difficulties has had a significant impact on Proposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-up amounts when funding has lagged the mandated amount. In response, teachers’ unions, the State Superintendent and others sued the State or Governor in 1995, 2005, 2009 and 2011 to force them to fund schools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted in over $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down the obligations through additional education funding over time, including the Quality Education Investment Act of 2006 (QEIA), have also become part of annual budget negotiations, resulting in repeated adjustments and deferrals of the settle-up amounts.

The State has also sought to preserve general fund cash while avoiding increases in the base guaranteed amount through various mechanisms: by treating any excess appropriations as advances against subsequent years’ Proposition 98 minimum funding levels rather than current year increases; by temporarily deferring apportionments of Proposition 98 funds from one fiscal year to the next; by permanently deferring apportionments of Proposition 98 funds from one fiscal year to the next; by suspending Proposition 98, as the State did in fiscal years 2004-05, 2010-11, 2011-12 and 2012-13; and by proposing to amend the Constitution’s definition of the guaranteed amount and settle up requirement under certain circumstances. The 2014-15 State Budget and 2015-16 State Budget reversed certain of these trends by, among other things, eliminating certain deferrals, authorizing payments of certain deferred amounts owed to schools subject to State General Fund Revenues and authorizing settle-up payments with respect deferred apportionments of the Proposition 98 minimum guarantee.

2016-17 Budget. On June 27, 2016, the Governor signed into the law the State budget for fiscal year 2016-17 (the “2016-17 Budget”). The following information is drawn from the Department of Finance’s summary of the 2016-17 Budget.

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The 2016-17 Budget projects, for fiscal year 2015-16, total general fund revenues and transfers of $117 billion and total expenditures of $115.6 billion. The State is projected to end the 2015-16 fiscal year with total available reserves of $7.3 billion, including $3.9 billion in the traditional general fund reserve and $3.4 billion in the Budget Stabilization Account (the “BSA”). For fiscal year 2016-17, the 2016-17 Budget assumes total general fund revenues of $120.3 billion and authorizes expenditures of $122.5 billion. The State is projected to end the 2016-17 fiscal year with total available reserves of $8.5 billion, including $1.8 billion in the traditional general fund reserve and $6.7 billion in the BSA.

For fiscal year 2016-17, the 2016-17 Budget sets the minimum funding guarantee at $71.9 billion, an increase of $3.5 billion over the revised level from the prior fiscal year. Significant features with respect to K-12 education funding include the following:

Local Control Funding Formula – $2.9 billion of Proposition 98 funding to continue the implementation of the LCFF. As a result, the 2016-17 Budget projects total LCFF implementation to be at 96% during fiscal year 2016-17.

College Readiness – $200 million in one-time Proposition 98 funding to fund a block grant for school districts and charter schools serving high school students. Funds are intended to provide additional services that support access and successful transition to higher education. Allocation of the funding will be based on the number of students in grades 9 through 12 that are English-learners, low-income or foster youth, with no district or charter school receiving less than $75,000. The 2016-17 Budget also provides $15 million in one-time Proposition 98 grant funding to support coordinated student outreach by local educational agencies and community college districts aimed at increasing college preparation, access, and success.

Teacher Workforce – $35 million in one-time funding, including $25 million of Proposition 98 funding, to provide grants aimed at recruiting additional teachers and streamlining teacher credentialing programs.

Charter Schools – An increase of $20 million in one-time Proposition 98 funding to support startup costs for new charter schools in 2016 and 2017. The funds are intended to offset the loss of previously available federal funding.

Support Systems – $20 million in one-time Proposition 98 funding to assist local educational agencies provide academic, behavioral, social and emotional student support services.

Truancy and Dropout Prevention – Proposition 47, approved by voters in November 2014, reduces penalties for certain non-serious and non-violent property and drug offenses, and requires that State expenditures savings resulting from these reduced penalties by invested into K-12 truancy and dropout prevention. The 2016-17 Budget allocates $18 million of such funding to K-12 local education agencies.

Drinking Water – $9.5 million in one-time Proposition 98 funding to assist school districts that serve isolated or economically disadvantaged areas improve access to safe drinking water.

Mandates – $1.3 billion in one-time Proposition 98 funding to reduce the existing backlog of unpaid reimbursement claims to K-12 local educational agencies for the cost of State-mandated programs. The funding would be provided to local educational agencies on a per-student basis, and would be available to be used at local discretion.

For additional information regarding the 2016-17 Budget, see the State Department of Finance website at www.dof.ca.gov. However, the information presented on such website is not incorporated herein by reference.

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Prohibitions on Diverting Local Revenues for State Purposes. Beginning in 1992-93, the State satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and college districts through a local Educational Revenue Augmentation Fund (“ERAF”) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the State Legislature proposed an amendment to the State Constitution, which the State’s voters approved as Proposition 1A at the November 2004 election. That measure was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as “Proposition 22.”

The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services. It prevents the State from redirecting redevelopment agency property tax increment to any other local government, including school districts, or from temporarily shifting property taxes from cities, counties and special districts to schools, as in the ERAF program. This is intended to, among other things, stabilize local government revenue sources by restricting the State’s control over local property taxes. One effect of this amendment will be to deprive the State of fuel tax revenues to pay debt service on most State bonds for transportation projects, reducing the amount of State general fund resources available for other purposes, including education.

Prior to the passage of Proposition 22, the State invoked Proposition 1A to divert $1.935 billion in local property tax revenues in 2009-10 from cities, counties, and special districts to the State to offset State general fund spending for education and other programs, and included another diversion in the adopted 2009 10 State budget of $1.7 billion in local property tax revenues from local redevelopment agencies, which local redevelopment agencies have now been dissolved. Redevelopment agencies had sued the State over this latter diversion. However, the lawsuit was decided against the California Redevelopment Association on May 4, 2010. Because Proposition 22 reduces the State’s authority to use or shift certain revenue sources, fees and taxes for State general fund purposes, the State will have to take other actions to balance its budget in some years – such as reducing State spending or increasing State taxes, and school and community college districts that receive Proposition 98 or other funding from the State will be more directly dependent upon the State’s general fund.

Future Budgets and Budgetary Actions. The Borrower and the Authority cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the Borrower will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State’s ability to fund schools during fiscal year 2016-17 and in future fiscal years. State budget shortfalls in future fiscal years could have a material adverse financial impact on the Borrower.

Allocation of State Funding to Charter Schools

General Purpose Entitlement. Under the Charter School Law, each charter school is calculated to have a “general purpose entitlement,” which has in the past been based on the statewide average amount of State aid, local property taxes and other revenue received by school districts of similar type and serving similar pupil populations. The general purpose entitlement is calculated on a per student basis at each of four grade level ranges (grades K-3, grades 4-5, grades 6-8, and grades 9-12) and is multiplied by the charter school’s Average Daily Attendance (“ADA”) in each grade level range.

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Each charter school’s general purpose entitlement is funded from local funding in lieu of property taxes and, to the extent such funding is insufficient to fulfill the entire entitlement, from money appropriated by the State from the State’s general fund for education. The local share, which must be transferred in monthly installments to the charter school by the sponsoring local educational agency in lieu of property taxes, is the average amount of property taxes per ADA received by the district, including charter school students, multiplied by the charter school’s ADA.

Categorical Funding. In addition, each charter school has been entitled to a “categorical block grant.” School districts must qualify for categorical aid on the basis of the actual number of students in attendance who qualify for one or more special programs, and may only spend the aid for the restricted purposes of the program. Charter school students do not need to qualify individually for each program of certain categorical aid. Instead, a charter school “categorical block grant” is computed annually. Categorical block grant funding may be used for any purpose determined by the charter school. In addition, charter schools may apply for and receive separate categorical funds for many programs that are not included in the block grants, if otherwise eligible, but may not receive aid for programs exclusively or almost exclusively provided by a county office of education.

Local Control Funding Formula. State Assembly Bill 97 (Stats. 2013, Chapter 47) (“AB 97”), enacted as part of the 2013-14 State budget, establishes a new system for funding school districts, charter schools and county offices of education. Certain provisions of AB 97 were amended and clarified by Senate Bill 91 (Stats. 2013, Chapter 49) (“SB 91”).

Funding. The primary component of AB 97, as modified by SB 91, is the implementation of the Local Control Funding Formula (“LCFF”), which replaces the revenue limit funding system for determining State apportionments, as well as the majority of categorical program funding. Under the LCFF, State allocations will be provided on the basis of target base funding grants per unit of ADA (a “Base Grant”) assigned to each of four grade spans (identical to the grade spans previously used for charter school funding). Each Base Grant is subject to certain adjustments and add-ons, as discussed below. Full implementation of the LCFF is expected to occur over a period of eight fiscal years. Beginning in fiscal year 2013-14, an annual transition adjustment will be calculated for each charter school, equal to such charter school’s proportionate share of appropriations included in the State budget to close the gap between the prior-year funding level and the target allocation following full implementation of the LCFF. In each year, charter schools will have the same proportion of their respective funding gaps closed, with dollar amounts varying depending on the size of the charter school’ respective funding gaps.

For fiscal year 2013-14, the Base Grants per unit of ADA for each grade span are as follows: (i) $6,845 for grades K-3; (ii) $6,947 for grades 4-6; (iii) $7,154 for grades 7-8; and (iv) $8,289 for grades 9-12. In each subsequent year, the Base Grants are to be adjusted for cost-of-living increases by applying the implicit price deflator for government goods and services. Following full implementation of the LCFF, the provision of COLAs will be subject to appropriation for such adjustment in the annual State budget. The differences among Base Grants are linked to differentials in statewide average revenue limit rates by district type, and are intended to recognize the generally higher costs of education at higher grade levels.

The Base Grants for grades K-3 and 9-12 are subject to adjustments of 10.4% and 2.6%, respectively, to cover the costs of class size reduction in early grades and the provision of career technical education in high schools. The LCFF also provides additional add-ons to charter schools that received categorical block grant funding pursuant to the Targeted Instructional Improvement and Home-to-School Transportation programs during fiscal year 2012-13.

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Charter schools that serve students of limited English proficiency (“EL” students), students from low income families that are eligible for free or reduced priced meals (“LI” students) and foster youth are eligible to receive additional funding grants. Enrollment counts are unduplicated, such that students may not be counted as both EL and LI. Foster youth automatically meet the eligibility requirements for free or reduced priced meals, and are therefore not discussed herein separately. The LCFF authorizes a supplemental grant add-on (each, a “Supplemental Grant”) for charter schools that serve EL/LI students, equal to 20% of the applicable Base Grant multiplied by such charter schools’ respective percentages of unduplicated EL/LI student enrollment. Charter schools whose EL/LI populations exceed 55% of their total enrollment are eligible for a concentration grant add-on (each, a “Concentration Grant”) equal to 50% of the applicable Base Grant multiplied by the percentage of such charter school’s unduplicated EL/LI student enrollment in excess of the 55% threshold; provided that a charter school may not receive a Concentration Grant for a greater proportion of EL/LI than the school district in which it is located.

For certain charter schools that would have received greater funding levels under the prior revenue limit system, the LCFF provides for a permanent economic recovery target (“ERT”) add-on, equal to the difference between the general purpose funding such charter schools would have received under the prior system in fiscal year 2020-21, and the target LCFF allocations owed to such charter schools in the same year. To derive the projected funding levels, the LCFF assumes the discontinuance of deficit revenue limit funding, implementation of a 1.94% COLA in fiscal years 2014-15 through 2020-21, and restoration of categorical funding to pre-recession levels. The ERT add-on will be paid incrementally over the eight-year implementing period of the LCFF.

The sum of a charter school’s adjusted Base, Supplemental and Concentration Grants will be multiplied by the charter school’s total current year ADA. This funding amount, together with any applicable ERT or categorical block grant add-ons, will yield a district’s total LCFF allocation. Generally, the amount of annual State apportionments received by a school district or charter school will amount to the difference between such total LCFF allocation and such entity’s share of applicable local property taxes. Most school districts and charter schools receive a significant portion of their funding from such State apportionments. As a result, decreases in State revenues may significantly affect appropriations made by the Legislature to school districts and charter schools.

Accountability. The SBE has adopted regulations regarding the expenditure of supplemental and concentration funding. These regulations include a requirement that school districts and charter schools increase or improve services for EL/LI students in proportion to the increase in funds apportioned to such districts on the basis of the number and concentration of such EL/LI students, as well as the conditions under which school districts can use supplemental or concentration funding on a school-wide or district-wide basis.

School districts and charter schools are also required to adopt local control and accountability plans (“LCAPs”) disclosing annual goals for all students, as well as certain numerically significant student subgroups, to be achieved in eight areas of State priority. LCAPs may also specify additional local priorities. LCAPs must specify the actions to be taken to achieve each goal, including actions to correct identified deficiencies with regard to areas of State priority. Charter school LCAPs are required to be included in charter petitions and updated annually. School District LCAPs are required to be adopted every three years, beginning in fiscal year 2014-15, and updated annually thereafter.

Lottery Funding. Charter schools receive funding from the State Lottery Fund, which receives all proceeds from, among other sources, the sale of lottery tickets. Lottery funding is allocated to charter schools per unit of ADA. Lottery funds are distributed quarterly by the State Controller’s Office. Funding is based on annual average ADA. Lottery funds are identified as either “Proposition 20” funds or “non-Proposition 20” funds. Proposition 20 lottery funds may only be used to purchase instructional

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materials. Non-Proposition 20 lottery funds are unrestricted, except that they may not be used for acquisition of property, construction of facilities, financing of research, or for other non-instructional purposes. Lottery funding is not included in the charter school categorical block grant.

SB 740 Facilities Grant Program Funding. Charter schools that meet certain criteria are eligible to receive up to $750 per unit of ADA to reimburse an amount up to 75% of their annual facilities rent and lease costs from amounts appropriated under the annual Budget Act (and, if insufficient amounts are appropriated, then on a pro-rata basis). Eligibility requires (i) 55% or more of the charter school’s students must be eligible for free or reduced cost meals, or (ii) the charter school must be located in the attendance area of a public elementary school in which 55% or more of students are eligible for free or reduced cost meals and (iii) the charter school gives a preference in admissions to students who are currently enrolled in that public elementary school and to students who reside in the elementary school attendance area where the charter school is located.

SB 740 facilities funding may be used for costs associated with facilities rents and leases (consistent with the definitions used in the California School Accounting Manual), and for costs associated with remodeling buildings, deferred maintenance, installing or extending service systems and other built-in equipment, and improving sites. SB 740 facilities funding is not included in the charter school categorical block grant.

While it is the intent of the Legislature to appropriate funds sufficient to fund all grant amounts approved under the Program, the Program is subject to the annual Budget Act. In the event insufficient funds are appropriated, the available funds are apportioned on a pro rata basis. In addition to the risk of underfunding, should there be any changes to the free and reduced-price meal eligibility data the amount of grant funds, which is awarded in three disbursements, may be adjusted (or a reimbursement notice provided).


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The following tables describe ADA-based state funding of California charter school education for Fiscal Year 2012-13 through 2016-17:

STATE FUNDING OF CHARTER SCHOOL EDUCATION FISCAL YEAR 2012-13 (Dollars per unit of ADA)

Grades K-3 4-6 7-8 9-12 General Purpose Entitlement $5,109 $5,187 $5,346 $6,188 Categorical Block Grant 412 412 412 412 Lottery(2) 154 154 154 154 Total(1) $5,675 $5,753 $5,912 $6,754

STATE FUNDING OF CHARTER SCHOOL EDUCATION FISCAL YEAR 2013-14(Dollars per unit of ADA)

Grades K-3 4-6 7-8 9-12 Target LCFF Base Grant $6,952 $7,056 $7,266 $8,419 CTE/CSR Add-ons 723 -- -- 219 Lottery(2) 154 154 154 154 Total(1) $7,829 $7,210 $7,420 $8,792





STATE FUNDING OF CHARTER SCHOOL EDUCATION FISCAL YEAR 2016-17(3)

(Dollars per unit of ADA) Grades K-3 4-6 7-8 9-12 Target LCFF Base Grant $7,083 $7,189 $7,403 $8,577 CTE/CSR Add-ons 737 -- -- 223 Lottery(2) 189 189 189 189 Total(1) $8,009 $7,378 $7,592 $8,989 _____________________________________ (1) Excludes Special education, nutrition, After School Education and Safety, SB 740, Charter School Facility Grants, No Child Left Behind or Every Student Succeeds Act, class size reduction, supplemental instruction, economic impact aid, and National School Lunch Program funding and any private philanthropy, grants, or other fund-raising. (2) Estimated. (3) The Fiscal Year 2016-17 funding amounts are preliminary, used for initial budgeting purposes in general. For specific projections with respect to the Schools, see “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto. Sources: California Charter Schools Association; California Department of Education.

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For a description of the Schools’ ADA and funding related thereto, see “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto.

CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING EDUCATION REVENUES AND APPROPRIATIONS

Limitations on Revenues

Article XIIIA of the California Constitution. Article XIIIA of the State Constitution, adopted and known as Proposition 13, was approved by the voters in June 1978. Section 1(a) of Article XIIIA limits the maximum ad valorem tax on real property to one percent of “full cash value,” and provides that such tax will be collected by the counties and apportioned according to State law. Section 1(b) of Article XIIIA provides that the one-percent limitation does not apply to ad valorem taxes levied to pay interest and redemption charges on: (i) indebtedness approved by the voters prior to July 1, 1978, or (ii) bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast on the proposition, or (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district voting on the ballot proposition, but only if certain accountability measures are included in the bond proposition. Charter schools may not conduct bond elections or issue bonds payable from property taxes, but may benefit from the proceeds of bonds issued by the school district in which the charter school is located.

Section 2 of Article XIIIA defines “full cash value” to mean the county assessor’s valuation of real property as shown on the Fiscal Year 1975-76 tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. The Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently “recapture” such value (up to the pre decline value of the property) at an annual rate higher than 2%, depending on the assessor’s measure of the restored value of the damaged property. The California courts have upheld the constitutionality of this procedure. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except the 1% base tax levied by each County and taxes to pay debt service on indebtedness approved by the voters as described above.

Since its adoption, Article XIIIA has been amended a number of times. These amendments have created a number of exceptions to the requirement that property be reassessed when purchased, newly constructed or a change in ownership has occurred. These exceptions include certain transfers of real property between family members, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property has been destroyed in a declared disaster, and certain improvements to accommodate disabled persons and for seismic upgrades to property. These amendments have resulted in marginal reductions in the property tax revenues of local school districts.

Both the California State Supreme Court and the United States Supreme Court have upheld the validity of Article XIIIA.

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Section 51 of the Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently “recapture” such value (up to the pre decline value of the property) at an annual rate higher than 2%, depending on the assessor’s measure of the restoration of value of the damaged property. The constitutionality of this procedure was challenged in a lawsuit brought in 2001 in the Orange County Superior Court and in similar lawsuits brought in other counties, on the basis that the decrease in assessed value creates a new “base year value” for purposes of Proposition 13 and that subsequent increases in the assessed value of a property by more than 2% in a single year violate Article XIIIA. On appeal, the California Court of Appeal upheld the recapture practice in 2004, and the State Supreme Court declined to review the ruling, leaving the recapture law in place. Charter schools are not directly dependent on local property taxes. To the extent local property taxes fund the general purpose entitlement, losses in local property tax income are required to be made up by the State.

Proposition 30

On November 6, 2012, voters of the State of California approved the Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment (also known as “Proposition 30”), which temporarily increases the State Sales and Use Tax and personal income tax rates on higher incomes. Proposition 30 temporarily imposes an additional tax on all retailers, at the rate of 0.25% of gross receipts from the sale of all tangible personal property sold in the State from January 1, 2013 to December 31, 2016. Proposition 30 also imposes an additional excise tax on the storage, use, or other consumption in the State of tangible personal property purchased from a retailer on and after January 1, 2013 and before January 1, 2017, for storage, use, or other consumption in the State. This excise tax will be levied at a rate of 0.25% of the sales price of the property so purchased. For personal income taxes imposed beginning in the taxable year commencing January 1, 2012 and ending December 31, 2018, Proposition 30 increases the marginal personal income tax rate by: (i) 1% for taxable income over $250,000 but not over $300,000 for single filers (over $340,000 but not over $408,000 for joint filers), (ii) 2% for taxable income over $300,000 but not over $500,000 for single filers (over $408,000 but not over $680,000 for joint filers), and (iii) 3% for taxable income over $500,000 for single filers (over $680,000 for joint filers).

The California Children’s Education and Health Care Protection Act of 2016, also known as Proposition 55, is a constitutional amendment approved by the voters of the State on November 8, 2016. Proposition 55 extends through 2030 the increases to personal income tax rates for high-income taxpayers that were approved as part of Proposition 30. Proposition 55 did not extend the sales tax rate increase enacted under Proposition 30.

The revenues generated from the temporary tax increases will be included in the calculation of the Proposition 98 minimum funding guarantee for school districts and community college districts. From an accounting perspective, the revenues generated from the temporary tax increases will be deposited into the State account created pursuant to Proposition 30 called the Education Protection Account (the “EPA”). Pursuant to Proposition 30, funds in the EPA will be allocated quarterly, with 89% of such funds provided to schools districts and 11% provided to community college districts. The funds will be distributed to school districts and community college districts in the same manner as existing unrestricted per-student funding, except that no school district will receive less than $200 per unit of ADA and no community college district will receive less than $100 per full time equivalent student. The governing board of each school district and community college district is granted sole authority to determine how the moneys received from the EPA are spent, provided that, the appropriate governing board is required to make these spending determinations in open session at a public meeting and such local governing boards are prohibited from using any funds from the EPA for salaries or benefits of administrators or any other administrative costs.

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Future Initiatives

Articles XIIIA, Proposition 98, and Proposition 30 were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. From time to time, other initiative measures could be adopted, further affecting State and local revenues for education, and the ability or obligation of these government agencies to expend revenues for charter school purposes.

RISK FACTORS

Investment in the Series 2016 Bonds involves substantial risks. The following information should be considered by prospective investors in evaluating the Series 2016 Bonds. However, the following does not purport to be an exclusive listing of risks and other considerations which may be relevant to investing in the Series 2016 Bonds, and the order in which the following information is presented is not intended to reflect the relative importance of any such risks. Certain factors which could result in a reduction of revenues available to the Schools and a corresponding reduction in payments made to the Authority by the Borrower are discussed herein.

A number of factors could have an adverse impact on the ability of the Schools to generate sufficient revenues to meet their respective obligations under the Leases, which could, in turn, have an effect on the Borrower’s ability to make loan repayments. The ability of the Schools to generate sufficient revenues is dependent upon a number of elements, including California State budget pressures, demand for charter schools, the ability of the Schools to provide the educational services and classes demanded by parents or to attract students generally, changes in the level of confidence in the public school system in general or public charter schools in particular, competition, faculty recruitment, demographic changes, legislation, governmental regulations, changes in immigration policy, litigation and Value’s ability to achieve and maintain enrollment levels. This, in turn, is affected by numerous circumstances both within and outside the control of Value and the Schools, including a continuation of favorable governmental policies and programs with respect to public charter schools (see “CHARTER SCHOOLS” herein); the competitive appeal and perceived quality of Value’s curriculum; each Schools’ ability and energy of its faculty and administration; and the benevolence of supporters of the Schools. There can be no assurance given that revenues of the Borrower or the Schools will not decrease. Any and all financial projections are only good faith estimates and are not intended as a representation or warranty as to the future financial condition of Value or the Borrower. Value is not liable on the Loan Agreement but is the lessee under the Leases.

See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto for more detailed information.

General

The Series 2016 Bonds are payable primarily from Revenues which are derived from Base Rent payments owed by the Schools under the Leases, which are expected to be made to the Trustee by the State pursuant to the Intercept. The Borrower and Value will be credited with such payments against their obligations under the Loan Agreement and the Leases. The Borrower has also encumbered the Facilities with the Deeds of Trust as security for its obligation to make the payments under the Loan Agreement. No representation or assurance can be made that Revenues will be realized by the Borrower in amounts sufficient to make the payments under the Loan Agreement.

THE SERIES 2016 BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE CALIFORNIA SCHOOL FINANCE AUTHORITY, AND ARE NOT

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AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE FAITH AND CREDIT OF THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE SERIES 2016 BONDS, OR THE REDEMPTION PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. THE ISSUANCE OF THE SERIES 2016 BONDS SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWER. NOTHING IN THE INDENTURE, THE ACT OR OTHERWISE IS AN UNDERTAKING BY THE AUTHORITY OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO FUND THE TRANSFERS DESCRIBED IN THE INTERCEPT NOTICE (DEFINED HEREIN) OR TO MAKE STATE APPORTIONMENTS OR OTHER FUNDS AVAILABLE TO THE SCHOOLS IN ANY AMOUNT OR AT ANY TIME.

Operating History; Reliance on Projections

While Value is successfully operating several charter schools in California, University Prep has a limited operating history, having opened in fiscal year 2015-16. See Appendix A for information regarding current and projected enrollment of the Schools. No assurance is given that such projections will be met, or that the number of students attending the Schools may not diminish in the future. The projections of revenues and expenses contained in Appendix A are based upon the number of students projected to be enrolled at the Schools and were prepared by Value for the Borrower and have not been independently verified by any party other than Value.

No feasibility studies have been conducted with respect to operations of the Facilities pertinent to the Series 2016 Bonds. The projections are “forward-looking statements” and are subject to the general qualifications and limitations described herein. The Underwriter has not independently verified the Borrower’s projections set forth in Appendix A or otherwise, and makes no representations nor gives any assurances that such projections, or the assumptions underlying them, are complete or correct. Further, the projections relate only to a limited number of fiscal years, and consequently do not cover the entire period that the Series 2016 Bonds will be outstanding.

VALUE PREPARED THE PROJECTIONS BASED ON ASSUMPTIONS ABOUT FUTURE STATE FUNDING LEVELS AND FUTURE OPERATIONS OF THE FACILITIES, INCLUDING STUDENT ENROLLMENT AND EXPENSES. THERE CAN BE NO ASSURANCE THAT ACTUAL ENROLLMENT REVENUES AND EXPENSES WILL BE CONSISTENT WITH THE ASSUMPTIONS UNDERLYING SUCH PROJECTIONS. MOREOVER, NO GUARANTEE CAN BE MADE THAT THE PROJECTIONS OF REVENUES AND EXPENSES INCLUDED HEREIN WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE BECAUSE THERE CAN BE NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE PROJECTIONS’ UNDERLYING ASSUMPTIONS. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING, BUT NOT LIMITED TO, INCREASED COSTS, LOWER THAN ANTICIPATED REVENUES (AS A RESULT OF INSUFFICIENT ENROLLMENT, REDUCED STATE OR FEDERAL AID PAYMENTS, OR OTHERWISE), EMPLOYEE RELATIONS, CHANGES IN TAXES, CHANGES IN APPLICABLE GOVERNMENT REGULATIONS, CHANGES IN DEMOGRAPHIC TRENDS, CHANGES IN EDUCATION COMPETITION AND CHANGES IN LOCAL OR GENERAL ECONOMIC CONDITIONS. THIS RISK IS HEIGHTENED BY THE SCHOOLS’ LACK OF OPERATING HISTORY. REFER TO “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” ATTACHED HERETO TO REVIEW THE PROJECTIONS, THEIR UNDERLYING ASSUMPTIONS, AND THE

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OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM PROJECTED RESULTS. REFER TO “INTRODUCTION” ABOVE, FOR QUALIFICATION AND LIMITATIONS APPLICABLE TO FORWARD-LOOKING STATEMENTS.

Dependence on State Aid Payments that are Subject to Annual Appropriation and Political Factors

California charter schools such as the Schools may not charge tuition and have no taxing authority. The primary source of revenue generated by charter schools is aid provided by the State for all public schools. The amount of State aid received with respect to any individual school is based on a variety of factors. The amount of aid available in any year to pay the per pupil allowance is subject to appropriation by the California Legislature. The Legislature bases its decisions about appropriations on many factors, including the State’s economic performance. Moreover, because some public officials, their constituents, commentators and others have viewed charter schools as controversial, political factors may also come to bear on charter school funding. As a result, the Legislature may not appropriate funds, or may not appropriate funds in a sufficient amount, for the Schools to generate sufficient revenue to allow Value to meet its obligations under the Leases representing debt service payments on the Bonds. No liability would accrue to the State in such event, and the State would not be obligated or liable for any future payments or any damages. If the State were to withhold State aid payments for any reason, even for a reason that is ultimately determined to be invalid or unlawful, the Schools could be forced to cease operations.

Possible Offsets to State Apportionment

Section 41344 of the Education Code provides that if an audit or review requires any of the Schools to repay prior year apportionments because of significant audit exceptions, including penalty payments (“Audit Exceptions”), the Superintendent of Public Instruction (the “Superintendent”) and the Director of the Department of Finance (the “Director”), or their designees, will jointly establish a plan for the annual repayment of Audit Exceptions (the “Audit Repayment Plan”), which under certain circumstances can extend for a period of up to eight equal annual payments. The State Controller withholds from the State School Fund the amounts specified in the Audit Repayment Plan. If the Superintendent and the Director do not establish an Audit Repayment Plan, the State Controller withholds the entire amount of the Audit Exceptions from the next apportionment.

Included in the principal apportionment is the general-purpose entitlement for charter schools, which are the “funds subject to intercept” pursuant to Section 17199.4 of the Education Code (“Section 17199.4”). Specifically, the funds subject to intercept are funds apportioned for purposes of the charter school block grant or the local control funding formula (as described in Section 17199.4) with respect to the Schools.

Because the apportionments are the sum of multiple program entitlement calculations as well as prior adjustments, the amount available may be more or less than the calculated amount of funds subject to intercept. The amount available for intercept is therefore the lesser of periodic calculated funds subject to intercept and the amount of cash provided to Value with respect to the applicable Schools by the State.

The State Controller may reduce the funding available in the payment schedules for these apportionments to offset for funds owing to the State. These offsets include, but are not limited to, the following: Charter School Revolving Loan (Education Code Section 41365), Class Size Reduction (Education Code Section 52124); Audit Repayment (Education Code Sections 41341, 41344); and Accounts Receivable (Government Code Section 12419.5), in addition to other possible authorized or required offsets, or additional offsets not yet authorized by legislation. None of the foregoing offsets is currently applicable to the Schools.

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No Fee Interest in Certain Facilities

The Borrower does not hold a fee interest in the Series 2016 Facility, which it leases pursuant to the Ground Lease. The Ground Lease is terminable for certain defaults by the tenant thereunder, subject to any rights of the Trustee to cure certain defaults. Following an event of default, if the Trustee attempts to foreclose under the Series 2016 Deed of Trust on the leasehold interest under the Ground Lease, the Trustee may be unable or delayed in substituting a tenant under the corresponding Lease. The rights of the Trustee in such event will be limited by the terms of the Ground Lease. See “APPENDIX J – THE GROUND LEASE” attached hereto.

Default Under a Lease; No Assurance Regarding Subsequent Tenant

If there is a default by the Borrower under the Loan Agreement attributable to a default by Value under a Lease, the Borrower will likely not have sufficient funds to satisfy its obligations under the Loan Agreement absent re-leasing – or in appropriate cases, selling – the applicable Facility. Were Value to default under a Lease, there is no assurance that the Borrower would be able to find a new tenant for the applicable Facility which could generate revenues in a sufficient amount to allow the Borrower to make payments under the Loan Agreement to satisfy debt service on the Bonds or a buyer that would purchase such Facility for a sufficient amount to allow the Borrower to repay principal and interest with respect to the Loan Agreement. This risk is heightened by the fact that each of the Facilities has been improved specifically for use as a charter school campus and may be legally restricted to that use.

In addition, the term of the Series 2016 Lease does not extend past June 30, 2050, approximately one year prior to the maturity of the Series 2016 Bonds; but the last year of debt service on the Series 2016 Bonds is expected to be paid from funds held in the Reserve Account. See “DEBT SERVICE SCHEDULE” and “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Reserve Account” herein.

Schools’ Reliance on Value; Value not Liable on Loan Agreement.

Each of the Schools was established by and is managed by Value, which holds the charter for each School. The success of the Schools in attracting and retaining students, and on managing their expenses, depends on the efforts of Value. Value, however, is not a party to, or obligated under, the Loan Agreement. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto for more information about Value.

California Budget Deficit

In recent years the State of California has struggled with large budget deficits, leading to cuts in a number of programs, including K-12 education. See “State Funding of Education” herein. Reductions in State K-12 funding have been significant in the recent past and future reductions may occur, reducing revenues of the Schools. Such reductions may be material and may adversely affect the ability of the Schools to make payments under the Leases.

Tax Related Issues

Tax-Exempt Status of Interest on the Series 2016A Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Series 2016A Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of Series 2016A Bond proceeds, limitations on the investment earnings of Series 2016A Bond proceeds prior to expenditure, a requirement that certain investment earnings on

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Series 2016A Bond proceeds be paid periodically to the United States and a requirement that the issuers file an information report with the Internal Revenue Service (the “IRS”). The Authority, Value, the Borrower, and its sole member, Value Schools Foundation (the “Sole Member”), have covenanted in certain of the documents referred to herein that they will comply with such requirements. Failure by any of the foregoing to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Series 2016A Bonds as taxable, retroactively to the date of issuance of the Series 2016A Bonds.

Maintenance of the Tax-Exempt Status. The tax exempt status of the Series 2016A Bonds depends upon the maintenance by each of Value and the Sole Member of its status as an organization described in section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including the operation for charitable and educational purposes and avoidance of transactions which may cause the assets of either to inure to the benefit of private individuals.

In recent years, the IRS has increased the frequency and scope of its audit and other enforcement activity regarding tax-exempt organizations and, in particular, charter schools. As a result, tax-exempt organizations are increasingly subject to a greater degree of scrutiny. The primary penalty available to the IRS under the Code with respect to a tax-exempt entity engaged in unlawful private benefit is the revocation of tax-exempt status. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit corporations, it could do so in the future. Loss of tax-exempt status by Value or the Sole Member could potentially result in loss of tax exemption of interest on the Series 2016A Bonds and of other existing and future tax-exempt debt of the Borrower, if any, and defaults in covenants regarding the Series 2016A Bonds and other existing and future tax-exempt debt, if any, would likely be triggered.

Less onerous sanctions have been enacted which focus enforcement on private persons who transact business with a tax-exempt organization rather than the tax-exempt organization, but these sanctions do not replace the other remedies available to the IRS as mentioned above.

State Income Tax Exemption. The loss by Value or the Sole Member of federal tax exemption might trigger a challenge to its State income tax exemption. Such event could be adverse and material.

Unrelated Business Income. In recent years, the IRS and state, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt organizations with respect to their exempt activities and the generation of unrelated business taxable income (“UBTI”). Value and the Sole Member currently report no UBTI. Value and the Sole Member may participate in activities which generate UBTI in the future. If so, Value and the Sole Member believe they would properly account for and report UBTI; nevertheless, an investigation or audit could lead to a challenge which could result in taxes, interest and penalties with respect to unreported UBTI and in some cases could ultimately affect their tax-exempt status, as well as the exclusion from gross income for federal income tax purposes of the interest on the Series 2016A Bonds.

Exemption from Property Taxes. In recent years, State, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt corporations with respect to their real property tax exemptions. The Facilities are currently exempt from California real property taxation.

Factors That Could Affect the Security Interest in the Pledged Revenues

The Trustee’s security interest in the Facilities may be subordinated to the interest and claims of others in several instances. The Ground Lease may be subordinate to financing liens subsequently created

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by the Ground Lessor. Some other examples of cases of subordination of prior claims are (i) statutory liens, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) present or future prohibitions against assignment in any statutes or regulations, (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction, (v) federal or state bankruptcy or insolvency laws that may affect the enforceability of the or Intercept Loan Agreement or the Leases, (vi) rights of third parties in amounts not in the possession of the Trustee, and (vii) claims that might arise if appropriate financing or continuation statements are not filed in accordance with the California Uniform Commercial Code as from time to time in effect.

Construction Risks

Construction under the Project is generally subject to all typical construction related risks. Such risks include, among others, labor disputes, defective building materials, schedule delays, shortages in various labor trades, fire or other property or casualty damage, unanticipated subsoil conditions and financial difficulties on the part of or disputes with a construction manager, key suppliers, contractors or subcontractors. There can be no assurance that construction problems of the types described above, or other problems, will not frustrate the planned completion of any part of the construction of the Series 2016 Facility.

Limitations On Value of the Facilities and to Remedies Under the Deeds of Trust

No Appraisal of Series 2016 Facility. No appraisal has been provided to determine the value of the Borrower’s leasehold interest in the Ground Lease relating to the Series 2016 Facility.

Maintenance of Value. The Facilities are located in a region that has experienced significant real property market volatility over the past several years. There can be no assurance that should the Borrower default in making the payments due under the Loan Agreement, the Facilities could be foreclosed upon and sold for the amounts owed with respect to the Bonds.

Appraised Value is Less Than the Principal Amount of the Outstanding Bonds. The appraisal reports (the “Appraisals”) for the Prior Facilities estimate the market value of the Prior Facilities, as of their effective dates. See “THE FACILITIES – Appraisals” herein. No assurance can be given that the Prior Facilities could be sold for the amount of estimated market value thereof contained in the Appraisals. The Appraisals are subject to numerous limitations. In addition, the appraised values in the Appraisals are less than the principal amount of the Outstanding Bonds.

Hazardous Substances. While governmental taxes, assessments and charges are common claims against the value of property, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized is a claim with regard to hazardous substances. In general, the Borrower may be required by law to remedy conditions of the Facilities relating to release of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act,” is the most well-known and widely applicable of these laws. California laws with regard to hazardous substances are stringent and similar to certain federal acts. 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) had or has anything to do with the creation or handling of the hazardous substance. The effect, therefore, should the Facilities be affected by a hazardous substance, is generally to reduce the marketability and value of the parcel by the cost of remedying the condition. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling the hazardous substance. Any of these potentialities could significantly affect the value of the Facilities that would be realized upon a default and foreclosure.

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Foreclosure. There are two methods of foreclosing on a deed of trust or mortgage under California law, by nonjudicial sale and by judicial sale. Foreclosure under a deed of trust may be accomplished by a nonjudicial trustee’s sale under the power of sale provision in the deed of trust. Prior to such sale, the trustee must record a notice of default and election to sell and send a copy to the trustor, to any person who has recorded a request for a copy of the notice of default and notice of sale, to any successor in interest of the trustor and to certain other parties discernable from the real property records. The trustee then must wait for the lapse of at least three months after the recording of the notice of default and election to sell before establishing the trustee’s proposed sale date and giving a notice of sale (in a form mandated by California statutes). The notice of sale must be posted in a public place and published once a week for three consecutive calendar weeks, with the first such publication preceding the trustee’s sale by at least 20 days. Such notice of sale must be posted on the property and sent, at least 20 days prior to the trustee’s sale, to the trustor, to each person who has requested a copy, to any successor in interest of the trustor, to the beneficiary of any junior deed of trust and to certain other parties discernable from the real property records. In addition, the notice of sale must be recorded with the county recorder at least 14 days prior to the date of sale. The trustor, any successor in interest of the trustor in the trust property, or any person having a junior lien or encumbrance of record may, during the statutory reinstatement period, which extends to five days prior to the sale date, cure any monetary default by paying any delinquent installments of the debt then due under the terms of the deed of trust and certain other obligations secured thereby (exclusive of principal due by virtue of acceleration upon default) plus costs and expenses actually incurred in enforcing the obligation and certain statutorily limited attorneys’ and trustees’ fees. Following a nonjudicial sale, neither the trustor nor any junior lienholder has any right of redemption, and the beneficiary may not ordinarily obtain a deficiency judgment against the trustor.

Should foreclosure under a deed of trust be sought in the form of a judicial foreclosure, it is generally subject to most of the delays and expenses of other lawsuits, and may require several years to complete. The primary advantage of a judicial foreclosure is that the beneficiary is entitled, subject to other limitations, to obtain a deficiency judgment against the trustor to the extent that the amount of the debt is in excess of the fair market value of the property. Following a judicial foreclosure sale, the trustor or its successors in interest may redeem the property for a period of one year (or a period of only three months if the proceeds of sale are sufficient to satisfy the debt, plus interest and costs). In addition, in order to assure collection of any rents assigned as additional collateral under the Deeds of Trust, a receiver for the Facilities may be appointed by a court.

Seismic. The Facilities are located in a seismically active region of California. The occurrence of severe seismic activity could result in substantial damage to the Facilities, which could adversely affect the ability of the Borrower to operate the Facilities and/or for the Schools to make the payments under the Leases and could adversely affect the value of the Facilities.

Environmental Risks. There are potential risks relating to liabilities for environmental hazards with respect to the ownership of any real property. If hazardous substances are found to be located on a property, owners of such property may be held liable for costs and other liabilities related to the removal of such substances which costs and liabilities could exceed the value of the Facilities or any portion thereof. See “THE PROJECT” herein.

Bankruptcy

The rights and remedies of the owners of the Bonds are subject to various provisions of the Federal Bankruptcy Code (the “Bankruptcy Code”). If the Borrower were to become a debtor in a bankruptcy case, its revenues and certain of its accounts receivable and other property created or otherwise acquired after the filing of such petition and for up to 90 days prior to the filing of such petition may not be subject to the security interest created under the Deeds of Trust for the benefit of the owners

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of the Bonds. The filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Borrower, and its property, and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property. If the bankruptcy court so ordered, the property of the Borrower, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of the Borrower despite the security interest of the Trustee therein. While the Bankruptcy Code requires that the interest of the Trustee as lien owner be adequately protected before the collateral may be used by the Borrower, such protection could take the form of a replacement lien on assets of the Borrower acquired or created after the bankruptcy petition is instituted. The rights of the Trustee to enforce liens and security interests against the Borrower’s assets could be delayed during the pendency of the rehabilitation proceedings.

The Borrower could file a plan for the reorganization of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the debtor provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two thirds in dollar amount and more than one half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly.

Key Management

The creation of, and the philosophy of teaching in, charter schools generally initially may reflect the vision and commitment of a few key persons on the board of directors and/or the upper management of the charter school (“Key Directors/Managers”). Loss of any such Key Directors/Managers, and the inability of Value and the Sole Member to find comparable qualified replacements, could adversely affect the operations or financial results of the Schools. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto for more information regarding the governance and management of the Borrower and Value.

Factors Associated with the Schools’ Operations

There are a number of factors affecting schools generally that could have an adverse effect on Value’s financial position and ability to make Lease payments necessary to permit the Borrower to make debt service payments on the Bonds. These factors include, but are not limited to, failure to qualify for statutory reimbursement under state programs; State deferrals of student payments; increasing costs of compliance with federal, state or local laws or regulations, including, but not limited to, laws or regulations concerning environmental quality, work safety and accommodation of persons with disabilities; taxes or other charges imposed by federal, state or local governments; the ability to attract a sufficient number of students due to reputational concerns; changes in existing statutes pertaining to the powers of the Schools and disruption of the Schools operations by real or perceived threats against the Schools, its staff members or students. Value cannot assess or predict the ultimate effect of such factors on its operations or financial results of its operations or on Value’s ability to make Lease payments.

State Financial Difficulties

Charter schools, like all public schools, depend on revenues from the State for a large portion of their operating budgets. The availability of State funds for public education is a function of constitutional and statutory provisions affecting school district revenues and expenditures, the condition of the State

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economy (which affects total revenue available to the State School Fund) and the annual State budget process. Decreases in State revenues may adversely affect education appropriations made by the Legislature. As noted, the Legislature bases its decisions about appropriations on many factors, including the State’s economic performance, and, because some public officials, their constituents, commentators and others have viewed charter schools as controversial, political factors may also come to bear on charter school funding. See “CERTAIN RISK FACTORS – Dependence on State Aid Payments that are Subject to Annual Appropriation and Political Factors” above.

The State has previously experienced severe financial difficulties. In prior years, the State’s response to its financial difficulties has had a significant impact on Proposition 98 funding and settle-up treatment, as further described in “STATE FUNDING OF EDUCATION.” In the past, the State has sought to avoid or delay paying settle-up amounts when funding has lagged the guaranteed amount. The State has also sought to avoid increases in the minimum guarantee through various mechanisms by treating any excess appropriations as advances against subsequent years’ Proposition 98 minimum funding levels rather than current-year increases; by deferring State aid payments from one fiscal year to the next; and by suspending Proposition 98. Continued decreases in State revenues may adversely affect education appropriations made by the Legislature. None of the Borrower, Value or any other party to the Series 2016 Bond transaction can predict how State income or State education funding will vary over the entire term of the Series 2016 Bonds. No party to the Series 2016 Bond transaction takes any responsibility for informing owners of the Series 2016 Bonds about any such changes.

Information about the financial condition of the State, as well as its budget and spending for education, is available and regularly updated on various State-maintained websites, including those of the LAO, the Department of Finance and the California State Controller. In addition, various State of California official statements, which contain summaries of current and past State budgets and the impact of those budgets on State education funding, may be found at the website of the California State Treasurer, www.treasurer.ca.gov. Such information is prepared by the respective State entity maintaining each such website and not by any of the parties to this transaction. The parties to this transaction take no responsibility for the accuracy, completeness or timeliness of such information or the continued accuracy of the internet addresses noted herein, and no such information is incorporated herein by these references.

Budget Delays and Restrictions on Disbursement of State Funds during a Budget Impasse

The State Constitution specifies that an annual budget will be proposed by the Governor by January 10 of each year for the next fiscal year (the “Governor’s Budget”). Under State law, the annual proposed Governor’s Budget cannot provide for projected expenditures in excess of projected revenues for the ensuing fiscal year. State law also requires the Governor to update the Governor’s Budget projections and budgetary proposals by May 14 of each year (the “May Revision”). The May Revision is normally the basis for final negotiations between the Governor and Legislature to reach agreement on appropriations and other legislation to fund State government for the ensuing fiscal year (the “Budget Act”).

The Budget Act must be approved by a majority vote of each House of the Legislature and must be in balance. The budget becomes law upon the signature of the Governor. Text of proposed and adopted budgets may be found at the website of the Department of Finance, www.dof.ca.gov, currently under the heading “California Budget.” Analyses of budgets are prepared by the Legislative Analyst’s Office at www.lao.ca.gov. Such information is prepared by the respective State entity maintaining each such website and not by any of the parties to this transaction. The parties to this transaction take no responsibility for the accuracy, completeness or timeliness of such information or the continued accuracy of the internet addresses noted herein, and no such information is incorporated herein by these references.

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The State Legislature is required to approve a State Budget Act no later than June 15 of each year. The State Legislature has failed to approve the State Budget Act by the deadline therefor in a number of years. Failure by the State to adopt a Budget Act restricts the California State Controller’s ability to disburse State funds after the beginning of the ensuing fiscal year. See “STATE FUNDING OF EDUCATION – General – Adoption of Annual State Budget” herein regarding the ability of the State Controller to disburse State funds in such situations. Any State budget delay would delay the State’s appropriation of funds and could negatively impact Value’s ongoing viability and its ongoing ability to make payments under the Leases representing debt service on the Bonds.

Other Limitations on Enforceability of Remedies

There exists common law authority and authority under various state statutes pursuant to which courts may terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that the corporation has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out such purposes. Such court action may arise on the court’s own motion or pursuant to a petition of a state attorney general or other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.

In addition to the foregoing, the realization of any rights under the Loan Agreement, the Indenture, the Leases and the Deeds of Trust upon a default depends upon the exercise of various remedies specified in the Loan Agreement, the Indenture, the Leases and the Deeds of Trust. These remedies may require judicial action which is often subject to discretion and delay. Under existing law, certain of the remedies specified in the Loan Agreement, the Indenture, the Leases and the Deeds of Trust may not be readily available or may be limited. For example, a court may decide not to order the specific performance of the covenants contained in the Loan Agreement, the Indenture, the Leases and the Deeds of Trust. Accordingly, the ability of the Authority or the Trustee to exercise remedies under the Loan Agreement, the Indenture, the Leases and the Deeds of Trust upon an Event of Default could be impaired by the need for judicial or regulatory approval.

Specific Risks of Charter Schools

Charter School Law. The Charter School Law is evolving. Amendments are made relatively frequently and legislative and public attitudes are still forming. It is likely that additional changes will be made in the future, some of which may be adverse to charter schools in general and to the Schools in particular. See “CHARTER SCHOOLS — Amendments to the Charter School Law” herein.

Non-Renewal or Revocation of Charters. The Charter School Law enables charter authorizers to grant five-year charters which may be renewed after evaluation and can be revoked at any time because of either educational non-performance or fiscal mismanagement. See “CHARTER SCHOOLS” herein. Management of Value believes that it has stable relationships with its district charter authorizer, the County offices of education, and representatives on the SBE, each of which, under appropriate circumstances, is authorized to grant charters under the Charter School Law. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto.

Legal Challenges. In addition to non-renewal or revocation, a charter may also be subject to challenge by an interested third-party. No assurance can be given that a School’s charter will not be subjected to legal challenge. See “ABSENCE OF MATERIAL LITIGATION – the Borrower” herein and “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND

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THE SCHOOLS – OPERATING AND FINANCIAL INFORMATION – Litigation” attached hereto. Any failure of Value to have a charter for each of the Schools in place could well have a material adverse effect on the Borrower and its ability to generate revenues necessary to make payments under the Loan Agreement which are expected to provide sufficient revenues to satisfy the debt service requirements for the Bonds.

Budgetary Constraints. Charter Schools are funded primarily from State and local tax revenues and budgetary pressures at the State or local level may jeopardize future funding levels, or result in material delays in the receipt of revenues, which may adversely affect the ability of the Schools to make their respective payments under the Leases. See “STATE FUNDING OF EDUCATION” above.

Enrollment Levels. Value’s revenues and financial strength will depend in part upon maintaining certain enrollment levels at the Schools. A reduction in enrollment will have a direct result of reducing ADA payable with respect to the affected charter School.

Risk of Reduction in ADA Funding. Since the vast majority of funds for the Schools’ operations come from the State on the basis of ADA, each School is subject to State funding reductions or restrictions that might affect all public school districts and charter schools. Among other such risks, over time the State may not increase ADA-based funding commensurate with increases in the cost of School operations, or the State may even decrease ADA-based funding.

ADA-based funding is determined by actual attendance, and not by student enrollment data. Regardless of the statewide level of ADA-based funding, the Schools are subject to loss of revenue if enrollment should decrease, or if average daily attendance should decrease even if enrollment remains steady, whether due to student illness, truancy or other factors. Such a loss of revenues could adversely affect the ability of Value to make payments under the Leases.

In addition, the Charter School Law prohibits a charter school from imposing fees or charges for its educational services. Therefore, Value is dependent upon receipt of ADA funding relating to its charters school as well as philanthropic support. There is little any school can do to increase revenues, other than to admit a larger number of students.

Compliance with the Elementary and Secondary Education Act. Prior to the adoption of the ESSA (defined below), the No Child Left Behind Act of 2001 (the “NCLB”) served as the primary federal law with respect to K-12 education. NCLB employed the concept of Adequate Yearly Progress (“AYP”) to measure and hold schools and school districts responsible for student achievement. In California, the NCLB subjected California schools to an annual AYP determination. AYP was calculated by using a formula set by the California Department of Education. It measured participation rates, math and reading performance, and graduation rate targets for the elementary, middle and high school levels. In connection with the adoption of ESSA, the federal government has repealed the AYP requirement.

Under California law, if a school received Title I funds and did not make AYP for two consecutive years, the school was placed on “Program Improvement” status and the school was required to develop a school improvement plan. If the school did not achieve AYP goals for a third year, “corrective action” was undertaken, which could include the provision of supplemental educational services for low-performing, low-income students. A school that continued to fail to make AYP was required to take corrective action and undergo restructuring plans. Failure to meet AYP for years subsequent to the second year carried further consequences under the NCLB. Under California law, the right to operate a charter school may be terminated if the school fails to make or meet reasonable progress toward achievement of goals, objectives, content standards, pupil performance standards or applicable federal requirements.

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In March 2014, the State of California was granted a one-year waiver by the U.S. Department of Education from using test results of academic assessments to calculate AYP under the then-existing NCLB, in order to facilitate the state’s transition to the new California Assessment of Student Performance and Progress (“CAASPP”) system. In March 2015, the California State Board of Education requested another one-year waiver from the U.S. Department of Education. In May 2015, the U.S. Department of Education granted the additional one-year waiver, with certain conditions.

In December 2015, the Every Student Succeeds Act of 2015 (the “ESSA”) was passed by Congress and signed by the President in connection with the amendment and reauthorization of the Elementary and Secondary Education Act of 1965. ESSA, among other things, prohibits officers and employees of the federal government from mandating, directing or controlling a state, local education agency or school’s specific instructional content, academic standards and assessments, curriculum, or program of instruction, as a condition of eligibility to receive funds under ESSA. Value is currently reviewing the ESSA. However, Value does not expect ESSA to impact its ability to make payments under the Leases representing debt service on the Bonds.

Risk of Reductions in Fundraising

Value has been successful in recent years raising funds from private sources. See “APPENDIX A – CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS” attached hereto. There is no assurance that such fundraising success will continue.

Claims and Insurance Coverage

Litigation could arise from the corporate and business activities of the Borrower and of the Schools, including from their status as employers. Many of these risks are covered by insurance, but some are not. For example, claims arising from wrongful termination or sexual molestation claims and business disputes may not be covered by insurance or other sources and may, in whole or in part, be a liability of the affected school if determined or settled adversely.

The Borrower covenants and agrees in the Loan Agreement that it will keep maintain, or caused to be maintained, property, general liability and business interruption insurance with respect to the Facilities at levels set forth in the Loan Agreement. The Borrower is not obligated by the Loan Agreement to maintain earthquake insurance and there can be no assurance that the Borrower will obtain such coverage in the future. See “APPENDIX D – SUMMARY OF PRINCIPAL BOND DOCUMENTS – SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT” attached hereto.

Purchases and Transfers of Bonds Restricted to Approved Institutional Buyers and Accredited Investors

As set forth under “TRANSFER RESTRICTIONS” herein, purchasers of Bonds are required to be Approved Institutional Buyers or Accredited Investors, as defined in the Indenture. Such requirement may make the Bonds harder to sell and may adversely affect their market value.

Failure to Provide Ongoing Disclosure

The Borrower and Value will enter into a Continuing Disclosure Agreement with the Trustee, as dissemination agent, pursuant to Securities and Exchange Commission Rule 15c2-12 (the “Rule”) in connection with the issuance of the Series 2016 Bonds. Any material failure to comply with the Continuing Disclosure Agreement and the Rule in the future may adversely affect the liquidity of the affected Series 2016 Bonds and their market price in the secondary market.

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Use of Facilities

No assurance can be given as to whether a challenge to the educational use of the Facilities brought would result in an interruption of the Schools’ operations and have a material negative impact on the Gross Revenues. Any court order prohibiting the educational use of the Facilities would entitle the Trustee to submit a claim on the lender’s title insurance policy. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS” herein.

ABSENCE OF MATERIAL LITIGATION

The Authority

To the knowledge of the Authority, there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending against the Authority seeking to restrain or enjoin the sale or issuance of the Series 2016 Bonds, or in any way contesting or affecting any proceedings of the Authority taken concerning the sale thereof, the pledge or application of any moneys or security provided for the payment of the Series 2016 Bonds, the validity or enforceability of the documents executed by the Authority in connection with the Series 2016 Bonds, the completeness or accuracy of the Limited Offering Memorandum or the existence or powers of the Authority relating to the sale of the Series 2016 Bonds.

The Borrower

There is no controversy or litigation of any nature now pending against the Borrower or, to the knowledge of the officers of the Sole Member of the Borrower, threatened, which seeks to restrain or enjoin the sale or issuance of the Series 2016 Bonds or in any way contests or affects the validity of the Series 2016 Bonds, or any proceedings of the Borrower taken concerning the issuance or sale of the Series 2016 Bonds, or the pledge or application of any moneys or security provided for the payment of the Series 2016 Bonds, the use of the Series 2016 Bond proceeds or the existence or powers of the Borrower relating to the issuance of the Series 2016 Bonds.

Value

There is no controversy or litigation of any nature now pending against Value or, to the knowledge of the officers of Value, threatened, which seeks to restrain or enjoin the sale or issuance of the Series 2016 Bonds or in any way contests or affects the validity of the Series 2016 Bonds, or any proceedings of the Schools taken concerning the issuance or sale of the Series 2016 Bonds, or the pledge or application of any moneys or security provided for the payment of the Series 2016 Bonds, the use of the Series 2016 Bond proceeds or the existence or powers of Value relating to the issuance of the Series 2016 Bonds.

TAX MATTERS

The Series 2016A Bonds

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2016A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Series 2016A Bonds is not a specific preference item

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for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in “APPENDIX H – FORM OF OPINION OF BOND COUNSEL” hereto.

To the extent the issue price of any maturity of the Series 2016A Bonds is less than the amount to be paid at maturity of such Series 2016A Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Series 2016A Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each beneficial owner thereof, is treated as interest on the Series 2016A Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Series 2016A Bonds is the first price at which a substantial amount of such maturity of the Series 2016A Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Series 2016A Bonds accrues daily over the term to maturity of such Series 2016A Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Series 2016A Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Series 2016A Bonds. Beneficial owners of the Series 2016A Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Series 2016A Bonds with original issue discount, including the treatment of beneficial owners who do not purchase such Series 2016A Bonds in the original offering to the public at the first price at which a substantial amount of such Series 2016A Bonds is sold to the public.

Series 2016A Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a beneficial owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such beneficial owner. Beneficial owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Series 2016A Bonds. The Authority, the Borrower, the Sole Member and Value have made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Series 2016A Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Series 2016A Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Series 2016A Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Series 2016A Bonds may adversely affect the value of, or the tax status of interest on, the Series 2016A Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters.

In addition, Bond Counsel has relied on, among other things, the opinion of Musick, Peeler & Garrett LLP, counsel to the Borrower, Value and the Sole Member (“Borrower’s Counsel”), regarding the

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current qualification of Value and the Sole Member as organizations described in Section 501(c)(3) of the Code and the intended operation of the facilities to be financed by the Series 2016A Bonds as substantially related to the Sole Member’s charitable purpose under Section 513(a) of the Code. Such opinions are subject to a number of qualifications and limitations. Bond Counsel has also relied upon representations of Value and the Sole Member concerning the intended operation of the facilities to be financed by the Series 2016A Bonds as substantially related to the their charitable purposes under Section 513(a) of the Code. Except as provided in this paragraph, neither Bond Counsel nor Borrower’s Counsel has given any opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor Borrower’s Counsel can give or has given any opinion or assurance about the future activities of the Borrower, Value or the Sole Member, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the resulting changes in enforcement thereof by the IRS. Failure of either of Value or the Sole Member to be organized and operated in accordance with the IRS’s requirements for the maintenance of their respective status as an organization described in Section 501(c)(3) of the Code, or to operate the facilities financed by the Series 2016A Bonds in a manner that is substantially related to their charitable purposes under Section 513(a) of the Code, may result in interest payable with respect to the Series 2016A Bonds being included in federal gross income, possibly from the date of the original issuance of the Series 2016A Bonds.

Although Bond Counsel is of the opinion that interest on the Series 2016A Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of amounts treated as interest on, the Series 2016A Bonds may otherwise affect a beneficial owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the beneficial owner or the beneficial owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Series 2016A Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. For example, legislative proposals have been made in recent years that would limit the exclusion from gross income of interest on obligations like the Series 2016A Bonds to some extent for taxpayers who are individuals and whose income is subject to higher marginal income tax rates. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for or marketability of, the Series 2016A Bonds. Prospective purchasers of the Series 2016A Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Series 2016A Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority, the Borrower, Value and the Sole Member, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority, the Borrower, Value and the Sole Member have covenanted, however, to comply with the requirements of the Code.

Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the Borrower, the Sole Member, Value or the beneficial owners regarding the tax-exempt status of the Series 2016A Bonds in the

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event of an audit examination by the IRS. Under current procedures, parties other than the Authority, the Borrower, the Sole Member, Value and their appointed counsel, including the beneficial owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or the Borrower, the Sole Member or Value legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Series 2016A Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues, may affect the market price for, or the marketability of, the Series 2016A Bonds, and may cause the Authority, the Borrower, the Sole Member, Value or the beneficial owners to incur significant expense.

The Series 2016B Bonds

In the opinion of Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2016B Bonds is exempt from State of California personal income taxes. Bond Counsel observes that interest on the Series 2016B Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Code. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2016B Bonds.

The following discussion summarizes certain U.S. federal income tax considerations generally applicable to U.S. Holders (as defined below) of the Series 2016B Bonds that acquire their Series 2016B Bonds in the initial offering. The discussion below is based upon laws, regulations, rulings, and decisions in effect and available on the date hereof, all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been or are expected to be sought from the U.S. Internal Revenue Service (the “IRS”) with respect to any of the U.S. federal income tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions. Further, the following discussion does not deal with U.S. tax consequences applicable to any given investor, nor does it address the U.S. tax considerations applicable to all categories of investors, some of which may be subject to special taxing rules (regardless of whether or not such investors constitute U.S. Holders), such as certain U.S. expatriates, banks, REITs, RICs, insurance companies, tax-exempt organizations, dealers or traders in securities or currencies, partnerships, S corporations, estates and trusts, investors that hold their Series 2016B Bonds as part of a hedge, straddle or an integrated or conversion transaction, or investors whose “functional currency” is not the U.S. dollar. Furthermore, it does not address (i) alternative minimum tax consequences, (ii) the net investment income tax imposed under Section 1411 of the Code, or (iii) the indirect effects on persons who hold equity interests in a holder. This summary also does not consider the taxation of the Series 2016B Bonds under state, local or non-U.S. tax laws. In addition, this summary generally is limited to U.S. tax considerations applicable to investors that acquire their Series 2016B Bonds pursuant to this offering for the issue price that is applicable to such Series 2016B Bonds (i.e., the price at which a substantial amount of the Series 2016B Bonds are sold to the public) and who will hold their Series 2016B Bonds as “capital assets” within the meaning of Section 1221 of the Code. The following discussion does not address tax considerations applicable to any investors in the Series 2016B Bonds other than investors that are U.S. Holders.

As used herein, “U.S. Holder” means a beneficial owner of a Series 2016B Bond that for U.S. federal income tax purposes is an individual citizen or resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust where a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons

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(as defined in the Code) have the authority to control all substantial decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust). If a partnership holds Series 2016B Bonds, the tax treatment of such partnership or a partner in such partnership generally will depend upon the status of the partner and upon the activities of the partnership. Partnerships holding Series 2016B Bonds, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the Series 2016B Bonds (including their status as U.S. Holders).

Prospective investors should consult their own tax advisors in determining the U.S. federal, state, local or non-U.S. tax consequences to them from the purchase, ownership and disposition of the Series 2016B Bonds in light of their particular circumstances.

U.S. Holders

Interest. Interest on the Series 2016B Bonds generally will be taxable to a U.S. Holder as ordinary interest income at the time such amounts are accrued or received, in accordance with the U.S. Holder’s method of accounting for U.S. federal income tax purposes.

To the extent that the issue price of any maturity of the Series 2016B Bonds is less than the amount to be paid at maturity of such Series 2016B Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Series 2016B Bonds), the difference may constitute original issue discount (“OID”). U.S. Holders of Series 2016B Bonds will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest (which may be before the receipt of cash payments attributable to such income). Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID in successive accrual periods.

Series 2016B Bonds purchased for an amount in excess of the principal amount payable at maturity (or, in some cases, at their earlier call date) will be treated as issued at a premium. A U.S. Holder of a Series 2016B Bond issued at a premium may make an election, applicable to all debt securities purchased at a premium by such U.S. Holder, to amortize such premium, using a constant yield method over the term of such Series 2016B Bond.

Sale or Other Taxable Disposition of the Series 2016B Bonds. Unless a nonrecognition provision of the Code applies, the sale, exchange, defeasance, redemption, retirement (including pursuant to an offer by the Authority) or other disposition of a Series 2016B Bond will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of a Series 2016B Bond will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid interest on the Series 2016B Bond, which will be taxed in the manner described above) and (ii) the U.S. Holder’s adjusted U.S. federal income tax basis in the Series 2016B Bond (generally, the purchase price paid by the U.S. Holder for the Series 2016B Bond, decreased by any amortized premium, and increased by the amount of any OID previously included in income by such U.S. Holder with respect to such Series 2016B Bond ). Any such gain or loss generally will be capital gain or loss. In the case of a non-corporate U.S. Holder of the Series 2016B Bonds, the maximum marginal U.S. federal income tax rate applicable to any such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. holder’s holding period for the Series 2016B Bonds exceeds one year. The deductibility of capital losses is subject to limitations.

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Information Reporting and Backup Withholding. Payments on the Series 2016B Bonds generally will be subject to U.S. information reporting and possibly to “backup withholding.” Under Section 3406 of the Code and applicable U.S. Treasury Regulations issued thereunder, a non-corporate U.S. Holder of the Series 2016B Bonds may be subject to backup withholding at the current rate of 28% with respect to “reportable payments,” which include interest paid on the Series 2016B Bonds and the gross proceeds of a sale, exchange, redemption, retirement or other disposition of the Series 2016B Bonds. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a U.S. taxpayer identification number (“TIN”) to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a “notified payee underreporting” described in Section 3406(c) of the Code or (iv) the payee fails to certify under penalty of perjury that the payee is not subject to withholding under Section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules may be refunded or credited against the U.S. Holder’s federal income tax liability, if any, provided that the required information is timely furnished to the IRS. Certain U.S. holders (including among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. A holder’s failure to comply with the backup withholding rules may result in the imposition of penalties by the IRS.

Foreign Account Tax Compliance Act (“FATCA”)

Sections 1471 through 1474 of the Code, impose a 30% withholding tax on certain types of payments made to foreign financial institutions, unless the foreign financial institution enters into an agreement with the U.S. Treasury to, among other things, undertake to identify accounts held by certain U.S. persons or U.S.-owned entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these and other reporting requirements, or unless the foreign financial institution is otherwise exempt from those requirements. In addition, FATCA imposes a 30% withholding tax on the same types of payments to a non-financial foreign entity unless the entity certifies that it does not have any substantial U.S. owners or the entity furnishes identifying information regarding each substantial U.S. owner. Failure to comply with the additional certification, information reporting and other specified requirements imposed under FATCA could result in the 30% withholding tax being imposed on payments of interest and principal under the Series 2016B Bonds and sales proceeds of Series 2016B Bonds held by or through a foreign entity. In general, withholding under FATCA currently applies to payments of U.S. source interest (including OID) and will apply to (i) gross proceeds from the sale, exchange or retirement of debt obligations paid after December 31, 2016 and (iii) certain “pass-thru” payments no earlier than January 1, 2017. Prospective investors should consult their own tax advisors regarding FATCA and its effect on them.

The foregoing summary is included herein for general information only and does not discuss all aspects of U.S. federal taxation that may be relevant to a particular holder of Series 2016B Bonds in light of the holder’s particular circumstances and income tax situation. Prospective investors are urged to consult their own tax advisors as to any tax consequences to them from the purchase, ownership and disposition of Series 2016B Bonds, including the application and effect of state, local, non-U.S., and other tax laws.

APPROVAL OF LEGALITY

The validity of the Series 2016 Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, the approval of certain matters for the Authority by the Honorable Kamala D. Harris, Attorney General of the State, the approval of certain matters for the Underwriter by Stradling Yocca Carlson & Rauth, a Professional Corporation, as Underwriter’s counsel, and the approval of certain matters by Musick, Peeler & Garrett LLP, as

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counsel to the Borrower and Value. Bond Counsel, the Underwriter and its counsel will receive compensation contingent upon the sale and delivery of the Series 2016 Bonds. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix H hereto. Neither Bond Counsel nor the Attorney General undertakes any responsibility for the accuracy, completeness or fairness of this Limited Offering Memorandum. Musick, Peeler and Garrett LLP will also render certain opinions pertaining to Value and the Sole Member as described herein under “TAX MATTERS.”

RATING

The Borrower has received the rating set forth on the cover hereof from S&P Global Ratings, (the “Rating Agency”) for the Series 2016 Bonds. The Borrower and Value have furnished to the Rating Agency certain information and materials concerning the Series 2016 Bonds. No application was made to any other rating agency for the purpose of obtaining additional ratings on the Series 2016 Bonds. Any explanation of the significance of such rating may only be obtained from the rating agency furnishing the same. Generally, rating agencies base their ratings on such information and materials and on investigations, studies and assumptions made by the rating agencies themselves. There is no assurance that the rating mentioned above will remain in effect for any given period of time or that it might not be lowered or withdrawn entirely by the rating agency, if in its judgment circumstances so warrant. Any such downward change in or withdrawal of the rating might have an adverse effect on the market price or marketability of the Series 2016 Bonds.

LIMITED OFFERING OF BONDS

The Series 2016 Bonds are exempt from registration under federal securities law but are being offered only to a limited number of sophisticated investors and will be sold only to purchasers who are Approved Institutional Buyers or Accredited Investors. By purchasing the Series 2016 Bonds, each investor is deemed to have made the acknowledgments, representations, warranties and agreements set forth under the heading “TRANSFER RESTRICTIONS” herein.

CONTINUING DISCLOSURE

The Borrower and Value will execute and deliver a Continuing Disclosure Agreement pursuant to which they will, for the benefit of the Beneficial Owners of the Series 2016 Bonds, annually compile and deliver to the Trustee certain financial information and operating data relating to the operations of the Borrower and Value (an “Annual Report”), and provide notices of the occurrence of certain enumerated events. An Annual Report will be provided by the Trustee to any person who requests it. The form of the Continuing Disclosure Agreement is attached hereto as Appendix F. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the “Rule”).

The Borrower and Value have, in the past five years, failed to file in a timely manner certain of the Annual Financial Information and Quarterly Information required in connection with their prior undertaking with regard to the Rule. In connection with the Annual Financial Information report for the fiscal year ending December 31, 2014, the Trustee filed a notice of failure to provide annual report.

The Authority has determined that no financial or operating data concerning the Authority is material to an evaluation of the offering of the Series 2016 Bonds or to any decision to purchase, hold or sell Series 2016 Bonds and the Authority will not provide any such information. The Authority shall have no liability to the Holders of the Series 2016 Bonds or any other person with respect to the Rule.

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UNDERWRITING

The Series 2016 Bonds are being purchased by Piper Jaffray & Co. (the “Underwriter”). The Underwriter has agreed to purchase the Bonds at a price of $8,365,913.21 (being the principal amount of the Bonds, less aggregate original issue discount of $6,687.10, less an Underwriter’s discount of $127,399.69). The Bond Purchase Agreement (“Bond Purchase Agreement”) pursuant to which the Bonds are being purchased by the Underwriter provides that the Underwriter will purchase all of the Bonds if any are purchased. The obligation of the Underwriter to make such purchase is subject to certain terms and conditions set forth in the Bond Purchase Agreement. The Underwriter may offer and sell the Bonds to certain dealers and others at prices different from the prices stated on the inside cover page of this Limited Offering Memorandum. The offering prices may be changed from time to time by the Underwriter.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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MISCELLANEOUS

The foregoing and subsequent summaries and descriptions of provisions of the Bonds and the Indenture and all references to other materials not purporting to be quoted in full are only brief outlines of some of the provisions thereof and do not purport to summarize or describe all of the provisions thereof, and reference is made to said documents for full and complete statements of their provisions. The appendices attached hereto are a part of this Limited Offering Memorandum. Copies, in reasonable quantity, of the Indenture, Loan Agreement and the Leases may be obtained during the offering period upon request directed to the Underwriter.

NONE OF THE INFORMATION IN THIS LIMITED OFFERING MEMORANDUM HAS BEEN SUPPLIED OR VERIFIED BY THE AUTHORITY OTHER THAN THE INFORMATION UNDER THE CAPTIONS “THE AUTHORITY” AND “ABSENCE OF MATERIAL LITIGATION – THE AUTHORITY.” THE AUTHORITY MAKES NO REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AS TO THE ACCURACY (OTHER THAN IN THE SECTIONS IDENTIFIED ABOVE) OR COMPLETENESS OF INFORMATION IN THIS LIMITED OFFERING MEMORANDUM.

The distribution and use of this Limited Offering Memorandum has been approved by the Authority, the Borrower, and the Lessee.

VSF SCHOOL FACILITIES #1 LLC, as Borrower

By: VALUE SCHOOLS FOUNDATION, its Sole Member

By: /s/ Geraldine Marie Jacoby

President

VALUE SCHOOLS, as Lessee

By: /s/ Geraldine Marie Jacoby President and Chief Executive Officer

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APPENDIX A

CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS

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TABLE OF CONTENTS

Page

INTRODUCTION ............................................................................................................................................ A-3 THE BORROWER ........................................................................................................................................... A-3

The Borrower ................................................................................................................................................ A-3 The Sole Member .......................................................................................................................................... A-3

VALUE ............................................................................................................................................................. A-3 General .......................................................................................................................................................... A-3 The Value Board of Directors ....................................................................................................................... A-4 Value Board Structure & Task Forces .......................................................................................................... A-5 Value Schools Foundation Board of Directors ............................................................................................. A-5 Value Leadership Team ................................................................................................................................ A-6 Value’s Mission ............................................................................................................................................ A-8 Value Instructional Methodology ................................................................................................................. A-9 Requirements for Success ........................................................................................................................... A-10 The Value Charters ..................................................................................................................................... A-11 Letters from the Authorizer ........................................................................................................................ A-12 Management Services Provided to Value’s Charter Schools ...................................................................... A-12 Historical Enrollment Information .............................................................................................................. A-13 Historical Attendance Rate ......................................................................................................................... A-13 Academic Outcomes for Existing Schools .................................................................................................. A-14 Employment and Staffing ........................................................................................................................... A-18

THE SCHOOLS ............................................................................................................................................. A-19 General ........................................................................................................................................................ A-19 Campus Service Areas and Competitive Schools ....................................................................................... A-22

OPERATING AND FINANCIAL INFORMATION ..................................................................................... A-24 Historical Financial Results and Statements of Financial Position ............................................................. A-24 Financial Statements ................................................................................................................................... A-27 State Teachers’ Retirement System ............................................................................................................ A-27 Outstanding Debt ........................................................................................................................................ A-32 SB 740 ........................................................................................................................................................ A-33 Public Charter Schools Grant Program ....................................................................................................... A-33 Facility Leases and Use Agreements .......................................................................................................... A-33 No Material Litigation ................................................................................................................................ A-34

PROJECTIONS AND COVERAGE RATIOS ............................................................................................... A-34 Projected Income and Coverage Ratios ...................................................................................................... A-34

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APPENDIX A

CERTAIN INFORMATION REGARDING THE BORROWER, VALUE AND THE SCHOOLS

Certain statements contained in this Appendix reflect forecasts, projections and “forward-looking statements.” No assurance can be given that the future results discussed herein will be achieved. Actual results may differ materially from the forecasts described herein. In this respect, the words “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe” and similar expressions are intended to identify forward-looking statements. All projections, forecasts, assumptions, expressions of opinions, estimates and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Limited Offering Memorandum. Unless otherwise noted, all information, data, and projections in this Appendix were furnished by the Borrower.

INTRODUCTION

Value Schools, a California nonprofit public benefit corporation (“Value”) founded in 2000, holds the charters for and operates four charter schools, including Downtown Value School (“Downtown Value”), Central City Value High School ( “Central City Value”), and University Preparatory Value High School (“University Prep” and, together with Central City Value and Downtown Value, the “Schools”). The Series 2016 Bonds are being issued to finance improvements to the University Prep facility (the “Series 2016 Facility”) in the City of Los Angeles, California (the “City”).

THE BORROWER

The Borrower

The Borrower is VSF School Facilities #1 LLC (the “Borrower”), a California limited liability company whose sole member is Value Schools Foundation (“VSF”), a California nonprofit public benefit corporation. The Borrower rents the Series 2016 Facility pursuant to the Ground Lease (as defined in the forepart of this Limited Offering Memorandum) and owns the Prior Facilities, all of which will be leased to Value. The Borrower was formed on July 2, 2012 and is an entity that has no significant assets other than the Prior Facilities, the Series 2016 Facility, and other charter school facilities operated by Value. Therefore, no financial information regarding the Borrower is provided herein.

The Sole Member

VSF was formed in January 2012 to provide philanthropic support to Value, including providing charter school facilities, operational assistance and other support to Value. The Board of Directors of Value is appointed by VSF. VSF submitted an application to the Internal Revenue Service on June 21, 2012 seeking a determination letter recognizing it as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). VSF received a letter from the Internal Revenue Service dated December 7, 2012 recognizing its exempt status effective January 30, 2012. VSF is not obligated on the Loan Agreement or the Leases. Therefore no financial information regarding VSF is provided herein.

VALUE

General

Value was formed in July, 2000 by Dr. Jerome Porath to establish and support high quality elementary and secondary charter schools for students who have historically been underserved by the public school system. After running a fee-based summer program and a small free kindergarten, Value opened Downtown Value in September 2002 serving 24 students in kindergarten and first grade and has grown to its full capacity

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of 455 students as of the 2015-16 school year. Central City Value opened in September 2003 with 90 students and has grown to its full capacity of 483 students as of the 2015-16 school year. University Prep opened in August 2015 with 111 students in 9th grade, and plans to expand to reach its enrollment capacity of 480.

The Value Board of Directors

The Value Board of Directors (the “Board”) is comprised of five members each of whom serves for such term of office as designated by VSF. Presently, all Board members serve one year terms and may be re-elected without limit. All Board members are appointed by the board of VSF. Biographies for those Board members are listed below:

Name Title Joined Board Term Expires Mr. Grant Cambridge Chair October 24, 2007 June 30, 2017 Mr. Jody Foldesy Member January 6, 2012 June 30, 2017 Mr. Jeffrey Garcia Member July 10, 2012 June 30, 2017 Mr. Jose Ramos Member June 15, 2011 June 30, 2017 Ms. Erika Martinez-Scott Member September 9, 2016 June 30, 2017

________________ Source: Value.

Grant Cambridge. Grant L. Cambridge, Chair of the Value Schools Board, is a Partner and a portfolio manager for the investment management firm Capital Group Companies. His responsibilities include analyzing and investing in global equities for a variety of the American Funds. He has lived in London, Hong Kong, New York and Los Angeles. Previously, Mr. Cambridge was an Officer of BTM Capital Corporation in Boston. He had various management responsibilities related to structured finance, leasing and portfolio management.

Mr. Cambridge received a Bachelor of Science in Business Administration, an Associate’s Law Degree from Bentley College, a Master’s Degree from Suffolk University in Boston and a Master’s in Business Administration from Harvard Graduate School of Business. Mr. Cambridge has been involved with many civic and community organizations, including Kidspace Museum (Pasadena), Mystic Seaport (Mystic, Connecticut), The Huntington Library, Art Collections, and Botanical Gardens (San Marino) and A Coalition for At-Risk Youth (Los Angeles).

Jody Foldesy. Mr. Foldesy is a Principal at The Boston Consulting Group (“BCG”), based in the Los Angeles office. Mr. Foldesy is a core member of BCG's Corporate Development practice area. Mr. Foldesy has served a number of leading companies on the West Coast and in the Asia-Pacific region, mostly in the Technology-Media and Industrial Goods spaces, and has extensive experience in developing corporate strategy and helping businesses maximize shareholder returns. Mr. Foldesy also has devoted a significant amount of his time at BCG to non-profit clients, including several in the public education space. Mr. Foldesy has helped the Los Angeles Unified School District develop an innovation division and its school report cards; the Cleveland Metropolitan School District launch a major transformation; and the State of Arizona develop its education strategy and policies.

Mr. Foldesy earned a Master’s in Business Administration with High Honors from the University of Chicago Graduate School of Business. Mr. Foldesy graduated with a Bachelor of Arts Degree in Journalism from American University in Washington, D.C., and worked as a sports journalist at the Washington Times before joining BCG.

Jeffrey Garcia. Mr. Garcia is an investment analyst at the Capital Group Companies in Los Angeles, where he is responsible for coverage of Latin American Equities. Prior to joining Capital Group, Mr. Garcia completed his undergraduate studies in Management Science and Engineering at Stanford University. Throughout college, Mr. Garcia led organizations supporting entrepreneurship in Latin America and private scholarships for outstanding Latino students. Mr. Garcia also served a two-year term as Vice-Chairman of The

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Guiding Concilio, the governing board for Stanford's Chicano/Latino Cultural Center. Mr. Garcia is a first generation college student.

Jose Ramos. Mr. Ramos is the Director of Community Services for Los Angeles County at the Children’s Bureau of Southern California, where his responsibilities include staff oversight and evaluation, grant writing, and representing the Bureau to Los Angeles communities. Mr. Ramos has broad and deep understanding of the communities served by Value Schools, having worked closely with community leaders to strengthen the community and to make positive changes to the lives of families. Mr. Ramos holds a Master's degree in Social Work from California State University, Long Beach, and has more than two decades of experience working in the child welfare field, most of it at the Children’s Bureau. Mr. Ramos also teaches in the Department of Social Work at California State University, Northridge. Born in Ecuador, Mr. Ramos shares the immigrant experience, having come to the United States at the age of 10. Mr. Ramos served on the VSF board from June 2011 until 2016, when he was appointed to the Board.

Erika Martinez-Scott. Ms. Martinez is the mother of two Value students, and has been a Value school parent for the past 5 years. Ms. Martinez has been an active member of the Value community having served on Downtown Value Local School Site Council as well as PTO Treasurer. Ms. Martinez currently volunteers her time teaching Downtown Value parents computer classes. Originally from Mexico, Ms. Martinez has lived in Los Angeles for the past 20 years. Ms. Martinez is a graduate of Manual Arts High School in South Los Angeles. Ms. Martinez is the Accounts Manager at D'Alessio Law Group.

Value Board Structure & Task Forces

The Board has created various task forces and committees to develop and implement academic and management policies that impact Value’s operations. The task forces include Academic Performance and Accountability, Finance, Governance, and Facilities. Pursuant to Value’s bylaws, the Board also has an Audit Committee. Each one of the task forces and committee has one Board member except for the Academic Performance and Accountability task force, which has two members.

Value Schools Foundation Board of Directors

All VSF board members are elected by a majority vote of the board of VSF to serve for three year terms and may be re-elected without limit. Biographies for those board members are listed below:

Name Title Joined Board Term Expires Mr. Grant Cambridge(1) Chair June 2012 June 30, 2017 Ms. Naya Bloom Member June 2014 June 30, 2018 Mr. James Bray Member June 2012 June 30, 2017 Mr. Juan Bustamante Member June 2016 June 30, 2019 Mr. Jody Foldesy(1) Member June 2012 June 30, 2019 Mr. Vincent Gonzales Member March 2015 June 30, 2018 Mr. Thomas Levee Member March 2012 June 30, 2017 Mr. Rob Lovelace Member November 2011 June 30, 2017 Ms. Dawn Nakagawa Member June 2012 June 30, 2018

________________ (1) Refer to biographies under “VALUE – The Value Board of Directors” herein. Source: Value.

Naya Bloom. Ms. Bloom served as Vice President of Alumni Leadership Development at Teach For America, where she was responsible for building, integrating, and systematizing career and professional development opportunities for over 32,000 Teach For America alumni. Ms. Bloom initially joined Teach For America staff in 2006 as a Director of Talent Recruitment and then as the inaugural Director of Alumni Affairs in Los Angeles. Ms. Bloom’s entry into, and passion for, education began in 1994 during the time she spent as a Teach For America corps member in Washington, DC, where she taught elementary English as a Second

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Language for 3 years and later worked as a middle school bilingual counselor. Ms. Bloom is a graduate of Smith College with a double major in Latin America Studies and Literature, and holds a Master's of Administration in Educational Leadership from Pepperdine University.

James Bray. Mr. Bray is an investment analyst for Capital Research Global Investors, with research responsibilities for U.S. small-capitalization companies. Mr. Bray graduated summa cum laude from New York University and received a Master’s of Business Administration Degree from the University of Chicago. Mr. Bray is based in Los Angeles. Mr. Bray previously served on the Value Board since October 7, 2010.

Juan Bustamante. Mr. Bustamante is an associate at Bocarsly Emden Cowan Esmail & Arndt LLP, where he practices real estate law with a focus on affordable housing and community development. Mr. Bustamante represents developers and investors in connection with the acquisition, financing and development of real estate, primarily in transactions involving federal low-income housing tax credits and new markets tax credits. Mr. Bustamante received his J.D. from New York University School of Law, where he was a Frank J. Guarini Government Scholar and a researcher at the Furman Center for Real Estate & Urban Policy. Mr. Bustamante earned his B.S. in Earth Systems and his M.S. in Civil/Environmental Engineering from Stanford University.

Vincent Gonzales. Mr. Gonzales is an Investment Analyst at the Capital Group Companies, where he is responsible for research coverage of fixed income structured products. Mr. Gonzales earned an MBA from the Harvard Business School and a BS in management science & engineering from Stanford University. Prior to joining Capital, Mr. Gonzales was an associate at Newstone Capital Partners and an investment banking analyst at Goldman Sachs. Throughout his academic and professional experience, Mr. Gonzales has volunteered with several youth mentoring and education organizations. As a Los Angeles native and graduate of the local public school system, and a first-generation college graduate, Mr. Gonzales is passionate about increasing student and parent awareness of higher-education opportunities and financing alternatives.

Thomas Levee. Mr. Levee is a television broadcast sales professional, currently serving as Vice President and Local Sales Manager of KABC-TV, Los Angeles. A native of Los Angeles, Mr. Levee holds a BA in political science from UCLA.

Rob Lovelace. Mr. Lovelace is a portfolio manager for the American Funds and President of the New Perspective Fund and New World Fund. Mr. Lovelace is also President and a Director of Capital Research and Management Company, a subsidiary of Capital Group, and serves on the Capital Group Companies Management Committee. Mr. Lovelace joined Capital in 1985 after receiving a bachelor’s degree in mineral economics from Princeton University and holds the Chartered Financial Analyst® designation. He was a founder, Trustee and Board President of Vistamar School, and is a Director of the Pacific Council on International Policy, as well as a Trustee of the Brain Mapping Support Foundation at UCLA.

Dawn Nakagawa. Ms. Nakagawa is the Executive Director of the Berggruen Institute on Governance, where she is responsible for building the institution to become an organization of global reach and influence. Before joining the Berggruen Institute on Governance, Ms. Nakagawa was the Executive Vice President of the Pacific Council on International Policy, at which she oversaw all aspects of the organization and drove several special initiatives and co-directed the project on California’s Adaptation to Climate Change. Ms. Nakagawa holds an MBA from the University of Chicago’s Booth School of Business, and an undergraduate degree in Political Science from the McGill University in Canada. Ms. Nakagawa is also a founding member of the local chapter of the Awesome Foundation.

Value Leadership Team

Value currently has 157 employees, the large majority being school-specific staff. Approximately seven employees serve in an administrative or support function at Value’s central office, which is located in

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Los Angeles, California. Value’s leadership team includes a Chief Executive Officer and Chief Financial Officer with overall management responsibilities and Principals for each school:

Name Title Ms. Geraldine Jacoby President & Chief Executive Officer Ms. Rhonda Hoffarth Chief Financial Officer Mr. David Doyle Principal, University Prep Mr. Jay Arroyo Principal, Central City Value Ms. Ana Chavez Principal, Downtown Value Mr. Christopher Medinger Principal, Everest Value

________________ Source: Value.

Geraldine Jacoby, President & CEO. Ms. Jacoby has been in the field of education for over thirty-five years. Ms. Jacoby earned a B.A. in Psychology and state certification in elementary and early childhood education from Seton Hill College and a Master’s degree in Education (Educational Communications and Technology) from the University of Pittsburgh. Ms. Jacoby has held progressively responsible teaching and administrative positions in public and private schools throughout her career. Ms. Jacoby joined Value in 2002 and became principal of Downtown Value in 2003. Ms. Jacoby led Downtown Value through the next ten years, bringing enrollment from 55 to 448 in five years. State API scores for the school climbed steadily from 560 to 838 during her leadership. Upon the announcement of Dr. Jerome Porath’s retirement as CEO, Value conducted an extensive search for a new CEO, unanimously naming Ms. Jacoby first as Interim CEO in June 2013, and thereafter as CEO.

Ms. Jacoby has announced plans to retire in June, 2017. The Board’s CEO Search Committee has engaged a CEO search firm that specializes in finding suitable leaders for charter school organizations. The committee has received several applications from highly qualified individuals from around the country. In addition, one of the Schools’ principals is currently a strong internal candidate. If this candidate moves into the CEO position, Value believes there are capable leaders ready to assume the role of school leader that will be vacated.

Rhonda Hoffarth, CFO. Ms. Hoffarth has been a senior executive with broad business acumen and multi-discipline experience in small- to mid-size ($10M to $500M) companies for many years. Blending strategic focus with management execution, Ms. Hoffarth helped companies maintain their competitive advantage, mitigate corporate risk and grow four-fold. Ms. Hoffarth joined the Value team in December 2014. At Value, Ms. Hoffarth is responsible for financial, accounting and human resource functions for Value’s four schools and its home office. In that role, Ms. Hoffarth transitioned accounting functions including accounts payable, monthly close, bank reconciliations and financial statement to the recently retained back office service provider. Ms. Hoffarth has also streamlined and standardized the hiring processes across all school sites. Ms. Hoffarth also serves as Corporate Treasurer and Secretary for the Value entities.

David Doyle, Principal of University Prep. Mr. Doyle brings more than 30 years of experience in high school administration and teaching. Mr. Doyle has been with Value since 2003, serving as principal of Central City Value High School for eight of those years, including in its early years in multiple temporary spaces. As the founding principal of Central City Value, Mr. Doyle hired and coached the entire teaching staff, brought the school through its WASC accreditation process, maintained its annual budget during lean recessionary times, oversaw the physical plant, and developed the high school version of Value’s curriculum and methods. Mr. Doyle also taught the Freshman Seminar course that has proved essential to building the school community from the beginning of students’ high school career.

Before he joined Value, Mr. Doyle held progressively responsible positions at two Catholic high schools in the Los Angeles area, including principal of Crespi Carmelite High School (1998-2003) and of Notre Dame High School (1991-1997). Mr. Doyle also taught history and government courses. Mr. Doyle

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holds a Bachelor of Arts from the University of Notre Dame and a Master’s in Educational Administration from the University of San Francisco.

Jay Arroyo, Principal of Central City Value. Mr. Arroyo began his teaching career in 1996 at Fairmont High School, a private college preparatory academy in Orange County. During his years at Fairmont Mr. Arroyo taught biology (AP and IB), chemistry, physics, integrated science and algebra I. Mr. Arroyo was the school’s AP/IB coordinator and junior class advisor, and he collaborated with two of his colleagues to develop a series of online classes. After nine years at Fairmont, Mr. Arroyo moved to Korea for two years, where he taught life and physical science and was responsible for creating tests for the school’s science department. Mr. Arroyo returned to the U.S. in 2008 to teach at Central City Value. After several years of successful teaching in the science department, Mr. Arroyo was chosen to succeed Mr. Doyle as principal of Central City Value.

Ana Chavez, Principal of Downtown Value. Ms. Chavez began her teaching career as a math and science teacher for Soledad Enrichment Action (S.E.A.) Charter School in 1999. As a lead teacher/academic counselor at this beginning charter school, Ms. Chavez was responsible for leading a team of staff and educators to ensure the safety and education of at-risk female students recently released by the court from juvenile hall and prison. In 2005, Ms. Chavez transitioned to Downtown Value as a 7th grade Math and Science teacher. Ms. Chavez was promoted to Vice Principal, where she served with Ms. Jacoby for five years before being appointed Principal in 2013.

Ms. Chavez immigrated to the United States in 1986 from El Salvador at the age of ten. Ms. Chavez lived and attended Los Angeles Unified School District schools in the same neighborhood she now serves as Principal. Ms. Chavez’s experience has given her a deep knowledge of the community and its educational needs and a passion for creating a school environment that responds to those needs. Ms. Chavez received a Bachelor of Science degree in Psychology from the University of California, Los Angeles, and earned her Master’s Degree in Education and an Administrative Credential from the California State University, Sacramento.

Value’s Mission

Value’s mission is to facilitate the learning of elementary, middle and high school students who come from underserved populations by providing a highly focused academic program in a community that will foster character development with a core set of values. Each school’s mission is to educate its students so that they may become persons who make a positive difference for their society and their world. The Value vision of an educated person in the 21st century is an individual who is able to make a positive difference in the world by thoroughly understanding and internalizing five core values. These individuals must demonstrate a desire to:

actively seek to continue to learn throughout their entire lives;

have both the basic knowledge and skills that all persons can acquire and the refinement of those special talents that each person possesses;

respect every person and work to promote the dignity of each person;

work in cooperation with others to achieve more than they could on their own; and

use what they have learned to contribute to society through employment, civic participation, family life, and community service.

To that end, Value focuses on the following knowledge and skills needed for 21st century America:

academic excellence in English language arts, mathematics, science, and social studies;

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the ability to gather and evaluate information from a variety of sources, articulate ideas, and produce original works with confidence and clarity;

skill in using technological tools effectively, creatively, and responsibly;

higher order thinking skills of application, analysis, synthesis and evaluation;

effective oral and written communication skills; and

the ability to work cooperatively toward a common goal.

Value Instructional Methodology

Value’s schools aim to increase academic success among low-income minority students using a model based on sound research. That model, which has succeeded for more than a decade at Central City Value, uses two proven elements: (1) an emphasis on values and (2) accountability for results.

An Emphasis on Values. Research has shown that low-income and minority students thrive in schools that share key characteristics with academically successful parochial schools serving the same demographic. Those characteristics include a focused curriculum, an emphasis on academics, and direct management by a school’s principal. The most important factor, though, is that parents and faculty share a set of core beliefs and values; this common ground generates an extra “social capital” propelling student achievement.

Research by Samuel Casey Carter found that schools that create a culture that purposefully emphasizes moral development have higher achievement levels. Carter described twelve very different schools, each of which fostered academic success by forming strong, character-based cultures. He described four traits of such schools: a strong belief that culture determines outcomes; a culture that is nurturing but demanding; a culture committed to student success; and a culture of people, principles and purpose.

The secret to the success of Value’s schools does not lie in the uniqueness of their curriculum or teaching methods, which are much like those of effective traditional public schools. Rather, what energizes and binds the Value community in the learning experience is a common “worldview.” That worldview is reflected in the Five Values that form the core of Value’s educational model:

Academic excellence is the means to a full life. Academic learning develops a person’s capacities to enjoy life, to live cooperatively and comfortably with others, to contribute to the economic well-being of oneself and society and to be an active citizen. Anything less than striving for excellence deprives both students and society. The fundamental means to excellence are teachers who offer expert instruction with high expectations for performance, students who are disciplined learners and standards of accountability for both.

Each student can develop to his or her fullest potential. Each person is different, but each is gifted with talents and abilities. While each ought to excel in an area of special talent, each also should develop the whole range of human talents to the maximum extent possible. Schools have the responsibility of assisting parents and the students to identify areas of special talent and, at the same time, guiding students so that no area of learning is neglected.

Each individual is unique and deserves respect. Each person has the right to life, liberty and the pursuit of happiness. These rights accord each with dignity that is to be respected by all. This dignity implies that in society there are rules that limit certain behaviors so that all might have the fullest exercise of their rights. These rules are the laws enacted by government, codes of conduct set

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by institutions, customs and practices found in civil society and the moral norms freely adopted by individuals. Good schools set high standards for student behavior.

A safe, nurturing community is essential to academic excellence. Rules of conduct that protect each person’s dignity are not enough to create community. A community grows from common ideals and shared experiences. A community is composed of persons who genuinely care for each other and who seek good for each other. In a community, everyone belongs and feels valued by the others. In community, each feels secure and is supported in efforts to grow in every way.

Service to others and the community is a responsibility of an educated person. An education completes a person by developing his/her talents and abilities. However, an educated person is not satisfied only with personal development. Talents and abilities perfected through an education need to be used to make a better world for all. Community service is a benefit for the civic or economic life of society, as well as for the family, social groups and voluntary organizations.

Value’s experience shows that emphasizing these five core values purposefully develops a school culture that forms student character and drives student achievement.

Requirements for Success

Value believes that for the teacher and principal selected methodology to be successful six conditions are absolutely essential:

Selection of the principal and teachers – The educators hired for Value must be persons who have both the professional training to be able to choose effective methods and materials and the confidence that they can identify student needs and utilize a variety of means to facilitate student learning. Value provides the support in the selection of the principal (and the teachers if necessary) to ensure the selection of the right education professionals.

Assessment and Planning – The principal and teachers must work as a team to choose a coordinated instructional program within the school to meet student needs. An annual cycle begins with a review of the curriculum standards. Next is an analysis of available assessment results; this is followed by a determination of the instructional activities that will take place. Individual teacher planning then follows the team planning. This is the on-going cycle identifying needs based on the standards, followed by instructional activities, followed by assessment, and so on.

Supervision – The success of Value’s program relies on the professionalism of the teacher. If the teacher has the right knowledge and skills and effectively utilizes them, student learning is facilitated. In the Value model, teachers are not simply trusted to be professional. The expectation is that they will, but the insurance is the supervision of the principal. Supervision is not only coaching teachers on different methodology of instruction (or the proper use of some chosen method); it is also the focusing of the teacher’s attention on the content standards and the results of assessments.

Professional development – As in most professions, teaching benefits from the professional development of the teachers. Value provides opportunities for the continued growth of the principal and the teachers. Professional development needs vary with the achievement of the students and the experience of the teachers in any given year. Throughout the year, administration and teachers set professional development goals and schedule workshops and training to meet these goals.

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Individual focus – A standards-based curriculum focuses on what students know, not what teachers teach. Teaching may be a group activity; but learning is done person-by- person. Learning plans for each student direct teachers to different sorts of activities for different students. Some learning activities occur individually, some in small groups and some in large groups. This individualized focus requires data driven instruction. Each school adopts one or more computer assisted programs to track, analyze and share data on student academic progress.

Research–based instructional materials – While the teachers must identify the specific learning needs of each student, they cannot be expected to design the learning materials to assist the students. Therefore, Value provides the teachers with research- based instructional materials to support the learning experience. The teachers are expected to use the materials when and where they are helpful to the students. When students require additional materials to master content and skills, the teachers are expected to research and request materials that will support student learning.

The Value Charters

Value currently operates four public charter schools: a high school known as Central City Value High School, a high school known as University Prep Value High School, a K-8 school known as Downtown Value School (collectively, the “Schools”), and a K-8 school known as Everest Value School (“Everest Value” or the “Non-Obligated School”). Value has received charters from the Los Angeles Unified School District (the “LAUSD”) for each of its charter schools. See “RISKS TO THE OWNERS OF THE SERIES 2016 BONDS – Specific Risks of Charter Schools – Non-Renewal or Revocation of Charters” in the main body of this Official Statement. The charters for Downtown Value and Central City Value have been renewed.

The charters for the schools operated by Value were all authorized by LAUSD, and were approved and expire on the dates set forth below:

School Date of Charter Renewal Dates Current Expiration Date

The Schools

University Prep July 2015 N/A June 30, 2020 Downtown Value July 2002 July 2007; July 2012; July 2017(1) June 30, 2022 Central City Value July 2003 July 2008; July 2013 June 30, 2018 Non-Obligated School Everest Value July 2014 N/A June 30, 2019

________________ (1) The charter renewal petition for Downtown Value was most recently approved by LAUSD on November 15, 2016, for a five-year period beginning July 2017. Source: Value.

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The following map shows the location of Value’s four charter schools, including the Schools:

________________ Source: Value.

Letters from the Authorizer

On September 9, 2016, Value received correspondence from LAUSD indicating that (i) each of the Schools was operating pursuant to an active charter and (ii) none of the Schools had any pending revocation issued by LAUSD.

Management Services Provided to Value’s Charter Schools

Value’s central office personnel manage the implementation and evaluation of all Value school-related systems, and ensure that the schools and respective school-based personnel have the resources, support, and training they need to meet the schools’ ambitious academic performance targets.

In consideration for the provision of administration and management services provided by Value, each school pays a monthly management fee equal to a percentage of their public fund revenues. Currently, management fee percentages are 3% for University Prep and 8% each for Downtown Value and Central City Value. For the year ended June 30, 2016, University Prep paid $49,269 in management fees (unaudited), Downtown Value paid $464,616 in management fees (unaudited), and Central City Value paid $521,365 in management fees (unaudited). For the 2016-17 fiscal year, Value has budgeted $171,373 in management fees for University Prep, $451,801 in management fees for Downtown Value, and $507,385 in management fees for Central City Value.

In connection with the Series 2016 Bonds, Value will subordinate its educational management fees to the payment of Rent under each Lease. See “THE LEASES – Payment of Rent.”

Parent Organization

Each School has a parent organization that meets at least three times per year. The parent organization provides an opportunity for communication between the parents and the School. The parent organizations also provide services to the Schools.

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School Site Council

Each School is served by a School Site Council. The Site Counsel for each School, comprising the school principal, parents, teachers and students, is responsible for reviewing proposed policy changes, the annual budget and any categorical funding programs that require parent involvement. The School Site Council is chaired by the School’s principal who reports the considerations of the Council to the Value Schools board of directors.

Accreditation

Central City Value received its initial accreditation by the Western Association of Schools and Colleges (“WASC”) in the spring of 2006 for a three-year term. Central City Value received additional three-year accreditations during the 2008-09 and 2011-12 school years. In the spring of 2015, Central City Value was granted a full six-year term of accreditation with a review after the third year, expiring on June 30, 2021.

Downtown Value received its initial accreditation by WASC in May 2009. Downtown Value submitted its self-study report and was visited by WASC during the 2011-12 school year. The school has received a full six-year term of accreditation with a review after the third year, expiring on June 30, 2018.

Everest Value also received its initial accreditation by WASC in May 2016. University Prep has submitted its application for WASC accreditation and anticipates having its initial site visit in the spring of 2017.

Historical Enrollment Information

The following table presents historical enrollment information at each of Value’s existing charter schools.

Table 1 HISTORICAL ENROLLMENT(1)

School Years 2010-11 through 2015-16 Value

School 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

University Prep(2) -- -- -- -- -- 111 Downtown Value 450 443 449 457 450 455 Central City Value 384 393 435 451 470 483 Subtotal – The Schools 834 836 884 908 920 1,049 Everest Value(3) -- -- -- -- 170 206 Total Network 834 836 884 908 1,090 1,255

(1) Reflects certified enrollment as of the fall census day (the first Wednesday in October), as reported to the California Longitudinal Pupil Achievement Data System (“CALPADS”) in each school year. (2) First year of instruction was 2015-16. (3) First year of instruction was 2014-15. Source: Value.

Historical Attendance Rate

The following table presents the historical attendance rates at each of Value’s existing charter schools.

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Table 2 HISTORICAL ATTENDANCE RATES

Value

School

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

Historical Average

University Prep(1) -- -- -- -- -- 96.7% 96.7% Downtown Value 97.1% 97.1% 96.7% 96.9% 97.7% 96.9 97.1 Central City Value 94.5 95.2 95.4 95.9 95.2 94.3 95.1 Subtotal – The Schools 95.8 96.2 96.1 96.4 96.5 96.0 96.1 Everest Value(2) -- -- -- -- 94.8 95.8 95.3 Total Network 95.8 96.2 96.1 96.4 95.9 95.9 96.1

(1) First year of instruction was 2015-16. (2) First year of instruction was 2014-15.

Source: Value.

Academic Outcomes for Existing Schools

Demographics. Student Composition as Title I eligible schools is presented in the following table.

Table 3 STUDENT DEMOGRAPHICS

School Year 2015-16 Value

School

Total Students(1)

Percentage Eligible for Free/Reduced Meals

ELL Percentage

University Prep 111 90.1% 25.2%

Downtown Value 455 90.0(2) 36.9 Central City Value 483 90.9 14.1 Subtotal – The Schools 1,049 90.4 25.2 Everest Value 206 93.7 59.2 Total Network 1,255 91.0 30.8

(1) Enrollment as of October 2015. (2) CALPADS contains an error, yielding 71.2% as the percent Free/Reduced Meals for Downtown Value in the 2015-16 school year. The figure shown here reflects the actual, corrected percentage. Source: Value.

Academic Performance Index. The Academic Performance Index (“API”) is a State of California method of comparing schools based on student test scores. API scores range from 200 to 1,000 and are based on results of statewide standardized tests. API scores are tracked for schools as a whole, and for certain subgroups of students. In addition, growth targets are established by the California Department of Education for schools and subgroups for each year.

API scores have not been calculated since the 2012-13 school year, as the State of California is transitioning from its former academic testing program, the Standardized Testing and Reporting (“STAR”) program, to the new California Assessment of Student Performance and Progress (“CAASPP”) system and developing new ways of comparing schools. The following table presents API scores for Value’s schools for 2012-13, as well as for the preceding four school years.

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Table 4 SCHOOL OUTCOMES – API SCORES School Years 2008-09 through 2012-13

Value

School 2008-09 2009-10 2010-11 2011-12 2012-13

University Prep(1) -- -- -- -- -- Downtown Value 713 769 800 816 837 Central City Value 647 662 737 734 767

Everest Value(2) -- -- -- -- -- California 755 767 779 788 789 Los Angeles Unified School District 694 709 729 744 750 (1) First year of instruction was 2015-16. (2) First year of instruction was 2014-15. (3) First year of instruction was 2015-16. Source: Value.

Transition to CAASPP. API scores have, in the past, been calculated using results of the State’s STAR program and, for high school students, the California High School Exit Examination (“CAHSEE”). See “ – Academic Performance Index” above. Changes to the Education Code enacted in 2013 deleted certain provisions of State law establishing the STAR program and replaced them with the California Assessment of Student Performance and Progress program (“CAASPP”), effective July 1, 2014. As a means to assess certain elementary and secondary pupils, CAASPP comprises:

(a) the State’s Smarter Balanced Assessments, composed of (i) summative assessments in English language arts (“ELA”) and mathematics for grades 3 to 8 inclusive, and grade 11, (ii) interim assessments to monitor student progress toward mastery of the Common Core State Standards in ELA and mathematics, and (iii) a “Digital Library” consisting of tools and practices designed to help teachers utilize formative assessment processes for improved teaching and learning;

(b) alternate assessments for ELA and mathematics in grades 3 through 8 and 11, that are based on alternate achievement standards and aligned with the Common Core State Standards for students with significant cognitive disabilities;

(c) science assessments in grades 5, 8, and 10, measuring specified content standards, currently composed of (i) the California Standards Test (“CST”) for students in public schools, (ii) the California Modified Assessment (“CMA”) for students with an individualized education program, and the (iii) California Alternate Performance Assessment (“CAPA”) for students with significant cognitive disabilities; and

(d) the Standards-based Tests in Spanish (“STS”), which are multiple-choice tests that allow Spanish-speaking English learners in grades 2 through 11 to demonstrate their knowledge of California content standards by taking a reading/language arts (“RLA”) assessment in their primary language.

The following figures summarize the performance of Central City Value and Downtown Value on CAASPP Smarter Balanced Assessments for ELA and mathematics in 2015-16, compared against the State averages and LAUSD for each School’s respective grade ranges. University Prep did not have results for the CAASPP in 2015-16, as the CAASPP is only administered to 11th grade students in high school.

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Figure 1 2015-16 SMARTER BALANCED ASSESSMENTS RESULTS

Percent of Students Met or Exceeded Standard(1)(2) Central City Value, LAUSD and the State

English Language Arts

Mathematics

(1) Percentages shown are sums of percentages of 11th grade students indicated as “Standards Met” and “Standards Exceeded” in Smarter Balanced Assessment results for the 2015-16 school year. Source: Value.

0

10

20

30

40

50

60

70

80

90

All Students Economically Disadvantaged

Percent of Students

Central City Value LAUSD High Schools California High Schools

0

10

20

30

40

50

60

All Students Economically Disadvantaged

Percent of Students

Central City Value LAUSD High Schools California High Schools

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Figure 2 2015-16 SMARTER BALANCED ASSESSMENTS RESULTS

Percent of Students Met or Exceeded Standard(1)(2) Downtown Value, LAUSD and the State

English Language Arts

Mathematics

(1) Percentages shown are sums of percentages of students in grades 3-8 indicated as “Standards Met” and “Standards Exceeded” in Smarter Balanced Assessment results for the 2015-16 school year. Source: Value.

California High School Exit Exam. Previously, California required passage of the CAHSEE as a prerequisite for a high school diploma. California discontinued the CAHSEE requirement following the administration of the 2014-15 examination. The following table shows the 2014-15 school year performance of Central City Value on the CAHSEE, compared against the State and District averages. University Prep had not yet begun operations when the CAHSEE was last administered.

0

5

10

15

20

25

30

35

40

45

50

All Students Econimically Disadvantaged

Percent of Students

Downtown Value LAUSD (Grades 3‐8) California (Grades 3‐8)

0

5

10

15

20

25

30

35

40

All Students Econimically Disadvantaged

Percent of Students

Downtown Value LAUSD (Grades 3‐8) California (Grades 3‐8)

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Table 5 CALIFORNIA HIGH SCHOOL EXIT EXAM(1)

2014-15 School Year Central City Value, LAUSD and the State

Math English

Central City Value 91% 89%

LAUSD 79 79

California 85 85 (1) Figures represent the percentage of tenth grade students (Class of 2017) who passed the CAHSEE throughout the 2014-15 school year. Source: California Department of Education.

Employment and Staffing

As of October 1, 2016, Value Had approximately 133.5 full-time equivalent (FTE) employees, which consist of approximately 77 FTE teachers, 13 FTE school teaching support staff, 10 FTE school administrative staff, 26.7 FTE school support staff and 6.75 FTE non-school professional staff including staff based in Value’s central office. The following tables set forth information regarding Value’s FTE employees attributable to the Schools for the last three school years and current figures for the 2016-17 school year.

Table 6 EMPLOYMENT AND STAFFING

School Years 2013-14 through 2016-17 University Prep

2013-14 2014-15 2015-16 2016-17 Teachers --(1) --(1) 6 12 School Support Staff -- -- 3.5 4 Total Employees -- -- 9.5 16 Total Number of Students -- -- 111 205 Student-to-Teacher Ratio -- -- 18:1 17:1

______________________ (1) First year of instruction was 2015-16.

Source: Value.


School Years 2013-14 through 2016-17 Downtown Value

2013-14(1) 2014-15 2015-16 2016-17 Teachers 24 24 24 24.5 School Support Staff 16 16 17 18.5 Total Employees 40 40 41 43.0 Total Number of Students 456 456 456 456 Student-to-Teacher Ratio 19:1 19:1 19:1 19:1

______________________ Source: Value.

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School Years 2013-14 through 2016-17 Central City Value

2013-14(1) 2014-15 2015-16 2016-17 Teachers 24 25 26 28 School Support Staff 3 3 3 3 Total Employees 30 31 32 34 Total Number of Students 451 473 483 480 Student-to-Teacher Ratio 19:1 19:1 19:1 17:1

______________________ Source: Value.

The following table sets forth the rate of retention of teachers, measured as the percentage of teachers for a given year who returned to teach the following year, for the last six school years for the Schools.

Table 9 TEACHER RETENTION RATES

School Years 2010-11 through 2015-16 The Schools

School Year University

Prep Downtown

Value Central

City Value 2010-11 -- 90% 92% 2011-12 -- 96 92 2012-13 -- 84 90 2013-14 -- 58(2) 90 2014-15 --(1) 82 76(2) 2015-16 67% 60 73(2)

(1) First year of operation was 2015-16. (2) Lower retention rates are an artifact of Value’s practice of using experienced teachers from one Value school to ensure newer schools begin on solid footing consistent with Value’s educational philosophy; most teachers who left Central City Value moved to University Prep and some teachers who left Downtown Value moved to Everest Value. Source: Value.

THE SCHOOLS

General

University Prep is currently located at 700 Wilshire Boulevard in Los Angeles, California, in space leased from 700 Wilshire Properties. Following the completion of the Project, as described in the forepart of this Limited Offering Memorandum, University Prep will relocate from its current location to the Series 2016 Facility. University Prep began operations in the 2015-16 school year, serving 111 students in grade 9 in its first year. At full capacity, University Prep expects to serve 480 students in grades 9 through 12. The charter for University Prep was authorized by LAUSD in 2015, and is scheduled to expire by its terms on June 30, 2020.

Downtown Value is located at 950 West Washington Boulevard in Los Angeles, California, on a site owned by the Borrower. The site is composed of a lot of 26,833 square feet and a two story building. Downtown Value serves over 450 students in kindergarten through grade 8. LAUSD serves as the chartering authority for Downtown Value, and has authorized its charter since 2002, with renewals in 2007 and 2012.

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The current charter for Downtown Value is scheduled to expire by its terms on June 30, 2017. Value submitted a petition for renewal of the Downtown Value charter in September 2016. If renewed by LAUSD, the Downtown Value charter would be extended for an addition five-year term.

Central City Value is located at 221 North Westmoreland Avenue in Los Angeles, California, on a site owned by the Borrower. The site is composed of a lot of 47,916 square feet and a one story building with a mezzanine of 30,642 square feet. Central City Value serves over 480 students in grades 9-12. LAUSD serves as the chartering authority for Central City Value, and has authorized its charter since 2003, with renewals in 2008 and 2013. The current charter for Central City Value is scheduled to expire by its terms on June 30, 2018.

Enrollment, Attendance & Student Retention

Enrollment. The table below shows grade level enrollment for the Schools in the school years 2012-13 through 2015-16, as well as projected enrollment by grade level through the 2020-21 school year. Across all Value schools, student attrition has historically been below 5%.

Table 10 ENROLLMENT BY GRADE LEVEL(1) School Years 2012-13 through 2020-21

University Prep(2)

Grade Level 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 9th Grade -- -- -- 111 96 120 120 120 120

10th Grade -- -- -- -- 110 120 120 120 120 11th Grade -- -- -- -- -- 110 120 120 120 12th Grade -- -- -- -- -- -- 110 120 120

Totals -- -- -- 111 206 350 470 480 480

Downtown Value

Grade Level 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Kindergarten 42 41 42 42 42 42 42 42 42

1st Grade 43 43 42 42 42 42 42 42 42 2nd Grade 41 41 42 42 42 42 42 42 42 3rd Grade 46 45 44 44 44 44 44 44 44 4th Grade 49 51 50 50 50 50 50 50 50 5th Grade 49 50 50 50 50 50 50 50 50 6th Grade 57 63 59 62 62 62 62 62 62 7th Grade 62 60 59 62 62 62 62 62 62 8th Grade 60 63 62 61 62 62 62 62 62

Totals 449 457 450 455 456 456 456 456 456

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Table 10 (continued) ENROLLMENT BY GRADE LEVEL(1) School Years 2012-13 through 2020-21

Central City Value

Grade Level 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 9th Grade 122 120 122 127 120 128 122 120 120

10th Grade 105 119 128 121 128 120 120 120 120 11th Grade 108 108 116 118 112 120 120 120 120 12th Grade 100 104 104 117 119 112 118 120 120

Totals 435 451 470 483 479 480 480 480 480

Total Enrollment University Prep(2), Downtown Value, and Central City Value

Grade Level 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Totals 884 908 920 1,049 1,141 1,286 1,406 1,416 1,416

________________ (1) For school years 2012-13 through 2015-16, data reflect certified enrollment as of the fall census day (the first Wednesday in October), which is reported to the California Longitudinal Pupil Achievement Data System (“CALPADS”) in each school year. (2) First year of operation was 2015-16. Source: Value.

Average Daily Attendance. The table below shows the average daily attendance (“ADA”) of the Schools from the 2011-12 school year through the 2015-16 school year. ADA is calculated as the total days of student attendance divided by the total days of instruction.

Table 11 AVERAGE DAILY ATTENDANCE


Year

University Prep

Downtown Value

Central City Value

2011-12 --(1) 433 366 2012-13 -- 434 415 2013-14 -- 443 433 2014-15 -- 437 447 2015-16 102 441 455

________________ (1) First year of operation was 2015-16. Source: Value.

The following table sets forth, for school years 2011-12 through 2015-16, the percentage of students in (i) kindergarten through 7th grade that attended Downtown Value in the following year, (ii) grade 8 at Downtown Value that attended either Central City Value or University Prep in the following year, and (iii) grades 9 through 11 at Central City Value and University Prep that attended the respective Schools in the following year.

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Table 12 HISTORICAL STUDENT RETENTION DATA


School Year

University Prep

Downtown Value

Central City Value

2011-12 --(1) 98% 96% 2012-13 -- 98 99 2013-14 -- 98 98 2014-15 -- 98 98 2015-16 97% 98 97

Source: Value.

Waitlist. The Schools maintain waitlists of applicants who wish to attend but exceed the available number of seats at the Schools. The following table sets forth the number of students at each School, by grade, who are on the wait list to enroll, as of Oct 25, 2016.

Table 13 WAIT LIST BY GRADE

as of Oct 25, 2016 The Schools

Grade

Downtown Value

University Prep

Central City Value

Kindergarten 36 n/a n/a 1st Grade 8 n/a n/a 2nd Grade 23 n/a n/a 3rd Grade 11 n/a n/a 4th Grade 0 n/a n/a 5th Grade 24 n/a n/a 6th Grade 0 n/a n/a 7th Grade 19 n/a n/a 8th Grade 3 n/a n/a 9th Grade n/a 0 1

10th Grade n/a n/a 57 11th Grade n/a n/a 0 12th Grade n/a n/a 0

Total 124 0 58 ________________ Source: Value.

Campus Service Areas and Competitive Schools

Competing Schools. The following table presents a summary of the certain demographics and test results for schools located in the vicinities of University Prep, Downtown Value and Central City Value that the management of Value regards as possible competing schools, indicating for each school the enrollment, the percentages of English Learners (“EL”), recipients of Free and Reduced Price Lunches (“FRL”) and the percentages of students meeting or exceeding standards for English language arts and literacy (“ELA/L”) and mathematics on the State’s Smarter Balanced Assessment tests, as well as Academic Performance Index (“API”) scores.

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Table 14 COMPETING SCHOOLS

University Prep

School

Distance from School

(miles)

Enrollment

(2015-16)

EL(%)

(2015-16)

FRL(%) (2015-16)

Smarter Bal. Assessment

ELA/L(%)(1)

Smarter Bal.Assessment Math(%)(1)

API

(2012-13)

University Prep(2) -- 111 25.2% 90.1% -- -- -- West Adams Prep 0.9 1,547 30.9 90.5 34% 16% 647 Alliance Gertz-Ressler HS(2)(3) 0.9 532 11.8 96.8 89 40 838 Alliance Dr. Olga Mohan HS(2) 1.2 451 10.9 96.0 80 57 895 Los Angeles HS of the Arts 1.7 430 20.7 86.5 37 11 -- Contreras Academic Leadership HS 1.8 472 31.8 91.9 62 24 658 Contreras Global Studies HS 1.8 382 26.4 92.9 55 21 650 Belmont High School 1.8 960 32.9 86.1 53 24 671

Downtown Value

School


(miles)

Enrollment

(2015-16)

EL(%)

(2015-16)

FRL(%) (2015-16)


ELA/L(%)(1)


API

(2012-13)

Downtown Value(2) -- 455 36.9% 90.0%(4) 43% 32% 837 Norwood Street Elementary 0.3 573 26.2 89.7 22 19 729 Magnolia Avenue Elementary 0.8 1,138 61.0 96.2 19 20 771 10th Street Elementary 1.1 698 65.3 97.0 29 30 795 Vermont Avenue Elementary 1.2 658 48.5 93.9 38 35 791 Liechty Middle School 1.4 1,076 33.7 93.7 22 14 685 John Adams Middle School 1.5 875 24.0 89.0 28 23 725 Berendo Middle School 1.5 816 29.9 94.0 22 11 739

Central City Value

School


(miles)

Enrollment

(2015-16)

EL(%)

(2015-16)

FRL(%) (2015-16)


ELA/L(%)(1)


API

(2012-13)

Central City Value(2) -- 483 14.1% 90.9% 77% 47% 767 Camino Nuevo High School(2) 0.3 324 22.2 89.5 77 44 -- Los Angeles HS of the Arts 1.4 430 20.7 86.5 37 11 -- Belmont High School 1.8 960 32.9 86.1 53 24 671 Contreras Academic Leadership HS 1.8 472 31.8 91.9 62 24 658 Contreras Global Studies HS 1.8 382 26.4 92.9 55 21 650 Roybal High School 2.2 1,107 27.4 88.3 30 16 664

________________ (1) Represents percentages of test-taking students that met or exceeded standards for 2015-16. (2) Charter school. (3) Enrollment represents grades 9-12. (4) CALPADS contains an error, yielding 71.2% as the percent Free/Reduced Meals for Downtown Value in the 2015-16 school year. The figure shown here reflects the actual, corrected percentage. Source: Value.

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OPERATING AND FINANCIAL INFORMATION

Historical Financial Results and Statements of Financial Position

Consolidated Financial Results for Value. The following table presents the audited statements of activities and changes in net assets for Value (system-wide) for fiscal years 2012-13 through 2015-16.

Table 15 STATEMENT OF ACTIVITIES

Fiscal Years 2012-13 through 2015-16 Value (Consolidated)(1)

2012-13 2013-14 2014-15 2015-16

REVENUE AND SUPPORT:

Revenues from Governmental Agencies: State $6,870,830 $7,965,984 $10,690,796 $14,796,598 Federal 1,272,009 1,099,402 1,433,153 1,779,710

Other Local Revenues: Contributions 117,723 168,512 394,949 1,079,640 Other 60,274 149,213 65,373 235,155

TOTAL REVENUE AND SUPPORT 8,320,836 9,383,111 12,584,271 17,891,103

OPERATING EXPENSES: Certificated Salaries 3,496,951 3,620,225 4,224,348 5,171,299 Classified Salaries 818,421 968,443 1,427,989 1,567,881 Fringe Benefits and Payroll Taxes 1,034,892 1,172,686 1,392,173 1,898,957 Books and Supplies 358,466 504,750 1,410,979 1,896,040 Services and Other Operating Expenses 2,297,362 2,909,765 3,411,714 4,844,158 Interest 127,953 12,351 -- -- Depreciation 138,511 14,906 -- -- District Oversight Fees 55,091 59,432 87,948 116,763

TOTAL OPERATING EXPENSES 8,327,647 9,262,558 11,955,151 15,495,098 CHANGE IN NET ASSETS FROM OPERATIONS (6,811) 120,553 629,120 2,396,005

OTHER EXPENSE: Grant Expense -- 2,508,648(2) -- --

CHANGE IN NET ASSETS (6,811) (2,388,095) 629,120 2,396,005 Net Assets (Deficit) – Beginning of Year 3,710,935 3,704,124 1,316,029 1,945,149

NET ASSETS (DEFICIT) – END OF YEAR $3,704,124 $1,316,029 $1,945,149 $4,341,154 (1) Represents the statement of activities of Value (central office) and the charter schools it operates, including the Schools. (2) In connection with the Series 2013 Bonds, Value recognized grant expense representing the difference in the net book value of facilities transferred from Value to the Borrower and the consideration received by Value. Source: Value; Audited Financial Reports for Fiscal Years 2012-13 through 2015-16.

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Consolidated Statements of Financial Position for Value. The following table sets forth the audited assets, liabilities and net assets of Value (system-wide) as of June 30 of each year for fiscal years 2012-13 through 2015-16.

Table 16 STATEMENT OF FINANCIAL POSITION

Fiscal Years 2012-13 through 2015-16 Value (Consolidated)(1)

2012-13 2013-14 2014-15 2015-16

ASSETS: Cash $862,203 $692,759 $1,563,073 $3,790,588 Due from Federal, State and Local Governments 1,443,436 1,421,429 1,212,357 1,548,764 Related Party Receivable 51,414 758,008 71,698 71,698 Note Receivable 809,709 -- -- -- Prepaid Expenses and Other Assets 315,521 54,934 374,659 408,686 Property and Equipment (Net) 3,530,392 -- -- 441,095

TOTAL ASSETS $7,012,675 $2,927,130 $3,221,787 $6,260,831

LIABILITIES AND NET ASSETS (DEFICIT) LIABILITIES: Accounts Payable and Accrued Expenses $1,232,235 $867,949 $385,874 $646,707 Due to Federal, State and Local Governments -- 171,221 -- -- Notes Payable – Related Parties 1,237,438 -- -- 450,002 Mortgage Payable 838,878 -- -- -- Deferred Rent -- 571,931 657,169 814,384 Deferred Revenue -- -- 233,595 8,584

Total Current Liabilities 3,308,551 1,611,101 1,276,638 1,919,677

Long Term Liabilities -- -- -- -- TOTAL LIABILITIES 3,308,551 1,611,101 1,276,638 1,919,677

COMMITMENTS AND CONTINGENCIES NET ASSETS (DEFICIT): Unrestricted 3,659,598 1,261,108 1,869,440 3,732,185 Retained Earnings -- -- -- -- Net Income -- -- -- -- Temporarily Restricted 44,526 54,921 75,709 608,969

TOTAL NET ASSETS (DEFICIT) 3,704,124 1,316,029 1,945,149 4,341,154 TOTAL LIABILITIES AND NET ASSETS (DEFICIT) $7,012,675 $2,927,130 $3,221,787 $6,260,831 ______________________ (1) Represents the statement of activities of Value (central office) and the charter schools it operates, including the Schools. Source: Value; Audited Financial Reports for Fiscal Years 2012-13 through 2015-16.

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Financial Results for the Schools. The following table presents the audited statements of activities and changes in net assets for the Schools for fiscal years 2012-13 through 2015-16.

Table 17 STATEMENT OF ACTIVITIES

Fiscal Years 2012-13 through 2015-16 The Schools(1)

2012-13 2013-14 2014-15 2015-16

REVENUE AND SUPPORT:

Revenues from Governmental Agencies: State $6,870,830 $7,965,984 $9,002,118 $12,450,676 Federal 1,272,009 1,099,402 1,016,056 1,426,532

Other Local Revenues: Contributions 9,141 102,313 66,295 601,762 Other 3,359 147,872 17,059 110,572

TOTAL REVENUE AND SUPPORT 8,155,339 9,315,571 10,101,528 14,589,542

OPERATING EXPENSES: Certificated Salaries: 3,496,951 3,587,560 3,420,262 4,232,425 Classified Salaries 529,396 622,286 890,468 873,872 Fringe Benefits and Payroll Taxes 957,850 1,074,645 1,061,824 1,339,309 Books and Supplies 352,894 500,974 1,028,852 1,570,747 Services and Other Operating Expenses 2,621,838 3,263,270 2,751,320 4,731,066 Interest 198 2,417 -- -- Depreciation 72,267 6,022 -- -- District Oversight Fees 55,091 58,432 73,442 97,774

TOTAL OPERATING EXPENSES 8,086,485 9,116,606 9,226,168 12,845,193

CHANGE IN NET ASSETS 68,854 198,965 875,360 1,744,349

Net Assets (Deficit) – Beginning of Year 1,858,168 1,927,022 2,125,987 3,001,347

NET ASSETS (DEFICIT) – END OF YEAR $1,927,022 $2,125,987 $3,001,347 $4,745,696 (1) For fiscal years 2012-13 through 2014-15, includes only Downtown Value and Central City Value. Source: Value; Audited Financial Reports for Fiscal Years 2012-13 through 2015-16.

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Statements of Financial Position for the Schools. The following table sets forth the audited assets, liabilities and net assets of the Schools as of June 30 of each year for fiscal years 2012-13 through 2015-16.

Table 18 STATEMENT OF FINANCIAL POSITION

Fiscal Years 2012-13 through 2015-16 The Schools(1)

2012-13 2013-14 2014-15 2015-16 ASSETS Cash $359,136 $324,519 $717,595 $3,185,345 Due from Federal, State and Local Governments 673,998 638,849 562,902 1,181,576 Related Party Receivable -- 274,313 26,115 71,698 Prepaid Expenses and Other Assets 3,942 1,092 56,439 341,447 Inter-Entity Receivable 164,727 1,450,538 1,476,404 1,571,616 Property and Equipment (Net) 1,142,829 -- -- 71,350

TOTAL ASSETS $2,344,632 $2,689,311 $2,839,455 $6,423,032

LIABILITIES AND NET ASSETS (DEFICIT) LIABILITIES: Accounts Payable and Accrued Expenses $587,795 $427,089 $187,548 409,093 Due to Federal, State and Local Governments -- 85,974 -- -- Deferred Rent -- 194,457 187,249 814,384 Deferred Revenue -- -- 1,095 8,584 Notes Payable -- -- -- 200,002 Inter-Entity Payable -- -- -- 245,273

Total Current Liabilities 587,795 707,520 375,892 1,677,336

Long Term Liabilities -- -- -- -- TOTAL LIABILITIES 587,795 707,520 375,892 1,677,336

COMMITMENTS AND CONTINGENCIES NET ASSETS (DEFICIT): Unrestricted 1,756,837 1,981,791 2,463,563 4,422,717 Retained Earnings -- -- -- -- Net Income -- -- -- -- Temporarily Restricted -- -- -- 322,979

TOTAL NET ASSETS (DEFICIT) 1,756,837 1,981,791 2,463,563 4,745,696 TOTAL LIABILITIES AND NET ASSETS (DEFICIT) $2,344,632 $2,689,311 $2,839,455 $6,423,032 ______________________ (1) For fiscal years 2012-13 through 2014-15, includes only Downtown Value and Central City Value. Source: Value; Audited Financial Reports for Fiscal Years 2012-13 through 2015-16.

Financial Statements

The consolidated audited financial statements of Value and its affiliates (including the Borrower and the Schools) for the year ended June 30, 2016 are set forth in “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF VALUE FOR THE YEAR ENDED JUNE 30, 2016” hereto.

State Teachers’ Retirement System

Through the State, qualified employees of Value participate in the California State Teachers Retirement System (“STRS”) and the California Public Employees Retirement System (“PERS”). Employees

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who are not members of STRS or PERS contribute to social security. Value makes employer contributions as required by STRS and PERS.

The information set forth below regarding the STRS and PERS programs, other than the information provided by Value regarding its annual contributions thereto, has been obtained from publicly available sources which are believed to be reliable but are not guaranteed as to accuracy or completeness, and should not be construed as a representation by Value or the Underwriter.

STRS. Value’s full-time certificated teachers are members of the State Teachers’ Retirement System (“STRS”). STRS provides retirement, disability and survivor benefits to plan members and beneficiaries under a defined benefit program (the “STRS Defined Benefit Program”). The STRS Defined Benefit Program is funded through a combination of investment earnings and statutorily set contributions from three sources: employees, employers, and the State. Benefit provisions and contribution amounts are established by State statutes, as legislatively amended from time to time.

Prior to fiscal year 2014-15, and unlike typical defined benefit programs, none of the employee, employer nor State contribution rate to the STRS Defined Benefit Program varied annually to make up funding shortfalls or assess credits for actuarial surpluses. In recent years, the combined employer, employee and State contributions to the STRS Defined Benefit Program have not been sufficient to pay actuarially required amounts. As a result, and due to significant investment losses, the unfunded actuarial liability of the STRS Defined Benefit Program has increased significantly in recent fiscal years. In September 2013, STRS projected that the STRS Defined Benefit Program would be depleted in 31 years assuming existing contribution rates continued, and other significant actuarial assumptions were realized. In an effort to reduce the unfunded actuarial liability of the STRS Defined Benefit Program, the State recently passed legislation described below to increase contribution rates.

Prior to July 1, 2014, participant employers were required by statute to contribute 8.25% of eligible salary expenditures, while participants contributed 8% of their respective salaries. On June 24, 2014, the Governor approved A.B. 1469 (“A.B. 1469”) as a part of the 2014-15 State Budget. A.B. 1469 seeks to fully fund the unfunded actuarial obligation with respect to service credited to members of the STRS Defined Benefit Program before July 1, 2014 (the “2014 Liability”), within 32 years, by increasing member, participant employer and State contributions to STRS. Commencing on July 1, 2014, the employee contribution rates will increase over a three-year phase-in period in accordance with the following schedule:

MEMBER CONTRIBUTION RATES STRS (Defined Benefit Program)

Effective Date

STRS Members Hired Prior to January 1, 2013

STRS Members Hired After January 1, 2013

July 1, 2014 8.150% 8.150% July 1, 2015 9.200 8.560 July 1, 2016 10.250 9.205

____________________ Source: A.B. 1469.

Pursuant to A.B. 1469, participant employers’ contribution rate will increase over a seven year phase in period in accordance with the following schedule:

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EMPLOYER CONTRIBUTION RATES STRS (Defined Benefit Program)

Effective Date

Participant Employers

July 1, 2014 8.88% July 1, 2015 10.73 July 1, 2016 12.58 July 1, 2017 14.43 July 1, 2018 16.28 July 1, 2019 18.13 July 1, 2020 19.10

____________________ Source: A.B. 1469.

Based upon the recommendation from its actuary, for fiscal year 2021-22 and each fiscal year thereafter, the STRS Teachers’ Retirement Board (the “STRS Board”) is required to increase or decrease the participant employers’ contribution rate to reflect the contribution required to eliminate the remaining 2014 Liability by June 30, 2046; provided that the rate cannot change in any fiscal year by more than 1% of creditable compensation upon which members’ contributions to the STRS Defined Benefit Program are based; and provided further that such contribution rate cannot exceed a maximum of 20.25%. In addition to the increased contribution rates discussed above, A.B. 1469 also requires the STRS Board to report to the State legislature every five years (commencing with a report due on or before July 1, 2019) on the fiscal health of the STRS Defined Benefit Program and the unfunded actuarial obligation with respect to service credited to members of that program before July 1, 2014. The reports are also required to identify adjustments required in contribution rates for participant employers and the State in order to eliminate the 2014 Liability.

Value’s contributions to STRS for the Schools were $264,956 for fiscal year 2012-13, $291,441 for fiscal year 2013-14 and $291,134 for fiscal year 2014-15. Value has estimated its contribution to STRS for the Schools as $448,096 for fiscal year 2015-16, and has budgeted for a contribution of $746,086 for fiscal year 2016-17.

The State also contributes to STRS, currently in an amount equal to 4.891% of teacher payroll for fiscal year 2015-16. The State’s contribution reflects a base contribution rate of 2.017%, and a supplemental contribution rate that will vary from year to year based on statutory criteria. Pursuant to A.B. 1469, the State contribution rate will increase over a three-year period to a total of 6.328% in fiscal year 2016-17. Based upon the recommendation from its actuary, for fiscal year 2017-18 and each fiscal year thereafter, the STRS Board is required, with certain limitations, to increase or decrease the State’s contribution rates to reflect the contribution required to eliminate the unfunded actuarial accrued liability attributed to benefits in effect before July 1, 1990. In addition, the State is currently required to make an annual general fund contribution up to 2.5% of the fiscal year covered STRS member payroll to the Supplemental Benefit Protection Account (the “SBPA”), which was established by statute to provide supplemental payments to beneficiaries whose purchasing power has fallen below 85% of the purchasing power of their initial allowance.

PERS. The Public Employees’ Retirement System (“PERS”) provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by the State statutes, as legislatively amended from time to time. PERS operates a number of retirement plans including the Public Employees Retirement Fund (“PERF”). PERF is a multiple-employer defined benefit retirement plan. In addition to the State, employer participants at June 30, 2013 included 1,580 public agencies and schools (representing more than 2,500 entities). PERS acts as the common investment and administrative agent for the member agencies. The State and participant employers (for “classified employees,” which generally consist of school employees other than teachers) are required by law to participate in PERF. Employees participating in PERF generally become fully vested in their retirement

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benefits earned to date after five years of credited service. One of the plans operated by PERS is for schools throughout the State (the “Schools Pool”).

Contributions by employers to the PERS Schools Pool are based upon an actuarial rate determined annually and contributions by plan members vary based upon their date of hire. Value is currently required to contribute to PERS at an actuarially determined rate, which is 11.847% of eligible salary expenditures for fiscal year 2015-16 and 13.888% in fiscal year 2016-17. Participants enrolled in PERS prior to January 1, 2013 contribute 7% of their respective salaries, while participants enrolled after January 1, 2013 contribute at an actuarially determined rate, which is 6% of their respective salaries for fiscal year 2015-16 and fiscal year 2016-17. See “—California Public Employees’ Pension Reform Act of 2013” herein.

Value’s contributions to PERS for the Schools were $36,715 for fiscal year 2012-13, $32,184 for fiscal year 2013-14 and $61,325 for fiscal year 2014-15. Value has estimated its contribution to PERS for the Schools as $70,285 for fiscal year 2015-16, and has budgeted for a contribution of $183,118 for fiscal year 2016-17.

State Pension Trust. Each of STRS and PERS issues a separate comprehensive financial report that includes financial statements and required supplemental information. Copies of such financial reports may be obtained from each of STRS and PERS as follows: (i) STRS, P.O. Box 15275, Sacramento, California 95851-0275 and (ii) PERS, P.O. Box 942703, Sacramento, California 94229-2703. Moreover, each of STRS and PERS maintains a website, as follows: (i) STRS: www.calstrs.com; (ii) PERS: www.calpers.ca.gov. The information presented in such financial reports or on such websites is not incorporated into this Limited Offering Memorandum by any reference.

Both STRS and PERS have substantial statewide unfunded liabilities. The amount of these unfunded liabilities will vary depending on actuarial assumptions, returns on investments, salary scales and participant contributions. The following table summarizes information regarding the actuarially-determined accrued liability for both STRS and PERS. Actuarial assessments are “forward-looking” information that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plans.

The following table sets forth information regarding the actuarially-determined accrued liabilities of both STRS and PERS.

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FUNDED STATUS STRS (Defined Benefit Program) and PERS

(Dollar Amounts in Millions) (1)

Fiscal Years 2010-11 through 2014-15

STRS

Fiscal Year

Accrued Liability

Value of Trust Assets

(MVA)(2)

Unfunded Liability

(MVA)(2)(3)


(AVA)(4)

Unfunded Liability

(AVA)(4)

2010-11 $208,405 $147,140 $68,365 $143,930 $64,475 2011-12 215,189 143,118 80,354 144,232 70,957 2012-13 222,281 157,176 74,374 148,614 73,667 2013-14 231,213 179,749 61,807 158,495 72,718 2014-15 241,753 180,633 72,626 165,553 76,200

PERS

Fiscal Year

Accrued Liability


(MVA)(2)

Unfunded Liability

(MVA)(2)


(AVA)(4)

Unfunded Liability

(AVA)(4)

2010-11 $58,358 $45,901 $12,457 $51,547 $6,811 2011-12 59,439 44,854 14,585 53,791 5,648 2012-13 61,487 49,482 12,005 56,250 5,237 2013-14 65,600 56,838 8,761 --(5) --(5) 2014-15(6) 73,325 56,814 16,511 --(5) --(5)

(1) Amounts may not add due to rounding. (2) Reflects market value of assets. (3) Excludes assets allocated to the SBPA reserve. (4) Reflects actuarial value of assets. (5) Effective for the June 30, 2014 actuarial valuation; PERS no longer uses an actuarial value of assets. (6) On April 19, 2016, the PERS Finance & Administration Committee approved the K-14 school district contribution rate for fiscal year 2016-17 and released certain actuarial information to be incorporated into the June 30, 2015 actuarial valuation to be released in summer 2015. Source: PERS Schools Pool Actuarial Valuation; STRS Defined Benefit Program Actuarial Valuation.

The STRS Board has sole authority to determine the actuarial assumptions and methods used for the valuation of the STRS Defined Benefit Program. The following are certain of the actuarial assumptions adopted by the STRS Board with respect to the STRS Defined Benefit Program Actuarial Valuation for fiscal year 2014-15: measurement of accruing costs by the “Entry Age Normal Actuarial Cost Method,” 7.50% investment rate of return (net of investment and administrative expenses), 4.50% interest on member accounts, 3.75% projected wage growth, and 3.00% projected inflation. According to the STRS Defined Benefit Program Actuarial Valuation, as of June 30, 2015, the future revenue from contributions and appropriations for the STRS Defined Benefit Program was projected to be sufficient to finance its obligations. This finding reflects the scheduled contribution increases specified in A.B. 1469 and is based on the valuation assumptions and the valuation policy adopted by the STRS Board.

In recent years, the PERS Board of Administration (the “PERS Board”) has taken several steps, as described below, intended to reduce the amount of the unfunded accrued actuarial liability of its plans, including the Schools Pool.

On March 14, 2012, the PERS Board voted to lower the PERS’ rate of expected price inflation and its investment rate of return (net of administrative expenses) (the “PERS Discount Rate”) from 7.75% to 7.5%. As one consequence of such decrease, the annual contribution amounts paid by PERS member employers, including Value, have been increased by 1 to 2% for miscellaneous plans and by 2 to 3% for safety plans

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beginning in fiscal year 2013-14. On February 18, 2014, the PERS Board voted to keep the PERS Discount Rate unchanged at 7.5%. On November 17, 2015, the PERS Board voted to reduce the PERS Discount Rate to 6.5% over a period of 20 years. This change could result in increased contributions over time from both employers and employees.

On April 17, 2013, the PERS Board approved new actuarial policies aimed at returning PERS to fully-funded status within 30 years. The policies include a rate smoothing method with a 30-year amortization period for gains and losses, a five-year increase of public agency contribution rates, including the contribution rate at the onset of such amortization period, and a five year reduction of public agency contribution rates at the end of such amortization period. The PERS Board has delayed the implementation of the new actuarial policies until fiscal year 2015-16 for the State, K-14 school districts and all other public agencies.

Also, on February 20, 2014, the PERS Board approved new demographic assumptions reflecting (i) expected longer life spans of public agency employees and related increases in costs for the PERS system and (ii) trends of higher rates of retirement for certain public agency employee classes, including police officers and firefighters. The new actuarial assumptions will first be reflected in the Schools Pool in the June 30, 2015 actuarial valuation. The increase in liability due to the new assumptions will be amortized over 20 years with increases phased in over five years, beginning with the contribution requirement for fiscal year 2016-17. The new demographic assumptions affect each of: the State, K-14 school districts and all other public agencies.

Value can make no representations regarding the future program liabilities of STRS, or whether Value will be required to make additional contributions to STRS in the future above those amounts required under A.B. 1469. Value can provide no assurances that any required contributions to PERS will not increase in the future.

California Public Employees’ Pension Reform Act of 2013. On September 12, 2012, the Governor signed into law the California Public Employee’s Pension Reform Act of 2013 (the “Reform Act”), which made changes to both STRS and PERS, most substantially affecting new employees hired after January 1, 2013 (the “Implementation Date”). For STRS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor (the age factor is the percent of final compensation to which an employee is entitled for each year of service) from age 60 to 62 and increasing the eligibility of the maximum age factor of 2.4% from age 63 to 65. Similarly, for non-safety PERS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor from age 55 to 62 and increases the eligibility requirement for the maximum age factor of 2.5% to age 67. Among the other changes to STRS and PERS, the Reform Act also: (i) requires all new participants enrolled in STRS and PERS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary, (ii) requires STRS and PERS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date (previously 12 months for STRS members who retire with 25 years of service), and (iii) caps “pensionable compensation” for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers) and benefit base for members participating in Social Security or 120% for members not participating in social security (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers), while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off.

Outstanding Debt

Series 2013 Bonds. In August 2013, the Borrower borrowed the proceeds of the California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2013 in the total aggregate principal

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amount of $12,870,000 (the “Series 2013 Bonds”) for the purpose of acquiring and improving certain charter school facilities. There is currently $12,635,000 principal amount of the Series 2013 Bonds outstanding.

Revolving Loans. In June 2015, Value, as borrower, entered into a revolving loan fund program with the California School Finance Authority (the “Authority”) on behalf of University Prep in the amount of $250,000, which matures in September 2020. Principal payments and accrued interest are payable annually per the terms of the loan agreement. The loan is subject to interest at the rate of 0.30%. Pursuant to the loan agreement, state apportionments attributable to University Prep are intercepted by the Authority to satisfy Value’s payment obligations. See “INTRODUCTION – Security for the Bonds – Parity Obligations; Prior Bonds” in the forepart of this Limited Offering Memorandum.

In September 2015, Value, as borrower, entered into a revolving loan fund program with the Authority on behalf of Everest Value in the amount of $250,000, which matures in September 2021. Principal payments and accrued interest are payable annually per the terms of the loan agreement. The loan is subject to interest at the rate of 0.36%. Pursuant to the loan agreement, state apportionments attributable to Everest Value are intercepted by the Authority to satisfy Value’s payment obligations.

SB 740

Value is currently eligible to receive funding under the California law referred to herein as SB 740, which provides for reimbursement of facilities lease costs of 75% of the actual lease cost to the extent funded by the State up to a limit of $750 per unit of classroom based ADA. To be eligible for SB 740 reimbursement, a charter school must serve a student population with at least 55% of its student population eligible for free or reduced lunch, or be located in a public elementary school attendance area with such composition.

In fiscal year 2014-15, Central City Value was awarded $335,040 and Downtown Value was awarded $328,380 in SB 740 funding. In the first two rounds of awards for fiscal year 2015-16 SB 740 funding, Central City Value was awarded $251,280, Downtown Value was awarded $188,212 and University Prep was awarded $54,675.

There can be no assurance that any particular level of SB 740 funding will be available in fiscal year 2016-17 or any future year, or that University Prep, Central City Value, Downtown Value or any other Value school will become or remain eligible for such funding.

Public Charter Schools Grant Program

The California Department of Education administers the Federal Public Charter Schools Grant Program (“PCSGP”), which provides funding to nonprofit entities and local educational agencies to assist in the development to open high-quality charter schools. The primary focus of the PCSGP is to create charter schools that will provide public school choice to students whose assigned traditional public school is chronically low performing. Value has received funds through PCSGP for University Prep in the amount of $575,000, and for Central City Value and Downtown Value in the amount of $375,000 each, distributed over the first three years of operation.

Facility Leases and Use Agreements

Value occupies various facilities for its operations through ground leases and facilities use agreements.

Everest Value. Value has entered into a commercial lease with Immanuel Presbyterian Church (the “Everest Value Lease”) whereby Value rents from Immanuel Presbyterian Church a portion of the building, known as the parish house, located at 668 S. Catalina Street, Los Angeles, California (the “Everest Value Facility”), for a period of five years, terminating in June 2019. The Everest Value Facility is used by Value for

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the operation of Everest Value. Value pays annual rent in the amount of $264,192 under the Everest Value Lease.

University Prep. Value has entered into an Office Lease with 700 Wilshire Properties, dated July 17, 2015, and amended on April 15, 2016 (as amended, the “University Prep Lease”) whereby Value rents from 700 Wilshire Properties the 4th floor of the building located at 700 Wilshire Boulevard, Los Angeles, California, comprising approximately 12,318 rentable square feet (the “Existing University Prep Site”), for a period of 23 months beginning August 1, 2015, and terminating on June 30, 2017. The Existing University Prep Site is used by Value for the operation of University Prep through the end of the 2016-17 school year. Value pays monthly rent in the amount of $19,055, as well as certain operating expenses, under the University Prep Lease. Following the completion of the Project, University Prep will relocate into the Series 2016 Facility and Value will cease renting facilities from unrelated third parties for its operation.

For a description of the Leases, see “SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2016 BONDS – The Leases” in the forepart of this Limited Offering Memorandum. For a description of the ground lease relating to University Prep, see “THE LEASES – The Ground Lease” in the forepart of this Limited Offering Memorandum.

No Material Litigation

No action, suit, proceeding or investigation at law or in equity, before or by any court, governmental agency or public board or body is pending or, to the knowledge of Value or the Borrower, threatened, affecting the validity of the Leases or the Series 2016 Bonds or contesting the corporate existence of the Borrower, Value or its authority to operate pursuant to the charters.

Value is subject to lawsuits and claims in the ordinary course of its operations. In the opinion of the management of Value, the aggregate amount of the uninsured liabilities for such lawsuits and claims will not materially affect the finances of Value or its operation of the Schools.

PROJECTIONS AND COVERAGE RATIOS

Projected Income and Coverage Ratios

Notwithstanding Value’s history of performance with respect to its charter schools in California, future financial performance of University Prep, Downtown Value and Central City Value may not equal or exceed the projections set forth in this Limited Offering Memorandum. No assurance is given that such projections will be met, or that the number of students attending the School may not diminish in the future. The projections of revenue and expenses contained in this Appendix A are based upon the number of students projected to be enrolled at the Schools and were prepared by Value for the Borrower and have not been independently verified by any party other than Value. See “THE SCHOOLS – Enrollment, Attendance & Student Retention” herein for information regarding current and projected enrollment of the Schools.

No feasibility studies have been conducted with respect to operations of the Facilities pertinent to the Series 2016 Bonds. The projections are “forward-looking statements” and are subject to the general qualifications and limitations described herein. The Underwriter has not independently verified the Borrower’s projections set forth in Appendix A or otherwise, and makes no representations nor gives any assurances that such projections, or the assumptions underlying them, are complete or correct. Further, the projections relate only to a limited number of fiscal years, and consequently do not cover the entire period that the Series 2016 Bonds will be outstanding.

VALUE PREPARED THE PROJECTIONS BASED ON ASSUMPTIONS ABOUT FUTURE STATE FUNDING LEVELS AND FUTURE OPERATIONS OF THE FACILITIES, INCLUDING

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STUDENT ENROLLMENT AND EXPENSES. THERE CAN BE NO ASSURANCE THAT ACTUAL ENROLLMENT REVENUES AND EXPENSES WILL BE CONSISTENT WITH THE ASSUMPTIONS UNDERLYING SUCH PROJECTIONS. MOREOVER, NO GUARANTEE CAN BE MADE THAT THE PROJECTIONS OF REVENUES AND EXPENSES INCLUDED HEREIN WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE BECAUSE THERE CAN BE NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE PROJECTIONS’ UNDERLYING ASSUMPTIONS. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING, BUT NOT LIMITED TO, INCREASED COSTS, LOWER THAN ANTICIPATED REVENUES (AS A RESULT OF INSUFFICIENT ENROLLMENT, REDUCED STATE OR FEDERAL AID PAYMENTS, OR OTHERWISE), EMPLOYEE RELATIONS, CHANGES IN TAXES, CHANGES IN APPLICABLE GOVERNMENT REGULATIONS, CHANGES IN DEMOGRAPHIC TRENDS, CHANGES IN EDUCATION COMPETITION AND CHANGES IN LOCAL OR GENERAL ECONOMIC CONDITIONS. REFER TO “INTRODUCTION” IN THE FOREPART OF THIS LIMITED OFFERING MEMORANDUM FOR QUALIFICATION AND LIMITATIONS APPLICABLE TO FORWARD-LOOKING STATEMENTS.


A-36

The table below sets forth the Historical and Projected Debt Service Coverage for the Schools. See “STATE FUNDING OF EDUCATION” and “CERTAIN RISK FACTORS” in the Limited Offering Memorandum. For historic operating results of Value and the Schools, see “OPERATING AND FINANCIAL INFORMATION” herein.

Table 19

HISTORICAL AND PROJECTED DEBT SERVICE COVERAGE Fiscal Years 2013-14 through 2020-21

Attributable to Operations of the Schools

Audited

FY2013-14 Audited

FY2014-15 Audited

FY2015-16 Projected

FY2016-17 Projected

FY2017-18 Projected

FY2018-19 Projected

FY2019-20 Projected

FY2020-21 DV Enrollment 457 450 455 456 456 456 456 456 CC Enrollment 451 470 483 479 480 480 480 480 UP Enrollment NA NA 111 206 350 470 480 480 Total 908 920 1049 1141 1286 1406 1416 1416 Revenues:

State Revenues $7,965,984 $9,002,118 $12,450,676 $13,911,032 $15,614,744 $17,274,894 $18,286,595 $18,314,320 Federal Revenues 1,099,402 1,016,056 1,426,532 1,287,977 1,454,614 1,637,985 1,735,412 1,774,965 Local Revenues 250,185 83,354 712,334 121,202 131,803 142,529 146,831 149,068

Total Revenues 9,315,571 10,101,528 14,589,542 15,320,211 17,201,161 19,055,409 20,168,838 20,238,353 Total Expenses 9,116,606 9,226,168 12,845,193 15,235,670 16,842,052 18,535,246 19,152,317 19,042,828 Operating Income $198,965 $875,360 $1,744,349 $84,540 $359,110 $520,162 $1,016,521 $1,195,526 Debt Service Coverage Ratio: FY2013-14 FY2014-15 FY2015-16 FY2016-17 FY2017-18 FY2018-19 FY2019-20 FY2020-21 Operating Income $198,965 $875,360 $1,744,349 $84,540 $359,110 $520,162 $1,016,521 $1,195,526 Plus: Downtown Value Lease 301,159 328,537 335,011 335,129 335,129 335,129 335,129 335,129 Plus: Central City Lease 584,602 637,748 650,317 650,545 650,545 650,545 650,545 650,545 Plus: University Prep Lease -- -- 206,830 488,400 376,059 501,413 561,413 562,803 Plus: Other -- -- -- -- -- -- -- -- Available for Debt Service 1,084,726 1,841,645 2,936,507 1,558,614 1,720,843 2,007,249 2,563,608 2,744,002 Series 2013 Debt Service 885,761 966,285 985,862 983,768 986,393 988,428 984,873 986,023 Series 2016 Debt Service - - - - 376,059 501,413 561,413 562,803 Total Debt Service 885,761 966,285 985,862 983,768 1,362,452 1,489,840 1,546,285 1,548,825 Debt Service Coverage Ratio 1.22 1.91 2.98 1.58 1.26 1.35 1.66 1.77

Source: Value.

B-1

APPENDIX B

AUDITED FINANCIAL STATEMENTS OF VALUE FOR THE FISCAL YEAR ENDED JUNE 30, 2016

VALUE SCHOOLS (A Non-Profit Organization)

FINANCIAL REPORTS

YEAR ENDED JUNE 30, 2016


FINANCIAL REPORTS


CONTENTS Financial Statements ................................................................................ Section A

Independent Auditor’s Report on State Compliance .............................. Section B Reports Required By Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) ............................................................................ Section C

SECTION A

Financial Statements


FINANCIAL STATEMENTS



FINANCIAL STATEMENTS


CONTENTS Page Independent Auditor’s Report ............................................................................... 1 Statement of Financial Position ............................................................................. 3 Statement of Activities ............................................................................................ 4 Statement of Functional Expenses ......................................................................... 5 Statement of Cash Flows ........................................................................................ 6 Notes to Financial Statements ............................................................................... 7 Supplementary Information ................................................................................. 14 Charter School Organization Structure ............................................................... 15 Schedule of Average Daily Attendance ................................................................ 19 Schedule of Instructional Time ............................................................................ 23 Reconciliation of Annual Financial Report with Audited Financial Statements ........... ………………………………………….………....27 Schedule of Expenditures of Federal Awards ...................................................... 31 Notes to Schedule of Expenditures of Federal Awards ....................................... 32 Combining Statement of Financial Position........................................................ 33 Combining Statement of Activities ...................................................................... 34

10990 Wilshire Boulevard 310.873.1600 T 16th Floor 310.873.6600 F Los Angeles, CA 90024 www.greenhassonjanks.com

An independent member of HLB International, a worldwide network of accounting firms and business advisors.

INDEPENDENT AUDITOR’S REPORT To the Board of Directors Value Schools Report on the Financial Statements We have audited the accompanying financial statements of Value Schools (a non-profit organization)(the Organization), which comprise the statement of financial position as of June 30, 2016 and the related statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of June 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

To the Board of Directors Value Schools Page 2

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Other Matters - Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of Schedule of Expenditures of Federal Awards is presented for additional analysis as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance. The schedules of charter school organization structure, average daily attendance, instructional time, reconciliation of annual financial report with audited financial statements, and combining statements of financial position and activities are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 23, 2016 on our consideration of the Organization’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization’s internal control over financial reporting and compliance.

Green Hasson & Janks LLP November 23, 2016 Los Angeles, California

The Accompanying Notes are an Integral Part of These Financial Statements

-3-

TemporarilyASSETS Unrestricted Restricted Total

Cash 3,181,619$ 608,969$ 3,790,588$ Due from Federal, State and Local Governments 1,548,764 - 1,548,764 Related Party Receivable 71,698 - 71,698 Prepaid Expenses and Other Assets 408,686 - 408,686 Property and Equipment (Net) 441,095 - 441,095

TOTAL ASSETS 5,651,862$ 608,969$ 6,260,831$

LIABILITIES AND NET ASSETS

LIABILITIES:Accounts Payable and Accrued Expenses 646,707$ -$ 646,707$ Deferred Rent 814,384 - 814,384 Deferred Revenue 8,584 - 8,584 Notes Payable 450,002 - 450,002

TOTAL LIABILITIES 1,919,677 - 1,919,677

COMMITMENTS AND CONTINGENCIES

NET ASSETS:Unrestricted 3,732,185 - 3,732,185 Temporarily Restricted - 608,969 608,969

TOTAL NET ASSETS 3,732,185 608,969 4,341,154

TOTAL LIABILITIES AND NET ASSETS 5,651,862$ 608,969$ 6,260,831$

STATEMENT OF FINANCIAL POSITIONJune 30, 2016

VALUE SCHOOLS(A Non-Profit Organization)


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TemporarilyUnrestricted Restricted Total

REVENUE AND SUPPORT:Revenues from Governmental Agencies: State 14,389,142$ 407,456$ 14,796,598$ Federal 1,779,710 - 1,779,710 Other Local Revenues: Contributions 579,640 500,000 1,079,640 Other 235,155 - 235,155 Net Assets Released from Purpose Restrictions 374,196 (374,196) -

TOTAL REVENUE AND SUPPORT 17,357,843 533,260 17,891,103

EXPENSES:Program Services 11,638,448 - 11,638,448 Supporting Services 3,856,650 - 3,856,650

TOTAL EXPENSES 15,495,098 - 15,495,098

CHANGE IN NET ASSETS 1,862,745 533,260 2,396,005

Net Assets - Beginning of Year 1,869,440 75,709 1,945,149

NET ASSETS - END OF YEAR 3,732,185$ 608,969$ 4,341,154$


STATEMENT OF ACTIVITIESYear Ended June 30, 2016


-5-

Program SupportingServices Services Total

Salaries - Certificated 4,910,461$ 260,838$ 5,171,299$ Salaries - Classified 972,841 595,040 1,567,881 Employee Benefits 1,543,661 355,296 1,898,957

TOTAL PERSONNEL COSTS 7,426,963 1,211,174 8,638,137

Books and Supplies 1,759,559 136,481 1,896,040 Services and Other Operating Expenses 2,451,926 2,392,232 4,844,158 District Oversight Fees - 116,763 116,763

TOTAL FUNCTIONAL EXPENSES 11,638,448$ 3,856,650$ 15,495,098$


STATEMENT OF FUNCTIONAL EXPENSESYear Ended June 30, 2016


-6-

CASH FLOWS FROM OPERATING ACTIVITIES:Change in Net Assets 2,396,005$ Adjustments to Reconcile Change in Net Assets to Net Cash Provided by Operating Activities: Depreciation 9,135 Bad Debt Expense 151,524 Contributions Restricted for Investment in Property and Equipment (200,000) Increase in: Due from Federal, State and Local Governments (487,931) Prepaid Expenses and Other Assets (67,168) Increase (Decrease) in: Accounts Payable and Accrued Expenses 260,833 Deferred Rent 157,215 Deferred Revenue (225,011)

NET CASH PROVIDED BY OPERATING ACTIVITIES 1,994,602

CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (417,089) Proceeds from Contributions Restricted for Investment in Property and Equipment 200,000

NET CASH USED IN INVESTING ACTIVITIES (217,089)

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Notes Payable 500,000 Payments on Notes Payable (49,998)

NET CASH PROVIDED BY FINANCING ACTIVITIES 450,002

NET INCREASE IN CASH 2,227,515

Cash - Beginning of Year 1,563,073

CASH - END OF YEAR 3,790,588$

VALUE SCHOOLS

STATEMENT OF CASH FLOWSYear Ended June 30, 2016

(A Non-Profit Organization)


NOTES TO FINANCIAL STATEMENTS

June 30, 2016

-7-

NOTE 1 - ORGANIZATION

Value Schools is a California not-for-profit public benefit corporation founded in 2000. Value Schools operates as the parent entity of four charter schools, namely, Downtown Value School (DVS), Central City Value School (CCVS), Everest Value School (EVS), and University Preparatory Value School (UPVS) (collectively, the Organization). Downtown Value School serves approximately 455 students in grades K through 8. Central City Value School serves approximately 470 students in grades 9 through 12. Everest Value School serves approximately 175 students in grades K through 8. University Preparatory Value serves approximately 110 students in grade 9.

The Schools are chartered by the Los Angeles Unified School District (the District) under California charter law. Each charter has been granted for a period of five years, with an opportunity to request a continuation. The charter may be revoked by the District for material violations of the charter, failure to meet or make progress toward student outcomes, failure to meet generally accepted standards of fiscal management, or violation of any provision of the law.

DVS, opened in June 2002 (originally under the name Las Familias del Pueblo), was granted its fourth five year charter on November 15, 2016 by the District which extends through June 2022. CCVS was opened in June 2003 and the District granted a third five year charter on January 15, 2013 which extends through June 2018. On December 17, 2013, the District approved the five year charter for EVS to open July 1, 2014 and extend through June 30, 2019. On November 18, 2014, the District approved the five year charter for UPVS to open July 1, 2015 and extend through June 30, 2020. UPVS opened in August 2015 at a temporary site. Enrollment began with ninth graders, to which a grade will be added each year, with maximum enrollment at 480 anticipated in approximately five years.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF PRESENTATION

The accompanying financial statements have been prepared on the accrual basis of accounting.

The financial statements include the accounts of Value Schools, DVS, CCVS, EVS and

UPVS. All significant inter-entity transactions and balances have been eliminated on combination.

(b) ACCOUNTING

To ensure observance of certain constraints and restrictions placed on the use of

resources, the accounts of the Organization are maintained in accordance with the principles of net assets accounting. This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into net asset classes that are in accordance with specified activities or objectives. Accordingly, all financial transactions have been recorded and reported by net asset class as follows:

Unrestricted Net Assets. These generally result from revenues generated by receiving unrestricted contributions, providing services, and receiving income from investments less expenses incurred in providing program related services, raising contributions, and performing administrative functions.



June 30, 2016

-8-

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) ACCOUNTING (continued)

Temporarily Restricted Net Assets. The Organization reports gifts of cash and other assets as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from purpose or time restrictions. The Organization has $608,969 of temporarily restricted net assets at June 30, 2016.

Permanently Restricted Net Assets. These net assets are received from donors who stipulate that resources are to be maintained permanently but permit the Organization to expend all of the income or other economic benefits derived from the donated assets. The Organization has no permanently restricted net assets at June 30, 2016.

(c) MANAGEMENT’S USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from these estimates.

(d) CASH

The Organization maintains its cash in bank checking accounts and other highly liquid investments which, at times, may exceed federally insured limits. The Organization has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

(e) DUE FROM FEDERAL, STATE AND LOCAL GOVERNMENTS

Due from federal, state and local governments are recorded based on amounts to be primarily awarded from the California Department of Education which are, in turn, based on the average daily attendance (ADA) of students. The amounts to be awarded are subject to change based on the availability of funds from the State of California. As a result, differences may occur when accruals are estimated because the exact amounts are not available at the time of the accrual. Any changes are recorded in the period that they are estimable.

The carrying value of due from federal, state and local governments, net of the allowance for doubtful accounts, represents their estimated net realizable value. The allowance for doubtful accounts is estimated based on historical collection trends, the age of outstanding amounts due from federal, state and local governments and existing economic conditions. If events or changes in circumstances indicate that specific due from federal, state and local government balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly.

Past due balances are written off when internal collection efforts have been unsuccessful in collecting the amount due. As of June 30, 2016, the Organization has not established any allowance for doubtful accounts.



June 30, 2016

-9-


(f) PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost at the date of acquisition if purchased or at estimated fair value at the date of donation if donated. Depreciation is computed using the straight-line basis over the estimated useful lives of the related assets. Property and equipment are capitalized if the cost of an asset is greater than or equal to $5,000 and the useful life is greater than one year.

The estimated useful lives are as follows:

Leasehold Improvements 5 Years Equipment 5 Years

Property and equipment funded by government contracts where title to the assets is retained by the government agencies are not capitalized.

Expenditures for repairs and maintenance are charged to expense as incurred while renewals and betterments are capitalized.

(g) LONG-LIVED ASSETS

The Organization evaluates long-lived asset for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated value. No impairment losses have been recognized during the year ended June 30, 2016.

(h) DEFERRED RENT

The Organization recognizes free rent periods and escalating rent provisions on a straight line basis over the term of the lease.

(i) DEFERRED REVENUE

Government grants are recognized as revenue in accordance with the terms of the applicable grant agreement, which is generally upon the incurrence of expenditures related to the required services. Any funds received in excess of expenditures are recorded as deferred revenue.

(j) INCOME TAXES

The Organization is exempt from taxation under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701(d).



June 30, 2016

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(k) FUNCTIONAL ALLOCATION OF EXPENSES

The costs of providing the Organization’s programs and other activities have been presented in the statement of functional expenses. During the year, such costs are accumulated into separate groupings as either direct or indirect. Indirect or shared costs are allocated among program and support services by a method that best measures the relative degree of benefit.

(l) NEW ACCOUNTING PRONOUNCEMENTS

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases, which is intended to improve financial reporting about leasing transactions. The new standard will require organizations that lease assets with terms of more than 12 months to recognize on the statement of financial position the assets and liabilities for the rights and obligations created by those leases. The ASU also will require disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements and providing additional information about the amounts recorded in the financial statements. For the Organization, the ASU will be effective for the year ending June 30, 2021.

In August 2016, FASB issued ASU No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), which is intended to reduce complexity in financial reporting. The ASU focuses on improving the current net asset classification requirements and information presented in financial statements that is useful in assessing a nonprofit’s liquidity, financial performance, and cash flows. For the Organization, the ASU will be effective for the year ending June 30, 2019.

(m) SUBSEQUENT EVENTS

The Organization evaluated events and transactions occurring subsequent to the statement of financial position date of June 30, 2016, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through November 23, 2016, the date these financial statements were available to be issued. No such significant events or transactions were noted to have occurred, except as noted in Note 1.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2016 consists of the following:

Construction in Progress $ 418,014 Leasehold Improvements 27,323 Equipment 18,350

TOTAL 463,687 Less: Accumulated Depreciation (22,592) PROPERTY AND EQUIPMENT (NET) $ 441,095

Depreciation expense for the year ended June 30, 2016 was $9,135.



June 30, 2016

-11-

NOTE 3 - PROPERTY AND EQUIPMENT (continued)

Construction in progress at June 30, 2016 consists of the following projects:

Construction in

Progress

Estimated Remaining Cost-

to-Complete UPVS Leasehold Improvements $ 346,664 $ 6,200,000 Proposition 39 Renovations 71,350 300,000 TOTAL $ 418,014 $ 6,500,000

NOTE 4 - NOTES PAYABLE Notes payable at June 30, 2016 consists of the following:

Note Payable - California School Finance Authority Under the Charter School Revolving Loan Fund Program, On behalf of EVS, Maturing September 2021, Repayments of Principal Totaling $49,998 and Accrued Interest Due Annually, Payments Through Intercept of School’s State Revenue, Interest Accrues at the Pooled Money Investment Account Rate $ 250,000 Note Payable - California School Finance Authority Under the Charter School Revolving Loan Fund Program, On behalf of UPVS, Maturing September 2020, Repayments of Principal Totaling $49,998 and Accrued Interest Due Annually, Payments Through Intercept of School’s State Revenue, Interest Accrues at the Pooled Money Investment Account Rate 200,002 TOTAL NOTES PAYABLE $ 450,002

The Pooled Money Investment Account Rate at June 30, 2016 was 0.36%. There was no interest

expense recognized on the loans during the year ended June 30, 2016. Future maturity of notes payable is as follows:

Years Ending June 30

2017 $ 99,996 2018 99,996 2019 99,996 2020 100,006 2021 50,008

TOTAL $ 450,002



June 30, 2016

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NOTE 5 - TEMPORARILY RESTRICTED NET ASSETS

Temporarily restricted net assets at June 30, 2016 are available for the following purposes:

College Preparatory Courses $ 32,770 School Start Up Program 36,134 EVS Building Improvements 200,000 State Funding: Educator Effectiveness Grant 79,420 Proposition 39 Clean Energy Grant 260,645 TEMPORARILY RESTRICTED NET ASSETS $ 608,969

NOTE 6 - COMMITMENTS AND CONTINGENCIES

(a) OPERATING LEASES

The Schools rent its DVS and CCVS locations from VSF School Facilities #1 LLC (an organization with common board members) (VSF) under lease agreements that expire in 2048. The Schools rent its EVS and UPVS locations from a third party, under lease agreements which expire in June 2019 and June 2040, respectively. The Schools rent its Home Office location from a third party under a lease agreement that expires in November 2019. Payments towards certain leases escalate based on a schedule specified under the agreements. The leases also require the Organization to pay for other costs such as property taxes, insurance, maintenance and utilities.

Future minimum lease payments for these leases are as follows:

Related Party Third Party

Years Ending June 30 Leases Leases Total

2017 $ 984,424 $ 765,813 $ 1,750,237 2018 986,901 554,620 1,541,521 2019 987,539 569,148 1,556,687 2020 985,160 355,361 1,340,521 2021 986,792 363,356 1,350,148

Thereafter 26,357,702 8,688,405 35,046,107

TOTAL $ 31,288,518 $ 11,269,703 $ 42,585,221

Total rent expense under all operating leases for the year ended June 30, 2016 was $1,930,799, of which $967,648 is related to leases with VSF.

(b) CONTRACTS

The Organization’s grants and contracts are subject to inspection and audit by the appropriate governmental funding agency. The purpose is to determine whether program funds were used in accordance with their respective guidelines and regulations. The potential exists for disallowance of previously funded program costs. The ultimate liability, if any, which may result from these governmental audits cannot be reasonably estimated and, accordingly, the Organization has no provisions for the possible disallowance of program costs on its financial statements.



June 30, 2016

-13-

NOTE 6 - COMMITMENTS AND CONTINGENCIES (continued)

(c) LITIGATION

In the ordinary course of conducting its operations, the Organization may become involved in various lawsuits. Some of these proceedings may result in judgments being assessed against the Organization, which, from time to time, may have an impact on its statement of activities or financial position. The Organization is not aware of any lawsuits or proceedings lodged against the Organization.

NOTE 7 - EMPLOYEE BENEFIT PLAN Qualified employees are covered under multiple-employer defined benefit pension plans

maintained by agencies of the State of California. Certificated employees are members of the State Teachers’ Retirement System (STRS). Classified employees are members of the Public Employees’ Retirement System (PERS).

The Organization has a pension plan covering full-time salaried administrative employees of the

Organization. There were no contributions to the pension plan for the year ended June 30, 2016.

The Organization reports all applicable information to STRS and PERS through the District. The Organization is required to contribute 10.73% and 11.85% of annual payroll for active plan members for STRS and PERS, respectively. Total STRS and PERS contributions for the year ended June 30, 2016 were $653,657.

NOTE 8 - RELATED PARTY TRANSACTIONS

(a) The District receives 1% of the Organization’s annual ADA-related revenues for supervisory oversight, administrative and other services. The total expense incurred for such supervisory oversight, administrative and other services for the year ended June 30, 2016 was $116,763.

(b) Effective August 2013, the DVS and CCVS pay VSF rent in accordance with the terms of

rental agreements to utilize their respective facilities (See Note 6(a)). At June 30, 2016, the Organization has $161,639 of prepaid rent for the VSF leases which is included in prepaid expenses and other assets.

(c) At June 30, 2016, the Organization has $71,698 receivable from VSF related to

reimbursements for repairs incurred on the leased properties. This balance is included in related party receivable.

(d) During the year ended June 30, 2016, Value Schools Foundation (parent of VSF), made

donations totaling $462,000 to Value Schools to support operations of the schools.

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SUPPLEMENTARY INFORMATION



CHARTER SCHOOL ORGANIZATION STRUCTURE

Year Ended June 30, 2016

See Independent Auditor’s Report

-15-

DOWNTOWN VALUE SCHOOL a. Date and Granting Authority

of Charter School: December 11, 2001; Los Angeles Unified School District

b. Members of the Governing Board:

Name Title Term Expiration Maria Ahumada Director 06/30/2017* Grant Cambridge Chairman 06/30/2017 Jody Foldesy Director 06/30/2017 Jeffrey Garcia Director 06/30/2017 Jose Ramos Director 06/30/2017

c. President: Geraldine Jacoby, President and CEO

Principal: Ana Chavez Chief Business Official: Rhonda Hoffarth, Business Manager

d. Charter School Name: Downtown Value School

Charter School Number: 0448 *Resigned from the Governing Board effective September 2016. Replaced by another individual immediately upon resignation.





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CENTRAL CITY VALUE SCHOOL a. Date and Granting Authority

of Charter School: February 20, 2003; Los Angeles Unified School District




Principal: Joaquin Arroyo Chief Business Official: Rhonda Hoffarth, Business Manager

d. Charter School Name: Central City Value School Charter School Number: 0534 *Resigned from the Governing Board effective September 2016. Replaced by another individual immediately upon resignation.





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EVEREST VALUE SCHOOL a. Date and Granting Authority

of Charter School: December 17, 2013; Los Angeles Unified School District




Principal: Chris Medinger Chief Business Official: Rhonda Hoffarth, Business Manager

d. Charter School Name: Everest Value School Charter School Number: 1638 *Resigned from the Governing Board effective September 2016. Replaced by another individual immediately upon resignation.





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UNIVERSITY PREPARATORY VALUE SCHOOL a. Date and Granting Authority

of Charter School: November 18, 2014; Los Angeles Unified School District




Principal: David Doyle Chief Business Official: Rhonda Hoffarth, Business Manager

d. Charter School Name: University Preparatory Value School Charter School Number: 1723 *Resigned from the Governing Board effective September 2016. Replaced by another individual immediately upon resignation.

See Independent Auditor's Report

-19-

SecondPeriod AnnualReport Report

Kindergarten and Grades 1 through 3 163.97 162.87 Grades 4 through 6 157.04 156.34 Grades 7 through 8 119.92 119.47

TOTAL 440.93 438.68


SCHEDULE OF AVERAGE DAILY ATTENDANCE(CLASSROOM BASED)


DOWNTOWN VALUE SCHOOL


-20-


Grades 9 through 12 459.46 454.94




CENTRAL CITY VALUE SCHOOL


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Kindergarten and Grades 1 through 3 88.94 89.80Grades 4 through 6 74.21 75.51Grades 7 through 8 36.84 37.19

TOTAL 199.99 202.50




EVEREST VALUE SCHOOL


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Grades 9 through 12 104.43 103.70




UNIVERSITY PREPARATORY VALUE SCHOOL


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InstructionalRequired Provided Days Status

Kindergarten 36,000 66,910 199 In ComplianceGrade 1 50,400 67,030 200 In ComplianceGrade 2 50,400 67,030 200 In ComplianceGrade 3 50,400 67,030 200 In ComplianceGrade 4 54,000 67,030 200 In ComplianceGrade 5 54,000 66,910 199 In ComplianceGrade 6 54,000 67,030 200 In ComplianceGrade 7 54,000 67,030 200 In ComplianceGrade 8 54,000 66,910 199 In Compliance




SCHEDULE OF INSTRUCTIONAL TIME

Instructional Minutes


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Grade 9 64,800 64,959 180 In ComplianceGrade 10 64,800 64,959 180 In ComplianceGrade 11 64,800 64,959 180 In ComplianceGrade 12 64,800 64,959 180 In Compliance







-25-


Kindergarten 36,000 67,070 199 In ComplianceGrade 1 50,400 67,280 200 In ComplianceGrade 2 50,400 67,280 200 In ComplianceGrade 3 50,400 67,280 200 In ComplianceGrade 4 54,000 67,280 200 In ComplianceGrade 5 54,000 67,070 199 In ComplianceGrade 6 54,000 67,280 200 In ComplianceGrade 7 54,000 67,280 200 In ComplianceGrade 8 54,000 67,070 199 In Compliance







-26-


Grade 9 64,800 65,963 180 In ComplianceGrade 10 64,800 65,963 180 In ComplianceGrade 11 64,800 65,963 180 In ComplianceGrade 12 64,800 65,963 180 In Compliance


SCHEDULE OF INSTRUCTIONAL TIMEYear Ended June 30, 2016




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June 30, 2016 Annual Financial Report Fund Balances (Net Assets) 3,349,183$

Adjustments and Reclassifications:

Increasing (Decreasing) the Fund Balance (Net Assets) Cash 9,008$ Due from Federal, State and Local Governments (120,277) Inter-Entity Receivable 2,493 Related Party Receivable 26,115 Property and Equipment 39,698 Accounts Payable and Accrued Expenses 74,966 Deferred Revenue 1

Net Adjustments and Reclassifications 32,004

June 30, 2016 Audited Financial Statement Fund Balances (Net Assets) 3,381,187$



RECONCILIATION OF ANNUAL FINANCIAL REPORTWITH AUDITED FINANCIAL STATEMENTS



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June 30, 2016 Annual Financial Report Fund Balances (Net Assets) 1,387,907$


Increasing (Decreasing) the Fund Balance (Net Assets) Cash (200,100)$ Due from Federal, State and Local Governments 124,047 Related Party Receivable 45,583 Property and Equipment 5,245 Accounts Payable and Accrued Expenses 135,805 Inter-Entity Payable (88,950)

Net Adjustments and Reclassifications 21,630

June 30, 2016 Audited Financial Statement Fund Balances (Net Assets) 1,409,537$






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June 30, 2016 Annual Financial Report Fund Balances (Net Assets) 245,822$


Increasing (Decreasing) the Fund Balance (Net Assets) Due from Federal, State and Local Governments 288,720$ Prepaids and Other Assets (107,883) Accounts Payable and Accrued Expenses 1,313 Inter-Entity Payable (197,091)

Net Adjustments and Reclassifications (14,941)

June 30, 2016 Audited Financial Statement Fund Balances (Net Assets) 230,881$






-30-

June 30, 2016 Annual Financial Report Fund Balances (Net Assets) 171,443$


Increasing (Decreasing) the Fund Balance (Net Assets) Due from Federal, State and Local Governments (62,704)$ Prepaids and Other Assets 27,444 Accounts Payable and Accrued Expenses (183,424) Deferred Revemue 158,536 Inter-Entity Payable (156,323)

Net Adjustments and Reclassifications (216,471)

June 30, 2016 Audited Financial Statement Fund Balances (Net Deficit) (45,028)$






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ProgramPass-Through Expenditures

Federal Entity fromFEDERAL AWARDS CFDA Identifying Contract Federal FederalFederal Grantor/Passed Through Grantor/Program or Cluster Title Number Number Number Revenues Revenues

MAJOR AWARDSU.S. Department of EducationPassed through the State of California,Department of Education:Title I, Part A - Improving the Academic Achievement of the Disadvantaged 84.010 14329 S010A130005 363,395$ 363,395$

Cluster Total 363,395 363,395

U.S. Department of AgriculturePassed through the State of California,Department of Education:National School Breakfast Program 10.553 13390 19-11197-6095624-01 143,493 143,493 National School Lunch Program 10.555 13391 19-11197-6095624-01 522,579 522,579


TOTAL MAJOR AWARDS 1,029,467 1,029,467

NON-MAJOR AWARDSU.S. Department of EducationPassed through the State of California,Department of Education:Individuals with Disabilities Education Act (IDEA) - Part B, Section 611 84.027 13379 H027A120116 228,825 228,825


U.S. Department of EducationPassed through the State of California,Department of Education:Title II - Improving Teacher Quality State Grants 84.367 14341 S367A120005-12A 5,152 5,152


U.S. Department of EducationPassed through the State of California,Department of Education:Title III, Part A - English Language Acquisition State Grants 84.365A 14346 S365A120005 13,230 13,230


U.S. Department of EducationPassed through the State of California,Department of Education:Public Charter Schools Grant Program 84.282A 14941 U282A100013 503,036 503,036


TOTAL NON-MAJOR AWARDS 750,243 750,243

TOTAL FEDERAL AWARDS 1,779,710$ 1,779,710$


SCHEDULE OF EXPENDITURES OF FEDERAL AWARDSYear Ended June 30, 2016


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NOTE 1 - BASIS OF PRESENTATIONThe accompanying Schedule of Expenditures of Federal Awards (Schedule) includes the Federal award activity ofValue Schools under programs of the Federal government for the year ended June 30, 2016. The information inthis Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards(Uniform Guidance). Because the Schedule presents only a selected portion of the operations of Value Schools, itis not intended to and does not present the financial position, changes in net assets, or cash flows of ValueSchools.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESExpenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures arerecognized following, as applicable, either the cost principles in Office of Management and Budget Circular A-122,Cost Principles for Non-Profit Organizations , or the cost principles contained in Title 2 U.S. Code of FederalRegulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements forFederal Awards , wherein certain types of expenditures are not allowable or are limited as to reimbursement.Negative amounts shown on the Schedule, if any, represent adjustments or credits made in the normal course ofbusiness to amounts reported as expenditures in prior years.

NOTE 3 - INDIRECT COST RATEValue Schools has not elected to use the 10 percent de minimis indirect cost rate allowed under the UniformGuidance.

VALUE SCHOOLS

NOTES TO SCHEDULE OF

Year Ended June 30, 2016EXPENDITURES OF FEDERAL AWARDS



-33-

UniversityDowntown Central City Everest Preparatory

Value Value Value Value ValueSchools School School School School Eliminations Combined

ASSETS

Cash 291,135$ 1,443,478$ 1,384,786$ 314,108$ 357,081$ -$ 3,790,588$ Due from Federal, State and Local Governments - 590,356 450,355 367,188 140,865 - 1,548,764 Related Party Receivable - 26,115 45,583 - - - 71,698 Prepaid Expenses and Other Assets 7,823 58,201 144,472 59,416 138,774 - 408,686 Property and Equipment (Net) 369,745 54,669 16,681 - - - 441,095 Inter-Entity Receivable - 1,571,616 - - - (1,571,616) -

TOTAL ASSETS 668,703$ 3,744,435$ 2,041,877$ 740,712$ 636,720$ (1,571,616)$ 6,260,831$

LIABILITIES AND NET ASSETS (DEFICIT)

LIABILITIES:Accounts Payable and Accrued Expenses 174,874$ 181,556$ 186,115$ 62,740$ 41,422$ -$ 646,707$ Deferred Rent - 180,597 349,786 - 284,001 - 814,384 Deferred Revenue - 1,095 7,489 - - - 8,584 Notes Payable - - - 250,000 200,002 - 450,002 Inter-Entity Payable 1,129,252 - 88,950 197,091 156,323 (1,571,616) -

TOTAL LIABILITIES 1,304,126 363,248 632,340 509,831 681,748 (1,571,616) 1,919,677


NET ASSETS (DEFICIT):Unrestricted (904,327) 3,240,175 1,227,570 213,795 (45,028) - 3,732,185 Temporarily Restricted 268,904 141,012 181,967 17,086 - - 608,969

TOTAL NET ASSETS (DEFICIT) (635,423) 3,381,187 1,409,537 230,881 (45,028) - 4,341,154

TOTAL LIABILITIES AND NET ASSETS (DEFICIT) 668,703$ 3,744,435$ 2,041,877$ 740,712$ 636,720$ (1,571,616)$ 6,260,831$


COMBINING STATEMENT OF FINANCIAL POSITIONJune 30, 2016


-34-

UniversityDowntown Central City Everest Preparatory

Value Value Value Value ValueSchools School School School School Eliminations Combined

REVENUE AND SUPPORT:Revenues from Governmental Agencies: State -$ 5,241,805$ 5,964,485$ 2,345,922$ 1,244,386$ -$ 14,796,598$ Federal - 576,165 472,653 353,178 377,714 - 1,779,710 Other Local Revenues: Contributions 704,147 45,780 45,904 23,731 510,078 (250,000) 1,079,640 Other 117,686 48,509 62,063 47,766 - (40,869) 235,155 Service Fees 1,200,062 - - - - (1,200,062) -

TOTAL REVENUE AND SUPPORT 2,021,895 5,912,259 6,545,105 2,770,597 2,132,178 (1,490,931) 17,891,103

EXPENSES:Salaries - Certificated 143,000 1,554,811 2,063,393 795,874 614,221 - 5,171,299 Salaries - Classified 215,942 576,173 234,399 478,067 63,300 - 1,567,881 Employee Benefits 221,860 659,403 540,055 337,788 139,851 - 1,898,957 Books and Supplies 19,333 434,214 739,696 305,960 396,837 - 1,896,040 Services and Other Operating Expenses 827,421 1,730,888 2,048,203 776,602 951,975 (1,490,931) 4,844,158 District Oversight Fees - 39,146 47,606 18,989 11,022 - 116,763

TOTAL EXPENSES 1,427,556 4,994,635 5,673,352 2,713,280 2,177,206 (1,490,931) 15,495,098

CHANGE IN NET ASSETS 594,339 917,624 871,753 57,317 (45,028) - 2,396,005

Net Assets (Deficit) - Beginning of Year (1,229,762) 2,463,563 537,784 173,564 - - 1,945,149

NET ASSETS (DEFICIT) - END OF YEAR (635,423)$ 3,381,187$ 1,409,537$ 230,881$ (45,028)$ -$ 4,341,154$


COMBINING STATEMENT OF ACTIVITIESYear Ended June 30, 2016

SECTION B

Independent Auditor’s Report on State Compliance



INDEPENDENT AUDITOR’S REPORT ON STATE COMPLIANCE To the Board of Directors Value Schools Compliance We have audited Value Schools' (the Organization) compliance with the compliance requirements applicable to charter schools in accordance with the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, prescribed in the California Code of Regulations, Title 5, Section 19810 and following for the year ended June 30, 2016. Management’s Responsibility Compliance with the requirements referred to above is the responsibility of the Organization’s management. Auditor’s Responsibility Our responsibility is to express an opinion on the Organization’s compliance with the applicable compliance requirements based on our compliance audit. We conducted our compliance audit in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, prescribed in the California Code of Regulations, Title 5, Section 19810 and following. Those standards and the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, prescribed in the California Code of Regulations, Title 5, Section 19810 and following require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements that could have a material effect on the results of the procedures applicable under the 2015-2016 Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, prescribed in the California Code of Regulations, Title 5, Section 19810 and following occurred. A compliance audit includes examining, on a test basis, evidence about the Organization’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our compliance audit provides a reasonable basis for our opinion. Our compliance audit does not provide a legal determination on the Organization’s compliance with those requirements. We selected and tested transactions and records to determine the Organization’s compliance with the state laws and regulations applicable to the following items:

Description

Procedures Performed

School Districts, County Offices of Education, and Charter Schools Educator Effectiveness Yes California Clean Energy Jobs Act Yes After School Education and Safety Program Yes Proper Expenditure of Education Protection Account Funds Yes Unduplicated Local Control Funding Formula Pupil Counts Yes Local Control and Accountability Plan Yes Independent Study-Course Based Not applicable Immunizations Not applicable

To the Board of Directors Value Schools Page 2

Description

Procedures Performed

Charter Schools Attendance Yes Mode of Instruction Yes Nonclassroom-Based Instruction/Independent Study for Charter Schools Not Applicable Determination of Funding for Nonclassroom-Based Instruction Not Applicable Annual Instructional Minutes - Classroom Based Yes Charter School Facility Grant Program Yes

Opinion In our opinion, the Organization complied, in all material respects, with the compliance requirements referred to above that are applicable to its Charter School for the year ended June 30, 2016.


SECTION C

REPORTS REQUIRED BY TITLE 2 U.S. CODE OF FEDERAL REGULATIONS (CFR) PART 200, UNIFORM ADMINISTRATIVE

REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS

(UNIFORM GUIDANCE)


REPORTS REQUIRED BY TITLE 2 U.S. CODE OF FEDERAL REGULATIONS (CFR) PART 200, UNIFORM ADMINISTRATIVE

REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS

(UNIFORM GUIDANCE)



REPORTS REQUIRED BY TITLE 2 U.S. CODE OF FEDERAL REGULATIONS

(CFR) PART 200, UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS

(UNIFORM GUIDANCE)

YEAR ENDED JUNE 30, 2016 CONTENTS Page Independent Auditor’s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ..................................................................... 1 Independent Auditor’s Report on Compliance for Each Major Federal Program and Report on Internal Control over Compliance in Accordance with the Uniform Guidance ............................................................................................. 3 Schedule of Findings and Questioned Costs ......................................................... 5



REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF

FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors Value Schools We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Value Schools (a non-profit organization) (the Organization), which comprise the statement of financial position as of June 30, 2016, and the related statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 23, 2016. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Organization’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

To the Board of Directors Value Schools

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Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.




REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE

WITH THE UNIFORM GUIDANCE

INDEPENDENT AUDITOR’S REPORT To the Board of Directors Value Schools Report on Compliance for Each Major Federal Program We have audited Value School’s (a non-profit organization) (the Organization) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of the Organization’s major federal programs for the year ended June 30, 2016. The Organization’s major federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of the Organization’s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization’s compliance. Opinion on Each Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2016. Report on Internal Control over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Organization’s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Organization’s internal control over compliance.

To the Board of Directors Value Schools

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A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of the internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.



SCHEDULE OF FINDINGS AND QUESTIONED COSTS


-5-

SECTION I - SUMMARY OF AUDITOR’S RESULTS Financial Statements

Type of auditor's report issued: Unmodified

Internal control over financial reporting:

• Are any material weaknesses identified? Yes x No

• Are any significant deficiencies identified? _ Yes x None reported

Is any noncompliance material to financial statements noted? Yes x No

Federal Awards

Internal control over major federal programs:

• Are any material weaknesses identified? Yes x No

• Are any significant deficiencies

identified? Yes x None reported

Type of auditor's report issued on compliance for major federal programs: Unmodified

Any audit findings disclosed that are

required to be reported in accordance with 2 CFR 200.516(a)? Yes x No

Identification of Major Programs:

CFDA Number(s) Name of Federal Program or Cluster

84.010 U.S. Department of Education Passed through the State of California:

Title I, Part A - Improving the Academic Achievement of the Disadvantaged 10.553 U.S. Department of Agriculture Passed through the State of California: National School Breakfast Program 10.555 U.S. Department of Agriculture Passed through the State of California: National School Lunch Program


SCHEDULE OF FINDINGS AND QUESTIONED COSTS


-6-

SECTION I - SUMMARY OF AUDITOR'S RESULTS (continued)

Federal Awards (continued) Dollar threshold used to distinguish

between type A and type B programs: $750,000 Auditee qualified as a low-risk auditee? Yes x No SECTION II - FINANCIAL STATEMENT FINDINGS

There are no current year audit findings. SECTION III - STATE AWARD FINDINGS AND QUESTIONED COSTS

There are neither findings nor questioned costs for state awards. SECTION IV - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

There are neither findings nor questioned costs for federal awards. SECTION V - SCHEDULE OF PRIOR AUDIT FINDINGS

Prior audit findings identified below were coded as follows:

Five Digit Code Finding Type 30000 Internal Control

2015-1: General Ledger Reconciliations and Monthly Closing Process

Finding Code: 30000 Observation: Significant Deficiency - Although, we noted that the Organization has made significant changes in critical processes and controls to address the prior year recommendation related to general ledger reconciliations and monthly closing process, there were still various accounts which were not completely reconciled at the end of the current fiscal year.

Current Status: The recommendations were adopted. No similar findings were noted in the June 30, 2016 audit.

2015-2: File Retention and Documentation Policies

Finding Code: 30000

Observation: Significant Deficiency - We noted that the Organization adopted our recommendation from prior year audit relating to the file retention and documentation of all new employees and students commencing from the start of the current fiscal year. However, we also noted that the personnel files related to prior years were still not maintained in a central location. We further noted that some files for employees with start dates prior to the 2014-15 school year lacked documentation such as residency documentation, W-4 forms, and I-9 forms. Additionally, we also noted certain inconsistencies in the completion of the I-9 forms.

Current Status: The recommendations were substantially adopted. No similar findings were noted in the June 30, 2016 audit.

C-1

APPENDIX C

AUDITED FINANCIAL STATEMENTS OF THE BORROWER FOR THE FISCAL YEAR ENDED JUNE 30, 2016

VALUE SCHOOLS FOUNDATION AND SUBSIDIARY


CONSOLIDATED FINANCIAL STATEMENTS




CONSOLIDATED FINANCIAL STATEMENTS


CONTENTS Page Independent Auditor's Report ..................................................................... 1 Consolidated Statement of Financial Position ............................................ 3 Consolidated Statement of Activities .......................................................... 4 Consolidated Statement of Cash Flows ....................................................... 5 Notes to Consolidated Financial Statements .............................................. 6 Supplementary Information ....................................................................... 15 Consolidating Statement of Financial Position .......................................... 16 Consolidating Statement of Activities ........................................................ 17



INDEPENDENT AUDITOR'S REPORT To the Board of Directors of Value Schools Foundation and Subsidiary Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Value Schools Foundation and Subsidiary (a non-profit organization) (collectively, the Organization), which comprise the consolidated statement of financial position as of June 30, 2016, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Organization as of June 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

To the Board of Directors of Value Schools Foundation and Subsidiary Page 2

-2-

Other Matters - Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating statements of financial position and activities are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.


The Accompanying Notes are an Integral Part of These Consolidated Financial Statements

-3-


Cash 91,626$ 20,100$ 111,726$ Restricted Cash 2,300,185 - 2,300,185 Investments 92,864 - 92,864 Deferred Rent and Other Receivables 530,734 - 530,734 Property and Equipment (Net) 13,475,256 - 13,475,256 Debt Issuance Costs (Net) 547,286 - 547,286

TOTAL ASSETS 17,037,951$ 20,100$ 17,058,051$

LIABILITIES:Accounts Payable and Accrued Expenses 30,909$ -$ 30,909$ Bond Interest Payable 433,465 - 433,465 Related Party Payable 233,337 - 233,337 Deferred Revenue 988,615 - 988,615 Bonds Payable 12,755,000 - 12,755,000

TOTAL LIABILITIES 14,441,326 - 14,441,326


NET ASSETS:Unrestricted 2,596,625 - 2,596,625 Temporarily Restricted - 20,100 20,100

TOTAL NET ASSETS 2,596,625 20,100 2,616,725

TOTAL LIABILITIES AND NET ASSETS 17,037,951$ 20,100$ 17,058,051$


CONSOLIDATED STATEMENT OF FINANCIAL POSITION

VALUE SCHOOLS FOUNDATION

June 30, 2016

ASSETS


AND SUBSIDIARY


-4-


REVENUE AND SUPPORT:Rental Income 967,648$ -$ 967,648$ Donations 230,709 45,000 275,709 Investment Loss (Net) (6,205) - (6,205) Interest Income 1,729 - 1,729 Net Assets Released from Purpose Restrictions 65,000 (65,000) -

TOTAL REVENUE AND SUPPORT 1,258,881 (20,000) 1,238,881

OPERATING EXPENSES:Donations Given 462,000 - 462,000 Amortization of Debt Issuance Costs 17,104 - 17,104 Depreciation 317,251 - 317,251 Interest Expense 866,388 - 866,388 Other Operating Expenses 51,421 - 51,421

TOTAL OPERATING EXPENSES 1,714,164 - 1,714,164

CHANGE IN NET ASSETS (455,283) (20,000) (475,283)

Net Assets - Beginning of Year 3,051,908 40,100 3,092,008

NET ASSETS - END OF YEAR 2,596,625$ 20,100$ 2,616,725$


CONSOLIDATED STATEMENT OF ACTIVITIESYear Ended June 30, 2016

(A Non-Profit Organization)AND SUBSIDIARY


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CASH FLOWS FROM OPERATING ACTIVITIES:Change in Net Assets (475,283)$ Adjustments to Reconcile Change in Net Assets to Net Cash Used in Operating Activities: Amortization of Debt Issuance Costs 17,104 Depreciation 317,251 Realized and Unrealized Loss on Investments 9,115 Contributed Investments (54,807) (Increase) Decrease in: Restricted Cash (2,487) Deferred Rent and Other Receivables 19,870 Increase (Decrease) in: Accounts Payable and Accrued Expenses 30,909 Bond Interest Payable (2,851) Related Party Payable (2,636)

NET CASH USED IN OPERATING ACTIVITIES (143,815)

CASH FLOWS USED IN FINANCING ACTIVITY:Payments on Bonds Payable (115,000)

NET DECREASE IN CASH (258,815)

Cash - Beginning of Year 370,541

CASH - END OF YEAR 111,726$ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash Paid During the Year for Interest 869,239$


Year Ended June 30, 2016CONSOLIDATED STATEMENT OF CASH FLOWS




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2016

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NOTE 1 - ORGANIZATION

Value Schools Foundation (the Foundation) is a California non-profit public benefit corporation incorporated on January 30, 2012. The primary purpose of the Foundation is to facilitate the development of charter schools; to lease, own, manage, maintain and operate an educational institution; to provide charter school facilities and operational and other support to charter schools; to assist philanthropists and foundations in accelerating the growth of high quality charter schools; and to provide and otherwise obtain or assist in obtaining charter school financing. Additionally, the Foundation may engage in any activities that are reasonably related to or in furtherance of its stated charitable and public purposes, or in any other charitable activities.

VSF School Facilities #1 LLC (VSF LLC) was incorporated on July 2, 2012 as a non-profit California limited liability company. VSF LLC is the sole subsidiary of the Foundation. VSF LLC was established to support Central City Value School (CCVS) and Downtown Value School (DVS) and future schools operated by Value Schools (an organization with common board members), through the purchase and ownership of each school’s facility (See Note 9).

The consolidated financial statements include the accounts of Value Schools Foundation and VSF School Facilities #1 LLC (collectively, the Organization). All inter-entity balances and transactions have been eliminated on consolidation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF ACCOUNTING

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting.

(b) ACCOUNTING

To ensure observance of certain constraints and restrictions placed on the use of

resources, the accounts of the Organization are maintained in accordance with the principles of net assets accounting. This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into net asset classes that are in accordance with specified activities or objectives. Accordingly, all financial transactions have been recorded and reported by net asset class as follows:

Unrestricted Net Assets. These generally result from revenues generated by

receiving unrestricted contributions, providing services and receiving income from investments less expenses incurred in providing program related services, raising contributions, and performing administrative functions.

Temporarily Restricted Net Assets. The Organization reports gifts of cash and

other assets as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from purpose or time restrictions. The Organization has $20,100 of temporarily restricted net assets at June 30, 2016.




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(b) ACCOUNTING (continued)

Permanently Restricted Net Assets. These net assets are received from donors who stipulate that resources are to be maintained permanently but permit the Organization to expend all of the income or other economic benefits derived from the donated assets. There are no permanently restricted net assets as of June 30, 2016.

(c) MANAGEMENT’S USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses during the reporting period. Although management believes its estimates are appropriate, changes in assumptions utilized in preparing such estimates could cause these estimates to change sometime in the future.

(d) CASH

The Organization maintains its cash in bank deposit and other investment accounts which may, at times, exceed federally insured limits. The Organization has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

(e) RESTRICTED CASH

As mandated by the Organization’s bond agreement, certain funds must be maintained by the Organization for payment of bond issuance costs, payment of principal and interest and capital expenditures; and are recorded as restricted cash on the consolidated statement of financial position. The Organization also records the funds received from the charter school credit enhancement facility grant as restricted cash. The Organization had a total restricted cash balance of $2,300,185 at June 30, 2016.

(f) INVESTMENTS

Investments in equity securities with readily determinable market values are reported at fair value. The fair value of investments is valued at the closing price on the last business day of the fiscal year. Securities are generally held in custodial investment accounts administered by financial institutions.

Investment purchases and sales are accounted for on a trade-date basis. Interest and dividend income is recorded when earned. Gains or losses (including investments bought, sold, and held during the year), and interest and dividend income are reflected in the consolidated statement of activities as increases or decreases in unrestricted net assets unless their use is temporarily restricted by donor stipulations or by law.




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(f) INVESTMENTS (continued)

Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain long-term investments, it is reasonably possible that changes in the values of these investments will occur in the near term and that such changes could materially affect the amounts reported in the consolidated statement of financial position.

(g) RECEIVABLES

Receivables are recorded when billed or accrued and represent claims against third parties that will be settled in cash. The carrying value of receivables, net of the allowance for doubtful accounts, if any, represents their estimated net realizable value. The allowance for doubtful accounts, if any, is estimated based on historical collection trends, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past due receivable balances are written-off when internal collection efforts have been unsuccessful in collecting the amount due. At June 30, 2016, all receivables are considered fully collectible; therefore, no allowance for doubtful accounts has been established.

(h) PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost if purchased or at fair value at the date of donation, if donated. Maintenance and repair costs are charged to expense as incurred. Property and equipment are capitalized if the cost of an asset is greater than or equal to $5,000 and the useful life is greater than one year.

Depreciation is provided using the straight-line method over the estimated useful lives of the buildings and building improvements of 27.5 years.

(i) DEBT ISSUANCE COSTS Fees and costs incurred in obtaining long-term financing are capitalized as debt issuance

costs and amortized over the term of the related loan agreement. The amortization of these costs is included in the consolidated statement of activities.

(j) LONG-LIVED ASSETS

The Organization evaluates long-lived assets for impairment whenever events or changes in

circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated value. No such impairment losses have been recognized during the year ended June 30, 2016.




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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (k) DEFERRED REVENUE

The deferred revenue balance of $988,615 at June 30, 2016 represents the balance of the credit enhancement grant received by the Organization under the Charter School Facilities Credit Enhancement Grant Program and funded by a federal award from the U.S. Department of Education to serve as credit enhancement for charter school facilities. The proceeds from the grant are to be used only if the Organization does not have any other legally available funds for debt service. There were no amounts used from this grant during the year ended June 30, 2016.

(l) RENTAL INCOME The Organization recognizes rental income under operating leases on a straight-line basis

over the terms of the respective leases and records deferred rent receivable or payable, as appropriate. Rents received in advance of their due dates are recorded as unearned revenue. There was $530,383 of deferred rent receivable included in deferred rent and other receivables at June 30, 2016.

(m) CONTRIBUTED INVESTMENTS

Contributions of donated non-cash investments are recorded at fair value in the period received. The Organization received $54,807 of contributed investments during the year ended June 30, 2016. Cash receipts from the sale of these investments are recognized as part of operating activities on the consolidated statement of cash flows.

(n) INCOME TAXES

The Organization is exempt from taxation under Internal Revenue Code Section 501(c)(3) and the corresponding California provisions.

(o) NEW ACCOUNTING PRONOUNCEMENT

In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities (Topic 958), which is intended to reduce complexity in financial reporting. The ASU focuses on improving the current net asset classification requirements and information presented in financial statements that is useful in assessing a nonprofit’s liquidity, financial performance, and cash flows. For the Organization, the ASU will be effective during the year ending June 30, 2019.




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(p) SUBSEQUENT EVENTS

The Organization has evaluated events and transactions occurring subsequent to the consolidated statement of financial position date of June 30, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through November 23, 2016, the date these consolidated financial statements were available to be issued. No such material events or transactions were noted to have occurred.

NOTE 3 - INVESTMENTS The Organization has implemented the fair value accounting standard. This standard establishes

a single authoritative definition of fair value, sets out a framework for measuring fair value based on inputs used, and requires additional disclosures about fair value measurements.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active

markets for identical assets (or liabilities). Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset (or liability) and include situations where there is little, if any, market activity for the asset (or liability).

The following table presents information about the Organization’s assets that are measured at fair

value on a recurring basis at June 30, 2016 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Fair Value Measurements Using


Quoted Prices in Active

Markets for Identical Assets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable Inputs

(Level 3) Equity Securities $ 92,864 $ 92,864 $ - $ -

The fair value of the equity securities within Level 1 were obtained based on quoted market prices at the closing of the last business day of the fiscal year.

The Organization recognizes transfers at the beginning of each reporting period. Transfers between Level 1 and 2 investments generally relate to whether a market becomes active or inactive. Transfers between Level 2 and 3 investments generally relate to whether significant relevant observable inputs are available for the fair value measurement in their entirety and when redemption rules become more or less restrictive. There were no transfers between levels during the year ended June 30, 2016.




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NOTE 3 - INVESTMENTS (continued)

Investment loss for the year ended June 30, 2016 consists of the following:

Interest and Dividend Income $ 2,910 Realized and Unrealized Losses (9,115) INVESTMENT LOSS (NET) $ (6,205)

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Building and Building Improvements $ 8,754,506 Land 5,512,676 TOTAL 14,267,182 Less: Accumulated Depreciation (791,926) PROPERTY AND EQUIPMENT (NET) $ 13,475,256

Depreciation expense for the year ended June 30, 2016 was $317,251.

NOTE 5 - DEBT ISSUANCE COSTS Debt issuance costs consist of the following:

Costs Related to Issuance of Bonds Payable $ 597,193 Less: Accumulated Amortization (49,907) DEBT ISSUANCE COSTS (NET) $ 547,286

Amortization expense relating to debt issuance costs included in the statement of activities was $17,104 for the year ended June 30, 2016. Amortization expense related to debt issuance costs for each of the next five succeeding years is as follows:


2017 $ 17,103 2018 17,103 2019 17,103 2020 17,103 2021 17,103




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NOTE 6 - BONDS PAYABLE

In August 2013, the Organization entered into a loan agreement with the California School Finance Authority (CSFA) to acquire, refinance, construct, expand, and remodel the land and facilities currently used as the Central City Value School and Downtown Value School locations. The CSFA sold the California School Finance Authority School Finance Revenue Bonds Series 2013 totaling $12,870,000 on behalf of the Organization. Central City Value School and Downtown Value School have both 35 year leases for their facilities with the Organization. Their quarterly rent payments cover the bond principal and interest payments. The amounts are intercepted from each school’s state funding and remitted directly to a third party trustee.

The bonds payable mature on July 1 in each of the years, in the principal amounts, and at the interest rates detailed below:

Year Principal Interest Rate

2023 $ 1,185,000 5.90% 2033 2,575,000 6.65% 2043 4,955,000 6.90% 2048 4,040,000 7.00%

TOTAL $ 12,755,000

The bonds payable are secured by substantially all of the assets of the Organization and a deed of trust, assignment of rents, security agreement and fixture filing on real property and leasehold improvements. Central City Value School and Downtown Value School both have 35-year leases for their facilities with the Organization. The bond agreement contains various covenants including, but not limited to, the maintenance of a debt service coverage ratio and minimum cash reserve balances.

The mandatory redemption of the sinking fund corresponds to the future repayment schedule of the bonds payable. The future repayment schedule of the bonds payable at June 30, 2016 is as follows:

Years Ending

2017 $ 245,000 2018 135,000 2019 145,000 2020 150,000 2021 160,000

Thereafter 11,920,000

TOTAL $ 12,755,000




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NOTE 7 - TEMPORARILY RESTRICTED NET ASSETS

Temporarily restricted net assets are available for the following purposes at June 30, 2016:

SAT Preparation $ 20,000 Other Restrictions 100 TOTAL TEMPORARILY RESTRICTED NET ASSETS $ 20,100

NOTE 8 - COMMITMENTS AND CONTINGENCIES

(a) CONTRACTS

The Organization’s grants and contracts are subject to inspection and audit by the appropriate governmental funding agency. The purpose is to determine whether program funds were used in accordance with their respective guidelines and regulations. The potential exists for disallowance of previously funded program costs. The ultimate liability, if any, which may result from these governmental audits cannot be reasonably estimated and, accordingly, the Organization has no provisions for the possible disallowance of program costs on its consolidated financial statements.

(b) LITIGATION

In the ordinary course of conducting its operations, the Organization may become involved in various lawsuits. Some of these proceedings may result in judgments being assessed against the Organization, which, from time to time, may have an impact on its consolidated statement of activities or consolidated statement of financial position. The Organization is not aware of any lawsuits or proceedings lodged against the Organization.

NOTE 9 - RELATED PARTY TRANSACTIONS

Value Schools rents its DVS and CCVS locations from the Organization under lease agreements which expire in May 2048. Payments towards the leases are to escalate based on a schedule specified under the lease agreements. Fixed minimum rents to be received, including operating escalations, are as follows:


2017 $ 984,424 2018 986,901 2019 987,539 2020 985,160 2021 986,792

Thereafter 26,357,702

TOTAL $ 31,288,518




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NOTE 9 - RELATED PARTY TRANSACTIONS (continued)

Total rental revenue recognized under these operating leases for the year ended June 30, 2016 was $967,648. At June 30, 2016, the Organization has $161,639 of advance rent payments for these leases which is included in related party payable on the consolidated statement of financial position.

During the year ended June 30, 2016, the Organization made donations totaling $462,000 to Value Schools to support activities of the schools.

At June 30, 2016, the Organization also has $71,698 payable to Value Schools with respect to certain improvements incurred by Value Schools under the leases.

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SUPPLEMENTARY INFORMATION



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Value Schools VSF SchoolFoundation Facilities #1 LLC Consolidated

Cash 111,217$ 509$ 111,726$ Restricted Cash - 2,300,185 2,300,185 Investments 92,864 - 92,864 Deferred Rent and Other Receivables - 530,734 530,734 Property and Equipment (Net) - 13,475,256 13,475,256 Debt Issuance Costs (Net) - 547,286 547,286

TOTAL ASSETS 204,081$ 16,853,970$ 17,058,051$

LIABILITIES:Accounts Payable and Accrued Expenses 30,909$ -$ 30,909 Bond Interest Payable - 433,465 433,465 Related Party Payable - 233,337 233,337 Deferred Revenue - 988,615 988,615 Bonds Payable - 12,755,000 12,755,000

TOTAL LIABILITIES 30,909 14,410,417 14,441,326


NET ASSETS:Unrestricted 153,072 2,443,553 2,596,625 Temporarily Restricted 20,100 - 20,100

TOTAL NET ASSETS 173,172 2,443,553 2,616,725

TOTAL LIABILITIES AND NET ASSETS 204,081$ 16,853,970$ 17,058,051$


CONSOLIDATING STATEMENT OF FINANCIAL POSITIONJune 30, 2016

ASSETS



AND SUBSIDIARY


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Value Schools VSF SchoolFoundation Facilities #1 LLC Consolidated

REVENUE AND SUPPORT:Rental Income -$ 967,648$ 967,648$ Donations 275,709 - 275,709 Investment Loss (Net) (6,205) - (6,205) Interest Income - 1,729 1,729

TOTAL REVENUE AND SUPPORT 269,504 969,377 1,238,881

OPERATING EXPENSES:Donations Given 462,000 - 462,000 Amortization of Debt Issuance Costs - 17,104 17,104 Depreciation - 317,251 317,251 Interest Expense - 866,388 866,388 Other Operating Expenses 51,228 193 51,421

TOTAL OPERATING EXPENSES 513,228 1,200,936 1,714,164

CHANGE IN NET ASSETS (243,724) (231,559) (475,283)

Net Assets - Beginning of Year 416,896 2,675,112 3,092,008

NET ASSETS - END OF YEAR 173,172$ 2,443,553$ 2,616,725$


CONSOLIDATING STATEMENT OF ACTIVITIESYear Ended June 30, 2016


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APPENDIX D

SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS

The following is a summary of certain provisions of the Indenture (as amended and supplemented by the First Supplemental Indenture), the Loan Agreement (as amended and supplemented by the First Supplemental Loan Agreement) and the Deeds of Trust, which are not described elsewhere in this Limited Offering Memorandum. These summaries do not purport to be complete or definitive and reference should be made to such documents for a full and complete statement of their provisions. All capitalized terms used with respect to the Bonds and not defined in this Limited Offering Memorandum have the meanings set forth in the Indenture.

Definitions

The following are definitions of certain terms used in the Indenture and the Loan Agreement applicable to the Bonds.

“Accountant” means any firm of independent certified public accountants selected by the Borrower.

“Act” means the California School Finance Authority Act, constituting Chapter 18 (commencing with Section 17170(of Part 10 of Division 1 of Title 1 of the Education Code of the State, as now in effect and as it may from time to time hereafter be amended or supplemented.

“Additional Bonds” means any bonds issued under the Indenture after the Closing Date.

“Additional Payments” shall have the meaning ascribed to it in the Loan Agreement.

“Administrative Fees and Expenses” means any application, commitment, financing or similar fee charged, or reimbursement for administrative or other expenses incurred, by the Authority or the Trustee in connection with the Bonds, including Additional Payments.

“Authority” means the California School Finance Authority, a public instrumentality of the State established by the Act.

“Authorized Borrower Representative” means any person who at the time and from time to time may be designated, by written certificate furnished to the Authority and the Trustee, as a person authorized to act on behalf of the Borrower. Such certificate will contain the specimen signature of such person, will be signed on behalf of the Borrower by any officer of the sole member of the Borrower and may designate an alternate or alternates.

“Authorized Denominations” means $100,000 and any integral multiple of $5,000 in excess thereof.

“Authorized Signatory” means any member of the Authority and any other person as may be designated and authorized to sign on behalf of the Authority pursuant to a resolution adopted thereby.

“Beneficial Owner” means, (i) when used with reference to the Book Entry Only System, the person who is considered the beneficial owner of the Bonds and, with respect to the Bonds pursuant to the arrangements for book entry determination of ownership applicable to the Depository and, (ii) for purposes of the provisions of the Indenture relating to continuing disclosure, any person who (a) has the

D-2

power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds and, with respect to the Bonds (including persons holding such through nominees, depositories or other intermediaries) or (b) is treated as the owner of any Bonds and, with respect to the Bonds for federal income tax purposes.

“Bondholder” or “Holder” means, with respect to any Bond, the person in whose name such Bond is registered.

“Bond Purchase Agreement” means the Bond Purchase Agreement, by and among the Underwriter, the Authority, the Borrower, the Treasurer of the State, as agent for sale and approved by the Lessees.

“Bonds” means the Series 2013 Bonds and the Additional Bonds.

“Book Value” means, when used in connection with Property of a Person, the value of such Property, net of accumulated depreciation, as it is carried on the books of such Person and in conformity with generally accepted accounting principles.

“Borrower” means VSF School Facilities #1 LLC, a California limited liability company, its successors and assigns.

“Borrower Documents” means the Loan Agreement, the Intercept Notice, the Leases and the Deeds of Trust.

“Borrower Resolutions” means the resolutions or other authorizing action adopted by the governing board of the sole member of the Borrower authorizing the Loan and execution and delivery of the Borrower Documents.

“Business Day” means any day other than a Saturday, a Sunday or a day on which banking institutions in the city in which the Principal Corporate Trust Office is located are authorized or obligated by law or executive order to be closed.

“Central City Lease” means that certain Lease Agreement, dated as of August 1, 2013, by and between the Borrower as lessor and Value as lessee related to the Central City Value School.

“Central City Value School Facility” means all the real property described in EXHIBIT A of the Central City Lease, together with the improvements thereon.

“Certificate of the Authority,” “Consent of the Authority,” “Order of the Authority,” “Request of the Authority” or “Requisition of the Authority” mean, respectively, a written certificate, consent, order, request or requisition of the Authority signed by or on behalf of the Authority by an Authorized Signatory authorized by the Authority to execute such a document on its behalf.

“Certificate of the Borrower,” “Consent of the Borrower,” “Request of the Borrower,” “Requisition of the Borrower” or “Statement of the Borrower” mean, respectively, a written certificate, request, requisition or statement of the Borrower executed by the Chief Financial Officer or the President of its sole member or such other person as may be designated by any of such officials to sign for the Borrower.

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“Charter School Law” means the Charter Schools Act of 1992, constituting Part 26.8, commencing with Section 47600, of Division 4 of Title 2 of the Education Code of the State, as now in effect and as it may from time to time hereafter be amended or supplemented.

“Code” means the Internal Revenue Code of 1986, or any successor code or law, and any regulations in effect or promulgated thereunder.

“Continuing Disclosure Agreement” means the Continuing Disclosure Agreement, dated as of August 1, 2013, among, the Borrower, Value and the Trustee, as dissemination agent, as originally executed and as it may be amended from time to time in accordance with the terms thereof.

“Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the Authority or the Borrower and related to the original authorization, execution, sale and delivery of the Bonds, including but not limited to costs of preparation and reproduction of documents, fees and expenses of the Authority, the State Treasurer’s Office, the Trustee, legal fees and charges of bond counsel, special counsel, disclosure counsel and Trustee’s counsel, underwriters’ discount, rating agency fees and any other costs, charges or fees in connection with the original delivery of the Bonds.

“Costs of Issuance Fund” means the fund by that name established pursuant to the Indenture.

“Debt Service” means, for any period of time, the sum of (a) the interest payable during such period on Outstanding Bonds, (b) that portion of the principal amount of all Outstanding Bonds maturing on each principal payment date during such period, and (c) that portion of the principal amount of all Outstanding Bonds which are Term Bonds required to be redeemed or paid from Sinking Fund Installments during such period (together with the redemption premiums, if any, thereon).

“Debt Service Coverage Ratio” has the meaning assigned to it in the Lease.

“Deeds of Trust” means that certain Deed or Deeds of Trust with Assignment of Rents, Security Agreement and Fixture Filing, executed as a counterpart to the Deed of Trust by the Borrower, as trustor, in favor of the trustee thereunder, creating a lien on the Facilities located in the County of Los Angeles that Borrower owns in fee for the benefit of the Trustee (as assignee of the Authority), as trustee for the Holders of the Bonds..

“Depository” means The Depository Trust Company and its successors and assigns, or any other depository selected as set forth in the Indenture which agrees to follow the procedures required to be followed by such depository in connection with the Bonds.

“Direct Costs” means the costs of the land, the improvements, the personal property, and all labor, materials, fixtures, machinery and equipment required to acquire, construct, equip and complete the construction and improvements to the Facilities.

“Downtown Lease” means that certain Lease Agreement, dated as of August 1, 2013, by and between the Borrower as lessor and Value as lessee related to the Downtown Value School.

“Downtown Value School Facility” means all the real property described in EXHIBIT A of the Downtown Lease, together with the improvements thereon.

“Education Code” means the Education Code of the State of California.

D-4

“Electronic Notice” means notice through telecopy, telegraph, telex, facsimile, transmission, internet, e-mail or other electronic means of communication, capable of making a written record.

“Eligible Securities” means any of the following obligations as and to the extent that such obligations are at the time legal investments under the Act for moneys held under the Indenture and then proposed to be invested therein and will be the sole investments in which amounts on deposit in any fund or account created under the Indenture or under the Loan Agreement will be invested:

(1) direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America or any Federal Reserve Bank and CATS and TIGRS) or obligations the timely payment of the principal of and interest on which are unconditionally guaranteed by the United States of America;

(2) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies, provided that such obligations are backed by the full faith and credit of the United States of America (stripped securities will constitute Eligible Securities only if they have been stripped by the agency itself); U.S. Export-Import Bank, Farmers Home Administration, Federal Financing Bank, General Services Administration, U.S. Maritime Administration, U.S. Department of Housing and Urban Development, Government National Mortgage Association, and Federal Housing Administration;

(3) Bonds, debentures, notes, or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities will constitute Eligible Securities only if they have been stripped by the agency itself): Federal Home Loan Bank System, Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Student Loan Marketing Association, Resolution Funding Corporation or Farm Credit System;

(4) Bonds or notes issued by any state or municipality which are rated by S&P and Moody’s in one of the three highest rating categories assigned by such agencies;

(5) repurchase agreements with either a primary dealer on the reporting dealer list of the Federal Reserve or any bank, which, in either case, is rated “A” or better by S&P, Fitch and Moody’s, provided that (a) the term of such repurchase agreement is not greater than thirty days, (b) the Trustee or third party acting solely as agent for the Trustee has possession of the collateral, (c) the collateral is valued weekly and the market value of the collateral is maintained at an amount equal to at least 104% (or, if the collateral consists of obligations of FHLMC or FNMA, 105%) of the amount of cash transferred by the Trustee to the dealer bank or securities firm under the repurchase agreement plus interest, (d) failure to maintain the requisite collateral levels will require the Trustee to liquidate the collateral immediately, (e) the repurchase securities are either obligations of, or fully guaranteed as to principal and interest by, the United States or any federal agency backed by the full faith and credit of the United States; (f) the repurchase securities are free and clear of any third-party lien or claim; and (g) there will have been delivered to the Trustee, the Authority and the Borrower an Opinion of Counsel to the effect that such repurchase agreement meets all guidelines under State law for legal investment of public funds;

(6) investment agreements, including guaranteed investment contracts (“GICs”) with providers, in one of the two highest rating categories of Moody’s and S&P;

(7) money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P

D-5

of AAAm-G, AAA-m, or AA-m and if rated by Moody’s rated Aaa, Aa1 or Aa2, including such funds advised, managed or sponsored by the Trustee or any of its affiliates;

(8) certificates of deposit secured at all times by collateral described in (1) and/or (2) above, issued by commercial banks, savings and loan associations or mutual savings banks relating to collateral held by a third party, and in which collateral the Trustee on behalf of the Bondholders has a perfected first security interest;

(9) certificates of deposit, savings accounts, deposit accounts or money market deposits that are fully insured by FDIC, including BIF and SAIF;

(10) commercial paper rated, at the time of purchase, “Prime-1” by Moody’s and “A-1” or better by S&P;

(11) federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of “Prime-1” or “A-3” or better by Moody’s and “A-1” or “A” or better by S&P;

(12) shares in a California common law trust established pursuant to Title 1, Division 7, Chapter 5 of the Government Code of the State which invests exclusively in investments permitted by Section 53635 of Title 5, Division 2, Chapter 4 of the Government Code of the State as it may be amended;

(13) the State of California’s Pooled Money Investment Account;

(14) the State of California’s Local Agency Investment Fund; and

(15) obligations of a bank or other financial institution rated at least “Aa3” by Moody’s or “AA-” by S&P.

“Event of Default” means any of the events specified in the Indenture.

“Facility” individually, and “Facilities” together, means the Central City Value School Facility, the Downtown Value School Facility, and the University Prep Facility.

“First Supplemental Indenture” means the first supplemental indenture, dated as of December 1, 2016, between the Authority and the Trustee.

“First Supplemental Loan Agreement” means that certain first supplemental loan agreement, dated as of December 1, 2016, among the Authority and the Borrower.

“Fiscal Year” means, with respect to the Borrower, the twelve month period beginning July 1 and ending on June 30, or such other twelve month period as may be designated in a written Statement of the Borrower delivered to the Authority and the Trustee.

“Government Obligations” means noncallable and nonprepayable direct obligations of the United States of America or obligations which as to full and timely payment of principal and interest constitute full faith and credit obligations of the United States of America (excluding therefrom unit investment trusts and money market funds comprised of such securities).

“Grant-Funded Reserve Eligible Securities” means:

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(1) obligations issued or guaranteed by the United States Government;

(2) obligations of agencies or instrumentalities of the United States, including government-sponsored enterprises;

(3) obligations issued by or guaranteed by any state, provided such obligations are rated in the two highest rating categories of Moody’s Investor Service, Standard and Poor’s Corporation or Fitch Ratings;

(4) commercial paper, repurchase agreements, guaranteed investment contracts or other similar instruments issued by corporations that are organized and operating within the United States having assets in excess of $500 million and having a short-term rating in the highest rating category of Moody’s Investor Service, Standard and Poor’s Corporation or Fitch Ratings, and a long-term rating in one of the two highest rating categories;

(5) money market funds that invest solely in United States Government securities or obligations of agencies or instrumentalities of the United States;

(6) money market fund deposits or certificates of deposit made in federally insured, regulated credit unions or banks, to the extent fully insured or collateralized with investments under categories (1) through (5); and

(7) such other investment securities as the Secretary may determine are prudent investments that comply with applicable law and regulations.

“Grant-Funded Reserve Fund Agreement” means the Debt Service Reserve Fund Agreement, dated as of August 1, 2013, by and between the Authority and the Borrower.

“Grant-Funded Reserve Subaccount” means the Reserve Subaccount of the Reserve Account established by the Trustee pursuant to the Indenture.

“Guaranty” means all loan commitments or other obligations of the Borrower, guaranteeing in any manner, whether directly or indirectly, any obligation of any other Person, which obligation of such other Person would constitute Indebtedness if such obligation were the obligation of the Borrower.

“Indebtedness” means all obligations for borrowed money, installment sales and capitalized lease obligations, incurred or assumed by the Borrower, including Guaranties, Long-Term Indebtedness, Short-Term Indebtedness.

“Indenture” means the indenture, dated as of August 1, 2013, between the Authority and the Trustee, as originally executed or as it may from time to time be supplemented, modified or amended by any supplemental indenture entered into pursuant to the provisions of the Indenture.

“Independent Consultant” means a firm (but not an individual) which (1) is in fact independent, (2) does not have any direct financial interest or any material indirect financial interest in the Borrower or any affiliate thereof and (3) is not connected with the Borrower or any affiliate thereof as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions, and designated by the Borrower, qualified to pass upon questions relating to the financial affairs of facilities of the type or types operated by the Borrower and having a favorable reputation for skill and experience in the financial affairs of such facilities.

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“Indirect Costs” means all title insurance premiums, survey charges, engineering fees, architectural fees, real estate taxes, appraisal costs, premiums for insurance, marketing, advertising and leasing costs, brokerage commissions, legal fees, accounting fees, overhead and administrative costs, and all other expenses as shown on the Development Budget that are expenditures relating to the Project and are not Direct Costs.

“Intercept” means the apportionment from the State Controller, pursuant to Section 17199.4(a)(4) of the Education Code (or any successor provision) and the Intercept Notice, of amounts specified in the Intercept Notice and payable directly to the Trustee.

“Intercept Notice” means any notice from the School to the State Controller, pursuant to Section 17199.4(a)(1) and (4) of the Education Code, specifying a transfer schedule for the payment directly to the Trustee of one or more of the following: (x) principal of the Bonds, (y) interest on the Bonds and (z) other costs necessary or incidental to financing pursuant to the Act relating to the Bonds, including Additional Payments, in substantially the form set forth in the [Loan Agreement], as the same may be amended, supplemented or restated from time to time.

“Insurance and Condemnation Proceeds Fund” means the fund by that name established pursuant to the Indenture.

“Interest Account” means the account by that name in the Revenue Fund established pursuant to the Indenture.

“Interest Payment Date” means each January 1 and July 1, commencing January 1, 2014.

“Irrevocable Deposit” means the irrevocable deposit in trust of cash in an amount (or Government Obligations the principal of and interest on which will be in an amount), and under terms sufficient to pay all or a portion of the principal of and/or premium, if any, and interest on, as the same will become due, of any Indebtedness which would otherwise be considered Outstanding. The trustee of such deposit may be any trustee or escrow agent authorized to act in such capacity.

“Lease” individually and “Leases” collectively, means the Central City Lease and the Downtown Lease.

“Lien” means any mortgage or pledge of, security interest in or lien or encumbrance on the Facilities or the Gross Revenues.

“Loan” means the loan of proceeds from the Authority to the Borrower pursuant to the Loan Agreement.

“Loan Agreement” means that certain loan agreement, dated as of August 1, 2013, among the Authority and the Borrower, as originally executed or as it may from time to time be supplemented, modified or amended subject to and in accordance with the terms thereof and of the Indenture.

“Long-Term Indebtedness” means Indebtedness other than Short-Term Indebtedness and Guaranties.

“Mandatory Sinking Account Payment” means the amount so designated which is established pursuant to the Indenture with respect to the Bonds.

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“Moody’s” means Moody’s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, or, if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Borrower.

“Opinion of Bond Counsel” means an Opinion of Counsel by a nationally recognized bond counsel firm experienced in matters relating to the exclusion from gross income for federal income tax purposes of interest payable on obligations of state and political subdivisions.

“Opinion of Counsel” means a written opinion of counsel (which may be counsel for the Authority) selected by the Authority. If and to the extent required by the provisions of the Indenture, each Opinion of Counsel will include the statements provided for in the Indenture.

“Optional Redemption Account” means the account by that name in the Redemption Fund established pursuant to the Indenture.

“Original Loan Agreement” means the Loan Agreement as originally executed and delivered by the parties thereto.

“Permitted Liens” means:

(a) Liens arising by reason of good faith deposits by the Borrower in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(b) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable the Borrower to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers’ compensation, unemployment insurance, pension or profit sharing plans or other social security benefits, or to share in the privileges or benefits required for companies participating in such arrangements;

(c) Any judgment lien against the Borrower so long as such judgment is being contested in good faith and execution thereon is stayed;

(d) Liens shown on the title policy for any Facility, including (i) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property; (ii) any liens on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen, laborers, suppliers or vendors, have been due for less than ninety (90) days; (iii) easements, rights-of-way, servitudes, restrictions, oil, gas or other mineral reservation and other minor defects, encumbrances, and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof; (iv) the rights of the Authority and the Trustee under the Indenture, the Loan Agreement and the Deeds of Trust; and (v) landlord’s liens;

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(e) Any Lien arising by reason of any escrow established to pay debt service with respect to the Bonds; and

(f) Any Lien securing the obligations of the Borrower under the Loan Agreement, including the Liens of the Deeds of Trust.

“Person” means an individual, corporation, firm, association, partnership, trust or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

“Principal Account” means the account by that name in the Revenue Fund established pursuant to the Indenture.

“Principal Corporate Trust Office” means for the Trustee originally appointed under the Indenture, the corporate trust office of The Bank of New York Mellon Trust Company, N.A., provided however, that for purposes of presentation of Bonds for payment or for registration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust agency business shall be conducted.

“Principal Payment Date” means the principal and Mandatory Sinking Account Payment dates for the Bonds, which dates occur on July 1 of each year commencing July 1, 2015.

“Project” has the meaning given to such term in Exhibit A of the Original Loan Agreement and the First Supplemental Loan Agreement.

“Project Fund” means the fund by that name established pursuant to the Indenture.

“Property” means any and all rights, titles and interests in and to any and all property of the Borrower whether real (including the Facilities) or personal, tangible or intangible and wherever situated whether currently owned or acquired in the future.

“Property, Plant and Equipment” means all Property which is property, plant and equipment under generally accepted accounting principles.

“Rating Agency” means at any time any rating agency including Fitch, Moody’s or S&P, then rating the Bonds at the request of the Authority or the Borrower.

“Rating Category” means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier.

“Rebate Analyst” means the Person engaged by the Borrower to calculate any rebate liability under the Code.

“Rebate Fund” means the fund by that name established pursuant to the Indenture.

“Record Date” means, with respect to the Interest Payment Date for the Bonds, the fifteenth day of the calendar month immediately preceding such Interest Payment Date, whether or not such day is a Business Day.

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“Repair and Replacement Fund” means the fund by such name established pursuant to the Indenture.

“Repair and Replacement Fund Requirement” means $200,000.

“Reserve Account” means the account by that name in the Revenue Fund established pursuant to the Indenture.

“Responsible Officer” of the Trustee means and includes a duly authorized officer of the Trustee, with regular responsibility for the administration of matters related to the Indenture.

“Retained Rights” means Authority right to payment of the Administrative Fees and Expenses, any Additional Payments, any right to be indemnified, held harmless or defended, any right to receive information, reports, certifications or other documents and any right to notice, consent or inspection hereunder or under the Loan Agreement.

“Revenue Fund” means the fund by that name established pursuant to the Indenture.

“S&P” means Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, or, if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Authority.

“School” individually, and “Schools” collectively means, Central City Value School and Downtown Value School.

“Securities Depositories” means The Depository Trust Company, 55 Water Street, 50th Floor, New York, N.Y. 10041-0099 Attn. Call Notification Department, Fax (212) 855-7232 or to such other addresses and/or such other securities depositories as the Authority may designate to the Trustee in writing.

“Series 2016 Interest Payment Date” means ________________.

“Short-Term Indebtedness” means all Indebtedness for any of the following: (a) Payments of principal and interest with respect to money borrowed for an original term, or renewable at the option of the Borrower for a period from the date originally incurred, of one year or less or which pursuant to the terms of a revolving credit or similar agreement or otherwise is renewable or extendable at the option of the Borrower to a date or for a period or periods from the date originally incurred of more than one year if, by the terms of such agreement, no indebtedness is permitted to be outstanding thereunder for a period of at least thirty (30) days during each period of twelve (12) consecutive months beginning with the effective date of such revolving credit or other similar agreement; and (b) Payments under leases which are capitalized in accordance with generally accepted accounting principles having an original term, or renewable at the option of the lessee for a period from the date originally incurred, of one year or less.

“Sinking Fund Installment” means, with respect to any Term Bonds, each amount so designated for such Term Bonds requiring payments by the Borrower from the Payments to be applied to the retirement of such Bonds on and prior to the stated maturity date thereof.

“Sole Member” means Value Schools Foundation, a California nonprofit public benefit corporation.

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“Special Record Date” means the date established by the Trustee pursuant to the Indenture as a record date for the payment of defaulted interest on Bonds.

“Special Redemption Account” means the account by that name in the Redemption Fund established pursuant to the Indenture.

“State” means the State of California.

“State Controller” means the Controller of the State.

“State School Fund” means the fund established and maintained in the general fund of the State pursuant to Articles 1 and 2 of Chapter 1 of Part 9 of Division 1 of Title 1 of the Education Code.

“Supplemental Indenture” or “Indenture supplemental thereto” means any indenture hereafter duly authorized and entered into between the Authority and the Trustee in accordance with the provisions of the Indenture.

“Tax Certificate” means the Tax Certificate of the Authority and the Borrower dated the date of issuance of the Bonds, as the same may be amended or supplemented in accordance with its terms.

“Term Bonds” means Bonds which are payable on or before their specified maturity dates from Mandatory Sinking Account Payments established for that purpose and calculated to retire such Bonds on or before their specified maturity dates.

“Trustee” means The Bank of New York Mellon Trust Company, N.A., or the successor as Trustee as provided in the Indenture.

“Underwriter” means Piper Jaffray & Co., its successors and assigns.

“University Prep Lease” means that certain Lease Agreement, dated as of December 1, 2016, by and between the Borrower as lessor and Value Schools as lessee, related to the University Prep Value High School.

“University Prep Facility” means all the real property described in EXHIBIT A of the University Prep Lease, together with the improvements thereon.

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The Indenture

The Indenture provides for, among other things, the issuance, execution and delivery of Bonds and sets forth the terms thereof, the nature and extent of the security, various rights of Bondholders, rights, duties and immunities of the Trustee and the rights and obligations of the Authority.

Certain provisions of the Indenture setting forth the terms of the Bonds, the redemption provisions thereof and the use of the proceeds of the Bonds are set forth elsewhere in this Limited Offering Memorandum. See “THE BONDS,” “ESTIMATED SOURCES AND USES OF FUNDS” and “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.” Certain provisions of the Indenture are summarized below. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Indenture.

The Bonds

Bond Register. The Trustee will keep or cause to be kept, at its Principal Corporate Trust Office, sufficient books for the registration of transfer of the Bonds, which will at all reasonable times during normal business hours upon reasonable notice be open to inspection by the Authority; and, upon presentation for such purpose, the Trustee will, under such reasonable regulations as it may prescribe, register the transfer or cause to be registered the transfer, on said books, of Bonds as hereinbefore provided.

Temporary Bonds. The Bonds may be initially issued in temporary form exchangeable for definitive Bonds when ready for delivery. The temporary Bonds may be printed, lithographed or typewritten, will be of such denomination as may be determined by the Authority, will be in registered form and may contain such reference to any of the provisions of the Indenture as may be appropriate. Every temporary Bond will be executed by the Authority and authenticated by the Trustee upon the same conditions and in substantially the same manner as the definitive Bonds. If the Authority issues temporary Bonds, it will execute and furnish definitive Bonds without delay, and thereupon the temporary Bonds may be surrendered, for cancellation, in exchange therefor at the Principal Corporate Trust Office of the Trustee, and the Trustee will authenticate and deliver in exchange for such temporary Bonds an equal aggregate principal amount of definitive Bonds of authorized denominations, of the same maturity or maturities. Until so exchanged, the temporary Bonds will be entitled to the same benefits under the Indenture as definitive Bonds authenticated and delivered under the Indenture.

Bonds Mutilated, Lost, Destroyed or Stolen. If any Bond will become mutilated, the Authority, at the expense of the Holder of said Bond, will execute, and the Trustee will thereupon authenticate and deliver, a new Bond of like tenor in exchange and substitution for the Bond so mutilated, but only upon surrender to the Trustee of the Bond so mutilated. Every mutilated Bond so surrendered to the Trustee will be canceled by it and delivered to, or upon the order of, the Authority. If any Bond issued under the Indenture will be lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence be satisfactory to it and indemnity satisfactory to it will be given, the Authority, at the expense of the Holder, will execute, and the Trustee will thereupon authenticate and deliver, a new Bond of like tenor in lieu of and in substitution for the Bond so lost, destroyed or stolen. If any Bond mutilated, lost, destroyed or stolen will have matured, instead of issuing a substitute Bond the Trustee may pay the same without surrender upon receipt of indemnity satisfactory to the Trustee. The Authority may require payment from the Holder of a sum not exceeding the actual cost of preparing each new Bond issued under this paragraph and of the expenses which may be incurred by the Authority and the Trustee. Any Bond issued under the provisions summarized in this paragraph in lieu of any Bond alleged to be lost, destroyed or stolen will constitute an original additional contractual obligation on the part of the Authority whether or not the Bond so alleged to be lost, destroyed or stolen be at any time

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enforceable by anyone, and will be entitled to the benefits of the Indenture with all other Bonds secured by the Indenture.

Conditions for the Issuance of Additional Bonds. The Authority may at any time issue Additional Bonds pursuant to a Supplemental Indenture, payable from the Payments as provided in the Indenture and secured by a pledge of and charge and lien upon the Payments as provided in the Indenture equal to the pledge, charge and lien securing the Outstanding Bonds theretofore issued under the Indenture, but only subject to the following specific conditions, which are made conditions precedent to the issuance of any such Additional Bonds under the Indenture:

(i) The Authority shall be in compliance with all agreements and covenants contained in the Indenture.

(ii) The Borrower shall be in compliance with the Loan Agreement.

(iii) No Event of Default shall have occurred and be continuing under the Indenture, under the Loan Agreement, and under any Lease;

Proceedings for Authorization of Additional Bonds. Whenever the Authority shall determine to execute and deliver any Additional Bonds pursuant to the provisions of the Indenture described under the subheading “Conditions for the Issuance of Additional Bonds” above, the Authority and the Trustee shall enter into a Supplemental Indenture providing for the issuance of such Additional Bonds, specifying the aggregate principal amount of such Additional Bonds and prescribing the terms and conditions of such Additional Bonds.

The Supplemental Indenture shall (a) prescribe the form or forms of such Additional Bonds, (b) require that all or a portion of the proceeds of such Additional Bonds be applied to financing or refinancing of the acquisition (by purchase or lease) or construction of facilities to be operated as a charter school established pursuant to the Charter School Law, and (c) subject to the provisions of the Indenture described under the subheading “Conditions for the Issuance of Additional Bonds” above, provide for the distinctive designation, denominations, method of numbering, dates, payment dates, interest rates (or method of determining the rates, if variable), interest payment dates, provisions for redemption (if desired) and places of payment of principal and interest.

The Loan Agreement shall be amended or supplemented, if necessary, so that the Loan Repayments in each Fiscal Year shall at least equal projected Debt Service, including Debt Service on the Additional Bonds and excluding any Debt Service relating to the Bonds being refunded by the Additional Bonds, in each Fiscal Year.

Before such Additional Bonds shall be issued, the Borrower shall file or cause to be filed the following documents with the Trustee:

(a) An Opinion of Counsel setting forth that (1) the issuance, execution and delivery of the Additional Bonds have been duly authorized by the Authority, (2) the Indenture as amended and supplemented to the date thereof, the Loan Agreement as amended and supplemented to the date thereof are valid and binding obligations of the Authority, (3) the Supplemental Indenture and the amendment or supplement to the Loan Agreement have been executed and delivered in accordance with the provisions of the Indenture and the Loan Agreement, (4) that the Additional Bonds are issued in accordance with the provisions of the Indenture, and (5) the execution and delivery of the Supplemental Indenture and the amendment or supplement to the Loan Agreement will not, in and of itself, cause interest on the Bonds to be included in gross income for purposes of federal income taxation.

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(b) A Certificate of the Borrower stating that the Borrower is not in default in the performance of any of the covenants, conditions, agreements or provisions contained in the Loan Agreement and applicable to the Borrower;

(c) An executed counterpart or duly authenticated copies of any amendment to document or new document required to be delivered pursuant to the provisions of the Indenture described under the subheading “Conditions for the Issuance of Additional Bonds” above; and

(d) A Certificate of the Borrower stating that the insurance required by the Loan Agreement is in effect.

Upon the delivery to the Trustee of the foregoing instruments, the Trustee shall authenticate and deliver said Additional Bonds as set forth in such Supplemental Indenture.

Pledge and Assignment

Pledge and Assignment.

(a) Subject only to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture, there are pledged to secure the payment of the principal of and interest on the Bonds in accordance with their terms and the provisions of the Indenture, all of the Payments (except Payments described in clause (i) of the definition thereof) and any other amounts (excluding proceeds of the sale of Bonds) held in any fund or account (other than the Rebate Fund and the Repair and Replacement Fund) established pursuant to the Indenture. Said pledge will constitute a lien on and security interest in such assets and will attach and be valid and binding from and after delivery of the Bonds, without any physical delivery thereof or further act.

(b) The Authority assigns to the Trustee, for the benefit of the Holders from time to time of the Bonds, all of the Payments (except Payments described in clause (i) of the definition thereof) and other amounts pledged in paragraph (a) above and all of the right, title and interest of the Authority in, to and under the Loan Agreement (except for the Retained Rights). The Trustee will be entitled to and will receive all of such assigned Payments, and any Payments collected or received by the Authority will be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and will forthwith be paid by the Authority to the Trustee. The Trustee also will be entitled to and will (subject to the provisions of the Indenture) take all steps, actions and proceedings following any event of default under the Loan Agreement reasonably necessary in its judgment to enforce, either jointly with the Authority or separately, all of the rights of the Authority assigned to the Trustee and all of the obligations of the Borrower under the Loan Agreement.

(c) The Trustee shall take all actions necessary for the Trustee to collect directly from the State Controller the amounts set forth in the Intercept Notice on the dates set forth in the Intercept Notice.

(d) All Payments will be promptly deposited by the Trustee upon receipt thereof in a special fund designated as the “Revenue Fund” which the Trustee is directed by the Indenture to establish, maintain and hold in trust. All Payments will be held in trust for the benefit of the Holders from time to time of the Bonds but will nevertheless be disbursed, allocated and applied solely for the uses and purposes set forth in the Indenture.

(e) The Bonds are not and will not be deemed to constitute a debt or liability of the State, or any political subdivision thereof, and are not and will not be deemed to be a pledge of the faith and credit of the State, or any political subdivision thereof, other than the Authority, which will only be obligated to

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pay the Bonds solely from the Payments and funds in the Indenture provided therefor. The issuance of the Bonds will not directly or indirectly or contingently obligate the State or any political subdivision thereof to levy or to pledge any form of taxation whatever for the Bonds or to make any appropriation for their payment. Nothing in the Indenture, the Act or otherwise is an undertaking by the Authority or the State or any political subdivision thereof to fund the transfers described in the Intercept Notice or to funds available to the Schools in any amount or at any time.

Establishment and Application of Redemption Fund. The Trustee will establish and maintain within the Redemption Fund a separate Optional Redemption Account and a separate Special Redemption Account. The Trustee will accept all moneys deposited for redemption and will deposit such moneys into the Optional Redemption Account or the Special Redemption Account, as applicable. All amounts deposited in the Optional Redemption Account and in the Special Redemption Account will be accepted and used and withdrawn by the Trustee solely for the purpose of redeeming Bonds, in the manner and upon the terms and conditions specified in the redemption provisions of the Indenture, at the next succeeding date of redemption for which notice has not been given and at the redemption prices then applicable to redemptions from the Optional Redemption Account and the Special Redemption Account, respectively; provided that, at any time prior to giving such notice of redemption, the Trustee will, upon written direction of the Borrower, apply such amounts to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Borrower may direct, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to such Bonds (or, if such Bonds are not then subject to redemption, the par value of such Bonds); and provided further that in the case of the Optional Redemption Account in lieu of redemption at such next succeeding date of redemption, or in combination therewith, amounts in such account may be transferred to the Revenue Fund and credited against Loan Repayments in order of their due date as set forth in a Request of the Borrower.

Rebate Fund.

(a) The Trustee will establish and maintain, when required, a fund separate from any other fund established and maintained under the Indenture designated as the Rebate Fund. Within the Rebate Fund, the Trustee will maintain such accounts as will be necessary to comply with instructions of the Borrower given pursuant to the terms and conditions of the Tax Certificate. Subject to the transfer provisions provided in paragraph (e) below, all money at any time deposited in the Rebate Fund will be held by the Trustee in trust, to the extent required to satisfy the Rebate Requirement (as defined in the Tax Certificate), for payment to the federal government of the United States of America. Neither the Authority, the Borrower nor the Holder of any Bonds will have any rights in or claim to such money. All amounts deposited into or on deposit in the Rebate Fund will be governed by the provisions summarized under this caption “–Rebate Fund,” by the provisions summarized under the caption “Covenants–Other Covenants; Amendment of the Loan Agreement” and by the Tax Certificate. The Trustee will be deemed conclusively to have complied with such provisions if it follows the directions of the Borrower including supplying all necessary information in the manner provided in the Tax Certificate, and will have no liability or responsibility to enforce compliance by the Borrower or the Authority with the terms of the Tax Certificate or any other tax covenants contained in the Indenture. The Trustee will not be responsible for calculating rebate amounts or for the adequacy or correctness of any rebate report or rebate calculations. The Trustee will have no independent duty to review such calculations or enforce the compliance by the Borrower with such rebate requirements. The Trustee will have no duty or obligation to determine the applicability of the Code and will only be obligated to act in accordance with written instructions provided by the Borrower.

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(b) Upon the Borrower’s written direction, an amount will be deposited to the Rebate Fund by the Trustee from deposits by the Borrower, if and to the extent required, so that the balance in the Rebate Fund will equal the Rebate Requirement. Computations of the Rebate Requirement will be furnished by or on behalf of the Borrower in accordance with the Tax Certificate. The Trustee will supply to the Borrower and/or the Authority all necessary information in the manner provided in the Tax Certificate to the extent such information is reasonably available to the Trustee.

(c) The Trustee will have no obligation to rebate any amounts required to be rebated pursuant to the provisions of the Indenture summarized under this caption “–Rebate Fund,” other than from moneys held in the funds and accounts created under the Indenture or from other moneys provided to it by the Borrower.

(d) At the written direction of the Borrower, the Trustee will invest all amounts held in the Rebate Fund in Eligible Securities, subject to the restrictions set forth in the Tax Certificate. Moneys will not be transferred from the Rebate Fund except as provided in paragraph (e) below. The Trustee will not be liable for any consequences arising from such investment.

(e) Upon receipt of the Borrower’ written directions, the Trustee will remit part or all of the balances in the Rebate Fund to the United States, as so directed. In addition, if the Borrower so directs, the Trustee will deposit money into or transfer money out of the Rebate Fund from or into such accounts or funds as directed by the Borrower’s written directions; provided, however, only moneys in excess of the Rebate Requirement may, at the written direction of the Borrower or the Authority, be transferred out of the Rebate Fund to such other accounts or funds or to anyone other than the United States in satisfaction of the arbitrage rebate obligation. Any funds remaining in the Rebate Fund after each five year remission to the United States of America, redemption and payment of all of the Bonds and payment and satisfaction of any Rebate Requirement, or provision made therefor satisfactory to the Trustee, will be withdrawn and remitted to the Borrower.

(f) Notwithstanding any other provision of the Indenture, including in particular the defeasance provisions of the Indenture, the obligation to remit the Rebate Requirement to the United States and to comply with all other requirements of the provisions summarized under this caption “–Rebate Fund,” the provisions summarized under the caption “Covenants–Other Covenants; Amendment of the Loan Agreement” and the Tax Certificate will survive the defeasance or payment in full of the Bonds.

Establishment and Application of Project Fund.

(a) The Trustee will establish, maintain and hold in trust a separate fund designated as the “Project Fund.” The moneys in the Project Fund will be disbursed pursuant to Requisitions of the Borrower, which will be substantially in the form provided in the Indenture. Each such Requisition of the Borrower will be sufficient evidence to the Trustee of the facts stated therein and the Trustee will have no duty to confirm the accuracy of such facts. No moneys in the Project Fund will be used to pay Costs of Issuance.

Establishment and Application of Costs of Issuance Fund; Insurance and Condemnation Proceeds Fund.

(a) The Trustee will establish, maintain and hold in trust a separate fund designated as the “Costs of Issuance Fund.” Moneys deposited in said fund will be used and withdrawn by the Trustee to pay the Costs of Issuance of the Bonds upon Requisition of the Borrower stating the person to whom payment is to be made, the amount to be paid, the purpose for which the obligation was incurred and that

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such payment is a proper charge against said fund, and including a copy of the invoice or statement evidencing the costs incurred. On the one hundred eightieth (180th) day following the initial issuance of the Bonds, or upon the earlier Request of the Borrower, amounts, if any, remaining in the Costs of Issuance Fund will be transferred to the Project Fund.

(b) As and when needed, the Trustee will establish, maintain and hold in trust a separate fund designated as the “Insurance and Condemnation Proceeds Fund,” and administer said fund as set forth in the Loan Agreement.

(c) Before any payment from the Insurance and Condemnation Proceeds Fund will be made, the Borrower will file or cause to be filed with the Trustee a Requisition of the Borrower stating: (1) the item number of such payment; (2) the name of the Person to whom each such payment is due, which may be the Borrower in the case of reimbursement for costs of such repair or replacement theretofore paid by the Borrower; (3) the respective amounts to be paid; (4) the purpose by general classification for which each obligation to be paid was incurred; (5) that obligations in the stated amounts have been incurred by the Borrower and are presently due and payable and that each item thereof is a proper charge against the Insurance and Condemnation Proceeds Fund and has not been previously paid from the Insurance and Condemnation Proceeds Fund; and (6) that there has not been filed with or served upon the Borrower any notice of claim of lien, or attachment upon, or claim affecting the right to receive payment of, any of the amounts payable to any of the persons named in such Requisition, for which adequate security for the payment of such obligation has been posted, or which has not been released or will not be released simultaneously with the payment of such obligation, other than materialmen’s or mechanics’ liens accruing by mere operation of law.

(d) Upon receipt of a Requisition, the Trustee will pay the amount set forth in such Requisition as directed by the terms thereof out of the Insurance and Condemnation Proceeds Fund. The Trustee may conclusively rely upon such Requisition and will have no responsibility or duty to investigate any of the matters set forth therein. The Trustee will not make any such payment if it has received any written notice of claim of lien, attachment upon, or claim affecting the right to receive payment of, any of the moneys to be so paid, that has not been released or will not be released simultaneously with such payment, unless adequate security for the payment of such obligation has been posted.

(e) When the repair or replacement of damaged, destroyed or taken property will have been completed, the Borrower will deliver to the Trustee a Certificate of the Borrower stating the fact and date of such completion and stating that all of the costs thereof have been determined and paid (or that all of such costs have been paid less specified claims that are subject to dispute and for which a retention in the Insurance and Condemnation Proceeds Fund is to be maintained in the full amount of such claims until such dispute is resolved). Subject to the Loan Agreement, the Borrower will direct the Trustee by said Certificate of the Borrower to transfer any remaining balance in the Insurance and Condemnation Proceeds Fund, less the amount of any such retention, to the Special Redemption Account of the Redemption Fund or, at the election of the Borrower, to the Revenue Fund. Upon the disbursement of all moneys in the Insurance and Condemnation Proceeds Fund, such fund will thereafter be closed until such time as such fund is again required to be established pursuant to paragraph (b) above.

Establishment and Application of the Repair and Replacement Fund.

(a) The Trustee will establish, maintain and hold in trust a separate fund designated as the “Repair and Replacement Fund,” which will be used solely for the purposes set forth in the provisions summarized under this caption “–Establishment and Application of the Capital Maintenance and Operating Fund.”

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(b) The Trustee shall withdraw funds from the Repair and Replacement Fund to pay for capital items not budgeted as ordinary maintenance and repair costs related to the Facilities.

(c) Moneys in the Repair and Replacement Fund to be used for the purpose described in the preceding paragraph (b) will be disbursed upon receipt of a Requisition of Borrower for payment substantially in the form provided in the Indenture, executed by the Authorized Borrower Representative, and the Trustee shall issue its checks for each such disbursement upon receipt of such a requisition.

(d) When (i) the amount of principal of, and premium, if any, and interest on the Outstanding Bonds is equal to or less than the sum of the balance of the Revenue Fund, the balance of the Redemption Fund and the balance of the Repair and Replacement Fund, and (ii) all other amounts owed under the Loan Agreement and the Indenture will have been paid, moneys held in the Repair and Replacement Fund may be deposited into the Revenue Fund and credited against payments of Loan Repayments required under the Loan Agreement.

Investment of Moneys in Funds and Accounts. All moneys in any of the funds and accounts established pursuant to the Indenture, except the Grant-Funded Reserve Subaccount of the Reserve Account, will be invested by the Trustee solely in such Eligible Securities as are specified in a Request of the Borrower, provided, however, that, if the Borrower does not file such a Request with the Trustee, the Trustee will invest to the extent practicable in investments described in clause (7) of the definition of the term “Eligible Securities” above; provided, however, that any such investment shall be made by the Trustee only if, prior to the date on which such investment is to be made, the Trustee shall have received a Request of the Borrower specifying a specific money market fund and, if no such Request of the Borrower is so received, the Trustee shall hold such moneys uninvested.

All moneys in the Grant-Funded Reserve Subaccount of the Reserve Account shall be invested by the Trustee solely in such Grant-Funded Reserve Eligible Securities as are specified in a Request of the Borrower, provided, however, that, if the Borrower does not file such a Request with the Trustee, the Trustee shall invest to the extent practicable in investments described in clause (5) of the definition of the term “Grant-Funded Reserve Eligible Securities” in the Indenture; provided, however, that any such investment shall be made by the Trustee only if, prior to the date on which such investment is to be made, the Trustee shall have received a Request of the Borrower specifying a specific money market fund and, if no such Request of the Borrower is so received, the Trustee shall hold such moneys uninvested.

All interest, profits and other income received from the investment of moneys will be deposited in the Revenue Fund; provided, however, all interest, profits and other income received from the investment of moneys in the Bond Reserve Subaccount and the Grant-Funded Reserve Subaccount of the Reserve Account shall remain in such Subaccount.

Investments in any and all funds and accounts established pursuant to the Indenture may be commingled for purposes of making, holding and disposing of investments, notwithstanding provisions in the Indenture for transfer to or holding in a particular fund amounts received or held by the Trustee under the Indenture, provided that the Trustee will at all times account for such investments strictly in accordance with the particular funds to which they are credited and otherwise as provided in the Indenture. The Trustee may act as principal or agent in the making or disposing of any investment. To the extent Eligible Securities are registrable, such investments will be registered in the name of the Trustee. The Trustee may sell or present for redemption, any securities so purchased whenever it will be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or account to which such securities are credited, and the Trustee will not be liable or responsible for any loss resulting from such investment.

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The Trustee is authorized by the Indenture, in making or disposing of any investment permitted by the provisions of the Indenture summarized under this caption “–Investment of Moneys in Funds and Accounts,” to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account. No float forward or forward purchase agreement or other arrangement, agreement or financial product may be utilized in connection with the Revenue Fund.

The Borrower acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Borrower the right to receive brokerage confirmations of security transactions as they occur, the Borrower specifically waives receipt of such confirmations to the extent permitted by law. The Trustee will furnish the Borrower periodic cash transaction statements which include detail for all investment transactions made by the Trustee under the Indenture.

Covenants

Punctual Payment. The Authority will punctually pay, but only out of Payments and pledged funds as provided in the Indenture, the principal and interest to become due in respect of every Bond issued under the Indenture at the times and places and in the manner provided in the Indenture and in the Bonds, according to the true intent and meaning thereof.

Extension of Payment of Bonds. The Authority will not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any of the claims for interest by the purchase or funding of such Bonds or claims for interest or by any other arrangement except with the written consent of the Bondholders and, if the maturity of any of the Bonds or the time of payment of any such claims for interest will be extended without the written consent of the Bondholders, such Bonds or claims for interest will not be entitled, in case of any default under the Indenture, to the benefits of the Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which will not have been so extended. Nothing in this paragraph will be deemed to limit the right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance will not be deemed to constitute an extension of maturity of Bonds.

Encumbrance Upon Payments. The Authority will not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Payments and other assets pledged or assigned under the Indenture while any of the Bonds are Outstanding, except the pledge and assignment created by the Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other programs under the Act, and reserves the right to issue other obligations for such purposes.

Accounting Records and Financial Statements. The Trustee will at all times keep, or cause to be kept, proper books of record and account, prepared in accordance with the Trustee’s accounting practices for books of record and account relating to similar trust accounts and in accordance with the customary standards of the corporate trust industry for such books of record and account, in which complete and accurate entries will be made of all transactions made by it relating to the proceeds of Bonds, the Payments, the Loan Agreement and all funds and accounts established pursuant to the Indenture. Such books of record and account will be available for inspection by the Authority, the Borrower and any Bondholder, or his agent or representative duly authorized in writing, at reasonable hours, upon reasonable notice and under reasonable circumstances.

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Other Covenants; Amendment of the Loan Agreement and the Leases.

(a) Subject to the provisions of the Indenture, the Trustee will promptly collect all amounts due pursuant to the Loan Agreement and diligently enforce and take all steps, actions and proceedings reasonably necessary for the enforcement of all of the rights of the Authority under the Loan Agreement assigned to it pursuant to the Indenture.

(b) The Authority will not amend, modify or terminate any of the terms of the Loan Agreement or any Lease, or consent to any such amendment, modification or termination, without the prior written consent of the Trustee. The Trustee will give such written consent if but only if (1) it has received a written representation from the Borrower to the effect that such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds; provided that, if an Event of Default described in the Indenture has occurred and is continuing, the Trustee rather than the Borrower will make a determination that such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds (provided that, in making such determination, the Trustee may conclusively rely on written representations of financial consultants or advisors or the opinion or advice of counsel), or (2) the Holders of a majority in aggregate principal amount of the Bonds then Outstanding consent in writing to such amendment, modification or termination, provided that no such amendment, modification or termination will reduce the amount of Loan Repayments payable to the Authority, or extend the time for making such payments, without the written consent of all of the Holders of the Bonds then Outstanding.

Further Assurances. The Authority will make, execute and deliver any and all such further indentures, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Indenture and for the better assuring and confirming unto the Holders of the Bonds of the rights and benefits provided in the Indenture.

Continuing Disclosure. Pursuant to the Loan Agreement, the Borrower has undertaken all responsibility for compliance with continuing disclosure requirements pursuant to Securities and Exchange Commission Rule 15c2-12(b)(5), and the Authority will have no liability to the Holders of the Bonds or any other person with respect to Securities and Exchange Commission Rule 15c2-12. The Trustee covenants and agrees that, subject to the provisions of the Indenture, it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement and the Loan Agreement applicable to it. Notwithstanding any other provision of the Indenture, failure of the Borrower or the Trustee to comply with the Continuing Disclosure Agreement will not be considered an Event of Default; however, the Trustee at the written request of the Underwriter (as defined in the Continuing Disclosure Agreement) or the Holders of at least 25% aggregate principal amount of Outstanding Bonds, will (but only to the extent the Trustee has been tendered funds in an amount satisfactory to it or it has been otherwise indemnified from and against any loss, liability, cost or expense, including without limitation, fees and expenses of its counsel and agents and additional fees and charges of the Trustee) or any Bondholder or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Borrower to comply with its obligations under the Loan Agreement or, as to any Bondholder or Beneficial Owner, to cause the Trustee to comply with its obligations summarized in this paragraph. For purposes of this Section, “Beneficial Owner” means any person which (1) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (2) is treated as the owner of any Bonds for federal income tax purposes.

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Tax Covenants.

(a) The Authority covenants that it will not take any action, or fail to take any action, if such action or failure to take such action would result in the interest on the Bonds not being excluded from gross income for federal income tax purposes under Section 103 of the Code. Without limiting the generality of the foregoing, the Authority covenants that it will comply with the requirements of the Tax Certificate. This covenant will survive the payment in full or the defeasance of the Bonds.

(b) In the event that at any time the Authority is of the opinion that for purposes of the provisions summarized under this caption “–Tax Covenants” it is necessary or helpful to restrict or limit the yield on the investment of any moneys held by the Trustee under the Indenture, the Authority will so instruct the Trustee in a Request of the Authority accompanied by a supporting Opinion of Bond Counsel, and the Trustee will take such action as may be directed in accordance with such instructions.

(c) Notwithstanding any provisions summarized under this caption “–Tax Covenants” , if the Authority will provide to the Trustee an Opinion of Bond Counsel to the effect that any specified action required under this paragraph is no longer required or that some further or different action is required to maintain the exclusion from federal income tax of interest on the Bonds, the Trustee may conclusively rely on such opinion in complying with the requirements of the provisions of the Indenture regarding tax covenants and the Tax Certificate, and the covenants under the Indenture will be deemed to be modified to that extent.

Intercept Covenants. The Trustee shall, on each Interest Payment Date and the Principal Payment Date on which a transfer from the Controller to the Trustee is scheduled pursuant to the Intercept Notice, notify the Authority and the Borrower of any shortfall in amounts received by the Trustee from the Controller compared to the amounts set forth in the Intercept Notice for such date. If, subsequent to any shortfall for which the Trustee has sent notice pursuant to the preceding sentence, the Trustee shall receive payment of amounts sufficient to cure such shortfall, the Trustee shall, within ten (10) business days thereof, notify the Authority and the Borrower of the receipt of such payment.

Events of Default; Remedies on Default

Events of Default; Waiver of Default. If one or more of the following events (“Events of Default”) will happen, that is to say: (a) if default will be made by the Authority in the due and punctual payment of the principal of any Bond as the same will become due and payable (whether at maturity, by declaration or otherwise); (b) if default will be made by the Authority in the due and punctual payment of interest on any Bond when and as such interest will become due and payable; or (c) if default will be made by the Authority in the performance or observance of any other of the covenants, agreements or conditions on its part in the Indenture or in the Bonds contained, and such default will have continued for a period of thirty (30) days after written notice thereof, specifying such default and requiring the same to be remedied, will have been given to the Authority by the Trustee, or to the Authority, the Borrower and the Trustee by the Holders of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding; then and in each and every such case during the continuance of such Event of Default, the provisions summarized in the following paragraphs under “–Institution of Legal Proceedings by Trustee” apply.

Institution of Legal Proceedings by Trustee.

(a) If one or more of the Events of Default will occur, the Trustee in its discretion may, and upon the written request of the Holders of a majority in principal amount of the Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, the Trustee will proceed to protect or enforce its

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rights or the rights of the holders of Bonds under the Indenture, the Loan Agreement, the Leases and the Deeds of Trust, by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained in the Indenture or therein, or in aid of the execution of any power in the Indenture or therein granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee will deem most effectual in support of any of its rights or duties under the Indenture, provided that any such request from the Bondholders will not be in conflict with any rule of law or with the Indenture, expose the Trustee to personal liability or be unduly prejudicial to Bondholders not joining therein.

(b) Notwithstanding anything to the contrary in the Indenture, the Authority will have no obligation to, and instead the Trustee may, without further direction from the Authority, take any and all steps, actions and proceedings, to enforce any or all rights of the Authority (other than those specifically retained by the Authority pursuant to the provisions of the Indenture summarized under the caption “Pledge and Assignment–Pledge and Assignment” above) under the Indenture or the Loan Agreement, including, without limitation, the rights to enforce the remedies upon the occurrence and continuation of an Event of Default and the obligations of the Borrower under the Loan Agreement.

Application of Moneys Collected by Trustee. Any moneys collected by the Trustee pursuant to the provisions summarized in the paragraphs under “–Institution of Legal Proceedings by Trustee” above and any other amounts then held by the Trustee under the Indenture, will be applied in the following order, at the date or dates fixed by the Trustee and, in the case of distribution of such moneys on account of principal upon presentation of the Bonds, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid:

First: To the payment of costs and expenses of collection and reasonable compensation to the Trustee for its own services and for the services of counsel, agents and employees by it properly engaged and employed, and all other expenses and liabilities incurred, and for advances, together with interest on such advances at a rate per annum equal to the Bond yield plus two percent, made pursuant to the provisions of the Indenture.

Second: In case the principal of any of the Bonds will have become due by declaration or otherwise and remains unpaid, first to the payment of interest in default, and then to the payment of the principal of all Bonds then due and unpaid, in every instance such payment to be made ratably to the persons entitled thereto without discrimination or preference.

Whenever moneys are to be applied pursuant to the provisions of the Indenture summarized under this caption “–Application of Moneys Collected by Trustee,” such moneys will be applied at such times, and from time to time, as the Trustee will determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee will apply such funds, it will fix the date (which will be the Interest Payment Date unless the Trustee will deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal and past-due interest to be paid on such date will cease to accrue.

Whenever all principal of and interest on all Bonds have been paid under the provisions of the Indenture summarized under this caption “–Application of Moneys Collected by Trustee,” and all fees, expenses and charges of the Trustee (including without limitation those of its attorneys) have been paid, any balance remaining in the funds and accounts under the Indenture will be paid to the Borrower.

Effect of Delay or Omission to Pursue Remedy. No delay or omission of the Trustee or of any Holder of Bonds to exercise any right or power arising from any default will impair any such right or

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power or will be construed to be a waiver of any such default or acquiescence therein, and every power and remedy given by provisions of the Indenture governing Events of Default and remedies on default to the Trustee or to the Holders of Bonds may be exercised from time to time, and as often as will be deemed expedient. In case the Trustee will have proceeded to enforce any right under the Indenture, and such proceedings will have been discontinued or abandoned because of waiver or for any other reason, or will have been determined adversely to the Trustee, then and in every such case the Authority and the Trustee, and the Holders of the Bonds, severally and respectively, will be restored to their former positions and rights under the Indenture in respect to the trust estate; and all remedies, rights and powers of the Authority, the Trustee and the Holders of the Bonds will continue as though no such proceedings had been taken.

Remedies Cumulative. No remedy in the Indenture conferred upon or reserved to the Trustee or to any Holder of the Bonds is intended to be exclusive of any other remedy, but each and every such remedy will be cumulative and will be in addition to every other remedy given under the Indenture or now or hereafter existing at law or in equity.

Covenant to Pay Bonds in Event of Default. The Authority covenants that, upon the happening of any Event of Default, the Authority will pay, but only out of Payments, to the Trustee, upon demand, for the benefit of the Holders of the Bonds, the whole amount then due and payable thereon (by declaration or otherwise) for interest and principal as the case may be, and all other sums which may be due under the Indenture or secured by the Indenture, including reasonable compensation to the Trustee and its agents and counsel and any expenses or liabilities incurred by the Trustee under the Indenture and, its agents and counsel. In case the Authority will fail to pay the same forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, will be entitled to institute proceedings at law or in equity in any court of competent jurisdiction to recover judgment for the whole amount due and unpaid, together with costs and reasonable attorneys’ fees, subject, however, to the condition that such judgment, if any, will be limited to, and payable solely out of, Payments as provided in the Indenture and not otherwise. The Trustee will be entitled to recover such judgment as aforesaid, either before or after or during the pendency of any proceedings for the enforcement of the Indenture, and the right of the Trustee to recover such judgment will not be affected by the exercise of any other right, power or remedy for the enforcement of the provisions of the Indenture.

Trustee Appointed Agent for Bondholders. The Trustee is appointed by the Indenture the agent and attorney-in-fact of the Holders of all Bonds Outstanding under the Indenture for the purpose of filing any claims relating to the Bonds.

Power of Trustee to Control Proceedings. Subject to the immediately following paragraph, in the event that the Trustee, upon the happening of an Event of Default, will have taken some action, by judicial proceedings or otherwise, pursuant to its duties under the Indenture, whether upon its own discretion or upon the request of the Holders of a majority in aggregate principal amount of the Bonds then Outstanding, it will have full power, in the exercise of its discretion for the best interests of the Holders of the Bonds, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee will not, unless there no longer continues an Event of Default under the Indenture, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with it a written request signed by the Holders of at least a majority in aggregate principal amount of the Bonds Outstanding under the Indenture opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation.

Limitation on Bondholders’ Right to Sue. Notwithstanding any other provision of the Indenture, no Holder of any Bond issued under the Indenture will have the right to institute any suit, action or

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proceeding at law or in equity, for any remedy under or upon the Indenture, unless (a) such Holder will have previously given to the Trustee written notice of the occurrence of an Event of Default under the Indenture; (b) the Holders of at least a majority in aggregate principal amount of all the Bonds then Outstanding will have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name; (c) said Holders will have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee will have refused or omitted to comply with such request for a period of sixty (60) days after such written request will have been received by, and said tender of indemnity will have been made to, the Trustee. Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Indenture; it being understood and intended that no one or more Holders of Bonds will have any right in any manner whatever by his or their action to enforce any right under the Indenture, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any provision of the Indenture will be instituted, had and maintained in the manner provided in the Indenture and for the equal benefit of all Holders of the Outstanding Bonds. The right of any Holder of any Bond to receive payment of the principal of and interest on such Bond out of Payments and the funds pledged in the Indenture, as provided in the Indenture, on and after the respective due dates expressed in such Bond, or to institute suit for the enforcement of any such payment on or after such respective dates, will not be impaired or affected without the consent of such Holder, notwithstanding the foregoing provisions of this paragraph or the immediately preceding paragraph or any other provision of the Indenture.

The Trustee

Duties, Immunities and Liabilities of Trustee.

(a) The Trustee will, prior to an Event of Default, and after the curing of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth in the Indenture. The Trustee will, during the existence of any Event of Default which has not been cured, exercise such of the rights and powers vested in it by the Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

(b) The Authority may remove the Trustee at any time unless an Event of Default will have occurred and then be continuing, and will remove the Trustee if at any time requested to do so by the Borrower (unless an Event of Default shall have occurred and then be continuing) or at any time by an instrument or concurrent instruments in writing signed by the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing) or if at any time the Trustee will cease to be eligible in accordance with paragraph (e) below, or will become incapable of acting, or will be adjudged a bankrupt or insolvent, or a receiver of the Trustee or its property will be appointed, or any public officer will take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee, and thereupon will appoint, with the written consent of the Borrower (unless an Event of Default has occurred and is continuing, at which time consent of the Borrower shall not be required) and Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing), a successor Trustee by an instrument in writing.

(c) The Trustee may at any time resign by giving written notice of such resignation to the Authority, and by giving the Bondholders notice of such resignation by mail at the addresses shown on the Bond registration books maintained by the Trustee. Upon receiving such notice of resignation, the Authority will appoint, with the written consent of the Borrower (unless an Event of Default has occurred

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and ins continuing, at which time consent of the Borrower shall not be required) and Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding (or their attorneys duly authorized in writing) a successor Trustee by an instrument in writing.

(d) Any removal or resignation of the Trustee and appointment of a successor Trustee will become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee will have been appointed and have accepted appointment within forty-five (45) days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Indenture will signify its acceptance of such appointment by executing and delivering to the Authority and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, will become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee in the Indenture; but, nevertheless at the Request of the Authority or the request of the successor Trustee, such predecessor Trustee will execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and conveying to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and will pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions set forth in the Indenture. Upon request of the successor Trustee, the Authority will execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this subsection, the Authority shall mail a notice of the succession of such Trustee to the trusts under the Indenture to the Bondholders at the addresses shown on the Bond registration books maintained by the Trustee. If the Authority fails to mail such notice within thirty (30) days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Authority.

(e) Any Trustee appointed under the provisions of the Indenture will be a trust, national banking association, or banking institution having trust powers, doing business and having a principal corporate trust office in California or, if it will not have a principal corporate trust office in California, having the power under California law to perform all the duties of the Trustee under the Indenture as evidenced by an opinion of its counsel, having, or if it is a member of a bank holding company system its parent will have, a combined capital (exclusive of borrowed capital) and surplus of at least $50,000,000 and subject to supervision or examination by State or federal authorities. In case at any time the Trustee will cease to be eligible in accordance with the provisions of this paragraph, the Trustee will resign immediately in the manner and with the effect specified in the Indenture.

(f) Notwithstanding anything contained in the Indenture or in the Deeds of Trust to the contrary, upon the occurrence and continuance of an Event of Default, before taking any foreclosure action or any action which may subject the Trustee to liability under any Environmental Law, the Trustee may require that a satisfactory indemnity bond, indemnity or environmental impairment insurance be furnished for the payment or reimbursement of all expenses to which it may be put and to protect it against all liability resulting from any claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability) and expenses which may result from such foreclosure or other action. The term “Environmental Laws” shall mean all federal, state and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances and codes relating to the protection of the environment or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Substances and the rules, regulations, policies, guidelines,

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interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto. The term “Hazardous Substances” shall mean any chemical, substance or material classified or designated as hazardous, toxic or radioactive, or other similar term, and now or hereafter regulated under any Environmental Law, including without limitation, asbestos, petroleum and hydrocarbon products. The Trustee shall not be required to take any foreclosure action if the approval of a government regulator shall be a condition precedent to taking such action.

Merger or Consolidation. Any company into which any successor Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it will be a party or any company to which the successor Trustee, if any, may sell or transfer all or substantially all of its corporate trust business, provided such company will be eligible under the immediately preceding paragraph (e), will be the successor to such successor Trustee without the execution or filing of any paper or any further act, anything in the Indenture to the contrary notwithstanding.

Rights of Trustee.

(a) The recitals of facts in the Indenture and in the Bonds contained will be taken as statements of the Authority, and the Trustee does not assume any responsibility for the correctness of the same, or make any representations as to the validity or sufficiency of the Indenture, the Loan Agreement or the Bonds, or incur any responsibility in respect thereof, other than in connection with the duties or obligations in the Indenture or in the Bonds assigned to or imposed upon it. The Trustee will, however, be responsible for its representations contained in its certificate of authentication on the Bonds. The Trustee will not be liable in connection with the performance of its duties under the Indenture, except for its own negligence or willful misconduct.

(b) The Trustee will not be liable for any error of judgment made in good faith by a Responsible Officer, unless it will be proved that the Trustee was negligent in ascertaining the pertinent facts.

(c) The Trustee will not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under the Indenture. The permissive right of the Trustee to do things enumerated in the Indenture will not be construed as a duty.

(d) The Trustee will be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request, order or direction of any of the Bondholders pursuant to the provisions of the Indenture unless such Bondholders will have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby.

(e) The Trustee will not be deemed to have knowledge of any Event of Default other than an Event of Default under the Indenture in connection with principal and interest payments of any Bond unless and until it will have actual knowledge thereof, or will have received written notice thereof, at its Principal Corporate Trust Office. Except as otherwise expressly provided in the Indenture, the Trustee will not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements in the Indenture or of any of the documents executed in connection with the Bonds or as to the existence of an Event of Default under the Indenture.

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(f) No provision of the Indenture will require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties under the Indenture, or in the exercise of its rights or powers. The Trustee has no obligation or liability to the Bondholders for the payment of interest or principal with respect to the Bonds.

(g) The Trustee will not be bound to ascertain or inquire as to the validity or genuineness of any collateral given to or held by it. The Trustee will not be responsible for the recording or filing of any document relating to the Indenture or of financing statements (or continuation statements in connection therewith) or of any supplemental instruments or documents of further assurance as may be required by law in order to perfect the security interests in any collateral given to or held by it.

(h) The Trustee will not be concerned with or accountable to anyone for the subsequent use or application of any moneys which will be released or withdrawn in accordance with the provisions of the Indenture.

(i) The Trustee agrees to accept and act upon instructions or directions pursuant to the Indenture sent by unsecured e-mail, facsimile transmission or other similar unsecured electronic methods, provided, however, that, the Trustee shall have received an incumbency certificate listing persons designated to give such instructions or directions and containing specimen signatures of such designated persons, which such incumbency certificate shall be amended and replaced whenever a person is to be added or deleted from the listing. If the Borrower elects to give the Trustee e-mail or facsimile instructions (or instructions by a similar electronic method) and the Trustee in its discretion elects to act upon such instructions, the Trustee’s understanding of such instructions shall be deemed controlling. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding such instructions conflict or are inconsistent with a subsequent written instruction. The Borrower agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk of interception and misuse by third parties.

(j) The Trustee shall not be liable to the parties to the Indenture or deemed in breach or default hereunder if and to the extent its performance under the Indenture is prevented by reason of force majeure. The term “force majeure” means an occurrence that is beyond the control of the Trustee and could not have been avoided by exercising due care. Force majeure shall include but not be limited to acts of God, terrorism, war, riots, strikes, fire, floods, earthquakes, epidemics or other similar occurrences.

(k) The Trustee may execute any of the trusts or powers of the Indenture and perform the duties required of it under the Indenture by or through attorneys, agents, affiliates, or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its duty under the Indenture, and the Trustee shall not be answerable for the acts or omissions of any such attorney, agent, or receiver selected by it with reasonable care.

(l) The Trustee shall have no responsibility or liability with respect to any information, statements or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of these Bonds.

(m) The Trustee shall not be required to review or inspect, and shall not be deemed to have notice of, the contents of any financial statement delivered to the Trustee, it being expressly understood that the Trustee shall only receive and hold such documents as a repository for examination and copying

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by any Holder at such Holder’s expense during business hours on Business Days with reasonable prior notice.

(n) Notwithstanding anything contained in the Indenture or in the Deeds of Trust to the contrary, upon the occurrence and continuance of an Event of Default, before taking any foreclosure action or any action which may subject the Trustee to liability under any Environmental Regulation, the Trustee may require that a satisfactory indemnity bond, indemnity or environmental impairment insurance be furnished for the payment or reimbursement of all expenses to which it may be put and to protect it against all liability resulting from any claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability) and expenses which may result from such foreclosure or other action. The Trustee shall not be required to take any foreclosure action if the approval of a government regulator shall be a condition precedent to taking such action.

(o) Whether or not therein expressly so provided, every provision of the Indenture, the Loan Agreement, the Deed of Trust, the [Guaranty Reserve Fund Agreement] or related documents relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of the Indenture described in this Section.

Right of Trustee to Rely on Documents. The Trustee will be protected in acting upon any notice, requisition, resolution, request, consent, order, certificate, report, opinion, Bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee may consult with counsel, who may be counsel of or to the Authority, with regard to legal questions, and the opinion of such counsel will be full and complete authorization and protection in respect of any action taken or suffered by it under the Indenture in good faith and in accordance therewith. The Trustee will not be bound to recognize any person as the Holder of a Bond unless and until such Bond is submitted for inspection, if required, and his title thereto is satisfactorily established, if disputed. Whenever in the administration of the trusts imposed upon it by the Indenture the Trustee will deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Indenture, such matter (unless other evidence in respect thereof be specifically prescribed in the Indenture) may be deemed to be conclusively proved and established by a Certificate of the Authority, and such Certificate will be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of the Indenture in reliance upon such Certificate, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as it may deem reasonable.

Preservation and Inspection of Documents. All documents received by the Trustee under the provisions of the Indenture will be retained in its possession and will be subject at all reasonable times to the inspection of the Authority and any Bondholder, and their agents and representatives duly authorized in writing, at reasonable hours, upon reasonable notice and under reasonable conditions.

Compensation and Indemnification of Trustee. The Authority (solely from payments received from the Borrower) shall from time to time, subject to any agreement between the Authority and the Trustee then in force, pay to the Trustee compensation for its services rendered by it in the execution of the trusts created by the Indenture and in the exercise and performance of any of the powers and duties under the Indenture of the Trustee, which compensation shall not be limited by any provision of law with respect to the compensation of a trustee of an express trust, and the Authority will reimburse the Trustee for all its advances (with interest on such advances at the maximum rate allowed by law) and expenditures, including but not limited to advances to and fees and expenses of independent accountants, counsel (including in-house counsel to the extent not duplicative of other counsel’s work) and engineers or other experts employed by it, and reasonably required, in the exercise and performance of its powers and duties under the Indenture. The Authority covenants and agrees to indemnify the Trustee (solely

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from payments received from the Borrower) against any loss, expense and liability (other than those which are due to the Trustee’s negligence or default) which it may incur arising out of or in the exercise and performance of its powers and duties under the Indenture, including the costs and expenses of defending against any claim of liability. The obligations of the Authority under this Section shall survive resignation or removal of the Trustee under the Indenture and payment of the Bonds and discharge of the Indenture.

Modification of Indenture

Modification Without Consent of Bondholders. Subject to the conditions and restrictions contained in the Indenture, the Authority and the Trustee, from time to time and at any time, may enter into an indenture or indentures supplemental to the Indenture, which indenture or indentures thereafter will form a part of the Indenture, including, without limitation, for one or more of the following purposes, provided that the Authority and the Trustee will have received an Opinion of Bond Counsel to the effect that such amendment or modification will not cause the interest on the Bonds to be included as gross income for federal income tax purposes and that such amendment or modification is permitted by the Indenture:

(a) to add to the covenants and agreements of the Authority contained in the Indenture, other covenants and agreements thereafter to be observed, or to assign or pledge additional security for the Bonds, or to surrender any right or power in the Indenture reserved to or conferred upon the Authority; provided such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds;

(b) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing, correcting or supplementing any defective provision, contained in the Indenture, or in regard to such matters or questions arising under the Indenture as the Authority may deem necessary or desirable and not inconsistent with the Indenture; provided such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds;

(c) to modify, amend or supplement the Indenture or any indenture supplemental to the Indenture in such manner as to permit the qualification of the Indenture or thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and, if they so determine, to add to the Indenture or any indenture supplemental to the Indenture such other terms, conditions and provisions as may be permitted by said Trust Indenture Act of 1939, as amended, or similar federal statute; provided such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds;

(d) in connection with an amendment of any agreement permitted by the Indenture for the purpose of conforming the terms, conditions and covenants of the Indenture to the corresponding or related provisions of such amended agreement;

(e) to modify or eliminate the book-entry registration system for the Bonds; or

(f) to comply with requirements of a Rating Agency in order to obtain or maintain a rating on any Bonds.

Any supplemental indenture authorized by the provisions summarized above may be executed by the Authority and the Trustee without the consent of the Holders of any of the Bonds at the time Outstanding, notwithstanding any of the provisions of the Indenture summarized under the caption “–Modification with Consent of Bondholders” below, but the Trustee will not be obligated to enter into any

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such supplemental indenture which affects the Trustee’s own rights, duties or immunities under the Indenture or otherwise.

The Trustee will mail an executed copy of a supplemental indenture authorized by the provisions summarized above and any document related thereto or executed in connection therewith to the Borrower and each Rating Agency then rating the Bonds promptly after execution by the Authority and the Trustee. The Authority will mail drafts of any such documents to such parties prior to execution thereof.

Modification With Consent of Bondholders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding), the Authority and the Trustee may from time to time and at any time, with an Opinion of Bond Counsel to the effect that such amendment or modification will not, in and of itself, cause the interest on the Bonds to be included as gross income for federal income tax purposes, enter into an indenture or indentures supplemental to the Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture; provided, however, that no such supplemental indenture will (1) extend the fixed maturity of any Bonds or reduce the rate of interest thereon or extend the time of payment of interest, or reduce the amount of the principal thereof or (2) reduce the aforesaid percentage of Holders of Bonds whose consent is required for the execution of such supplemental indentures or extend the time of payment or permit the creation of any lien on the Payments or the assets pledged in the Indenture prior to or on a parity with the lien of the Indenture or deprive the Holders of the Bonds of the lien created by the Indenture upon the Payments or the assets pledged in the Indenture, without the consent of the Holders of all of the Bonds then Outstanding. Upon the filing with the Trustee of evidence of the consent of Bondholders, as aforesaid, the Trustee will join with the Authority in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under the Indenture or otherwise, in which case the Trustee may in its discretion, but will not be obligated to, enter into such supplemental indenture.

It will not be necessary for the consent of the Bondholders under the provisions summarized under this caption “–Modification with Consent of Bondholders” to approve the particular form of any proposed supplemental indenture, but it will be sufficient if such consent will approve the substance thereof.

Promptly after the execution by the Authority and the Trustee of any supplemental indenture pursuant to the provisions summarized under this caption “–Modification with Consent of Bondholders,” the Authority, will mail a notice to the Trustee setting forth in general terms the substance of such supplemental indenture, and the Trustee, upon receipt of such notice, shall mail such notice to the Borrower and the Bondholders at the addresses shown on the Bond registration books maintained by the Trustee. Any failure of the Authority or the Trustee to give such notice, or any defect therein, will not, however, in any way impair or affect the validity of any such supplemental indenture.

The Trustee will mail an executed copy of such supplemental indenture and any amendment of the Loan Agreement permitted under the Indenture to the Borrower, each Rating Agency then rating the Bonds promptly after execution by the Authority, the Trustee, and in the case of the Loan Agreement, the Borrower. The Authority will mail drafts of any such documents to such parties prior to execution thereof.

Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions of the Indenture will be, and will be deemed to be, modified and amended in accordance therewith, and the respective rights, duties and obligations under the Indenture of the Authority, the Trustee and all Holders of Outstanding Bonds will thereafter be determined, exercised and enforced under the Indenture subject in all respects to such modifications and amendments, and all the terms and

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conditions of any such supplemental indenture will be part of the terms and conditions of the Indenture for any and all purposes.

Opinion of Counsel as to Supplemental Indenture. Subject to the provisions of the Indenture summarized above under “ The Trustee–Right of Trustee to Rely on Documents” and the requirement described above under the captions “ –Modification without Consent of Bondholders” and “–Modification with Consent of Bondholders,” for an Opinion of Bond Counsel, the Trustee may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to the Indenture complies with the requirements of the Indenture and will have no liability to Holders in excluding any supplemental indenture in reliance on an Opinion of Bond Counsel.

Notation of Modification on Bonds; Preparation of New Bonds. Bonds authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of the Indenture may bear a notation, in form approved by the Authority, as to any matter provided for in such supplemental indenture, and if such supplemental indenture will so provide, new Bonds, so modified as to conform, in the opinion of the Authority, to any modification of the Indenture contained in any such supplemental indenture, may be prepared by the Authority, authenticated by the Trustee and delivered without cost to the Holders of the Bonds then Outstanding, upon surrender for cancellation of such Bonds, in equal aggregate principal amounts.

Miscellaneous

Evidence of Rights of Bondholders. Any request, consent or other instrument required or permitted by the Indenture to be signed and executed by Bondholders may be in any number of concurrent instruments of substantially similar tenor and will be signed or executed by such Bondholders in person or by an agent or agents duly appointed in writing. Proof of the execution of any such request, consent or other instrument or of a writing appointing any such agent, or of the holding by any person of Bonds transferable by delivery, will be sufficient for any purpose of the Indenture and will be conclusive in favor of the Trustee and of the Authority if made in the manner provided in this paragraph. The fact and date of the execution by any person of any such request, consent or other instrument or writing may be proved by the certificate of any notary public or other officer of any jurisdiction, authorized by the laws thereof to take acknowledgments of deeds, certifying that the person signing such request, consent or other instrument acknowledged the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The ownership of Bonds will be proved by the bond registration books held by the Trustee. Any request, consent, or other instrument or writing of the Holder of any Bond will bind every future Holder of the same Bond and the Holder of every Bond issued in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Authority in accordance therewith or reliance thereon.

Disqualified Bonds. In determining whether the Holders of the requisite aggregate principal amount of Bonds have concurred in any demand, request, direction, consent or waiver under the Indenture, Bonds which are owned or held by or for the account of the Authority or the Borrower or by any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the Borrower will be disregarded and deemed not to be Outstanding for the purpose of any such determination. Bonds so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this paragraph if the pledgee will establish to the satisfaction of the Trustee the pledgee’s right to vote such Bonds and that the pledgee is not a person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Authority or the Borrower. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel will be full protection to the Trustee. Upon request of the Trustee, the Authority and the

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Borrower will specify in a certificate to the Trustee those Bonds disqualified and the Trustee may conclusively rely on such certificate.

Funds and Accounts. Any fund required by the Indenture to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee, either as a fund or an account, and may, for the purposes of such records, any audits thereof and any reports or statements with respect thereto, be treated either as a fund or as an account; but all such records with respect to all such funds will at all times be maintained in accordance with customary standards of the corporate trust industry, to the extent practicable, and with due regard for the requirements of the Indenture (and the Tax Certificate) and for the protection of the security of the Bonds and the rights of every Holder thereof.

Waiver of Personal Liability. No member, officer, agent or employee of the Program Participant or the Authority will be individually or personally liable for the payment of the principal (or redemption price) of or interest on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof; but nothing in the Indenture contained will relieve any such member, officer, agent or employee from the performance of any official duty provided by law or by the Indenture.

Governing Law; Venue. The Indenture will be construed in accordance with and governed by the Constitution and the laws of the State applicable to contracts made and performed in the State. The Indenture will be enforceable in the State, and any action arising out of the Indenture will be filed and maintained in Sacramento County Superior Court, Sacramento County, California unless the Authority waives this requirement.

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The Loan Agreement

The Loan Agreement provides for, among other things, the loan of the Bond proceeds by the Authority to the Borrower, certain covenants of the Borrower relating to the loan and of the Project, including repayment of the loan, and defines events of default and remedies therefor.

Certain provisions of the Loan Agreement are set forth in this Limited Offering Memorandum. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS” and “CERTAIN FINANCIAL COVENANTS OF THE BORROWER.” Certain provisions of the Loan Agreement are summarized below. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Loan Agreement.

Loan Financing; Loan Repayments; Indemnification

Agreement to Issue Bonds and Application of Bond Proceeds. In order to fund the Loan and for the other purposes set forth in the Indenture, the Authority, concurrently with the execution of the Loan Agreement, will issue, sell and deliver the Bonds and direct the proceeds thereof to be deposited with the Trustee and applied as provided in the Indenture. The Authority and the Borrower agree that the proceeds of the Bonds will be applied solely in accordance with the Indenture.

The Borrower approves the terms of the Indenture and, to the extent applicable, agrees to be bound by such terms.

The Loan; Loan Repayments; Intercept; Additional Payments.

(a) The Loan. The Authority agrees, upon the terms and conditions specified in the Loan Agreement, to loan to the Borrower that portion of the proceeds received by the Authority from the sale of the Bonds by causing such proceeds to be deposited with the Trustee for disposition as provided in the Indenture. The obligation of the Authority to make the Loan is limited solely to such sale of proceeds of the Bonds received by the Authority and will be deemed fully discharged upon the deposit of the proceeds of the Bonds with the Trustee pursuant to the Loan Agreement.

(b) Loan Repayments. The Borrower shall pay, or cause to be paid, from the Gross Revenues to the Authority as repayment of the Loan the following amounts (which collectively constitute the “Loan Repayments”):

(i) an amount equal to the aggregate amount of interest payable by the Authority on the then Outstanding Bonds;

(ii) on or before the maturity of the Bonds, an amount equal to the principal amount with respect to the Bonds; and

(iii) on or before any redemption date, such amounts as will, together with any other money available therefor, be sufficient to pay all amounts, if any, required to redeem the Bonds pursuant to the provisions of the Indenture, including any related redemption premium;

The Loan Repayments and all other amounts provided under this caption “–The Loan; Loan Repayments; Additional Payments,” will be payable in such lawful money of the United States of America as at the time of payment will be legal tender for the payment of public and private debts. All deposits under the Loan Agreement will be made at the corporate trust office of the Trustee, or at such other location as will be designated in writing by the Trustee to Sole Member and the Borrower.

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The obligations to pay Loan Repayments and all other amounts provided under this heading are joint and several liabilities of the Borrower.

The Borrower will pay, or cause to be paid, the Loan Repayments from the Gross Revenues of the Borrower, including Rental Payments, or from any other legally available funds of the Borrower, without any further notice thereof except as may be specifically required by the provisions under this caption “–The Loan; Loan Repayments; Additional Payments.” The Loan Repayments payable by the Borrower under the Loan Agreement are expected to be equal in the aggregate to an amount which, together with other funds in the Revenue Fund then available for the payment of principal and interest on the Bonds, will be sufficient to provide for the payment in full of the interest on, premium, if any, and principal of the Bonds as the same become due and payable.

(c) Intercept. Simultaneously with the execution and delivery of the Bonds, the Borrower shall cause each School to deliver an Intercept Notice to the State Controller.

Not later than the twentieth (20th) calendar day of any month in which payment is scheduled, the Borrower will revise the Intercept Notice and cause such revision to be delivered such to the State Controller from time to time as necessary or appropriate (including without limitation as a result of redemption prior to maturity) to specify transfers to the Trustee necessary to pay the amounts due under the Loan Agreement and other costs necessary or incidental to the financing pursuant to the Act relating to the Bonds, as the same become due, and to cure any delinquency in payment of such amounts. The Borrower will, and shall cause the Schools to, cooperate with the Trustee in any manner the Trustee may request in connection with revising the Intercept Notice. If at any time the Intercept Notice is revised for any reason, the Borrower shall cause the Schools to promptly provide to the Authority, the Department of Education and the Trustee with a copy of such revised Intercept Notice. The Intercept Notice may provide additional amounts payable to the Trustee for purposes set forth in the Indenture; provided the Schools shall not grant preference or any prior right of funding access or security in respect of any payment indicated in the Intercept Notice or any other notice delivered pursuant to Section 17199.4 of the Education Code or any successor provision.

All deposits of moneys derived from the Intercept under the Loan Agreement shall be made at the corporate trust office of the Trustee set forth in the Intercept Notice. The Borrower shall cause the Schools to timely revise the Intercept Notice to require transfers to such other location as shall be designated in writing by the Trustee.

(d) Additional Payments. In addition to the Loan Repayments, the Borrower will also pay certain Trustee fees, Authority expenses, costs of issuance and other miscellaneous amounts to the Authority or to the Trustee, as the case may be.

Failure to Make Payments. In the event the Borrower will fail to deposit, or fail to cause to be deposited, with the Trustee any Loan Repayments or Additional Payments as required by the provisions under this caption “–The Loan; Loan Repayments; Additional Payments,” the Loan Repayments, Additional Payments or other payments required under the Loan Agreement not paid from Gross Revenues will continue as an obligation under the Loan Agreement of the Borrower until the amount in default will have been fully paid.

Obligations of Borrower Unconditional. The Borrower will pay to or upon the order of the Authority, at or before the time when payable by the Authority, all costs and liabilities incurred by the Authority, including without limitation fees and expenses of counsel to the Authority, in connection with the issuance of the Bonds and the making of the Loan to the Borrower in the Loan Agreement, or otherwise as a result of the transactions contemplated by the Borrower Documents or the Indenture.

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The obligations of the Borrower to make the payments as required in the Loan Agreement, and to perform and observe any and all of the other covenants and agreements on its part contained in the Loan Agreement, will be absolute and unconditional irrespective of any defense or any rights of setoff, recoupment, or counterclaim which the Borrower may otherwise have against the Authority. The Borrower will not: (1) suspend, discontinue, or abate any payment required by the provisions under the caption “–The Loan; Loan Repayments; Additional Payments” (except as expressly provided in the Loan Agreement); (2) fail to observe any of its other covenants or agreements in the Loan Agreement; or (3) terminate the Loan Agreement for any cause whatsoever (except as expressly provided with prepayment of the loan under the Loan Agreement), including without limiting the generality of the foregoing, any declaration or finding that the Bonds, the Indenture, or any portion of the Loan Agreement are invalid or unenforceable, and, any failure of the Authority to perform and observe any agreement, whether expressed or implied, or any duty, liability, or obligation, arising out of or in connection with the Loan Agreement or otherwise.

Notwithstanding anything in the Loan Agreement to the contrary, the liability of the Borrower under the Loan Agreement to any person or entity, including, but not limited to, the Trustee or the Authority and their respective successors and assigns, is limited to the Gross Revenues and the amounts held in the funds and accounts created under the Indenture or under the Loan Agreement, and such persons and entities will look exclusively thereto, or to such other security as may from time to time be given for the payment of obligations arising out of the Loan Agreement or any other agreement securing the obligations of the Borrower with respect to the Loan or the Bonds.

Deeds of Trust; Assignment of Leases; Assignment of Authority’s Rights. To secure the payment of Loan Repayments and Additional Payments, the performance by the Borrower of its other obligations under the Loan Agreement, the Borrower has entered into a Deed of Trust, which Deeds of Trust the Borrower agrees will be recorded on or prior to the Closing Date. The Borrower agrees, as long as any of the Loan Repayments or Additional Payments remain unpaid, to supplement the Deed of Trust or to execute and deliver such other deeds of trust in substantially the form of the Deed of Trust as may be necessary from time to time to grant the Trustee a first priority Lien on each Facility owned by the Borrower in fee, subject to Permitted Liens. The Borrower will obtain, at its own cost and expense, an ALTA policy of title insurance, or an endorsement to such policy at the time of and dated as of the date of acquisition of the real property underlying the Project with a portion of the proceeds of the Bonds, in an aggregate amount not less than the aggregate principal amount of the Bonds, payable to the Trustee, insuring the title of the Borrower to the Facilities owned by such Borrower in fee, subject only to Permitted Liens, issued by a title insurance company qualified to do business in the State. The Borrower will execute and cause to be filed Uniform Commercial Code financing statements, and will execute and deliver such other documents (including, but not limited to, continuation statements) as may be necessary or reasonably requested by the Authority or the Trustee in order to perfect or maintain as perfected such security interest or give public notice thereof.

Property will be released from the Deed of Trust if all outstanding Bonds related to such Property are redeemed pursuant to the Indenture.

As security for the payment of the Bonds, the Authority in the Indenture assigns to the Trustee certain of the Authority’s rights under the Loan Agreement, including the right to receive payments under the Loan Agreement, but excluding any deposits to the Rebate Fund; and the Borrower assents to such assignment and agree to make payments from Gross Revenues or other funds of the Borrower directly to the Trustee, without defense or set-off by reason of any dispute between the Borrower and the Authority or the Trustee. By virtue of such assignment and certain obligations of the Borrower to the Trustee, the Trustee will be a third-party beneficiary of the Loan Agreement and will have the right to enforce the obligations of the Borrower under the Loan Agreement, subject to the limitations thereof.

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Maintenance, Taxes, Insurance and Condemnation, Change in Use

Maintenance and Operation of the Facilities. The Borrower will operate and maintain the Facilities in accordance in all material respects with all governmental laws, ordinances, approvals, rules, regulations and requirements including, without limitation, such zoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder as may be binding upon the Borrower. The Borrower will maintain and operate the Facilities and all engines, boilers, pumps, machinery, apparatus, fixtures, fittings and equipment of any kind in or that will be placed in any building or structure now or hereafter at any time constituting part of the Facilities which are material to the operation of the Facilities in good repair, working order and condition, and will from time to time make or cause to be made all needful and proper replacements, repairs, renewals and improvements so that the efficiency and value of the Facilities will not be materially adversely impaired.

Taxes, Assessments, Other Governmental Charges and Utility Charges. The Borrower will pay and discharge all taxes, assessments, governmental charges of any kind whatsoever, water rates, meter charges and other utility charges which may be or have been assessed or which may have become liens upon the Facilities or the interest therein of the Authority, the Trustee or the Holders of the Bonds, and will make such payments or cause such payments to be made, respectively, in due time to prevent any delinquency thereon or any forfeiture or sale of the Facilities or any part thereof, and, upon request, will furnish to the Authority or Trustee receipts for all such payments, or other evidences satisfactory to the Authority and the Trustee; provided, however, that the Borrower will not be required to pay any tax, assessment, rate or charge as provided in the Loan Agreement as long as they will in good faith contest the validity thereof, provided that the Borrower will have set aside reserves with respect thereto that, in the commercially reasonable opinion of the governing body of the Borrower, are adequate.

Insurance Required.

(a) The Borrower covenants and agrees that it will keep (or cause to be kept) insurance (including builder’s all-risk insurance) against loss or damage to any structure constituting any part of the Facilities by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Said extended coverage insurance will, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. All insurance provided pursuant to this paragraph will be in an amount equal to the lesser of (i) one hundred percent (100%) of the replacement cost (without deduction for depreciation) of all buildings, structures and fixtures constituting any part of the Facilities, or (ii) the principal amount of the Bonds then Outstanding, and will be subject to a deductible not to exceed $100,000.

(b) The Borrower covenants and agrees to procure and maintain, throughout the term of the Loan Agreement, business interruption insurance to cover loss, total or partial, of the use of any structures constituting any part of the Facilities as the result of any of the hazards covered by the insurance required by paragraph (a) above, in an amount sufficient to pay the maximum Loan Repayments under the Loan Agreement for a period of at least twelve (12) months. Proceeds of such insurance in the amount of at least twelve (12) months of maximum Loan Repayments under the Loan Agreement will be applied to Loan Repayments, in installments as the proceeds are paid to the Borrower.

(c) Subject to the provisions of the Loan Agreement relating to Workers’ Disability Compensation Act, the Borrower covenants and agrees to procure and maintain at all times such other insurance on the Facilities and all operations thereon (including, without limitation, liability insurance) in amounts which are customarily carried and against such risks as are customarily insured against by other corporations in connection with the ownership and operation of facilities of similar character and size to the Facilities.

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(d) An Independent Consultant shall review the insurance requirements of the Borrower with respect to the Facilities from time to time (but not less frequently than once every five years) commencing July 1, 2018. If such review indicates that the Borrower should increase any of the coverages required the Loan Agreement, the Borrower shall review such recommendation with the governing body of the Borrower and shall increase such coverage; provided, however, that such coverage is available from reputable insurance companies at a reasonable cost on the open market.

(f) The Borrower covenants that it will use its best efforts to apply for any grants, loans or other relief available from the State or federal government to obtain amounts necessary to rebuild any portion of the Facilities destroyed or damaged in connection with an uninsured or underinsured calamity causing destruction or damage; provided, however, that the Borrower will not be required to accept such amounts if doing so would jeopardize the integrity of the Borrower’s programs.

Workers’ Disability Compensation Act. The Borrower will at all times comply with the Workers’ Disability Compensation Act of the State, or any successor statute or statutes.

Insurers; Policy Forms and Loss Payees. The insurance policies required by the Loan Agreement will be carried by insurance companies which are financially responsible and capable of fulfilling the requirements of such policies. All such policies (except liability policies) will name the Borrower and the Trustee and the Authority as insured parties, beneficiaries or loss payees as their interest may appear. Each policy will be in such form and contain such provisions as are generally considered standard for the type of insurance involved and will contain a provision to the effect that the insurer will not cancel or substantially modify the policy provisions without first giving at least thirty (30) days written notice thereof to the Borrower and the Trustee. In lieu of separate policies, the Borrower may maintain blanket policies which cover any one or more risks required to be insured against so long as the minimum coverages required in the Loan Agreement are met.

Disposition of Insurance and Condemnation Proceeds.

(a) All proceeds of the insurance carried pursuant to paragraph (a) under “–Insurance Required” above (except proceeds of the liability portion, if any, of such insurance), and proceeds of any condemnation awards with respect to any individual Facility will be paid immediately upon receipt by the Borrower or other named insured parties to the Trustee for deposit in a special fund which the Trustee will establish and maintain and hold in trust pursuant to the Indenture, to be known as the “Insurance and Condemnation Proceeds Fund.” In the event the Borrower elects to repair or replace the portion or portions of the Facilities damaged, destroyed or taken, moneys in the Insurance and Condemnation Proceeds Fund will be disbursed by the Trustee, after deducting therefrom the reasonable charges and expenses of the Trustee in connection with the collection and disbursement of such moneys, for the purpose of repairing or replacing the Facilities damaged, destroyed or taken in the manner and subject to the conditions set forth in the Indenture with respect to disbursements from the Insurance and Condemnation Proceeds Fund.

(b) If the Borrower will elect not to, or cannot, repair or replace the portion or portions of the Facilities damaged, destroyed or taken, as provided in paragraph (a) above, subject to paragraph (c) below, the Trustee will transfer all amounts in the Insurance and Condemnation Proceeds Fund on account of such damage, destruction or condemnation to the Special Redemption Account established in the Indenture.

(c) If all amounts in the Insurance and Condemnation Proceeds Fund are not sufficient to retire all Bonds then Outstanding, the Trustee will not transfer said amounts to the Special Redemption Account unless the Borrower will file with the Trustee a report of an Independent Consultant showing

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that net operating income of the School or Schools in such Facility is projected to be at least equal to amounts due under the applicable Lease for each of the three full Fiscal Years immediately following such transfer after giving effect to the retirement of such Bonds. In the event such report of an Independent Consultant shows that projected net operating income of the School or Schools in such Facility will not be sufficient to pay amounts due under the applicable Lease for each of the three full Fiscal Years immediately following such transfer after giving effect to the retirement of such Bonds, the Borrower will apply all amounts in the Insurance and Condemnation Proceeds Fund to the repair or replacement of the portion or portions of the Facilities damaged, destroyed or taken, as provided in paragraph (a) above.

Additional Covenants and Agreements of Borrower

Tax Covenants.

(a) It is the intention of the Borrower that interest on the Bonds will be and remain excluded from the gross income of the owners thereof for federal income tax purposes, and to that end the covenants and agreements of the Borrower summarized in this caption “–Tax Covenants” and in the Tax Certificate are for the benefit of the Trustee on behalf of and for each and every owner of the Bonds.

(b) The Borrower covenants and agrees that it will not use or permit the use of any of the funds provided by the Authority under the Loan Agreement or any other funds of the Borrower, directly or indirectly, or direct the Trustee to invest any funds held by it under the Loan Agreement or under the Indenture, in such manner as would, or enter into, or allow any “related person” (as defined in Section 147(a)(2) of the Code) to enter into, any arrangement, formal or informal, for the purchase of the Bonds that would, or take or omit to take any other action that would cause any Bond to be an “arbitrage bond” within the meaning of Section 148 of the Code or “federally guaranteed” within the meaning of Section 149(b) of the Code and applicable regulations promulgated from time to time thereunder.

(c) In the event that at any time the Borrower is of the opinion or becomes otherwise aware, including from any School, that for purposes of the provisions the Loan Agreement and the Indenture regarding tax covenants, it is necessary to restrict or to limit the yield on the investment of any moneys held by the Trustee under the Indenture, the Borrower will determine the limitations and so instruct the Trustee in writing and cause the Trustee to comply with those limitations under the Indenture. The Borrower will take such action or actions as may be reasonably necessary in the opinion of Bond Counsel, or of which it otherwise becomes aware, to comply fully with Section 148 of the Code.

(d) The Borrower will not, pursuant to an arrangement, formal or informal, purchase Bonds in an amount related to the amount of the Loan, except as otherwise permitted under the Indenture.

(e) In order to maintain the exclusion of interest on the Bonds from the gross income of the owners thereof for federal income purposes and to assure compliance with the laws of the State, the Borrower agrees that it shall, concurrently with or before the execution and delivery of the Bonds, execute and deliver the Tax Certificate, and shall comply with every term of the Tax Certificate. The Borrower covenants with the Authority, for the benefit of the Owners of the Bonds from time to time outstanding, that so long as any Bonds remain outstanding, moneys on deposit in any fund, or account in connection with the Bonds, whether or not such moneys were derived from the proceeds of the sale of the Bonds or from any other sources, and moneys pledged directly or indirectly to the payment or for the securing of the Bonds, will not be used by or for the Borrower in a manner that will cause the Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code. The Borrower expressly recognizes that, to the extent required by Section 148 of the Code, “proceeds” of the Bonds (including investment proceeds and “replacement” proceeds) may be required to be invested at a yield not exceeding the yield on the Bonds in

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order to comply with this Section. In furtherance of the covenant in this Section, the Borrower agrees that it will not direct any investments or reinvestments that would contravene either the investment representations made by the Authority in the Tax Certificate or any investment directions provided by the Authority and deemed reasonably necessary in the opinion of Bond Counsel to preserve the exclusion from gross income of interest on the Bonds for federal income tax purposes.

In the event of any conflict between the terms of the Loan Agreement and the requirements of the Tax Certificate, the Tax Certificate will control.

Continuing Disclosure. The Borrower covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Loan Agreement or the Indenture, failure of the Borrower or the Dissemination Agent (as defined in the Continuing Disclosure Agreement) to comply with the Continuing Disclosure Agreement will not be considered an Event of Default under the Loan Agreement or under the Indenture.

Financial Covenants. The Borrower covenants:

(a) To maintain books and records separate from any other person or entity;

(b) To maintain its accounts separate from any other person or entity;

(c) Not to commingle assets with those of any other entity;

(d) To conduct its own business in its own name;

(e) To maintain separate financial statements;

(f) To pay its own liabilities out of its own funds;

(g) To observe all corporate formalities;

(h) To maintain an arm’s-length relationship with its affiliates;

(i) To pay the salaries of its own employees and maintain a sufficient number of employees in light of its contemplated business operations;

(j) Not to guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others;

(k) Not to acquire obligations or securities of its partners, members, or shareholders;

(l) To allocate fairly and reasonably any overhead for shared office space;

(m) To use separate stationery, invoices, and checks;

(n) Not to pledge its assets for the benefit of any other entity or make any loans or advances to any entity;

(o) To hold itself out as a separate entity;

(p) To correct any known misunderstanding regarding its separate identity; and

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(q) To maintain adequate capital in light of its contemplated business operations.

Employee Benefit Plan Covenant. The Borrower shall continue to make all required contributions to all employee benefit plans, if any, and the Borrower has no knowledge of any material liability which has been incurred by itself and remains unsatisfied for any taxes or penalties with respect to any employee benefit plan or any multi-employer plan, and each such plan has been administered in compliance with its terms and the applicable provisions of ERISA and any other federal or state law.

Prohibited Uses. No portion of the proceeds of the Bonds will be used to finance or refinance any facility, place or building to be used (1) primarily for sectarian instruction or study or as a place for devotional activities or religious worship or (2) by a person that is not a 501(c)(3) Organization or a Governmental Unit or by a 501(c)(3) Organization (including the Borrower) in an “unrelated trade or business” (as set forth in Section 513(a) of the Code), in such a manner or to such extent as would result in any of the Bonds being treated as an obligation not described in Section 103(a) of the Code.

Limitation on Disposition of Property, Plant and Equipment and the Project. The Borrower covenants and agrees that it will not sell or otherwise dispose, including any disposition by lease, of the Property, Plant and Equipment consisting of all or any part of the Facilities, except for disposition or transfers:

(a) Of Property, Plant and Equipment no longer necessary for the operation of the Facilities;

(b) Of Property, Plant and Equipment replaced by Property, Plant and Equipment of similar type and/or of substantially equivalent function with a substantially equivalent value; or

(c) Of Property, Plant and Equipment sold or disposed of at a price equal to their fair market value.

In addition to the foregoing limitations, the Borrower may not sell, lease or otherwise dispose (other than with respect to the public dedication in connection with the development of the Project) of any Property unless it will be established to the satisfaction of the Trustee that (i) the security of the Deed of Trust and the ability of the trustee thereunder to foreclose upon the remaining Property will not be impaired as a result of the disposition of such property, and (ii) the Borrower will have conveyed to the trustee under the Deed of Trust such rights-of-way, easements and other rights in land as are required for ingress to and egress from the remaining Property, for the utilization of the facilities located thereon and for utilities required to serve such facilities. The Borrower may not cause or permit any portion of the Facilities that are part of the Project to be used or operated in any manner except in conjunction with a school under the Charter School Law.

Maintenance of Corporate Existence. The Borrower will maintain its corporate existence under the laws of the State and its status as an organization described in Section 501(c)(3) of the Code.

Sufficiency of Rental Payments. The Borrower confirms that its Gross Revenues are expected to be in an amount sufficient (without any other borrowing) to pay all Loan Repayments.

Limited Purpose of the Borrower; Prohibition on Additional Debt. The Borrower agrees that it is organized and operated for the sole purpose of owning the Facilities owned by it and that it shall not engage in any other business activity or incur any obligations or liabilities other than those associated with the Lease or Leases executed by it.

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The Borrower shall not incur, or cause any School to incur, any additional Indebtedness secured in whole or in part by Liens on the Facilities and the Gross Revenues of the Schools, that are senior to the Deed of Trust and the security interest in the Gross Revenues.

The Borrower shall not incur, or cause any School to incur, any additional Indebtedness secured on a parity with the Bonds and in whole or in part by Liens on the Facilities or the Gross Revenues (with the exception of (i) annual lease payments not to exceed $50,000 or (ii) the securing of alternate financing that contemporaneously pays in full all obligations of the Borrower under the Loan Agreement and the Schools under the Leases); provided that the Borrower may incur additional parity Indebtedness, including the issuance of Additional Bonds pursuant to the Indenture, if the Borrower has delivered evidence to the Trustee that the Debt Service Coverage Ratio for the preceding Fiscal Year was equal to or greater than 1.2 to 1 and that the projected Debt Service Coverage Ratio for the Fiscal Year in which the additional parity Indebtedness will be incurred and for one subsequent Fiscal Year, taking into account the additional Indebtedness, will be equal to or greater than 1.2 to 1.

Indenture Provisions. The execution and delivery of the Loan Agreement will constitute conclusive evidence of approval of the Indenture by the Borrower. Whenever the Indenture by its terms imposes a duty or obligation upon the Borrower, such duty or obligation shall be binding upon the Borrower to the same extent as if the Borrower were an express party to the Indenture, and the Borrower shall carry out and perform all of its obligations under the Indenture as fully as if the Borrower were a party to the Indenture.

Defaults and Remedies

Events of Default. Any one of the following which occurs and continues will constitute an Event of Default under the Loan Agreement:

(a) failure by the Borrower to pay or cause to be paid the Loan Repayments when due, or

(b) failure by the Borrower to pay or cause to be paid when due any other amounts required to be paid under the Loan Agreement and continuation of such failure to pay for ten (10) Business Days following the giving of written notice thereof to the Borrower; or

(c) failure of the Borrower to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Loan Agreement (other than failure by the Borrower to pay the amounts required to be paid under the Loan Agreement, as referred to in paragraphs (a) or (b) above, and other than as provided in paragraph (d) below) after the Borrower will have been given 30 days’ written notice specifying such default and requesting it be remedied, unless the Trustee will have consented to an extension beyond such 30-day period, which extension will not exceed 90 days; provided that the Borrower will have commenced cure and be diligently pursuing cure in good faith; or

(d) voluntary initiation by the Borrower of any proceeding under any federal or state law relating to bankruptcy, insolvency, arrangement, reorganization, readjustment of debt or any other form of debtor relief, or the initiation against the Borrower of any such proceeding that will remain undismissed for 60 calendar days, or failure by the Borrower to promptly have discharged any execution, garnishment or attachment of such consequence as would impair the ability of the Borrower to carry on its operations, or assignment by the Borrower for the benefit of creditors, or the entry by the applicable Borrower into an agreement of composition with creditors or the failure generally by the Borrower to pay its debts as they become due;

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(e) occurrence and continuance of an “Event of Default” under the Indenture or any of the Borrower Documents, provided, however, that an Event of Default under the Indenture arising solely from the actions or inactions of the Authority or the Trustee will not be an Event of Default under the Loan Agreement; or

(f) any representation or warranty made in the Loan Agreement or any statement or representation made by the Borrower in any certificate, report, opinion, financial statement or other instrument furnished in connection with the Loan or any of the Borrower Documents proves to be false or misleading in any material respect when made.

Remedies.

(a) Upon the occurrence of an Event of Default described above and at any time thereafter during the continuance of such Event of Default, the Trustee may take one or more or any combination of the following remedial steps:

(i) By written notice to the Borrower, declare the unpaid indebtedness on the Bonds and all amounts then due and payable under the Loan Agreement, whether by acceleration of maturity or otherwise, to be immediately due and payable, whereupon the same will become immediately due and payable; and

(ii) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due under the Loan Agreement, or to enforce performance and observance of any obligation, agreement or covenant of the Borrower under the Loan Agreement, the Bonds or any other Borrower Document.

Any amounts collected pursuant to action taken by the Trustee under paragraph (a) will be applied in accordance with provisions of the Indenture. Notwithstanding anything in the Loan Agreement to the contrary, the indebtedness of the Borrower under the Loan Agreement may be separately and independently accelerated with or without an acceleration of the Bonds.

(b) If the Trustee will have proceeded to enforce the rights of the Authority under the Loan Agreement and such proceedings will have been discontinued or abandoned for any reason or will have been determined adversely to the Trustee or the Authority, then the Borrower, the Trustee and the Authority will be restored respectively to their several positions and rights under the Loan Agreement, and all rights, remedies and powers of the Borrower, the Authority and the Trustee will continue as though no such proceedings had taken place.

Additional Remedies. In addition to the above remedies, if an Event of Default occurs under the Loan Agreement, the Authority and the Trustee will have the right and remedy, without posting bond or other security, to have the provisions of the Loan Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to the Trustee or the Authority and that money damages will not provide an adequate remedy thereto.

Prepayment

Prepayment of the Loan.

(a) General. As further described below, the Borrower will have the right, so long as all amounts which have become due under the Loan Agreement have been paid, at any time or from time to time to prepay all or any part of its Loan Repayments and the Authority agrees that the Trustee will

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accept such prepayments when the same are tendered. Prepayments may be made by payments of cash or surrender of Bonds. All such prepayments (and the additional payment of any amount necessary to pay the applicable redemption price, if any, payable upon the redemption of Bonds) will be deposited upon receipt in the applicable account of the Redemption Fund and, at the request of and as determined by the Borrower, credited against payments due under the Loan Agreement or used for the redemption of Outstanding Bonds in the manner and subject to the terms and conditions set forth in the provisions of the Indenture regarding optional redemption and special redemption. The Borrower also will have the right to surrender Bonds acquired by it in any manner whatsoever to the Trustee for cancellation, and such Bonds, upon such surrender and cancellation, will be deemed to be paid and retired. Notwithstanding any such prepayment or surrender of Bonds, as long as any Bonds remain Outstanding or any Additional Payments required to be made under the Loan Agreement remain unpaid, the Borrower will not be relieved of its obligations under the Loan Agreement.

(b) Prepayment in Whole or in Part. The Loan may be prepaid in whole or in part at any time by delivering to the Trustee amounts sufficient to defease a like principal amount of Bonds to their optional redemption date pursuant to the provisions of the Indenture regarding optional redemption, special redemption and defeasance.

(c) Prepayment in Whole or in Part from Amounts Transferred from Insurance and Condemnation Proceeds. The Loan may be prepaid in whole or in part at any time in a principal amount corresponding to amounts transferred from the Insurance and Condemnation Proceeds Fund pursuant to the Indenture and used to redeem Bonds at the option of the Borrower pursuant to the Indenture.

(d) Prepayment in Part from Amounts Transferred from Project Fund. The Loan may be prepaid in part at any time in a principal amount corresponding to amounts transferred from the Project Fund pursuant to the Indenture and used to redeem Bonds at the option of the Borrower pursuant to the Indenture.

Redemption of Bonds Upon Prepayment. Upon prepayment of the Loan as provided in under the caption “–Prepayment of the Loan,” the Trustee will do any of the following, as applicable: (1) call all or part of the Bonds for redemption, as required by the Indenture in the respective amounts set forth in the applicable paragraph of the provisions of the Indenture regarding optional redemption and special redemption, and (2) provide for the defeasance of Bonds pursuant to the Indenture.

Amount of Prepayment. In the event of any prepayment pursuant to the provisions of the Loan Agreement summarized under the caption “–Prepayment of the Loan,” the amount of the Loan deemed to be prepaid will be equal to the principal amount of Bonds defeased or redeemed as described in the provisions of the Indenture regarding optional redemption and special redemption. In the case of prepayment of the Loan in full, the Borrower will pay to the Trustee an amount sufficient, together with other funds held by the Trustee and available for such purpose, to pay all reasonable and necessary fees and expenses (including attorneys’ fees) of the Authority, the Trustee and any paying agent accrued and to accrue through final payment of the Bonds and all other liabilities of the Borrower accrued and to accrue under the Loan Agreement and will pay to the Authority certain other Additional Payments required by the Loan Agreement. In the case of partial prepayment of the Loan, the Borrower will pay or cause to be paid to the Trustee an amount sufficient, together with other funds held by the Trustee and available for such purpose, to pay expenses of redemption of the Bonds to be redeemed upon such prepayment.

The Borrower agrees that it will not prepay the Loan or any part thereof, except in amounts sufficient to redeem Bonds in Authorized Denomination.

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Miscellaneous

Amendments; Modifications in Writing. Except as otherwise provided in the Loan Agreement or the Indenture, subsequent to the initial issuance of Bonds and prior to their payment in full, or provision for such payment having been made as provided in the Indenture, the Loan Agreement may be effectively amended, changed, modified, altered or terminated only by written instrument executed by the parties to the Loan Agreement.

Waiver of Personal Liability. No member, officer, agent or employee of the Borrower, the Sole Member or any School or of the Authority will be individually or personally liable for the payment of any principal (or redemption price) or interest on the Bonds or any other sum under the Loan Agreement or be subject to any personal liability or accountability by reason of the execution and delivery of the Loan Agreement; but nothing contained in the Loan Agreement will relieve any such member, director, officer, agent or employee from the performance of any official duty provided by law or by the Loan Agreement.

No Prevailing Party Provision. Nothing in the Loan Agreement shall be construed to provide for award of attorneys’ fees and costs to the Authority or the Borrower for the enforcement of the Loan Agreement as described in Section 1717 of the Civil Code. Nothing in the provisions of the Loan Agreement described in this paragraph affects the rights of the Trustee provided therein.

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The Deeds of Trust

Each Facility will be encumbered by a separate Deed of Trust, each of which is substantially the same. The summary of certain provisions thereof below applies to each Deed of Trust. Certain provisions of the Deeds of Trust are summarized below. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Deed of Trust.

Definitions

For purposes of the Deeds of Trust: “Trustor” means VSF School Facilities #1 LLC; “Trustee” means the Title Insurance Company named in the Deed of Trust; and “Beneficiary” means the holder or issuers from time to time of Bonds and the Authority. Other definitions particular to the Deeds of Trust are contained below.

Grant in Trust

Trustor grants and assigns to Trustee, in trust, with power of sale and right of entry and possession, all of Trustor’s right, title and interest owned in certain real property located in the County of Los Angeles, State of California (the “Site”), together with all of the Trustor’s right, title and interest, whether now owned or hereafter acquired, in or to the property and rights listed in paragraphs (a) through (h) below (for purposes of the Deeds of Trust, collectively referred to as the “Property”):

(a) All buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements located on the Site (the “Improvements”); and to the extent permitted by law, the name or names, if any, as may now or hereafter be used for each Improvement;

(b) All easements, rights-of-way, strips and gores of land, streets, ways, alleys, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, liberties, tenements, hereditaments and appurtenances of any nature whatsoever, in any way belonging, relating or pertaining to the Site or the Improvements and the reversions, remainders, and all land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the Site to the center line thereof and all the estates, rights, titles, interests, property, possession, claim and demand whatsoever, both in law and in equity, of Trustor of, in and to the Site and the Improvements and every part and parcel thereof, with the appurtenances thereto;

(c) All machinery, equipment, fixtures, inventory and articles of personal property and accessions thereof and renewals, replacements thereof and substitutions therefor, and other tangible property of every kind and nature whatsoever owned by Trustor, or in which Trustor has or shall have an interest, located upon the Site or used in connection with the operation and occupancy of the Site;

(d) All awards of payments that may be made with respect to the Property to the extent actually received by Trustor, whether from the exercise of the right of eminent domain or for any other injury to or decrease in the value of the Property;

(e) All leases and other agreements affecting the use, enjoyment or occupancy of the Property entered into (the “Leases”) and all oil and gas or other mineral royalties, bonuses and rents, revenues, security deposits, issues and profits from the Property (the “Rents”) and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the obligations secured by the Deeds of Trust;

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(f) All proceeds of and any unearned premiums on any insurance policies covering the Property for damage to the Property;

(g) The right, in the name and on behalf of Trustor, to appear in and defend any action or proceeding brought with respect to the Property and to commence any action or proceeding to protect the interest of Beneficiary in the Property; and

(h) All right, title and interest of the Trustor in all receivables and other accounts of Trustor relating to the Property and in all monies deposited or to be deposited in any funds or account maintained or deposited with Beneficiary in connection herewith.

Assignment of Rents

Trustor absolutely and irrevocably assigns to Beneficiary the Rents of the Property upon the terms and conditions set forth in the Deeds of Trust. Beneficiary is authorized to collect and receive the foregoing Rents, to give proper receipts and acquittances therefor and to apply the same to the payment of the obligations secured hereby. However, Beneficiary hereby grants Trustor a revocable license to collect and receive, and to use in accordance with the provisions of the Indenture, such Rents until after an Event of Default (as that term is defined in the Deeds of Trust) has occurred and while such Event of Default is continuing. Upon an Event of Default, the license shall be automatically revoked, and Beneficiary shall immediately be entitled to possession of all Rents of the Property as the same shall become due and payable.

Obligations Secured

Trustor makes the foregoing grant for the purpose of securing:

1. Payment to the Authority of all Loan Repayments and Additional Payments and other amounts to be paid by Trustor arising under the Loan Agreement;

2. The observance and performance by Trustor of each covenant and obligation on the part of Trustor to be observed or performed pursuant to the Loan Agreement (collectively with the Indenture, the “Financing Documents”);

3. The payment of all payments required with respect to Bonds issued or executed and delivered from time to time by the Trustor and the performance by Trustor of each covenant and obligation on part of Trustor to be observed or performed pursuant to the agreements and instruments pursuant to which such Bonds is issued or executed and delivered;

4. The observance and performance of each covenant and obligation of Trustor contained or incorporated in the Deeds of Trust by reference and payment of each fee, cost and expense by Trustor as set forth in the Deeds of Trust; and

5. Payment of such further sums and performance of such further obligations as the then record owner of the Property may undertake to pay and perform for the benefit of Beneficiary, its successors or assigns, when said borrowing or obligation is evidenced by a writing signed by such owner reciting that it or they are so secured.

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Certain Rights and Duties of the Parties

Title. Trustor warrants that it lawfully holds and possesses the real property described in the Deeds of Trust, in fee simple, free and clear of all liens, encumbrances and other exceptions, other than the Permitted Liens, and without limitation on the right to encumber except as set forth in the Loan Agreement.

Liens and Encumbrances. Except as permitted by the Financing Documents, Trustor shall pay, when due at or prior to maturity or such other period as permitted in the Loan Agreement, all obligations secured by or reducible to liens and encumbrances which shall encumber the Property. Trustor shall have the right to contest in good faith any such obligation or claim provided such contest shall be prosecuted diligently and in a manner not prejudicial to Beneficiary, and if a judgment adverse to Trustor is obtained, such judgment shall be fully paid or discharged within ten (10) days after the entry of such judgment unless such judgment is stayed.

Maintenance and Preservation of the Property. Trustor covenants: (i) to maintain or cause to be maintained the Property in good condition and repair; (ii) to pay when due all claims for work performed and for materials furnished on or to the Property to the extent required by the Financing Documents and which are not otherwise being contested by the Trustor in good faith, and to pay within the periods permitted in the Financing Documents any and all liens or encumbrances arising out of or resulting from work performed or materials supplied on or to the Property to the extent required by the Financing Documents; (iii) to comply in all material respects with and not suffer material violations of, (a) any and all laws, ordinances and regulations (“Laws”), (b) any and all covenants, conditions, restrictions and equitable servitudes (“Covenants”), and (c) all requirements of insurance companies (“Requirements”), which Laws, Covenants or Requirements affect the Property and pertain to acts committed or conditions existing thereon; (iv) not to commit or permit waste of the Property; (v) to do all other acts which from the character or use of the Property may be reasonably necessary to maintain and preserve its value; (vi) to perform all material obligations required to be performed in leases, conditional sales contracts or like agreements affecting the Property or the operation, occupation or use thereof; (vii) not to create any deed of trust or encumbrance upon the Property other than Permitted Liens; and (viii) to make no further assignment of Rents of the Property other than Permitted Liens.

Collection of Rents. Subject to the provisions of the Financing Documents, Beneficiary confers upon Trustor the authority to collect and retain Rents of the Property as they become due and payable; provided, however, that Beneficiary may revoke said authority and collect and retain the Rents of the Property assigned herein to Beneficiary upon the occurrence and continuance of an Event of Default (as that term is defined in the Deeds of Trust). Beneficiary may apply, in its sole discretion, any Rents, so collected by Beneficiary against any indebtedness secured hereby or any obligations of Trustor arising hereunder or any other obligations of Trustor to Beneficiary.

Powers of Trustee. From time to time upon the written request of Beneficiary and presentation of the Deeds of Trust for endorsement, Trustee may (i) reconvey all or any part of the Property, (ii) consent to the making of any map or plat thereof, (iii) join in granting any easement thereon, (iv) join in any declaration of covenants and restrictions, or (v) join in any extension agreement or any agreement subordinating the lien or charge hereof. Trustee shall, upon request by Trustor, consent to utility easements, subdivision maps and similar rights in the Property granted or applied for by Trustor, provided that rights granted or applied for (a) are customary in connection with the development of real property, (b) are reasonable in form and content, and (c) do not materially and adversely diminish the value of the Property.

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Reconveyance. Upon Beneficiary’s written request, and upon surrender to Trustee for cancellation of this Deed of Trust and a copy of the instruments setting forth all obligations secured hereby, Trustee shall reconvey the Property or that portion thereof then held hereunder. When the Property has been fully reconveyed, the last such reconveyance shall operate as a reassignment of all future Rents of the Property to the person legally entitled thereto, unless such reconveyance expressly provides to the contrary.

Environmental Matters.

(a) Definitions. The following definitions apply to the provisions of the Deeds of Trust concerning environmental matters:

(1) The term “Applicable Law” shall include, but shall not be limited to, each statute named or referred to in (2) below and any other local, state and federal laws, rules, regulations and ordinances, which govern, to the extent applicable to the Property: (i) the existence, cleanup or remedy of contamination on property; (ii) the protection of the environment from soil, air or water pollution, or from spilled, deposited or otherwise emplaced contamination; (iii) the emission or discharge of hazardous substances into the environment; (iv) the control of hazardous wastes; or (v) the use, generation, transport, treatment, removal or recovery of hazardous substances.

(2) The term “Hazardous Substance” shall mean (a) any oil, flammable substance, explosives, radioactive materials, hazardous wastes or substances, toxic wastes or substances or any other wastes, materials or pollutants which (i) pose a hazard to the Property or to persons on or about the Property or (ii) cause the Property to be in material violation of any Applicable Law; (b) asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls, or radon gas; (c) any chemical, material or substance defined as or included in the definition of “waste,” “hazardous substances,” “hazardous wastes,” “hazardous materials,” “extremely hazardous waste,” “restricted hazardous waste,” or “toxic substances” or words of similar import under any Applicable Law including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), 42 U.S.C. §§ 9601 et seq.; the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. §§ 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. §§ 1801 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. §§ 1251 et seq.; the California Hazardous Waste Control Law (“HWCL”), CAL. HEALTH & SAFETY CODE §§ 25100 et seq.; the Hazardous Substance Account Act (“HSAA”), CAL. HEALTH & SAFETY CODE §§ 25300 et seq.; the Underground Storage of Hazardous Substances Act, CAL. HEALTH & SAFETY CODE §§ 25280 et seq.; the Porter Cologne Water Quality Control Act (the “Porter Cologne Act”), CAL. WATER CODE §§ 13000 et seq.; the Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65); and Title 22 of the California Code of Regulations, Division 4, Chapter 30; (d) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or agency or may or could pose a hazard to the health and safety of the occupants of the Property or the owners or occupants of property adjacent to or surrounding the Property, or any other person coming upon the Property or adjacent property; and (e) any other chemical, materials or substance which may or could pose a hazard to the environment.

(b) Covenants and Representations.

(1) Except as set forth in the Limited Offering Memorandum related to the issuance of the Bonds, Trustor represents and warrants that there have not been during the period of

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Trustor’s ownership and, to the best of Trustor’s knowledge, information and belief, there have not been at any other times, any activities on the Property involving the use, generation, treatment, storage or disposal of any Hazardous Substances in material violation of Applicable Law (a) under, on or in the land included in the Property, (b) incorporated in the buildings, structures or improvements included in the Property, or (c) used in connection with any operations on or in the Property, in each case that would have a material adverse effect on the Trustor’s operations, taken as a whole.

(2) Trustor shall not allow any Hazardous Substances to be brought onto, installed, used, stored, treated or disposed or transported over the Property in material violation of Applicable Law.

(3) Trustor represents that all activities and conditions on the Property are currently in compliance with Applicable Law, except to the extent that non-compliance could not reasonably be expected to materially impair the use of the Property or materially and adversely affect the value thereof. So long as Trustor shall own the Property, Trustor covenants and agrees that all activities on the Property shall at all times comply with Applicable Law except to the extent that non-compliance could not reasonably be expected to materially impair the use of the Property or materially and adversely affect the value thereof.

(4) Trustor shall be solely responsible for and agrees to indemnify Beneficiary, the Authority and the Bond Trustee, protect and defend with counsel acceptable to Beneficiary and the Authority, and hold Beneficiary and the Authority harmless from and against any claims, actions, administrative proceedings, judgments, damages, punitive damages, penalties, fines, costs, liabilities, interest or losses, reasonable attorneys’ fees, reasonable consultant fees, and expert fees that arise from or in connection with the presence or release of any Hazardous Substance in, or from the Property, or any other violation of Applicable Law, or any breach of the foregoing representations and covenants.

Default Provisions

Definitions. As used in the Deeds of Trust, the term “Event of Default” means each of the following:

(a) Trustor fails to perform or observe any term or condition of the Deeds of Trust applicable to Trustor or to the Property, and such event or circumstance, if capable of being cured, is not cured within 60 days after written notice thereof is given by Trustee or Beneficiary to Trustor;

(b) The holder of any junior, subordinated or senior mortgage, deed of trust or other lien on the Property is granted relief in any foreclosure for the enforcement of its remedies thereunder, which relief (i) negatively affects Beneficiary’s rights hereunder and (ii) is not stayed; or

(c) If any Event of Default under the Indenture or under the Loan Agreement shall occur.

Rights and Remedies. At any time after the occurrence and during the continuance of an Event of Default, Beneficiary and Trustee shall each have the following rights and remedies:

(a) To declare all obligations secured hereby immediately due and payable;

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(b) To cure any default of Trustor and, in connection therewith, to enter upon the Property and to perform such acts and things as Beneficiary or Trustee deem necessary or desirable to inspect, investigate, assess and protect the security thereof;

(c) To commence and maintain an action in any court of competent jurisdiction to foreclose the Deed of Trust instruments as a mortgage or to obtain specific enforcement of the covenants of Trustor thereunder;

(d) Beneficiary may enter upon, possess, manage, operate, dispose of and contract to dispose of the Property; negotiate with governmental authorities with respect to the Property’s environmental compliance and remedial measures; make, terminate, enforce or modify leases of the Property upon such terms and conditions as Beneficiary deems proper; contract for goods and services, hire agents, employees and counsel, make repairs, alterations and improvements to the Property necessary to protect the security thereof; or incur the risks and obligations ordinarily incurred by owners of property;

(e) To execute a written notice of such Event of Default, and of its election to cause the Property to be sold to satisfy the obligations secured hereby, Trustee shall give and record such notice as the law then requires as a condition precedent to a Trustee’s sale. When the minimum period of time required by law after such notice has elapsed, Trustee shall sell the Property at public auction to the highest bidder for cash payable at time of sale;

(f) To resort to and realize upon the security hereunder in such order and manner as Trustee and Beneficiary may determine;

(g) To seek a judgment that Trustor has breached its covenants, representations or warranties with respect to the environmental matters set forth above, by commencing and maintaining an action in any court of competent jurisdiction for breach of contract pursuant to California Civil Procedure Code Section 736, and to seek the recovery of any and all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other reasonable out of pocket costs or expenses actually incurred by Beneficiary (collectively, the “Environmental Costs”) incurred by Beneficiary relating to the cleanup, remediation or other response action required by Applicable Law; and

(h) To waive its lien against the Property to the extent such property is found to be environmentally impaired in accordance with California Code of Civil Procedure Section 726.5 and to exercise any and all rights and remedies of an unsecured creditor against Trustor and all of Trustor’s assets and property for the recovery of any deficiency and Environmental Costs.

Security Agreement and Fixture Filing

Grant of Security Interest. As additional security for the obligations secured by the Deeds of Trust, Trustor grants to Beneficiary a security interest in and to the following items (collectively, the “Collateral”). Trustor is sometimes referred to herein as “Debtor” and Beneficiary is sometimes referred to herein as “Secured Party”.

(a) All goods, fixtures and other equipment of every kind in which Debtor owns or acquires any interest in connection with the Property;

(b) All inventory and tangible assets used or consumed in connection with the Property in which Debtor owns or acquires any interest to the extent located at the Property;

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(c) All goods and property covered by any warehouse receipts, bills of lading and other documents evidencing any goods or other tangible personal property of any kind in which Debtor has any interest in connection with the Property or Collateral;

(d) All goods and other tangible personal property of every kind, character or nature in which Debtor has any interest, located on or used in the operation, use, maintenance, development or construction of or otherwise in connection with the Property or Collateral;

(e) All general intangibles, accounts, agreements, contracts, documents and leases in which Debtor has an interest related to the Property or the use, operation or maintenance of the Property;

(f) All profits, payments or proceeds of and from any and all agreements for the sale, lease, transfer or conveyance of the Property, subject to the rights of Debtor to collect and retain the same so long as no Event of Default shall have occurred and is continuing; and

(g) Any and all products, accessions, additions, substitutions, replacements or proceeds of or to any of the Collateral, and any and all rent or income derived from the Collateral, subject to the rights of Debtor to collect and retain the same so long as no Event of Default shall have occurred and is continuing.

Remedies. Upon an Event of Default, Beneficiary shall be entitled to all the rights, powers and remedies granted a secured party under the California Uniform Commercial Code and other applicable law.

Amendments; Releases or Reconveyances

The Deeds of Trust may be amended, changed, modified or terminated at any time, without the necessity of obtaining the consent of the Authority, the Bond Trustee or the holders of the Bonds, subject to the conditions and as provided in Section 8.04 of the Loan Agreement and Section 6.06 of the Indenture.

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APPENDIX E

SUMMARY OF THE LEASES

Certain provisions of each of the Leases are summarized below. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Leases. Unless otherwise noted, these provisions apply to each Lease. Except as noted, capitalized words and phrases in this Appendix are defined in the Preliminary Limited Offering Memorandum to which this Appendix is a part.

Basic Provisions

The Lease. Unless otherwise noted, the terms “the Lease” or “each Lease” shall refer to each of the Prior Leases and the Series 2016 Lease. The Series 2016 Lease is a Sublease between Borrower as Sublessor and Value as Sublessee. For the purposes of this Summary below, except as expressly noted, all references to the Series 2016 Lessor shall refer to the Sublessor under the Series 2016 Lease and all references to the Series 2016 Lessee shall refer to the Sublessee under the Series 2016 Lease.

Term. The lease term of each Prior Lease (the “Prior Lease Initial Term”) commenced on August 1, 2013, and the lease term of each Prior Lease shall end on July 1, 2048 (or such other later date if the Prior Lessee exercises its extension options) (such date, as it may be extended, “Prior Lease Expiration Date”). The term of the Series 2016 Lease shall commence on the funding of the Loan and shall terminate on June 30, 2040 (“Series 2016 Lease Initial Term”) (or such other later date if the Series 2016 Lessee exercises its extension options) (“Series 2016 Lease Expiration Date”). The Prior Lease Initial Term and Series 2016 Lease Initial Term are collectively defined as “Initial Term” and the Prior Lease Expiration Date and Series 2016 Expiration Date are collectively referred to as the “Expiration Date”). Based upon the occurrence of any of the events described in the Loan Agreement, each Lease may be terminated by Lessee by depositing with the Trustee (as described under the heading “Base Rent” below) sufficient cash or securities to defease the principal amount of the Bonds (as described under the heading “Base Rent” below) relating to the School as set forth as an exhibit to the Loan Agreement (as described under the heading “Base Rent” below).

Extension Option. Each Lessee under the Prior Leases shall have two (2) options to extend the Initial Term, each for five (5) years; and the Series 2016 Lessee shall have two (2) options to extend the Initial Term, each for five (5) years, provided that in no event shall the Lease Term extend beyond the Term of the Ground Lease (such extension terms, the “Extension Term” and, collectively with the Initial Term, the “Term”) with the Rent during the Extension Term to be set at an amount no less than the Fair Market Rent of the Property at the date the option becomes exercisable. “Fair Market Rent” for purposes of the provisions of the Lease described in this section shall be determined pursuant to the Lease.

Base Rent. So long as the Loan is outstanding, the “Base Rent” for each Lease shall be payable in accordance with the schedule set forth in Exhibit B for each Lease, subject to downward adjustment in the event of (a) any defeasance of all or a portion of the Bonds related to the Property and (b) prepayment of all or a portion of the Loan related to the Property. In the event of defeasance of all of the Bonds related to the Property Prior to the Expiration Date or prepayment of all of the Loan related to the Property Prior to the Expiration Date, such that no Bonds remain outstanding under the Indenture, the Base Rent shall be payable based upon the average of the debt service payments during the five (5) years immediately preceding such defeasance or prepayment.

Rent and Expenses

Rent Defined. Subject to the terms of each Lease, Base Rent, Expenses, Additional Rent and all other monetary obligations of Lessee to Lessor or to third parties arising under the terms of the Lease, excluding Lessee’s obligations under the Lease, are deemed to be rent (“Rent”).

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Expenses. Lessee shall be responsible for all Expenses which Lessee shall pay to Lessor within thirty (30) days after receiving a statement from Lessor itemizing (with reasonable description) all charges included thereon.

“Expenses” shall mean all costs and expenses of the ownership, operation, maintenance, repair or replacement, and insurance of the Property, as determined by standard accounting practices, including, by way of illustration only, and not by way of limitation, to the extent they apply to the Property:

(i) Gross receipts taxes, whether assessed against Lessor or assessed against Lessee and collected by Lessor;

(ii) Water, sewage, and waste or refuse removal charges;

(iii) Gas, electricity, telephone and other utilities;

(iv) Reasonable costs incurred in the day-to-day management (if any), including the cost of management personnel;

(v) Air conditioning & heating;

(vi) Elevator maintenance (if any);

(vii) Supplies, materials, labor, equipment, and utilities used in or related to the operation and maintenance of the Property;

(viii) All maintenance, replacement and repair costs including, without limitation, janitorial, cleaning and repair services relating to the Property and all improvements thereon, including, without limitation, air conditioning systems, landscaping, service areas, building exteriors (including painting), signs and directories, repairing and replacing roofs, walls, janitorial (if any is supplied), capital improvements and upgrades, and cost of compliance with applicable laws;

(ix) Capital improvements made to the Property (whether funded in full or amortized with reasonable financing charges) which may be required by any government authority or which will improve the operating efficiency of the Property;

(x) Real Property Taxes and personal property taxes, if any; and

(xi) Any other costs or expenses reasonably incurred by Lessor under the Lease and not otherwise reimbursed by Lessee.

(xii) Any other costs or expenses incurred by Lessor under the Lease and not otherwise reimbursed by Lessee or any other lessee of the Premises. Expenses shall not include depreciation on the buildings of which the Premises are a part.

Additional Rent. In addition to Base Rent and Expenses, Lessee shall be responsible for the payment of Additional Rent. Additional Rent shall be paid to Lessor on demand or, if such Additional Rent is ongoing and can be calculated on a periodic basis, on a monthly basis pursuant to a written schedule from time to time delivered by Lessor.

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“Additional Rent” shall include but not be limited to the following:

(i) All amounts required to reimburse Lessor, or satisfy Lessor’s obligations, for any fees, expenses, taxes, indemnities, assessments or other payments that it pays under the terms of the Loan Agreement to or on behalf of the Issuer;

(ii) Amounts necessary to reimburse Lessor, or satisfy Lessor’s obligations, for any payments it makes as may be required under the Loan Agreement or this Lease; and

(iii) Amounts necessary to reimburse Lessor for payments it makes with respect to Lessor’s reasonable general operating expenses, including Lessor’s payment of Lessor’s share of the reasonable general operating expenses of Lessor’s sole member.

“Extraordinary Monthly Rent”. In the event that Series 2016 Lessee receives a notice (an “Extraordinary Monthly Rent Notice”) from either Series 2016 Lessor or the Master Trustee, stating the Master Trustee has not received the payment of rent with respect to a Related Project (as defined in the Master Indenture) on or before the date that such required payment is due, then Series 2016 Lessee shall pay the Extraordinary Monthly Rent to the Master Trustee within three (3) business days after Series 2016 Lessee’s receipt of the Extraordinary Monthly Rent Notice. Series 2016 Lessor covenants to immediately provide Series 2016 Lessee with a copy of any Extraordinary Monthly Rent Notice received by Series 2016 Lessor pursuant to the terms of the Master Indenture. The “Extraordinary Monthly Rent” shall mean the amount set forth in such Extraordinary Monthly Rent Notice, which shall be Series 2016 Lessee’s Proportionate Share of the Extraordinary Monthly Rent. “Proportionate Share” shall mean the amount required to be paid by Series 2016 Lessee to ensure that all of the required rent with respect to all of the Related Projects have been timely made.

Payment. Subject to payments made in accordance with the Intercept Notice, Lessee shall cause all Rent payable to Lessor under the Lease to be received by Lessor in lawful money of the United States on or before the day on which it is due, without offset or deduction. Rent for any period during the Term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent due to Lessor shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Subject to the terms of the Indenture, and so long as any of the Bonds or the Loan remains outstanding, through the Intercept Notice, Lessee shall from time to time, as necessary, transfer the portion of the State Apportionment attributable to the School to the Trustee for deposit in the Revenue Fund an amount equal to the Rent due to Lessor under the terms of the Lease.

Budgeting Rent. Lessee covenants to take such action as may be necessary to include all such payments of Rent due hereunder in its annual budgets, to make, as necessary, annual appropriations for all such payments and to take such action annually as shall be required to provide funds in such year for such payments of Rent.

Source of Rent Payments. Lessee’s obligation to pay the Rent is a general obligation of Lessee, and Lessor has full recourse to the Gross Revenues of Lessee for the payment of the Rent. As used in the Lease Agreement, “Gross Revenues of Lessee” means all funds, assets and revenues, of Lessee; provided, however, that Lessor shall have no recourse to any funds, assets, revenues, gifts, grants, bequests and contributions (including income and profits therefrom) specifically restricted by the donor or maker thereof or restricted by law to a particular purpose inconsistent with their use for the payments required under this Lease.

Use

Use. Lessee shall use and occupy the Premises only for “educational facilities” as defined in Section 17173(f) of the Education Code of the State of California in order to operate a charter school that is exempt

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from federal income taxation under Section 501(a) of the Internal Revenue Code (the “Code”) as an organization described in Code Section 501(c)(3) and that qualifies as an “educational organization” as described under Code Section 170(b)(1)(A)(ii) (the “Agreed Use”), and for no other purpose, provided that Lessee shall not rent the Premises as residential rental property to others, or permit any subtenant to rent the Premises as residential rental property to others. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs other tenants on the Property of or causes damage to neighboring premises or properties.

Hazardous Substances.

(a) Reportable Uses Require Consent. The term “Hazardous Substance” as used in the Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) injurious to the public health, safety or welfare, the environment or the Property, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor, Lender or Lessee to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Property which constitutes a Reportable Use of Hazardous Substances without the express Prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Property of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Property or neighboring properties. Notwithstanding the foregoing or anything herein to the contrary, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Property or neighboring property to any meaningful risk of contamination or damage or expose Lessor, Lender or Lessee to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Property and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements).

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Property (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Property or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Property during the Term of the Lease, by or for Lessee, or any third party.

(d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its managing member, and the agents, employees, officers, directors of either of them harmless from and against any and all loss of rents and/or damages, liabilities (including, without limitation, any liability of Lessor to the Lender

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under the Loan Agreement), judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Property by or for Lessee (provided, however, that Lessee shall have no liability under the Lease with respect to underground migration of any Hazardous Substance under the Property from adjacent properties not caused or contributed to by Lessee). No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under the Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. The provisions of the Lease described in this subparagraph (d) shall survive the termination of the Lease.

(e) Lessor Indemnification. Lessor shall indemnify, defend and hold Lessee, its managing member, and the agents, employees, officers, directors of either of them harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Property (by a party other than Lessee) prior to the Commencement Date or with respect to the Series 2016 Leases prior to the commencement of the Lessee’s occupancy of the Premises, (provided, however, that Lessor shall have no liability under the Lease with respect to underground migration of any Hazardous Substance under the Property from adjacent properties not caused or contributed to by Lessor). No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessor from its obligations under the Lease with respect to Hazardous Substances, unless specifically so agreed by Lessee in writing at the time of such agreement.

(f) Hazardous Substance Condition Remediation. If Lessee becomes aware of a Hazardous Substance Condition occurring during the Term of the Lease, then Lessee shall notify Lessor and Lessor shall make the investigation and remediation thereof required by the Applicable Requirements, the costs relating thereto constituting an Expense for which Lessee is responsible and the Lease shall continue in full force and effect, but subject to Lessor’s rights under the Lease; provided, however, that if a Hazardous Substance Condition occurs as a result of Hazardous Materials that are brought on the Property (by a party other than Lessee) Prior to the Commencement Date, then Lessor shall be solely responsible for making the investigation and remediation thereof at its sole cost and expense, and the Lease shall continue in full force and effect. “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in the Lease, in, on, or under the Premises which requires repair, remediation, or restoration.

Maintenance; Repairs

Lessee’s Obligations. Subject to the provisions of the Lease under the headings “Lessor’s Obligations”, “Damage or Destruction” and “Condemnation”, Lessee shall, at Lessee’s sole expense, keep the interior, exterior and structural elements of the Premises in good order, condition and repair; and keep the exterior, structural and major utility components of the Premises and other portions of the Property in good order, condition and repair, including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Property. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Property and all improvements thereon or a part thereof in good order, condition and state of repair. Subject to the provisions of the Lease under the headings “Damage or Destruction” and “Condemnation” and to the provisions of the Indenture (governing funds relating to, among other things, insurance and condemnation proceeds and charter revocation), it is intended by the Parties to the Lease that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of Lessee. It is the intention of the Parties that the terms of the Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the term so of the Lease.

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Lessor’s Obligations. Subject to the provisions of the Lease under the headings “Condition”, “Compliance”, “Damage or Destruction” and “Condemnation”, Lessor shall keep the Common Facilities and Areas and other portions of the Property not covered in the Lease in good order, condition and repair. All costs and expenses incurred by Lessor in connection with the aforesaid maintenance and repair shall be deemed “Expenses.” Lessor’s obligations shall include restorations, replacements or renewals when necessary to keep the Property and all improvements thereon or a part thereof in good order, condition and state of repair, and the costs relating thereto shall be deemed an “Expense.”

Insurance; Indemnity

Liability. Lessee shall keep in force such liability insurance policies and in such amounts as set forth as an exhibit attached to the Lease. The premium for such insurance shall be deemed an “Expense” under the Lease.

Property. Lessee shall obtain and keep in force a policy or policies of property insurance in the name, and for the benefit, of Lessor, with loss payable to Lessor and to any lender insuring loss or damage to the Property. The amount of such insurance shall be as set forth as an exhibit to the Lease. The premium for such insurance shall be deemed an “Expense” under the Lease.

Rental Interruption. Lessee shall also obtain and keep in force, for the benefit of Lessor, rental interruption insurance insuring Lessor for the amounts of Base Rent arising from an interruption of the payment of the Base Rent, Expenses and Additional Rent otherwise payable by Lessor under the Lease, as set forth as an exhibit to the Lease. The premium for such insurance shall be deemed an “Expense” under the Lease.

Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against in the Lease. The effect of such release and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable to the Lease. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

Indemnity. Except for Lessor’s negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, partners, members, directors, officers and lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. The provisions of the Lease described in this section shall survive the termination of the Lease.

Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or from other sources or places.

Indenture. For so long as the Loan is outstanding, Lessee shall be deemed to meet its insurance obligations as set forth in the Lease if it carries, and it agrees to carry, the insurance required under the terms of the Indenture, as such requirements may change from time to time as provided in the Indenture. For so long as

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the Loan is outstanding, Lessee shall cause the Trustee and Lessor to be named as additional insureds on Lessee’s liability and property insurance policies.

Real Property Taxes

Definition. As used in the Lease, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Property, Lessor’s right to other income therefrom; and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the address of the Property and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Property is located. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the Term of the Lease, including but not limited to, a change in the ownership of the Property, and (ii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to the Lease.

Payment of Taxes. Lessee shall timely file for exemption against any Real Property Taxes and shall maintain such exemption during the Term. In any event, Lessee shall pay, before the same become past due, the Real Property Taxes applicable to the Property during the Term to the extent any such Real Property Taxes are charged, levied, assessed or imposed.

Personal Property Taxes. Lessee shall timely file for exemption against any taxes on Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee and shall maintain such exemption during the Term. Lessee shall pay, Prior to delinquency, all such taxes to the extent they are charged, levied, assessed or imposed after an exemption for such taxes is filed as required under the Lease.

Assignment and Subletting

By Lessee. Lessee shall not sublease, assign, mortgage, pledge, hypothecate or encumber the Lease or any of Lessee’s interest under the Lease without the Prior written consent of Lessor (which shall not be unreasonably withheld). Lessee acknowledges that, pursuant to the Loan Agreement, Lessor is required to obtain Lender’s approval to a sublease, assignment or other transfer of Lessee’s interest in the Lease and that Lessor’s disapproval shall be deemed reasonable if based on Lender’s disapproval. Lessee acknowledges that the financing of the Property through the tax-exempt Bonds may restrict the assignees which could be approved by Lessor.

By Lessor. Lessee acknowledges that the Premises are subject to a deed of trust and assignment of rents in favor of the Lender and that the Lease is assigned to the Lender as security for the Loan.

Default; Breach; Remedies

Default; Breach. A “Default” is defined as a failure by Lessee to comply with or perform any of the terms, covenants or conditions under the Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises.

(b) The failure of Lessee to make any payment of Rent required to be made by Lessee under the Lease, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under the Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee.

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(c) Any material representation or warranty made in the Lease, or in any report, certificate, financial statement, or instrument furnished in connection with the Lease, proves to have been false or misleading when made, in any material respect.

(d) Lessee violates or fails to observe or perform any covenant contained in the Lease.

(e) A Default by Lessee as to the terms, covenants, conditions or provisions of the Lease, other than those described in subparagraphs (a) through (d) above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.

(f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. §101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 90 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in the Lease, where possession is not restored to Lessee within sixty (60) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in the Lease, where such seizure is not discharged within sixty (60) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(g) The discovery that any financial statement of Lessee given to Lessor was materially false.

In addition, the Series 2016 Lease is subject to the Ground Lease by and between Byzantine LLC as the Ground Lessor and the Series 2016 Lessor as Ground Lessee. To the extent applicable, the Series 2016 Lessee is deemed to have assumed and is subject to the Series 2016 Lessor’s obligations as Ground Lessee under the Ground Lease, such that upon Series 2016 Lessee’s breach of any obligations of the Ground Lessee under the Ground Lease, the Ground Lessor may exercise any and all rights and remedies granted to the Ground Lessor under the Ground Lease as well as any rights granted to the Series 2016 Lessor under the Series 2016 Lease.

Remedies

If Lessee fails to perform any of its affirmative duties or obligations (other than compliance with covenants and financial reporting requirements pursuant to the provisions of the Lease), within fifteen (15) days after written notice (or, in the case of those duties and obligations that cannot reasonably be performed within fifteen (15) days after notice, to commence and diligently prosecute such duties and obligations to completion), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, including Lessee’s failure to comply with the covenants or financial reporting requirements set forth in the Lease, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case the Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid Rent for the

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balance of the term after the time of award exceeds the amount of such rental loss that Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee’s failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees of Lessor and the Lender, and that portion of any leasing commission paid by Lessor in connection with the Lease applicable to the unexpired term of the Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of the Lease shall not waive Lessor’s right to recover damages under the Lease. If termination of the Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under the Lease was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by the Lease. In such case, the applicable grace period required by the Lease and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of the Lease entitling Lessor to the remedies provided for in the Lease and/or by said statute.

(b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect Lessor’s interests, shall not constitute a termination of Lessee’s right to possession.

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of the Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under the Lease, including under any indemnity provisions of the Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

Interest. Any monetary payment due Lessor under the Lease not received by Lessor when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payments, shall bear interest from the date when due as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to any late charges and default rate interest under the Loan Agreement.

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APPENDIX F

FORM OF CONTINUING DISCLOSURE AGREEMENT



SERIES 2016A




THIS CONTINUING DISCLOSURE AGREEMENT dated as of December 1, 2016 (the “Disclosure Agreement”) is executed and delivered by VSF School Facilities #1 LLC, a California limited liability company (the “Borrower”), The Bank of New York Mellon Trust Company, N.A., in its capacity as Trustee under the Indenture (defined below) and as Dissemination Agent hereunder (the “Dissemination Agent”) and Value Schools (“Value”), for the holders of the above-captioned bonds (the “Series 2016 Bonds”) under the Indenture, dated as of August 1, 2013, (the “Original Indenture”), and a First Supplemental Indenture, dated as of December 1, 2016 (the “Supplemental Indenture” and, together with the Original Indenture, the “Indenture”), by and between the California School Finance Authority (the “Authority”) and the Trustee. The Borrower, Value and the Dissemination Agent covenant and agree as follows:

Section 1. Purpose of Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Borrower, Value and the Dissemination Agent for the benefit of the Holders and Beneficial Holders of the Bonds and in order to assist the Participating Underwriter in complying with, and constitutes the written undertaking of the Borrower and Value for the benefit of the Bondholders required by, Section (b)(5)(i) of Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act of 1934, as amended (the “Rule”)

Section 2. Defined Terms. In addition to the definitions set forth in the Indenture, the Series 2016 Lease (as herein defined) or the Loan Agreement, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined herein, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the Borrower pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

“Authority” means the California School Finance Authority, its successors and assigns.

“Beneficial Owner” means any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any Bonds for federal income tax purposes.

“Bonds” means the Series 2016A Bonds and the Series 2016B Bonds.

“Borrower” means VSF School Facilities #1 LLC, a California limited liability company.

“Disclosure Representative” shall mean the chief executive officer of Value or such other officer, agent or employee as Value shall designate in writing to the Dissemination Agent from time to time.

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“Dissemination Agent” means the Dissemination Agent named above, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Borrower and which has filed with the Trustee a written acceptance of such designation.

“EMMA” means the Electronic Municipal Market Access system operated by the MSRB and the primary portal for complying with the continuing disclosure requirements of the Rule.

“Events Notices” means the notices required to be given by Value pursuant to Section 5 of this Disclosure Agreement.

“Indenture” means, collectively, the Indenture, dated as of August 1, 2013, (the “Original Indenture”), and the First Supplemental Indenture, dated as of December 1, 2016 (the “Supplemental Indenture”), by and between the Authority and the Trustee

“Fiscal Year” means the twelve month accounting period used with respect to the operations of Value ending June 30 of each year; provided, however, Value, by resolution duly passed, may change such accounting period to end on another date if such change is found and determined to be necessary or appropriate for budgetary or other fiscal purposes.

“Leases” means the Lease Agreements, between the Borrower and Value, to lease Facilities financed with proceeds of the Bonds and the Series 2013 Bonds (as defined herein).

“Limited Offering Memorandum” means the Limited Offering Memorandum dated December 15, 2016, relating to the Bonds.

“Listed Events” means any of the events listed in Section 4(a) hereof.

“MSRB” means the Municipal Securities Rulemaking Board, located at 1900 Duke Street, Suite 600, Alexandria, Virginia 22314, its successors and assigns.

“Participating Underwriter” means Piper Jaffray & Co., as original purchaser of the Bonds, its successors and assigns.

“Quarterly Report” any Quarterly Report provided by the Borrower pursuant to, and as described in, Sections 6 and 7 of this Disclosure Agreement.

“Repository” means EMMA.

“Rule” means SEC Rule 15c2-12(b)(5) promulgated by the SEC under the Securities Exchange Act of 1934, as amended or supplemented by the SEC from time to time.

“Schools” shall mean Downtown Value School (“Downtown Value”), Central City Value High School (“Central City Value”), and University Preparatory Value High School (“University Prep”).

“SEC” means the Securities and Exchange Commission, its successors and assigns.

“Series 2013 Bonds” means the Authority’s School Facility Revenue Bonds (Value Schools) Series 2013, issued in the aggregate principal amount of $12,870,000 on August 8, 2013.

“Series 2016A Bonds” means the Authority’s School Facility Revenue Bonds (Value Schools) Series 2016A.

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“Series 2016B Bonds” means the Authority’s School Facility Revenue Bonds (Value Schools) Series 2016B (Taxable).

“Trustee” means The Bank of New York Mellon Trust Company, N.A., its successors and assigns.

Section 3. Provision of Annual Reports.

(a) The Borrower shall provide, or shall cause the Dissemination Agent to provide, to the MSRB, not later than December 15 of each year, commencing December 15, 2017 (except as hereinafter provided), an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Agreement; provided that the consolidated audited financial statements of Value and of the Borrower (and any information determined from the audited financial statements) may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If Value’s Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(d). Value hereby agrees to provide to the Borrower any information required from Value for the Annual Report. The Annual Report shall be submitted on a standard from in use by industry participants or other appropriate form and shall identify Bonds by name and CUSIP number, if available.

(b) The Borrower shall be responsible for the preparation of the Annual Report. Not later than five (5) days prior to the date specified in subsection (a) for providing the Annual Report to the MSRB, the Borrower shall provide the Annual Report to the Dissemination Agent. If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Borrower to determine if the Borrower is or expects to be in compliance with the first sentence of subsection (a) above.

(c) The Dissemination Agent shall transmit the Annual Report to the MSRB in electronic format accompanied by identifying information as prescribed by the MSRB.

Section 4. Content of Annual Reports.

(a) The Annual Report shall be in a format suitable for filing with the MSRB and shall contain or include by reference the following:

(i) The audited financial statements of Value for the prior Fiscal Year beginning with the Fiscal Year ending June 30, 2017, prepared in accordance with generally accepted accounting principles applicable to nonprofit corporations from time to time, if available.

(ii) The audited financial statements of the Borrower for the prior Fiscal Year beginning with the Fiscal Year ending June 30, 2016, prepared in accordance with generally accepted accounting principles applicable to nonprofit corporations from time to time, if available.

(iii) For the Fiscal Years ended June 30, 2017 and thereafter, an Executed Certificate for Annual Filing of Certain Financial and Operating Covenants completed substantially in the form attached hereto as Exhibit A.

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(b) Any or all of the items listed above may be included by specific reference to other documents, including any official statement or prospectus of debt issues for the benefit of the Schools or related public entities, which have been submitted to the MSRB. If the document included by reference is a final official statement, it must be available from the MSRB. Value shall clearly identify each such other document so included by reference. Value and the Borrower are solely responsible for the content and format of the Annual Report, and the Dissemination Agent shall have no liability or responsibility for content, format, accuracy or completeness of such Annual Report.

(c) Any or all of the Disclosure Reports may be incorporated by reference from other documents, including official statements, which have been submitted to the Repository. If the Disclosure Report information is changed or this Disclosure Agreement is amended in accordance with its terms, then Value is to include in the next Disclosure Report to be delivered thereunder, to the extent necessary, an explanation of the reasons for the amendment and the effect of any change in the type of financial information or operating data provided.

Section 5. Reporting of Listed Events.

(a) Pursuant to the provisions of this Section 5, Value shall give, or cause to be given, notice of the occurrence of any of the following events with respect to Bonds, if material:

(i) non-payment related defaults;

(ii) modifications to rights of Bondholders;

(iii) optional, unscheduled or contingent Bond calls;

(iv) unless described in Section 5(b)(vii) below, other material notices or determinations with respect to the tax exempt status of Series 2016A Bonds or other events affecting the tax exempt status of Series 2016A Bonds;

(v) release, substitution or sale of property securing repayment of Bonds;

(vi) the consummation of a merger, consolidation or acquisition involving the Borrower or Value or the sale of all or substantially all of the assets of the Borrower or Value (other than in the ordinary course of business) or the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions other than in accordance with its terms; or

(vii) appointment of a successor or additional trustee or change in name of a trustee.

(b) Pursuant to the provisions of this Section 5, Value shall give, or cause to be given, notice of the occurrence of any of the following events with respect to Bonds:

(i) principal and interest payment delinquencies;

(ii) defeasances;

(iii) rating changes;

(iv) unscheduled draws on debt service reserves reflecting financial difficulties;

(v) unscheduled draws on any credit enhancements reflecting financial difficulties;

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(vi) substitution of credit or liquidity providers, or their failure to perform;

(vii) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;

(viii) tender offers; and

(ix) bankruptcy, insolvency, receivership or a similar proceeding by the Borrower, Value or any School.

For purposes of the event identified in clause (ix) above, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for Value or the Borrower in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court of governmental authority has assumed jurisdiction over substantially all of the assets or business of Value or the Borrower, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of Value or the Borrower.

(c) Upon the occurrence of a Listed Event specified in Section 5(a), Value shall as soon as possible determine if such event would be material. The Dissemination Agent shall have no responsibility for such determination.

(d) If Value has determined that the occurrence of a Listed Event specified in Section 5(a) would be material, or upon the occurrence of a Listed Event specified in Section 5(b), Value shall notify the Dissemination Agent in writing within three business days of the occurrence of such event in a format suitable for filing with the MSRB, with instructions to the Dissemination Agent to file a notice of the occurrence of such Listed Event pursuant to subsection (e).

(e) If the Dissemination Agent has been instructed in writing by Value to report the occurrence of a Listed Event and has received a notice of the occurrence in a format suitable for filing with the MSRB, the Dissemination Agent shall file such notice with the MSRB with a copy to the Participating Underwriter in a timely manner not in excess of ten business days after the occurrence of the event.

(f) The Borrower hereby agrees to provide to Value notice of any events specified in this Section 5 of which it has actual notice within five (5) days of receipt of such notice by the Borrower.

Section 6. Provision of Quarterly Reports.

(a) The Borrower agrees to provide, or shall cause the Dissemination Agent to provide, to the MSRB, not later than 60 days after the end of Value’s fiscal quarters, commencing with the fiscal quarter ending June 30, 2017, a Quarterly Report which is consistent with the requirements of Section 7 of this Disclosure Agreement. The Quarterly Report may be submitted as a single document or as separate documents constituting a package, and may include by reference other information as provided in Section 7 of this Disclosure Agreement. Value hereby agrees to provide to the Borrower any information required with respect to the Schools for the Quarterly Reports.

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(b) The Borrower shall be responsible for the preparation of the Quarterly Report. Not later than five (5) business days prior to the date specified in subsection (a) for providing the Quarterly Report to the MSRB, Value agrees to provide the Quarterly Report to the Dissemination Agent. If by such date, the Dissemination Agent has not received a copy of the Quarterly Report, the Dissemination Agent shall contact the Borrower to determine if the Borrower is or expects to be in compliance with the first sentence of subsection (a) above.

(c) The Dissemination Agent shall transmit the Quarterly Report to the MSRB in electronic format accompanies by identifying information as prescribed by the MSRB.

Section 7. Content of Quarterly Reports.

(a) The Quarterly Report shall be in a format suitable for filing with the MSRB and shall contain or include by reference the following:

(i) The unaudited financial statements and operating data for the previous fiscal quarter of the type and in the format provided in audited financial statements of Value and the Borrower for the prior Fiscal Year.

(ii) For the last fiscal quarter of each Fiscal Year, a copy of the Schools’ budgets for the subsequent Fiscal Year.

(iii) A year-to-date comparison of the revenues and expenditures in the unaudited financial statements to the annual budget.

(iv) Recommendations of any consultant received in accordance with the Indenture during such fiscal quarter.

(v) Notice of any threatened termination of any license, charter or other official approval or accreditation which is material to the activities of Value or any School, or of the commencement of any litigation or other governmental or judicial proceeding in which an outcome adverse to Value or any School could result in a judgment in excess of available insurance coverage or otherwise have a material adverse effect on the operations or financial condition of Value or any School, and any other event which reasonably could be expected to have a material adverse effect on the operations or financial condition of Value or any School.

(vi) Management discussion of any significant variance between budgeted and actual revenues and expenditures during the previous fiscal quarter.

(vii) Any change in the Value Leadership Team as shown on pages A-6 through A-8 of Appendix A to the Limited Offering Memorandum.

(viii) Debt Service Coverage Ratio with respect to the Schools.

(ix) Enrollment and ADA with respect to each School.

(x) State standardized test results received within the preceding quarter.

(b) Any or all of the items listed in subsection (a) above may be included by specific reference to other documents, including any official statement or prospectus of debt issues for the benefit of the Schools or related public entities, which have been submitted to each of the MSRB. If the

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document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. Value shall clearly identify each such other document so included by reference. Value is solely responsible for the content and format of the Quarterly Report, and the Dissemination Agent shall have no liability or responsibility for content, format, accuracy or completeness of such Quarterly Report.

Section 8. Use of EMMA. Any filings required to be made with or notices to be given to the MSRB under this Disclosure Agreement shall be effected by sending the filing or notice to EMMA at www.emma.msrb.org in an electronic format accompanied by identifying information as prescribed by the MSRB, or to such other entity and in such other format as may be designated under the Rule. The Dissemination Agent agrees to comply with the provisions of EMMA in making such filings and giving such notices under this Disclosure Agreement.

Section 9. Termination of Reporting Obligation. The obligations of Value, the Borrower and the Dissemination Agent under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption, prepayment or payment in full of all of Bonds. If such termination occurs prior to the final maturity of Bonds, Value shall give notice of such termination in the same manner as for a Listed Event under Section 5(d) hereof.

Section 10. Annual Conference Calls. Value shall schedule annual conference calls for Beneficial Owners to be held during normal business hours (for both prevailing Eastern Time and prevailing Pacific Time), and shall provide the Dissemination Agent and the Participating Underwriter with a notice of date and time for such call and contact telephone information.

Section 11. Failure to File. If Value does not provide to the Dissemination Agent a copy of an Annual Report or a Quarterly Report by the applicable dates required in Section 3(a) or Section 6(a) above, the Dissemination Agent shall send a notice to the Borrower, Value and the Participating Underwriter in substantially the form attached as Exhibit B. If the Borrower or Value files any report directly with MSRB, the Borrower shall promptly provide the Dissemination Agent with a confirmation or documentation reasonably required by the Dissemination Agent confirming that the filing of such report was made in a timely manner on or before the date required herein (or if not as of such date, specifying the date of filing) and that such filing contained the information required by this Disclosure Agreement.

Section 12. Dissemination Agent. Value may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by Value pursuant to this Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, Value shall be the Dissemination Agent. The initial Dissemination Agent shall be The Bank of New York Trust Mellon Trust Company, N.A. The Dissemination Agent may resign its duties under this Disclosure Agreement upon 60 days prior written notice to Value.

Section 13. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, Value, the Borrower and the Dissemination Agent may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal

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requirements, change in law, or change in the identity, nature or status of an obligated person with respect to Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original execution and delivery of Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The proposed amendment or waiver either (i) is approved by the Holders of Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Holders, or (ii) does not, in the opinion of nationally recognized bond counsel or another party unaffiliated with Value, materially impair the interests of the Holders or Beneficial Owners of Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, Value shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by Value. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, notice of such change shall be given in the same manner as for a Listed Event under Section 5(d).

Section 14. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent Value from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If Value chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, Value shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 15. Default. In the event of a failure of Value, the Borrower or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Dissemination Agent (at the written direction of the Holders of not less than 25% in aggregate principal amount of Bonds then outstanding and upon being indemnified to its satisfaction therefor, shall, or the Participating Underwriter or any Holder of Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause Value, the Borrower or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an event of default under Bonds, the Indenture, or the Loan Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of Value, the Borrower or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. The Dissemination Agent shall not be required to take any action whatsoever to cause Value or the Borrower to comply with its obligations under this Dissemination Agreement other than those specifically set forth in Section 3 hereof.

Section 16. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and no implied covenants or obligations of the Dissemination Agent shall arise in this Disclosure Agreement. Value and the Borrower agree jointly and severally to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, fees, expenses and liabilities which it may incur arising out of the disclosure of information pursuant to this Disclosure Agreement or arising out of or in the exercise or performance of their powers and duties hereunder, including the costs and

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expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct, as the case may be. The obligations of Value under this Section shall survive resignation or removal of the Dissemination Agent, termination of this Disclosure Agreement and payment of Bonds. The Dissemination Agent shall have no liability for Value’s failure to report any event or any financial information or operating data as to which Value has not provided an information report in format suitable for filing with the MSRB. The Dissemination Agent shall have no duty or obligation to review any information provided to it hereunder and shall not be deemed to be acting in a fiduciary capacity. The obligations of Value under this Section shall survive resignation of the Dissemination Agent or the termination of this Dissemination Agreement. In the absence of bad faith on its part, the Dissemination Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Dissemination Agent by the Disclosure Representative and conforming to the requirements of this Disclosure Agreement. In the case of any Annual Reports or description of any Listed Events, or any opinions which by any provision hereof are specifically required to be furnished to the Dissemination Agent, the Dissemination Agent shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Disclosure Agreement, but shall be under no duty to verify independently or investigate the accuracy or completeness of any information contained therein or the correctness of any opinion furnished hereunder. No provision of this Disclosure Agreement shall require the Dissemination Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. The Dissemination Agent may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, or other paper or document believed by it to be genuine and to have been signed or presented by the Disclosure Representative. The Dissemination Agent may consult with counsel of its choice and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon, it being understood that for purposes of this provision, that such counsel may be counsel to Value. The Dissemination Agent shall not be bound to make any investigation into the facts or matters stated in and Annual Report or description of a Listed Event.

Section 17. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:

To Value and Borrower: Value Schools Attn: Chief Executive Officer 680 Wilshire Place, Suite 315 Los Angeles, California 90005

To Dissemination Agent: The Bank of New York Mellon Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, California 90017

A copy of each notice shall be sent to the Participating Underwriter as follows:

Piper Jaffray & Co. Attn: Bill Wildman 50 California Street, Suite 3100 San Francisco, California 94111

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.

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Section 18. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of Value, the Dissemination Agent, the Participating Underwriter, and Holders and Beneficial Owners from time to time of Bonds, and shall create no rights in any other person or entity.

Section 19. Fees and Expenses. Except to the extent limited by Section 15 hereof, the Dissemination Agent shall be entitled to payment and reimbursement from Value for its services rendered hereunder and all rightful advances and other expenses reasonably made or incurred by the Dissemination Agent.

Section 20. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one instrument.

Section 21. Choice of Law. This Disclosure Agreement shall be governed by and construed in accordance with the laws of the State of California, provided that to the extent this Disclosure Agreement addresses matters of federal securities laws, including the Rule, this Disclosure Agreement shall be construed in accordance with such federal securities laws and official interpretations thereof.

Section 22. Severability. If any portion of this Disclosure Agreement shall be held invalid or inoperative, then, so far as is reasonable and possible (i) the remainder of this Disclosure Agreement shall be considered valid and operative, and (ii) effect shall be given to the intent manifested by the portion held invalid or inoperative.

Section 23. Other Instruments. Value and the Dissemination Agent covenant and agree that they will execute such other and further instruments and documents as are or may become necessary or convenient to effectuate and carry out this Disclosure Agreement.

Section 24. Captions, Titles, and Headings. The captions, titles, and headings used in this Disclosure Agreement are for convenience only and shall not be construed in interpreting this Disclosure Agreement.

Section 25. Entire Agreement. This Disclosure Agreement contains the entire understanding among the parties and supersedes any prior understandings or written or oral agreements between them respecting the subject matter of this Disclosure Agreement.

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IN WITNESS WHEREOF, the undersigned have duly authorized, executed and delivered this Continuing Disclosure Agreement as of the date first written above.

VSF SCHOOL FACILITIES #1 LLC

By: VALUE SCHOOLS FOUNDATION, its Sole Member

By:

President

VALUE SCHOOLS, a California nonprofit public benefit corporation

By: President and Chief Executive Officer

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Dissemination Agent and Trustee

By: Authorized Officer

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EXHIBIT A

FORM OF CERTIFICATE FOR ANNUAL FILING OF CERTAIN FINANCIAL AND OPERATING COVENANTS

Name of Issuer: California School Finance Authority Name of Bond Issue: California School Finance Authority School Facility Revenue Bonds (Value

Schools) Series 2016A and Series 2016B (Taxable) Dissemination Agent: The Bank of New York Mellon Trust Company, N.A. Name of Borrower: VSF School Facilities #1 LLC Date of Issuance: December 29, 2016

The undersigned authorized representative of VSF School Facilities #1 LLC (the “Borrower”), is providing to the Dissemination Agent the following operational information as required under Section 4 of the Continuing Disclosure Agreement, dated as of December 1, 2016 (the “Disclosure Agreement”), between the Dissemination Agent, the Borrower and Value. The Disclosure Agreement requires that this information be provided to the Dissemination Agent by December 15 of each fiscal year. Defined terms used in this certificate and not defined herein shall have the meaning granted to such terms in the Disclosure Agreement or, if not defined therein, in the Indenture. The information contained below is unaudited.

1. The undersigned is familiar with the provisions of the Leases, and based on such review and familiarity, the Schools have fulfilled all of their respective obligations thereunder throughout Fiscal Year preceding the date hereof, and there have been no Defaults or Events of Default under the Leases (or, if there has been a Default or Event of Default in the fulfillment of any such obligation in such Fiscal Year, attached hereto is additional information specifying each such Default or Event of Default known to the undersigned and the nature and status thereof and the actions taken or being taken to correct such Default or Event of Default).

2. All insurance required by the Leases is in full force and effect as of the date hereof.

3. Financial Covenants As of June 30, 20__, for each School:

(a) The Debt Service Coverage Ratio for the Fiscal Year ended June 30, 20__ was ____x.

(b) Days Cash on Hand for the Fiscal Year ended June 30, 20__ is $____________.

4. Updates to the following tables from Appendix A to the Limited Offering Memorandum, incorporating data with respect to the most recently concluded school year, for the Schools:

(a) Figures 1-3, entitled “2015-16 SMARTER BALANCED ASSESSMENT RESULTS;”

(b) Tables 6-8, entitled “EMPLOYMENT AND STAFFING;”

(c) Tables 9-12, entitled “TEACHER RETENTION RATES;”

(d) Table 10, entitled “ENROLLMENT BY GRADE LEVEL;”

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(e) Table 11, entitled “AVERAGE DAILY ATTENDANCE;”

(f) Table 12, entitled “HISTORICAL STUDENT RETENTION DATA;”

(g) Table 13, entitled “WAIT LIST BY GRADE;” and

(h) Table 14, entitled “COMPETING SCHOOLS.”

This certificate is being provided by the Borrower to the Dissemination Agent on a date which is [on or before][after] December 15.

Dated:

VSF SCHOOL FACILITIES #1 LLC, as Borrower

By: Its:

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EXHIBIT B

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL OR QUARTERLY REPORT

Name of Issuer: California School Finance Authority Name of Bond Issue: California School Finance Authority School Facility Revenue Bonds

(Value Schools) Series 2016A and Series 2016B (Taxable) Dissemination Agent: The Bank of New York Mellon Trust Company, N.A. Name of Borrower: VSF School Facilities #1 LLC Date of Issuance: December 29, 2016 NOTICE IS HEREBY GIVEN that the Borrower has not provided an [Annual Report][Quarterly Report] with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated as of December 1, 2016, between the undersigned Dissemination Agent, the Borrower and Value. The Borrower anticipates that the [Annual Report] [Quarterly Report] will be filed by ____________________________. Dated: ______________________

as Dissemination Agent By Authorized Signatory

cc: Piper Jaffray & Co.

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APPENDIX G

BOOK-ENTRY SYSTEM

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Series 2016 Bonds. The Series 2016 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each series the Series 2016 Bonds, each in the aggregate principal amount of such issue, and will be deposited with DTC.

2. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

3. Purchases of Series 2016 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2016 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2016 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Series 2016 Bonds, except in the event that use of the book-entry system for the Series 2016 Bonds is discontinued.

4. To facilitate subsequent transfers, all Series 2016 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2016 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2016 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2016

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Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

6. Redemption notices shall be sent to DTC. If less than all of the Series 2016 Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2016 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Series 2016 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds, distributions, and dividend payments on the Series 2016 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Authority or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

10. DTC may discontinue providing its services as depository with respect to the Series 2016 Bonds at any time by giving reasonable notice to the Authority or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

11. The Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.

12. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Borrower believes to be reliable, but none of the Borrower, the Authority or the Underwriter take any responsibility for the accuracy thereof.

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APPENDIX H

FORM OF OPINION OF BOND COUNSEL

Upon the delivery of the Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, proposes to deliver its final approving opinion with respect to the Bonds in substantially the following form:

_____________, 2016

California School Finance Authority Los Angeles, California

California School Finance AuthoritySchool Facility Revenue Bonds

(Value Schools) Series 2016A

and

California School Finance AuthoritySchool Facility Revenue Bonds

(Value Schools) Series 2016B (Taxable)

(Final Opinion)

Ladies and Gentlemen:

We have acted as bond counsel to the California School Finance Authority (the “Authority”) in connection with the issuance of $8,090,000 aggregate principal amount of California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016A (the “Series A Bonds”) and $410,000 aggregate principal amount of California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016B (Taxable) (the “Series B Bonds” and, together with the Series A Bonds, the “Bonds”). The Bonds are issued under and pursuant to an Indenture, dated as of August 1, 2013, as supplemented by a First Supplemental Indenture, dated as of December 1, 2016 (collectively, the “Indenture”), each by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Indenture provides that the Bonds are issued for the stated purpose of making a loan of the proceeds thereof to VSF School Facilities #1 LLC, a California limited liability company (the “Borrower”), whose sole member is Value Schools Foundation, a California nonprofit public benefit corporation (the “Sole Member”) pursuant to a Loan Agreement, dated as of August 1, 2013, as supplemented by a First Supplemental Loan Agreement, dated as of December 1, 2016 (collectively, the “Loan Agreement”), each between the Authority and the Borrower. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

In such connection, we have reviewed the Indenture, the Loan Agreement, the Intercept Notice, the Lease, the Tax Certificate and Agreement, dated the date hereof (the “Tax Certificate”), between the Authority, the Sole Member, the Borrower and Value Schools, a California nonprofit public benefit corporation (“Value”), opinions of counsel to the Authority, the Sole Member, the Borrower, Value, and the Trustee, certificates of the Authority, the Sole Member, the Borrower, Value, the Trustee and others,

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and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein.

We have relied on the opinion of Musick Peeler & Garrett LLP, Los Angeles, California, counsel to the Borrower, the Sole Member and Value, regarding, among other matters, the current qualification of the Sole Member and Value as organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”), the use of the facilities financed or refinanced with the proceeds of the Series A Bonds in activities that are not considered unrelated trade or business activities of the Sole Member within the meaning of Section 513 of the Code, and the status of Value as a charter school organized under the Charter School Law. We note that the opinion of counsel to the Borrower, the Sole Member and Value is subject to a number of qualifications and limitations. We have also relied upon representations of Value concerning the intended operation of the facilities to be financed or refinanced with the proceeds of the Series A Bonds in activities that are not considered unrelated trade or business activities of Value within the meaning of Section 513 of the Code. Failure of either the Sole Member or Value to be organized and operated in accordance with the Internal Revenue Service’s requirements for the maintenance of its status as an organization described in Section 501(c)(3) of the Code, or use of the bond-financed or refinanced facilities in activities that are considered unrelated trade or business activities of the Borrower, the Sole Member or Value within the meaning of Section 513 of the Code, may result in interest on the Series A Bonds being included in gross income for federal income tax purposes, possibly from the date of issuance of the Series A Bonds.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the Authority. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second and third paragraphs hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, the Loan Agreement, the Lease, the Intercept Notice and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Series A Bonds to be included in gross income for federal income tax purposes. In addition, we have assumed that actions of the Borrower and other persons will not cause any of the Bonds to exceed the $150,000,000 limitation on qualified 501(c)(3) bonds that do not finance hospital facilities set forth in Section 145(b) of the Code. We call attention to the fact that the rights and obligations under the Bonds, the Indenture, the Loan Agreement, the Lease, the Intercept Notice and the Tax Certificate, and their enforceability, may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations on legal remedies against instrumentalities of the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in or as subject to the lien of the Indenture, the Loan Agreement, the Lease, or the

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accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such property. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Limited Offering Memorandum, dated _________, 2016, relating to the Bonds, or other offering material relating to the Bonds and express no opinion with respect thereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The Bonds constitute the valid and binding limited obligations of the Authority.

2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Authority. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Payments (except Payments pursuant to the Intercept Notice) and any other amounts (excluding proceeds of the sale of the Bonds) held by the Trustee in any fund or account under the Indenture (other than the Rebate Fund and the Repair and Replacement Fund), subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture. The Bonds are further secured by apportionments from the State Controller, pursuant to Section 17199.4 of the Education Code and the Intercept Notice, of amounts specified in the Intercept Notice and paid directly to the Trustee.

3. The Loan Agreement has been duly executed and delivered by, and constitutes the valid and binding obligations of, the Authority.

4. Interest on the Series A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code. Interest on the Series A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Interest on the Bonds is exempt from State of California personal income taxes. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds.

Faithfully yours,

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APPENDIX I

FORM OF INVESTOR LETTER

The Honorable John Chiang Treasurer of the State of California 915 Capitol Mall, Room 261 Sacramento, California 95814

California School Finance Authority 304 South Broadway Los Angeles, California 90013

The Bank of New York Mellon Trust Company, N.A. 700 South Flower Street, Suite 500 Los Angeles, California 90017

Piper Jaffray & Co. 50 California Street, Suite 3100 San Francisco, California 94111

Re: $8,090,000 California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016A and $410,000 California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016B (Taxable)

Ladies and Gentlemen:

The undersigned (the “Investor”) hereby acknowledges that it is purchasing $__________ aggregate principal amount of California School Finance Authority (the “Authority”) School Facility Revenue Bonds (Value Schools) Series 2016A (the “Series 2016A Bonds”) and $________ aggregate principal amount of California School Finance Authority School Facility Revenue Bonds (Value Schools) Series 2016B (Taxable) (the “Series 2016B Bonds” and together with the Series 2016A Bonds, the “Bonds”), issued pursuant to an Indenture, dated as of August 1, 2013 (the “Original Indenture”), as supplemented by a First Supplemental Indenture, dated as of December 1, 2016 (the “Supplemental Indenture” and, collectively with the Original Indenture, the “Indenture”), each by and between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

This letter is being provided pursuant to a Bond Purchase Agreement, dated December 15, 2016 (the “Purchase Agreement”), among the Authority, the Treasurer of the State of California, as agent for sale on behalf of the Authority, VSF School Facilities #1 LLC (the “Borrower”) and Piper Jaffray & Co.

The undersigned acknowledges that the Bonds are being delivered for the purpose of financing the acquisition, construction, improvement and equipping of certain charter school facilities located in Los Angeles, California (collectively, the “Project”) on behalf of the Borrower, as more particularly described in the First Supplemental Loan Agreement, dated as of December 1, 2016 (the “Supplemental Loan Agreement”) and a Loan Agreement, dated as of August 1, 2013 (the “Original Loan Agreement” and, together with the First Supplemental Loan Agreement, the “Loan Agreement”) each by and among the Authority and the Borrower. The undersigned further acknowledges that the Borrower will lease the charter school facilities to Value Schools (the “Lessee”) pursuant to that certain lease (the “Lease”) between the Borrower and the Lessee.

The Bonds and the interest thereon are payable solely out of certain revenues and income received by the Authority or the Trustee pursuant to the Loan Agreement and the Indenture. The Indenture, the Loan Agreement, and the Lease are referred to herein as the “Bond Documents.”

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In connection with the sale of the Bonds to the Investor, the Investor hereby makes the following representations upon which you may rely:

1. The Investor has authority and is duly authorized to purchase the Bonds and to execute this letter and any other instruments and documents required to be executed by the Investor in connection with the purchase of the Bonds.

2. The Investor is either (a) a “qualified institutional buyer” as defined in Rule 144A of the Securities Act of 1933, as amended (the “Act”) or (b) an “accredited investor” as defined under Regulation D promulgated under the Act, and therefore has sufficient knowledge and experience in financial and business matters, including in the purchase and ownership of municipal obligations, to be able to evaluate the risks and merits of the investment represented by the Bonds.

3. The Bonds are being acquired by the Investor for investment and not with a view to, or for resale in connection with, any distribution of the Bonds, and the Investor intends to hold the Bonds solely for its own account for investment purposes for an indefinite period of time, and does not intend at this time to dispose of all or any part of the Bonds. However, the Investor may sell the Bonds at any time the Investor deems appropriate, subject to the transfer restrictions set forth in the Bonds and in the Indenture. The Investor understands that it may need to bear the risks of this investment for an indefinite time, since a sale of the Bonds, or any portion thereof, prior to maturity may not be possible.

4. The Investor understands that the Bonds are not registered under the Act and that such registration is not legally required as of the date hereof and further understands that the Bonds (a) are not being registered or otherwise qualified for sale under the “Blue Sky” laws and regulations of any state, (b) will not be listed in any stock or other securities exchange, and (c) may not be readily marketable due to restrictions on transfer.

5. The Investor acknowledges that it has either been supplied with or been given access to information, including financial statements and other financial information, which it has requested from the Borrower and to which a reasonable investor would attach significance in making investment decisions, and the Investor has had the opportunity to ask questions and receive answers from knowledgeable individuals, including its own counsel, concerning the Borrower, the Project, the Lessee, the Bond Documents and the Bonds and the security therefor so that, as a reasonable investor, the Investor has been able to make a decision to purchase the Bonds. The Investor has received a copy of the Preliminary Limited Offering Memorandum, dated December 6, 2016 (the “Preliminary Limited Offering Memorandum”), and the Limited Offering Memorandum, dated December 15, 2016 (the “Limited Offering Memorandum”). The Investor acknowledges that it has not relied upon any advice, counsel, representation or information of the Authority in connection with the Investor’s purchase of the Bonds except information of the Authority set forth under the captions “THE AUTHORITY” and “ABSENCE OF MATERIAL LITIGATION – The Authority” in the Preliminary Limited Offering Memorandum.

6. The Investor acknowledges that the obligations of the Authority under the Indenture are special, limited obligations payable solely from amounts paid to the Authority or the Trustee pursuant to the Loan Agreement and the Indenture and the Authority shall not be directly or indirectly or contingently or morally obligated to use any moneys or assets of the Authority to pay any portion of the costs of the Project, the Costs of Issuance, or any other costs or expense in connection with the Project, the Costs of Issuance, the Bonds or the Bond Documents. The Investor understands that the Bonds are not secured by any pledge of any moneys received or to be received from taxation by the Authority (which has no taxing power), the State of California or any political subdivision or taxing district thereof; that the Bonds will never represent or constitute a general obligation or a pledge of the faith and credit of the Authority, the State of California or any political subdivision thereof; that no right will exist to have taxes levied by the State of California or any political subdivision thereof for the payment of principal of or interest on the

I-3

Bonds and that the liability of the Authority and the State of California with respect to the Bonds is subject to further limitations as set forth in the Bonds and the Indenture.

7. The Investor has made its own inquiry and analysis with respect to the Bonds and the security therefor, and other material factors affecting the security and payment of the Bonds. The Investor is aware that the business of the Borrower and the Lessee involves certain economic and regulatory variables and risks that could adversely affect the security for the Bonds. The Investor has reviewed the documents executed in conjunction with the issuance of Bonds, or summaries thereof, including, without limitation, the Indenture and the Loan Agreement.

8. The Investor acknowledges and agrees that the Authority takes no responsibility for, and makes no representation to the Investor, or any subsequent purchaser, with regard to, a sale, transfer or other disposition of the Bonds in violation of the provisions hereof, or any securities law or income tax law consequences thereof. The Investor also acknowledges that, with respect to the Authority’s obligations and liabilities, the Investor is solely responsible for compliance with the sales restrictions on the Bonds in connection with any subsequent transfer of the Bonds made by the Investor.

9. The Investor agrees that it is bound by and will abide by the provisions of the Indenture relating to transfer, the restrictions noted on the face of the Bonds and this Investor Letter. The Investor also covenants to comply with all applicable federal and state securities laws, rules and regulations in connection with any resale or transfer of the Bonds by the Investor.

10. The Investor acknowledges that the sale of the Bonds to the Investor is made in reliance upon the certifications, representations and warranties herein by the addressees hereto.

11. The Investor hereby waives any and all claims, actions, or causes of action which the Investor may have from and after the date hereof against the Authority, the State Treasurer, counsel to the Authority, counsel to the State Treasurer, and their respective members, officers, agents, and employees, growing out of any action (other than gross negligence or willful misconduct) which the Authority or the State Treasurer took or could have taken in connection with the authorization, execution, delivery, and sale of the Bonds or the purchase of the Bonds by the undersigned. This waiver does not go to the Borrower, the Underwriter, the Lessee, or their counsel, their respective members, officers, agents, or employees.

12. The interpretation of the provisions hereof shall be governed and construed in accordance with California law without regard to principles of conflicts of laws.

Date: _________ Very truly yours, [NAME OF PURCHASER]

By:

Name:

Title:

J-1

APPENDIX J

THE GROUND LEASE

CHARLES DUNN COMPANY, INC, International Real Estate Services 800 West Sixth Street, Suite 800 Los Angeles, California 90017 M2709 213 481-1800, FAX: 213 481-0758 www.charlesdunn.com

To: DANMORRAR

DATE: February 3, 2015

SUBJECT: Fully Executed Lease

MEMO from the desk of

CHRISTOPHER STECK SENIOR DIRECTOR

Direct Phone: (213) 534-3216 Email: [email protected]

Comments: Enclosed is one (1) original fully executed Lease Document for 1929 Pico Boulevard for your records. Please call me with any questions or to discuss. Thank you

ii AIR COMMERCIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAUCOMMERCIAL SINGLE-TENANT LEASE •• NET

(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1. Basic Provisions iBasic Provisions"). 1.1 Parties: This lease ("Lease"), dated for reference purposes only ,J0a=n,u0 a=r,y~10 60 ,~02000l0S~------------

is made by end between Byzantine, LLC, a California limited liability company

("Lessor'')

and Value Schools, a California Non profit corporation

("Lessee"), (collectlvely the "Parties," or individually a "Party").

1.2 Premises; That certain real property, Including all improvements therein or to be provided by Lessor under the terms of this Lease,

andcommonlyknownasl929 West Pico Boulevard

located in the County of =L0o0s'--'Ane"sg,e010e0s'----------------- , State of California and generally described es (describe briefly the nature of the property and, if applicable, the "Projecr•, If the property is localed within a Project)

An approximately 24,400 SF industrial warehouse building and parking lot

("Premlses0). (See also Paragraph 2)

1.3 Term: 2 5 years and ,S,______ months ("Original Term") commencing February 1, 2015

("Commencement Date") and ending 0J_,u0n0e~3e.eOL'-'200'-400"----------·-------- ("Expiration Date"). (See also Paragraph 3) 1.4 Early Possession: If the Premises ara available Lessee may have non-exclusive possession of the Premises commencing

Upon mutual execution of a lease document ("Early Possession Data0). (See also Paragraphs 3.2 and 3.3)

1.5 Base Rent: $2 2, 22 2 . 2 3 per month ("Base Rent°), payable on the ,10s0t~--------------- clay of

each month commencing ,M0a,.,_----=1L,__.2,0~la5 ___________________________________ _

• (See also Paragraph 4)

@ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. See Paragraph ,501~------

1.6 Base Rent and Other Monies Paid Upon Execution:

(a) Base Rent: $2 2, 2 22 . 23 for Iha period 0M~a~y--'l'-----_,M~a~y,__~3_,1L, ---=2_,0_,1_,5 ____________ _

Security Deposit: $4 6,812.89 ("Security Deposit"). (See also Paragraph 5) (b)

(o)

(d)

Association Fees: $, ________ _ for the parlod _____________________ _

Other: $, __________ _ fo, _______________________ _

(e) Total Due Upon Execution of this Lease: $,,6090,000 3"-=50.0102'---------------1.7 Agreed Use: A school, currently known as University Preparatory Value School, which

is operated by the Lessee, and other ancillary and related uses (See also Paragraph 6)

1.8 Insuring Party: Lesseeei: ls the "Insuring Party" unless otherwise staled here!n. (See also Paragraph 8)

1.9 Real Estate Brokers: (See also Paragraph 15 and 25)

(a) Representation: The following real estate brokera (the "Brokers 0) encl brokerage relatlonshlps exist in this transaction (check

applicable boxes):

@Charles Dunn Company, Inc.

@ InSite EFS, Inc. D ________________________ _

represents Lessor axcluslvaly ("Lessor's Broker");

rapresenl9 Lessee exclusively ("Lessee's Broker''); or

represents both Lsssor encl Lessee (0 Dual Agency'').

(b) Payment to Broke~: I lpsA e::es1,1tisA aAEI Elslh<eF/ sf 11:iis bease by bstR Par:liss, Lessor shall pay to the Brokers the brokerage

ree agree cl to in a separate written agreement !(s••C;!-ft••••"•><aisHa,oHoo,••••H••••,.•••m•••a•ts, Otl:i,oHo•,•mo-<a<f ======-H'"''======•0~~sf0t•••a41e•t•a!-l Blle,asa&o

R.sAI) fer ll=le lnelffiFaijS S8P<l8SB FSAElel'BEI k} 11:is irsl:eFS.

1.10 Guarantor. The obligations of tha Lessee under this Lease are to be guaranteed by ________________ _

("Guarantor''). (See also Paragraph 37)

1.11 Attachment9. Attached hereto are the following, all of which constitute a part of this Leese:

li1 an Aclclendum consisting of Paragraphs 51 through 0606'----------D a plot plan clepicling the Premises;

D a currant set of Iha Rules and Regulations;

D a Work Letter;

@ a energy disclosure addendum is attached;

@ other (specify): Rent Adjustment (Exhibit A)

2. Premises.

2.1 Letting. Lasser hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and

upon ell of Iha terms, covenants and conditions set forlh in this Lease. While the approximate square footage of the Premises may have been used in

PAGE 1 OF 17

INITIALS

©2001 • AIR COMMERCIAL REAL ESTATE ASSOCIATION

$ ~

FORM STN-1B-04114E

the marketing of the Premises for purposes of comparison, the Base Rent slated herein Is NOT tied to square footage and is not subject to adjustment

should the actual size be determined to be different. Note: Lessee Is advised to verify the actual size prior to executing this Lease.

2.2 Condition. Lessor shall deliver the Premises to Lessee 91'9eFR eleaFI aAEI free ef Ele9Fls in it6 AS-15 condition on the

Commencement Date or the Early Possession Date, whichever first occurs (0 Start Date"). , aAel, sa leR9 as tRe Feq1,1iFael sel' lee seRti:asts eleseR9eEI IR

PaFa9FapR 7.1 (9) eare" aFa elltaiReel by bessee a REI !R el'klel u'itAiR tAiFty dars felle•ulRg tl=le 5:taFI Qate, l',ai+.rnts tRal !The existing electrical, plumbing,

fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, sump pumps, !f any, and all other such elements In the

Premises, a!Rer IAaFI these seR&1Fb1Steel By basses, sRall I.a iR eead epaFatiR9 seFIElllleR SR saiel date, that and the structural elements of the roof,

bearing walls and foundation of any buildings on the Premises (the 0 Bulldlng0) shall be delivered In th~lr AS-15 condition. f•BB ef 1J1ateFial Elefests, BREI ll=lat

tRe PFeffiises els Ret eeRtali:i haza.Fee1,1s leue!s sf aR) FRelel er H.IRgl EleflReEI as ten's liREler applieallle state eF feElei:al la . If a i:ieR eeFR,eliaRSB u IIA salel

u•aFFaFlt'/ aidsls as ef tt:le StaFI Qate, BF If BRe sf s1,1eh systems BF elemeRts shebllel malfYRBlieR eF fail ilRiR the appFepF'<Ne SFFaRty peFisel, bass er

shall, as besseFs sale eBll9atlaR •uitt:l respeet le s1,1sl=I matter, ei,se,et as etheR•tjse pre iefeEI ii:, IRis bease, prnm,etl) af:ter resel,el sf Fitl:eR Reties fram

bessee setl:IFlg feFll'I will:, spesifleit) tl=le Ratllre aRel eiGeRt ef s1:1sR RSA seFRpllaRee, malH.IRstieR er fail1:1ra, reellfy same at besssFs ei1,eeRse. TRe

"faFJBFlty peFieds sRall ea as falls •rs· (i) 6 meRll:is as te tRe l=ll!t'G eyele1J1s, aRd {ii) 39 days as ta the remaiRiRg systems aRel ell:ieF eleFRBRtEI ef tl=le

liYlleliR9. If basses elees RBI gi"a bessar IRe requlreel F1atiee witRiR tl'le apprepFlats waFfaR~• peFleel, GerFeetieR sf &Ry BblGh RGR ssmpllai:iea, FRalflmetieR

er fail: :r-e shall be tRe el=lllgalleR af beosee at l.essee's sale i;est aREI BllpBFISB l.esser alse u aFfaRts, tl=lat YR[ess ati:,epuise spee·fieef iR nifiliRg, Lesser is

l:IRB • are sf (l) aRy resereled Meliees sf Qefa1,1lt a#eeliR9 tl=le PFemise; (ii) aRy elellR(lllBRI a:;r.ellRIB el1,1e l:IRder aR~ [eaR ses1,1red By tl=le PFSFRisee; aRd (iii)

aF1y l.aRkruptsy ,ereeeeeliRg affestiRg tRe Premises.

2.3 Compliance. besser rarraRls IRal le tt:le I.est sf its IERB ieElge !Re lmpreuemeRls GR tRe Premises Lese;or has no knowledge of the legality of the lmprovement6 on the Preml6e6 and the improvements on the Premises may not comply with the building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances ("Applicable Requlremenl9") that were In el'fect at the time that each

Improvement, or portion thereof, was conetrucled. 5:aiel "far+a:Rt) ease Rel a.a.a~/ le tRe r :se kl ml:iiel=I bessee '1111 pblt tRe Pre1J1lses, FReelifisatieRs ,.,i,,isR

may Ile req1,1ireel B) IAe 'l1J1eril~aRs u4th Oisallililies Ast er aRy similaF laws as a Fes1:1lt sf bessee's use (see Paraera,eA 'aQ), er le BR} AlteFallBRB er I Jtility

IRslallalieRs (as ElefiRBEI 11'1 ParagrapA 7.3(a)) maele er ta 9s maele l,y basses. NOTE: Lessee Is responsible for determining whether or not'the

Applicable Requirements, and especially the zoning, are appropriate fer Lessee's intended use, and acknowledges that past uses of the

Premises may no longer be allowed. If tl=le PreFRises Eie Rel eemply with saiel arraRt'/, besser shall, ei,eept as alRBP"ise pre><ieleEI, pre1J1ptly after

reseipl sf ritl:ei:i Reties fl'eFR bes see set'iiRg feFll=I itR s,eeeffieil'/ the Ral1:1re a Rel ei!leRt sf s1,1et: i:iaR eempliaRee, J'Betlfy lt:le same at besssFs eiq:ieRse. If

bessee Elsea Rat gi e bass er ifitl:eR Rellse sf a RBR eeFR,eliaRse u ltR tRis 11raFfaR~ ill=iiR 'e 1J1eRtRs falle•"iRg tl=le €1aFI Qate, eer:reetieR ef tRat

R8R eampliaRse shall Ile lt:le sl:rligatieR sf bessee al bessee'e sale asst aRel enpeRSB If the Applicable Requirements are hereafter changed so as to

require during the term of this Lease the construction of an addition lo or an alteration of the Premises and/or Building, the remediation of any

Hazardous Substance, or the reJnfon:ement or other physical modification of the Unit, Premises and/or Building ("Capital Expenditure"), bes&Gr-aAa

bessee shall allesate !Re sest ef susR wsrl1: as ful!ems:

{a} S1,1l=ljest ts Pa::agrapt:l do 3(s} be[aiu, !t s1,1st: Gapllal li11,eeRQitr:res aFB reqYlreel as a res::11 ef IAe speelfle aREI r:Ri(!Ye blse ef tl=le

PreFRises By basses as seFRparad witA bis es By teF1aF1ts IA geReral, Lessee shall be fully responsible for the coat thereof. , pre'lldaEI, Rau'B•<sr tt:lal if s1,1sh

Gaiaital Eicpei:iElitblFB is FBE!liiFeel E11,1FiRg tRe last 2 ysaFS sf this bease aREI the seat tt:lereef BHeeeEls 'e FReRtt:ls' Base ReRI:, basses may iFlsteael termiRate

tAis Lease 1:1Rless besser i:ietlfles basses, iR Titii:i9, uitt:llFI 19 ears afteF reeeipt sf beseee's leFf!"iRalieR Ratlse tt:lat beeser Ras elesteel ta ,eay lt:le

Elll'klreFIGB l.etweeR the ast1,1al asst tl=leresf aREi BR ame1:1Rt eqYal ta 'e maR!t:ls' Base ReRt If basses eleels termiRatieR, beeeee shall immeEliatel) seaes

tRe ;,;se ef tRe PFeFRlses whiet:l reei1:1ires s1,1sR Gapllal EiM,ElBRelit1:1re aREI Eleli •er ta besser rritl:eR Reties speeit.,iRg a teFmiRatieR elate al least 99 elays

tRereafleF. S1,1GR term'i:iatlei:i Elate st:lall, t:101ue• ar, iR Re eueRI !;re earlier li'laR tl=le last Eley !Rat basses se1,1[EI legally 1,1!iliui !Re Premises witt:le1,1t

88FflFR8FIGIRg Sl:IGl=i Capital ExpaRElit;,;re, -

(bj If sust: Capital ExpeREllt1,1re Is Rel lt:le result sf !Re speelfie aRel b1Riq1,1e 1,1se eftl=le Premises l.y basses (sllsR as, 9e•rerF11J1SRta!1y FRBRElateEI seisFRis mei:lifisalieRsj, tReR besser sl:iall pay fer s1:1st:l Capital lixpeRQit1,1re aRi:l basses st:lall eRly Ile ebllgateel le pay eaah meRl:R i:lYFIRg IAe

Femaim::ler af 11:,e ts Ff!" ef IRis bease er a Ry entsRsisR ll=lereef, GR tt:le Elale 11=:at aR Riel=, tt:le Base Rel'll is El;,;e, BR am ell Rt eq;,ial Is 1111111:1 sf tt:le per:tieR ef s1,1st:l easts FeaseRal:rl} atl:Fib1:1table ts tt:le Premises. basses shall iaay IF1terest 91'1 IRe 13alaRSB 9lll may pFepa~ its eBr9atlaF1 at aRy liFFIB. If, l=is <e"BF,

s;,ish Ga,eltal elipeRelilblre is FBSjbliFeef E11:1FIR9 tl=le last 2 yeaFS sf tl=lis bease er If bessaF FeaeeRaBI} eletermlRes tl=lat it is RBI eeeRBFRleally feasil:rle le pa) its st:laFe lt:leFeef, bessar sl=iall Ra •e IRe eptieR le leFFRlFrate tt:lie beaes 1:1peR 99 Says pFlsr" itleR Fl Bliss ta bessee llRlees basses Rslifies bessar, iR

'l'FillRg, mltl=IIR 1Q Says &Aer reseipt ef besseFs termiRatieR Relles tRat basses will pay fGt s1:1el=I Capital li:1pemlitllre. If besser Elaes Ret sleet kl tel'R'liAale, aRd fails le teRelBF Its share e:f BR)' susR Capital EnpeRditllF8, basses FR~ aEl1<8RS8 Sb'Gi:i fuREIS aREI eleEl:rel same, mi!R IRlerest, fram i;«,Rt 1:1Rl:il besseFs st:laFS ef s1,1et: easts l=la e 9seR :fl :lly paid. If bessse Is blFlal.le le fiRaRee besssFs sAars, eF if !Re llalaRse ef the lileRI 81,10 a Rd pa) aBle fer

tt:e remaiRder e:f !Ris beaee Is Flat suffiaieRI le Holl~ F0i1J1l.llFS8 bessea SR ai:i sffset l.asis, basses sl=lall trans tt:le rigt:11 kl teFff'iFiate tl=lle bease b'JIBR 39

Elays u'FitteR Reliee ta besser. fe) MetmlthstaREliFlg lt:le al;ra •e, Iha JIFe"iSiBRS S8R8BFRiRg Gapltal EiepeRElil;,;rss are IRteREleEI le a.a.a~ SRI~ te FIBFI >'Sll:IRtaF,,

l:IRBJ{jilesleel, BREI RS •.e.elieable R.eqbllteFRBFIIB. If !Re Gapltal El,peRelitl:IFBS BFB iRsteaEI tFiggeFeEI l:r} basses as a FBBbllt ef BR aet1,1al SF JIFBJIGSBef

shaR9e iR 1,1ss, sRaRge iR IRtei:ielty ef blSB, er meEllflealleR le !As Preffii&Bs IRei:i, aREi iR tt:at e BAI, bessee sAall eilt:lsr: {i) iFRFRBEliately eease s;,;eR

sl=lai:i9eEI Yee er IRlemiit-, sf YBB aRElfar tal1e suel=I elRer steps as ma) Ile Resessal) ta ell1J11Rate tl=le req;,;ireFReRI fsr s1,1eh Gapilal E:HpeRelil;,;re, er (ii)

semplete BblsR Capita[ E11psRdit1,1re at its au R BH,El&Rse. l..essee sRall Rel REN 9"8", haue aRy Rgt:lt le termiRale IRis I ease.

2.4 Acknowledgements. Lessee acknowledges thal: (a) It has been given an opportunity to inspect and measure the Premises, (b) it

has been advised by Lessor andfor Brokers to satisfy itself wlth respect to the size and condition of the Premises (Including but not limited to the

electrical, HVAC and flre sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with

Disabilities Act), and their suitability for Lessee's intended use, (c) Lessee has made such Investigation as it deems necessary with reference to such

matlerli and assumes all responsibility therefor as Iha same relate to !ts occupancy of the Premises, (d) it is not relying on any representation as lo the

size of the Premises made by Brokers or Lessor, (e) the square footage of the Premises was not material to Leeeae's decision lo lease the Premises

and pay the Rent stated herein, and (f) neither Leasor, Lessor's agents, nor Brokara have made any oral or written representations or warranties with

respect to said matters other then es eat forth In this Lease. In addition, Lessor acknowledges that: (I) Brokara have made no representations,

promises or warranties conceming Lessee's ability to honor the Leaee or suitability to occupy the Premises, and (II) It Is Lessor's sole responsibility to

Investigate the financial capability and/or suilebilify of ell proposed tenants.

2.5 Lessee as Prier OwAerlOcsblpaRI +he warraRtles FRaEie By besser iR Pa::ag::apt:l 2 shall be sf Re furGe st e#est if iFRmeQiately

(l C,

---- PAGE 2 OF 17 z!Jt±_ INIT~S

@2001 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18-04/14E

pfier 1s tl=!e StaF! Qate besees as tl=!e e 'l'IBF sr eesi.paFlt sf 11:!e PreR'lises. IR s1rnl=! B>'BRI, bessee sl=!all Ile respeF1sillle fer aF1r ResessaF} seFFseti re -3. Term.

3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are ae specified in Paragraph 1.3.

3.2 Early Po99B99lon. Any provision herein granting Lessee Early Possession of the Premises is subject lo and conditioned upon the

Premises being available for such possession prior to the Commencement Date. Any grant of Early Possession only c:onveys a non-exclusive right to

occupy the Premises. If Lessee tolally or partially occupies the Premises prior to the Commencement Dela, Iha obligation lo pay Base Rent shall be

abated for !ha period of such Early Possession. All other terms of this Lease (Including but not limited to the obligations lo pay Res] Property Taxes

and insurance premiums and to maintain the Premises) shall be In effect during such period. Any such Early Possession shall not affect the Expiration

Date.

3.3 Delay In Po9session. Lessor agrees to use its best commercially reasonabls efforts to deliver possession of the Premises lo

Lessee by the Commencement Date. If, despite said efforts, Lessor Is unable to deliver possession by such dale, Lessor shall not be subject to any

liability therefor, nor shall such failure affect the validity of this Lease or change Iha Expiration Date. Lessee shall not, however, be obligated to pay Rent

or perform Its other obligations untl] Lessor delivers possession of the Premises and any period of rent abatement that Lessee would othenvlse have

enjoyed shall run from the dale of delivery of possession and continue for a period equal to what Lessee would olhenvise have enjoyed under the terms

hereof, but minus any days of delay caused by the acts or omissions of Lessee. If pessesslsR Js Rat Gel~reFed rnitl=!iA liQ Ela) s after 11:!s CeR'lFFIBRsemeAI

Qate, as !Re same may Be aifleF1ded 1..1F1Eler tRe terme ef BR) Werl; better BlEesuted by PaFliee, bessee ma~, al its eplisFI, By Flslise iFI u•FiliAg ill=!iR 1Q

da)s after llu eREI sf swsR SQ Ela) perieB, saAssl tl=!ls bease, IR u l=!isl=! s rsAt tRs PaFlles sl=!all be Elissl=!argeEI ff"Bffl all ebligatieAs Rerei.Ader. If SllGA

Fit:l:sR Relise Is Flat rsssi •eEI lly bsssar u IIRIFI said 1Q day peFled, bessse's rlgl=!I le seRsel sRa!I lsFFF1iAals. If possession of the Premises is not

delivered within 120 days after the Commencement Dale, this Lease shall terminate unless other agreements era reached between Lessor and Lessee,

JnwrJtlng.

3.4 Lessee Compliance. Lessor shell not be required to deliver possession of the Premises to Lessee until Lessee complies with its

obligation to provide evidence of insurance (Paragraph B.5). Pending delivery of such evidence, Lessee shall be required to perform all of its

obligations under this Lease from and after the Start Date, Including the payment of Rent, notwithstanding Lessor's election to withhold possession

pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date,

the Start Date shall occur but Lessor may elect to withhold possession until such conditions era satisfied.

4. Rent.

4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are

deemed to be rent ("Rent'').

4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor In lawful money of the United States, without offset or

deduction (except as specifically permitted in this Lease), on or before the day on which It Is due. All monetary amounts shall be rounded to the nearest

whole dollar. In the event that any Invoice preperad by Lessor is inaccurate such Inaccuracy shall not constitute a waiver and Lessee shall be obligated

to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full cslendar month shall be prorated

based upon the actual number of days of said month. Payment of Rent shell be made to Lessor at its address staled herein or to such other pe1$ons or

place as Lessor may from time to lime designate in writing. Acceptance of a payment which is less than the amount then due shell not be a waiver of

Lessor's rights lo the balance of such Rent, regardless of Lessor's endorsement of any check eo stating. In the event that any check, draft, or other

instrument of payment given by Lessee to Lessor Is dishonored for any reason, Lessee agrees to pay to Lessor the eum of $25 in addition to any Late

Charge and Lessor, at its option, may require all future Rent be paid by cashier's check. Payments will be applied first lo accrued late charges end

attorney's fees, second to accrued interest, then to Base Rent, Insurance and Real Property Taxes, and any remaining amount to any other outstanding

charges or costs.

4.3 f\ssesiatieR lases [Fl aEIGU:leFI ta 11:!e liaee ReRt, bessee sRall pa) te beeser easl=! FFISRtl=i aR amer1At sqwal ts aRY 8'1Rer's

asses·atieR er seRdeFRiAiYR'I fees le ied er assessed agalF1st the Premises. SaiEI meRies sl=!al! be pa'EI al !Re sal'Re IIFFle BFld iR the same R'ISRAer as tl=!e ........... 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance

of its obligations under this Lease. If Lessee falls to pay Rent, or otherwise Defaults under this Lease, Lessor may use, spply or rate in all or any portion

of said Securily Deposit for the payment of any amount already due Lessor, for Rents which wJII be due in the future, and! or lo reimburse or

c:ompensale Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any

portion of Iha Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security

Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shell, upon written request from

Lessor, deposit additional monies with Lessor so that the total emount of the Security Deposit shall at ell times bear the same proportion lo the

increased Base Rent as the Initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a materlal

change In the buainees of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit lo the

extent necessary, in Lessor's reasonable judgment, to acc:ount for any increased wear and teer that the Premises may suffer as a resull thereof. If a

change in control of Lessee occurs during this Leese and following such change the financial condition of Lessee is, in Lessor's reasonable judgment,

slgnmcantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient lo cause the Security Deposit to be at a

commercially reasonable level based on such change in financial condition. Lessor ahall not be required to keep the Security Deposit aeparate from its

general accounts. Within 30 9Q. days after the expiration or termination of this Leese, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held In true!, to bear interest or to be prepayment for any monies to be

paid by Lessee under this Lease.

6. Use.

6.1 Use. Lessee shall uee and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable

thereto, and for no other purpose. Lessee shall not use or permit the uae of the Premises in a manner that is unlawful, creates damage, waste or a

nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signel and seeing eye dogs, Lessee

ehall be permitted to flGl keep or allow Jn the Premises any pets, animals, birds, fieh, or reptiles. Lessor shall not unreasonably withhold or delay Its

c:onsent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the Improvements on

rec PAGE 3 OF 17 £ INITIAf;S

©2001 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN°18-04{14E

the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold

consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor's objections

to the change in Iha Agreed Use.

6.2 Hazardous Substances,

(a) Reportable Uses Require Consent. The !arm 0 Hazardous Substance" es used Jn this Lease shall mean any product,

substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by ilself or in combination with other materials

expected to ba on the Premises, Is either: (i) potentially injurious to the public health, safety or welfare, tha environment or the Premises, (ii) regulated

or monitored by any governmental authority, or (Ill) a basis for potential liability of Lessor to any governmental agency or third party under any applicable

statute or common law theory. Hazardous Substances shall Include, but not be llmltad to, hydrocarbons, patrolaum, gasoline, and/or crude oil or any

products, by-products or fractions thereof. Lessee shall not engage In any activity in or on the Premises which constitutes e Reportable Use of

Hazardous Substances without the express prior written consent of Lessor end timely compliance (at Lessee's expense) with all Applicable

Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage lank, (ii) the generation, possession,

storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or

business plan is required to be filed with, any governmental authority, end/or (iii) the presence at the Premises of a Hazardous Substance with respect

to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties.

Notwithstanding the foregoing, Lessee may use any ordinary and customary materials, Including matt:rlal,; ue;ed in a typical K-12 echool science

and chemi5try lab, reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, ate.) and common household cleaning materials, so long as such use is in compliance with ell Applicable Requirements, is not a Reportable Use, and

does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In

addition, Lessor may condition lie consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary lo

protect itself, the publ!c, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the

installation {end removal on or before Leese expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the

Security Deposit.

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be

located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact

to Lessor, and provide Lessor wlth a copy of any report, notice, claim or other documentation which II hes concerning the presence of such Hazardous

Substance.

{c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or

about the Premises (Including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, comply with all Applicable

Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup

of any contamination of, end for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially

contributed to by Lessee, or pertaining to or Involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for

Lessee, or any third party.

(d) Lessee Indemnification. Lessee shall indemnify, defend end hold Lessor, Its agents, emp!oye98, lenders and ground lessor,

if any, harmless from and against any and all loss of rents end/or damages, liabilities, judgments, claims, expenses, penalties, end attorneys' and

consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided,

however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises

from adjacent properties not caused or contributed to by Lessee). Lessee's obligations shell include, but not be limtted lo, the effecta of any

contamination or injury to person, property or the environment created or suffered by Lessee, and Iha cost of investigation, removal, remediation,

restoration and/or abatement, end shall survive the expiration or termination of this Leese. No termination, cancellatlon or release agreement

entered into by Lessor and Lessee shall release Lessee from its obllgatlons under this Lease with respect to Hazardous Substances, unless

specltlcally so agreed by Lessor In writing at the time of such agreement.

(a) Lessor Indemnification. Except as otherwise provided in paragraph B.7, Lessor end its successors and assigns shall

indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including

the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee's occupancy or which ere caused by

the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obllgsllons, as and when required by the Applicable

Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, end shall survive the

expiration or termination of this Lease.

(f) Investigations and Remediations. Lessor shall retain the responsibility end pay for any investigations or remediation

measures required by governmental entitles having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to

Lessee's occupancy, unless such remediation measure is required as a result of Lessee's use (Including "Alterations", as defined in paragraph 7.3(a)

below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such actlvilies al the request

of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises et reasonable times in order lo cany out Lessor's

investigative and remedial responsibilities.

(g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease,

unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable

Requirements and this Leese shall continue in full force end effect, but subject to Lessor's rights under Paragraph ll.2(d) and Paragraph 13), Lessor

may, at Lessor's option, either (I) Investigate and remediale such Hazardous Substance Condillon, If required, as soon es reasonably possible at

Lessor's expense, in which event this Leesa shall continue In full force and effacl, or (ii) If Iha estimated cost to remadiete such condition exceeds 12

times the then monthly Base Rent or $100,000, whichever is greeter, give written notice lo Lessee, wlthin 30 days after receipt by Lessor of knowledge

of the occurrence of such Hazardous Substance Condition, of Lessor's desire lo terminate this Lease as of the date 60 days following the date of such

notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give wrttten notice to Lessor of Lessee's

commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal lo 12 times the

then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30

days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation

ylc. PAGE40F 17

INITIALS

©2001 • AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18-04114E

as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance

thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination.

6.3 Lessee's Compllance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's

sole expense, fully, diligently and in a timely manner, materially comply w!lh all Applicable Requirements, the requirements of any applicable fire

Insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate In any manner to the such

Requirements, without regard to whether such Requirements are now !n effect or become effective after the Start Date. Lessee shall, within 10 days

after receipt of Lessor''s written request, provide Lessor with copies of all permits and Other documents, and other information evidencing Lessee's

compliance with any Applicable Requirements specified by Lessor, and shell immediately upon receipt, notify Lessor in writing (with copies of any

documents Involved) of eny threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the

Premises to comply with any Appllcable Requiremenls. Likewise, Lessee shall lmmedlately give written notlce to Lessor of: (i) eny water damage to the

Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors

that might indicate the presence of mold in the Premises. In addition, Lessee shall provide copies of ell relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of a written request therefor. In addition, Lessee shall provide Lessor with copies of its business license, certlflcete

of occupancy and/or any sim!lar document within 10 days of the receipt of a written request therefor.

6.4 Inspection; Compliance. Subject to applicable law and Lessee'& rea&onable requiremente. of non-school per&on11el on

school grounda durlng school hour5, Lessor and Lessor''s "Lender" (es defined in Paragraph 30) and consultants shall have the right to enter Into

Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting the

condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shell be paid by Lessor, unless a

violation of Applicable Requirements, or e Hazardous Substance Condition (see paragraph 9.1) is found to exist or be imminent, or the inspection is

requested or ordered bye governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long

as such inspection Is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant materiel safety data

sheets (MSDS) to Lessor within 10 days of lhe receipt of a written request therefor.

7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.

7 .1 Lessee's Obllgatlons.

(a) In General. Subject to the provisions of Paragraph 2.a (GaRSltlaR), a.3 (GampliaRae), 6.3 (Lessee's Compliance with Applicable

Requirements), 7.2 (Lessor's Obligations), Q (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the

Premises, Utility Installations (Intended for Lessee's exclusive use, no matter where located), and Alterations in good order, condition and repair

(whether or not the portion of the Premises requiring repairs, or the means of repafrtng the same, ere reasonably or readily accessible to Lessee, and

whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises),

including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire

protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, roof drainage systems, floors, windows, doors, plate glass,

skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises.

Lessee, in keeping the Premises Jn good order, condition and repair, shall exercise and perform good maintenance practices, speclflcally including the

procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall Include restorations,

replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof In good order, condition and stale of

repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Bu ii ding In e first-class condition (!ncluding, e.g. graffiti removal)

consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior

repainting of the Building.

(9) Sel"l•lse C8Rlrasta bessee sAall, at bessee's eels ei:peRsa, pras11Fs aml maiRtaiR aeRlraste, witA sepias ta bessar, iR

sYsleJ:Rar; Ulrm a RS su9staRae far, al'1el u 111'1 saRlrastera spesla!ll!IR§' aRQ e::perieRsai::I iR U=1a FRalRleRaRss sf tAa fQ)lsu iR§' e1f 1ipmeRt am::I

imprn• emaRls, If aRy1 If BREI ,uAeR iRstalled BR IAe Premises· (i) 1,,11/AG e111,1ipmeRl1 (II) 9alle1', aRS pressure ressels, (iii) fire extiRgYisRiR§' systems

iic1sh,1EIIR9 fire alami aREl'sr smal1s EiateslleR1 (I q laRGssapiR!l aREi iFFlgatleR systems, ( ) reef ss eriR!l aREI EiraiRs, aREI ( i) slarifiers. Heureuer, bsssar

rsser•es t!:1e rigJ:il:, YpeR Rellsa le bessse, ts f!FSBYFe aRi;I maiRtaiR aR} er all sf BYsR sar<lse eeRlraels, aREI basses sliall raimBurae I BSser, 1,1peR

EisJ:RaREI, fQr tAe aesl 11:iereaf.

(c) Failure to Perform. If Lessee falls to perform Lessee's obligallcns under this Paragraph 7.1, Lessor mey enter upon the

Premises after 10 days' prior written notice to Lessee (except In the case of an emergency, In which case no notice shall be required), perform such

obligations on Lessee's behalf, and pul the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 105%

~ of the cost thereof.

(Ei) RaplaHJ:R&Rt 'iYlajast ts bsssss's IRi;lamRilleatieR sf beeser as set farlA iR ParagrapA IU• 9elsw, aRi;I mil:Re1,1t FBlie iR§' basses

sf lia9ilit, reso1lliRS ff's~ bsssee's fail1,1re la eHeraiss aic,Ei peFferFR gaael malRteic1aRse praslises, if aR item ElessRllei:l iR ParagFapR 'i!.1{B) eaRRSI Be

repalraEi ettler tAaR al a sest rJ:iisA Is IA a:wess sf 89% sf tAs sesl sf replasiRg so1sR its~. tAsR s1,1sA Item sAall Be replaseEi By besser, aREI IAe asst

tAeraaf sAall Ile prarateEi 9etweeR Ilia Parties aREI bessee aRall eRt1 9e e911gateEi le fla), saeA maRtl=I E11:1riR!l tRe reFRaiREier sf !Re !arm sf tl=lls beess, eR

tAe Bate SR RisA !sass R.eic,t Is EiYe, aR ams1:1Rli s111,1al Is !Ae praEio1at sf mullipl)iR§' !Re asst af susA replasemeRI 9) a frastieR, tl=le Ro1meralsF sf AlsA Is

el'1e, aic,Ei tAe GaRsmiRaler sf ,.rJ:iisR is 111 (le. 1111111=1 sf the see! par ~BRIA). bassee sAa!I pay IR!isrss! SR Ilia YRaJ:Rsrt·HEi 9alaRss 9111 may prepay its

a91igatieR at BRV time.

7.2 Lessor's Obllgatlons. Subject to the provisions of ParagrapAe 2 a (GsRditieR), a.3 (GsmflllBRSS), 9 (Damage or Destruction) and

14 (Condemnation), it is intended by the Parl!es hereto that Lessor have no obligation, in any manner whatsoever, lo repair and maintain the Premises,

or the equipment therein, all of which obligations are intended to be the! of the Lessee. It is the Intention of the Parties that the terms of this Lease

govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now

or hereafter in effect to the extent it is Inconsistent with the tarms of this Lease.

7.3 Utility Installations; Trade Fixtures; Alteratlons.

(a) Definitions. The term "Utility Installations" refers to ell floor and window coverings, air andfor vacuum lines, power panels,

electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, end fencing in or on

the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed wilhout doing material damage to the

Premises. The term "Alteratlons" shell mean any mcdificetion of the Improvements, other than Utility Installations or Trade Fixtures, whether by

~c:. ---- PAGE 5 OF 17

----INITIALS 4* ©2001 • AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18-04/14E

addition or deletion. "Lessee Owned Alterations andfor Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee

that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent.

Lessee may, however, make non-structural Alterations or Utility Installations to the Interior of the Premises (excluding the roof) wltho'ut such consent but

upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls,

will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not

exceed a sum equal to 3 month's Base Rent in the aggregate or e sum equal to one month's Base Rent in any one year. Notwithstanding the

foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of L88sor. Lessor

may, as e precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility

lnstallattons that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed

plans. Consent shall be deemed conditioned upon Lessee's: (I) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both

the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other

Applicable Requirements In a prompt end expeditious manner. Any Alterations or Utillty Installations shall ba performed ln a workmanlike manner with

good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. f'er erl: nl:llsl:l sesls ai:i

ams11Rt ii:, s1<sass 9f eris merill:l's iii ass l'lsRI:, l..ssser may sei:idlt!er::i !Is ser::iseril uper::i basses pFG,fdlRg a lisR aRd samplellsR 9sRQ iR aR ameuAt equal

Is 1BQ"{ 9f 11:le sstimater;I east ef swel=I o lteratleR er I ltllity lrislallalieR aRdler upeR bessee's pestlrig BR aQdillerial 'aeswril'J Cepesit ili:l besser.

(c) Liens; Bonda. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished lo or

for Lessee al or for use on the Premises, which claims are or may be secured by any mechanic's or meterialmen's lien against the Premises or any

interest therein. Lessee shall give Lessor not less than 10 days notice prior lo the commencement of any work in, on or about the Premises, and

Lessor shall have the right lo post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee

shall, at Its sole expense defend and protect itself, Lessor and the Premises against the same end shall pay end satisfy any such adverse judgment that

may be rendered thereon before the enforcement thereof. If Lessor shell require, Lessee shall furnish a surety bond In en amount equal to 150% of the

amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action,

Lessee shall pay Lessor's attorneys' fees and costs.

7 .4 Ownership; Removal; Surrender; and Restoration.

(a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility

lnstallatlons made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the

owner of all or any specified pert of Iha Lessee OWned Alterations end Utility Installations. Unless otherwise Instructed per paragraph 7.4(b) hereof, all

Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be

surrendered by Lessee with the Premises.

(b) Rem,a,ral. Ely dall>raP/ UI basses ef u'FilteR Aetisa fmm besssr rial earlier tllaR QQ arid r::iet [atartllaR 30 days prier le tile ei:id ef

tl:le IBFFR ef 11:lls I.ease besser may FB~u!rs tl:lsl a Ry er all basses Omried o lteJalieRs er 1 ltility lristal!ellsRs 9s rame•red 9y tl:le s11piralieR er leFFRIRalleR ef

tl=lis beasa. Lessor may require the removal at any time of all or any part of any Lessee Owned Alteralfons or Utility Installations made without the

required consent.

(c) Surrander; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of

the Improvements, parts and surfaces thereof broom clean and free of debris, end in good operating order, condition and state of repair, ordinary weer

and tear excepted, "Ordinary wear and tear" ehall not include any damage or deterioration that would have been prevented by good maintenance

practice. Notwithstanding the foregoing, if this Lease Js for 12 months or less, then Lessee shall surrender the Premises in the same condition as

delivered to Lessee on the Start Date with NO allowance for ordinary weer end tear. Lessee shall repair any damage occasioned by the Installation,

maintenance or removal of Trade Fixtures, Lessee owned Altarations and/or Utility Installations, furnishings, end equipment as well as the removal of

any storage tank installed by or for Lessee. Lessee shall remove from the Premises any and all Hazardous Substances brought onto the Premises by

or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises) to

the level specified in Applicable Requirements. Trade Fixtures shall remain the property of Lessee and shall be ramoved by Lessee. Any personal

property of Lessee not removed on or before the Expiration Date or any earlier termination date shall ba deemed to have been abandoned by Lessee

and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacata the Premises pursuant to this Paragraph

7.4(c) without the express written consent of Lessor shall constitute e holdover under the provisions of Paragraph 26 below.

8. Insurance; Indemnity,

B.1 Payment For Insurance. Lessee shell pay for all insurance required under Paragraph B e1<Gept ta tl:ls e:ltaAI sf tl:ls east

attri9uta91e ta naelllty iRSYFBAse saR'isd er bssser YRSar 12aragirapl:l il • .::1{9) iR aJ«>ess ef $:1.,QQQ,QQQ per esGYrFBRse. Premiums for policy periods

commencing prior to or extending beyond the Lease term shall be prorated to correspond lo the Lease term. Payment shall be made by Lessee to

Lessor within 10 days following receipt of an Invoice.

B.2 Llablllty Insurance.

(a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee

and Lessor as an additional Insured against claims for bodily injury, personal Injury and property damage based upon or arising out of the ownership,

use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on en occurrence basis providing single

limit coverage In an amount not less than $1,000,000 per occurrence with en annual aggregate of not !ass than $2,000,000. Lessee shall add Lessor as

en edd!tlonal insured by means of an endorsement at least as broad as the Insurance Service Organization's "Additional Insured-Managers or Lessors

of Premises" Endorsement. The policy shall not contain any intra-insured exclusions es betwaen insured persons or organizations, but shell Include

coverage for liability assumed under this Lease as en "Insured contract' for the performance of Lessee's indemnity obligations under this Lease. The

limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an

endorsement on its liability pollcy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by

Lessor, whose Insurance shall be considered excess insurance only.

(9) Car:ried 9) I.Haer besser sl:lall FRaiRtalR lla9ility iRswraic1ss as 9assFi9ad iR PaFaffFapi:l li • .::!(a), IR a99itiaR la, aRd Rat iR lieu ef,

tl:le IRswraRse rs~wired ta 9s malRta!Rsd 9y Lasses. bssses shall r::iet ea i:iamsQ as aR additleAal IRsured IJ:isrsiR

6.3 Property Insurance. Buildin11, Improvements and Rental Value,

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(a) Bulldlng and Improvements. The Insuring Party shall obtain and keep in force a policy or policies In the name of Lessor, with

loss payable to Lessor, any ground-lessor, and to any Lender Insuring loss or damage to Iha Premises. The amount of such insurance shall ba equal to

the full insurable replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event

more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility lnslellelions, Trade Fixtures, 21nd

Lessee's personal property shall ba insured by Lessee Ret By basser. If the coverage is available end commercially approprlale, such policy or policies

shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by e Lander}, includlng

coverage for debris removal and the enforcement of any Applicable Requiremenls requiring the upgrading, demolition, reconstruction or replacement of

any portion of the Premises as the result of a covered loss. Said policy or policies shell also contain an agreed valuation provision in lieu of any

coinsuranca clause, waiver of subrogation, and Inflation guard protection causing an Increase In the annual property Insurance coverage amount by a

factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the

Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $5,000 per occurrence, and Lessee

shall be liable for such deductible amount In the event of an Insured Loss.

(b) ReRtal Ualua. +Ra Insuring Pait; &Rall a'et:aln a1u:I keep IR fafGB a pellsy er pa!lsies iR !Re naFRe sf basser witR lass paya'ele ta

besser am::I a Ry beRSer, iRsi.Fing !Re less sf the fl,ill Rent far a Rs year with an al«aneae perie'<I sf ir'<IBFRRity far an aeSitiaRal 1 !IO Bays ("Penta! '!ali.s

iRsb'raRse'). Said Ins IFaRsa sRall seRtaiR aR agFBed ah,tatisn PFB"lsfen iR 1ie1;1 sf any seirs1;1i:anse s/a1,1se a?G the am8blAI 8f C8'<91'a§'e sila'! Be

aaji.stee ann11a!ly le reflect tRe prejaelaS Rent atRaF"uise p~ab!a by lesses, far tRa rent 1.a FRenll=I psFieEI. bassea sRall be liable far BAY eaei.stible

ams1:1nt iA thee ant ef sueh less.

(c) i\djasent PreA'l.ises. If tRe PreFRises are par! ef a fal'{ler Bb1if8ing, er sf a gra1;1p af bf:fi/S'A!!S a11"ReEI ey besi;;er I' /:(sh a<e ad,;aseAt

le IAe Premises, tRa bassae shall pa) far any iRerease in the preFRiUA=ls far tRe preparly ins1,1ranse sf s11eR 'e lldill§ sr lrni!Sirgs If said inerease is

sa11sae by bessaa's aGts, arnlsslena, use er essupansy sf the Prsrnlsss

8.4 Lessee's Property; BuslnHs Interruption Insurance; Worker's Compensation Insurance.

(a) Property Damage. Lessee shall obtain end maintain Insurance coverage on ell of Lessee's personal property, Trade Fixtures,

and Lessee Owned Alterations and Utility lnstallatlons. Such insurance shall be full replacement cost coverage with e deducl\ble of not to exceed

$1,000 per occurrence. The proceeds from any such Insurance shall be used by Lessee for the replacement of personal property, Trade Fixlu'es and

Lessee Owned Alterations and Utility Installations.

(b) Business lnlaA'uptlen basses sRall e'etain are Malntai1=1 lass af inseMa are eiara BllJ3SAsa lAsuranea In aFReuRts as ,.fill relmln1rsa basses far 0lrsst er ind ire Gt less sf earnings atlFiB1:1taBle le alf pa Fils BBA=1f11eR!y insure a against El) pFI de11t /.essees ·R !)le bbls·Aass sf !.sssae

eraijrlbutabls te pra• entiefl efasssss ta !Re Premises as a Fl!s1;1~ efsuell perils

(c) Worker's Compensation Insurance. Lessee shall obtain end maintain Worker's Compensation Insurance in such amount es may be required by Applicable Requirements. Such policy shall include a Waiver of Subrogation' endorsement Lessee shall provide Lessor with a copy of such endoraement along with the certificate of insurance or copy of the policy required by paragraph B.5.

(d) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease.

8.5 Insurance Policies, Insurance required herein shall be by companies maintaining during the pol!cy term a "General Policyholders

Rating" of al least A-, VII, as set forth in the most current Issue of "Best's Insurance Guide", or such other rating es may be required by a Lender.

Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shell, prior to the Siert Date, deliver to

Lessor certified copies of policies of such Insurance or certificates wllh copies of the required endorsements evidencing the existence and amounts of

the required Insurance. No such policy shall be cancelable or subject lo modification except after 30 days prior written notice lo Lessor. Lessae shall,

at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or nlnsurance binder$" evidencing renewal thereof, or

Lessor may order such insurance and charge the cost thereof to Lessee, which amount shell be payable by Lessee lo Lessor upon demand. Such

policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever Is less. lf either Party shall fail to procure

and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the

other, end waive their entire right to recover damages against the other, for loss of or damage lo lls property arising out of or incident to the perlls

required to be insured against herein. The effect of such releases and waive!$ is not limited by the amount of insurance carrted or required, or by any

deductibles appllceble hereto, The Parties agree to have their respective property damage insurance carrlers waive any right to subrogation that such

companies may have against Lessor or Lessee, ea the case may be, so long as the Insurance is not Invalidated thereby.

a. 7 Indemnity. Except for Lessor's gm&& negligence or willful misconduct, Lessee shell indemnify, protect. defend and hold harmless

the Premises, Lessor and its agents, Lessor's master or ground lessor, partners end Lenders, from and against any and all claims, loss of rents and/or

damages, liens, judgments, penalties, attorneys' and consullants' fees, expenses and/or liebillttes arising out of, involving, or in connection with, the use

end/or occupancy of the Premises by Lessee. If any acllon or proceeding is brought' against Lessor by reason of any of the foregoing matters, Lessee

shell upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shell cooperate with Lessee in such

defense. Lessor need not heve first paid any such cl aim in order to be defended or indemnified.

a.a Exemption of Lessor and its Agents from Liability. ~Jetwithstan0in,!l 1Re Except in ca5ee of negligence or breach of this Lease by Lessor or its agents, neither Lessor nor Its agents shell be liable under any circumstances for: (i) injury or damage to the person or goods,

wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises,

whether such damage or Injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the

breakage, leakage, obstrucllon or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting nxturas, or from any other cause,

whether the said Injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a

part, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant _of Lessor or from the failure of Lessor or its

agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee's business or for any loss of Income or profit therefrom.

Instead, it is intended that Lessee's sole recourse in the event of such damages or Injury be to file a claim on the insurance policy(les) that Lessee is

required to maintain pursuant ti the provisKlns of paragraph a. 8.9 Failure to Provide Insurance. Lessee acknowledges that any failure on Its pert lo obtain or maintain tile Insurance required

herein will expose Lessor to risks end potentially cause Lessor to incur costs not contemplated by this Leese, the extent of which will be extremely

difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not meintain the required insurance and/or does not provide Lessor

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with the required .binders or certificates evidencing the existence of the required Insurance, the Base Rent shall be automatically increased, without any

requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such

increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor wilt Incur by reason of Lessee's failure to

maintain the required insurance. Such Increase in Base Rent shall in no event constitute a waiver of Lessee's Default or Breach with respect to the

failure to maintain such Insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to

maintain the Insurance specified in this Lease.

9. Damage or Destruction.

9.1 Daflnltlon9.

(a) "Premises Partial Damage" shall mean damage or destruction lo the improvements on the Premises, other than Lessee

Owned Alterations and Utility Installations, which can reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor

shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

{b) 0 Premisas Total Destructlon° shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and

Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor

shell notify Lessee In writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c) 0 1nsured Loss" shall mean damage or destruction to Improvements on the Premises, other than Lessee Owned Alterations and

Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the Insurance described in Paragraph 6.3(a),

irrespective of any deductible amounts or coverage limits involved.

(d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence

to their condit!on existing Immediately prior thereto, Including demolition, debris removal and upgrading required by the operation of Applicable

Requirements, and without deduction for depreciation.

(e) "Hazardous Substance Condltion" shall mean the occurrence or discovery of a condition Involving the presence of, or a

contamination by, a Hazardous Substance, in, on, or under the Premises which requires remediation.

9.2 Partial Damage • Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then b8s&8I' Lessee shell, et

be&6GF& Leesee's expense, repair such damage (lmt Ret beeeae's Trade Fint1,1res er basses G•n18EI AltaralieRs aRd lltilit; IRstallelisRs} as soon as

reasonably posstble and this Lease shall continue In full force and effect; provided, howaver, that bessaa sRall, at bassar's alastisR, malts tl:!.a FSpair af

aRy Elamaga er Eleslr1,1stiaR ti'ie tatal asst ta repair sf, i'ilsR le $1Q,ggg er less, aRd, IR e1,1si', e •eRI, Lessor shall make aRY the applicable insurance

proceeds available to Lessa a on a reasonable basis for that purpose. Notwithstanding the foregoing, If tha required insurance was not in force or the

Insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as lo the

deductible which Is Lessee's responsibility) as and when required to complete said repairn. In the event, however, such shortage was due to Iha feet

that, by reason of the unique natura of the improvements, full replacement cost insurance coverage was not commercially reasonable and available,

Lesser sRall icuwa RB aBligatieA te pa',' Klr 11:la sRsFtage iR iAs!lraRee presaaQs er ts fu;(ly restere 11:le 'IRi'JblB aspests sf tl:le Premises dRlass basses

pre•/4Gas besssr wltR IRe :fl IRS& ta ae><er same, er aea,,;ii ala as&blFaRBB tRaraaf, wltl:liR 1 g days Klll9'• IRg rssaipl ef mrilteR Ratlsa af s1,1slt site Raga a Rd

rai;iuast ti'iarefer Lessee shall have the option to repair 5uch damage at ite coat and expense or to terminate the Lease as provided

herein. If Lessor recaivas said funds or adequate assurance thereof u ithiR seii:t 1Q ela) par.:Jed, Iha party responsible for making the repairs shell

comp!e1a tham es soon as reasonably possible end this Lease shall remain in full force and affacl. If such funds or assurance are not received, Lessor

may nevertheless elect by written notice to Lessea within 10 days thereaflar to: (i) make such restoration and repair as is commercially reasonebla with

Laesor paying any shortage In procaads, in which case this Laase shall remain In full force and effect, or (ii) have this Leasa terminate 30 days

thereafter. Lassae shall not be entltlad to reimbursement of any funds contributed by Lassaa to repair any such damage or destruction. Premises

Partial Damage due lo flood or aerthquake shall be subject lo Paragraph 9.3, notwithstanding that there may ba some insurance coverage, but the net

proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3 Partial Damage • Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, YRless sa1,1seB lly a

RB9ll90Rt er ,.,illfld asl ef bessae (iR n<i'iisA a eRI bessae sl:lall make the repairs at Lessee's ei1per1se), Lasser either Party may ailher: {i) repair such

damage as soon as reasonably possible at-b&sSGF& their expense, !n which event this Laase shall continue in full forca and effect, or (ii) terminate this

Laasa by giving written notica to be&see the other party within 30 days aflar receipt by Lessor of knowledge of the occurrence of such damaga. Such

termination shall ba affaclive 60 days followlng the date of such notice. In the event Leasor alecls to terminate this Laase, Lessea shall have the right

within 10 days after receipt of the termination notlca to give written notice to Lessor of Lessee's commitment to pay for Iha repair of such damage

without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance tharaof within 30 days after making such

commitment. In such avant this Lease shall continue in full force and affect, and Lessor shall proceed to make such repairs as soon as reasonably

posslbla after the required funds are available. If Lessee doas not make tha required commitment, this Laasa shell terminate as of the date speclflad in

the termination notice.

9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate

60 days following such Destruction. If the damage er elestFbls!leR "'8.S ea1,1sed lly !Re grass r1agliseRse er u ll!fbll miseeR81;1sl sf Lessee, besser sRall

Ra><e the rigt:it la rese er besser!s Elamases frsm bessee, ensept as prauldei:t iR ParagrapA 8.8.

9.5 Damage Near End of Tenn. If at any lime during Iha last 6 months of this Lessa there is damege for which the cost to rapair

exceeds ene msRIR's three (3) months' Basa Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective eo 30 days following

the date of occurrence of such damage by giving a writtan termination notica to Lessee within 30 days aftar tha date of occurrence of such damaga.

Notwithstanding Iha foregoing, if Lessee al that time has an exercisable option to extand this Lease or to purchase the Premises, !hen Lessee may

preserve this Lessa by, {a) exercising such option and (b) providing Lessor with any shortage In Insurance procasds (or adequate assurance thersof)

needed to make the repairs on or before Iha aarlier of {i) the data which is 10 days after Lessee's receipt of Lessor's written notice purporting lo

terminate this Lease, or (ii) Iha day prior to the dale upon which such option expires. If Lassaa duly exercises such option during such pariod and

provides Lessor with funds {or adequate assurance thereof) to cover any shortage in insurance proceeds, Lasser shall, at Lessor's commercially

reasonable expense, repair such damage as soon as reasonably possible and this Laasa shall continue in full forca and effect. If Lessee fails to

exercise such option and provide such funds or assurance during such period, then this Lease shall termlnate on the date specified in the termination

notice and Lessee's option shell be extlngu!shed.

9.6 Abatement of Rent; Lessee's Remedies.

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(a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for

which Lessee is not responsible under this Lease, the Rant payable by Lessee for the period required for the repair, remediation or restoration of such

damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, trnt RBI ts SHSasd tRe ~reseeds Feselua9 from

tRe RaAtal llah.10 iASllFaAee. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such

damage, destruction, remediation, repair or restoration except as provided herein.

(b) Remedies. If, pun,uant to this Article, Lessor is obligated or becomes obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at

any time prior lo Iha commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice,

of Lessee's election to terminate this Lease on a date not lass than 60 days following the giving of such notice. If Lessee gives such notice and such

repair or restoration ls not commenced within 30 days thereafter, lhls Lease shall terminate as of the date specified In said notice. If the repair or

restoration is commenced within such 30 days, this Lease shall continue In full force and effect. "Commence" shall mean either the unconditional

authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

9.7 Termination; Advance Payments, Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable

adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return

to Lessee so much of Lessee's Security Deposit as has not bean, or is not than required lo be, used by Lessor.

10. Real Property Taxes,

10.1 Definition. As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special,

ordinary or extraordinary, or rontal levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed

upon or levled against any legal or equitable interest of Lessor in the Premises or the Project, Lessor's right to other income therefrom, and/or Lessor's

business of leasing, by any authority having the direct or indirect power to tax and where the funds ere generated with reference to the Bulldlng address

and where Iha proceeds so genera.tad are to be applied by the city, county or other local taxing authority of a Jurisdiction within which the Premises are

located. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by res.son of events

occurring during the term of this Lease, Including but not limited to, a change In Iha ownership of Iha Premises, and (ii) levied or assessed on

machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

10.2 Payment of Taxes. In addition to Basa Rani, Lessee shall pay to Lessor an amount equal to the Real Property Tax Installment

due at least 20 days prior to the applicable delinquency date. If any such installment shall cover any period of time prior to or after the expiration or

termination of this Lease, Lessee's share of such Installment shall be prorated. In the event Lessee Incurs a late charge on any Rent payment, Lessor

may estimate the currant Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee monthly In advance with the

payment of the Base Rent. Such monthly payments shall be an amount equal to the amount of the estimated installment of taxes divided by the

number of months remaining before the month in which said Installment becomes delinquent. When the actual amount of the applicable tax bill is

known, Iha amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed lo pay the applicable taxes. Jf

Iha amount collected by Lessor Is Insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sum

as Is necessary. Advance payments may be intermingled wlth other moneys of Lessor and shall not bear Interest. Jn the event of a Breach by Lessee

In the performance of ils obligations under !his Lease, !hen any such advance payments may be treated by Lessor as an additional Security Deposit.

10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real

Property Taxes for all of the land and Improvements Included within Iha tax parcel assessed, such proportion to be conclusively determined by Lessor

from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available.

10.4 Personal Property Taxes, Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee OWned

Alterations, Ull!lty Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause its

Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed

separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the

taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property.

11. Utilities and Services. Lessee shall pay for all water, gas, heal, light, power, telephone, trash disposal and other utilities and services

supplied lo the Premises, together with any taxes thereon. lf any such services are not separately matarad or billad lo Lessee, Lessee shall pay a

reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be

Hable In any respect whatsoever for the inadequacy, stoppage, Interruption or discontinuance of any utility or service due to riot, strike, labor dispute,

breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions.

12. Assignment and Subletting.

12.1 Lessor's Consent Required.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, 0 asslgn or

anignment") or sublet all or any part of Lessee's Interest 1n th!s Lease or In the Premises without Lessor's prior written consent.

(b) Unless Lessee !s a corporation and its stock is publicly traded on a national stock exchange, s change In the control of Lessee

shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a

change in control for this purpose.

(c) The invo[Vement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition,

financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypolhecation of this Lease or Lessee's assets occurs,

which results or will result in a reduction of the Nat Worth of Lessee by an amount greater than 25% of such Net Worth as ii was represented al Iha

time of the execution of this Lease or al Iha time of the most recent assignment lo which Leasor has consented, or as II exists fmmadlalaly prior lo said

transaction or transactions conslllullng such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor

may withhold Its consent. "Net Worth of Lessee" shall mean Iha net worth of Lessee (excluding any guarantors) established under generally accepted

accounting principles.

(d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or

a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a

noncurabla Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, Increase the monthly Base Rent to 110% of the Basa

Rent then in effect. Further, in the event of such Breach and rental adjustment, (l) the purchase price of any option lo purchase the Promises held by

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Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled

durlng the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shell be limited to compensatory damages and/or injuncllve relief,

f) Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is

requested.

(g) Notwithstanding lhe foregoing, allowing a de minimis portion of the Premises, ie. 20 square feet or less, to be used by a third

party vendor in connection with the installation of a vending machine or payphone shall not conslitule a subletting.

12.2 Terms and Conditions Applicable to Assignment and Sublettlng.

(a) Regardless of Lessor's consent, no assignment or subletting shall: (i) be effective without the express written assumption by

such assignee or sublessee of the obligations of Lessee under this lease, (ii) release Lessee of any obligations hereunder, or (Iii) alter the primary

liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by lessee.

(b) lessor may accept Rent or performance of Lessee's obligations from any person other than lessee pending approval or

disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall

constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach.

(c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else

responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's

remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

(a) Each request for consent to en assignment or subletting shall be In wr1ting, accompanied by information relevant to Lessor's

determination es to the financial and operational responsibility and appropriateness of the proposed assignee or subleasee, including but not Hmiled to

the Intended use and/or required modification of the Premises, if any, together with a fee of $500 es consideration for Lessor's considering end

processing said request. Lessee agrees to provide Lessor with such other or additional information andlor documentation as may be reasonably

requested. (See also Paragraph 36)

(I) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering Into such sublease, or

entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every

term, covenant, condition and obligation ha rein to be observed or performed by Lessee during the lenn of said assignment or sublease, other than such

obligations as are contrary lo or Inconsistent with provisions of an assignment or sublease to which Leasor has specifically consented to In writing.

(g) Lessor's consent to any assignment or subletting shall not transfer lo the assignee or sublessee any Option granted lo the

original Lessee by this Lease unless such transfer is specincally consented lo by Lessor in writing. (Sae Paragraph 39.2)

12.3 Addltional Terms and Conditions Appllcable to Subletting. The following terms and conditions shall apply to any subletting by

Lessee of all or any part of lhe Premises and shell be deemed included In all subleases under this Lease Whether or not expressly Incorporated therein:

(a) Lessee hereby assigns end transfers to Lessor all of Lessee's Interest In all Rent payable on any sublease, and Lessor may

collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance

of Lessee's obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor ext:eeds lessee's then outstanding obligations

any such excess shall be refunded to Lessee. Lessor shell not, by reason of the foregoing or any assignment of such sublease, nor by reason of the

collection of Rent, be deemed llable to the sublessee for any failure of Lessee to perform and comply with any of lessee's obligations to such

sublessee, Lessee hereby irrevocably authorizes end directs any such sublessee, upon receipt of a written notice from lessor stating that a Breach

exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee

shall rely upon any such notice from Lessor and shall pay all Rents to lessor without any obligation or right to Inquire as to whether such Breach exists,

notwithstanding any claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee, Lessor may, al its option, require sub!essee lo ettorn to Lessor, in which event Lessor shall

undertake the obllgetions of the sublessor under such sublease from the time of Iha exercise of said option to the expiration of such sublease; provided,

however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or

Breaches of such sublessor.

(c) Any matter requiring the consent of the sublessor under a sublease shell also require the consent of Lessor.

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent.

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the

Default of Lessee within the grace period, if any, specified in such notice. The sublessee shell have a right of reimbursement and offset from and

against lessee for any such Defaulls cured by the sublessee.

13. Default; Breach; Remedies.

13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants,

conditions or Rules and Regulations under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the

failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises; or Iha vacating of the Premises without providing a commercially reasonable level of

security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or wlthout providing reasonable

assurances to minimize potential vandalism.

(b) The failure of Lessee to make any payment of Rent or any Security Deposit required lo be made by Lessee hereunder, whether

to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surely bond, or lo fulfill any obligetlon under this Lease which

endangers or threatens life or property, where such failure contlnues for a period of 3 business days followJng written notice to Lessee. THE

ACCEPTANCE BY LESSOR OF A PARTIAL PAYMENT OF RENT OR SECURITY DEPOSIT SHALL NOT CONSTITUTE A WAIVER OF ANY OF

LESSOR'S RIGHTS, INCLUDING LESSOR'S RIGHT TO RECOVER POSSESSION OF THE PREMISES.

(c) The failure of Lessee to allow Leasor and/or its agents access to the Premises or the commission of waste, act or acts

constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period cf 3 business days

following written notice to Lessee.

(d) The failure by lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service

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FORM STN-18-04/14E

contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppal Certificate or financial statements, (v) a requested

subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42, (viii) material safety dale

sheets (MSDS), or (Ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where

any such failure continues for a period of 10 days following written notice to Lessee.

(e) A Default by Lessee as to the terms, covenants, conditions or provisions of this Leese, or of the rules adopted under Paragraph

40 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written

notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then ii shall not be

deemed to ba a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure lo completion.

(f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of

creditors; (il) becoming a "debtor" as defined in 11 U.S.C. §101 or any successor statute thereto (unless, in the case of a petition filed against Lessee,

the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at

the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other

judicial seizure of substantially all of Lessee's assets localed et the Premises or of Lessee's interest in this Lease, where such seizure is not discharged

within 30 days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no

force or effect, and not affect the validity of the remaining provisions.

(g) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

(h) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a

Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the

subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory

basis, and Lessee's failure, within 60 days followlng written notice of any such event, to provide written alternative assurance or security, which, when

coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at

the time of execution of this Lease.

13.2 Remedies, If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an

emergency, without notice), Lessor may, al Its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of

reasonably required bonds, insurance policies, or govemmenlel licenses, permits or approvals. Lessee shall pay to Lessor an amount 8(\ual to 115% of

the costs and expenses incurred by Lessor In such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or

without furl her notice or demand, and without limiting Lessor In the exercise of any right or remedy which Lessor may have by reason of such Braach:

(a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Leese shell terminate and

Lessee shell immediately surrender possession to Lessor. ln such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rant which had

been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after

termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at

the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that

the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by

the Lessee's failure to perform Its obligations under this Lease or which In the ordinary course of things would be likely lo result therefrom, including but

not limited to the cost of recovering possession of the Premises, expenses of reletllng, Including necessary renovation end alteration of the Premises,

reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to Iha unexpired term of

this Lease. The worth at the time of award of the amount referred to ln provision (iii) of the immediately preceding sentence shall be computed by

discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located et the time of award

plus one percent. Effor1s by Lessor to mitigate damages caused by Lessee's Breach of this Lease shell not waive Lessor's right to recover any

damages to which Lessor is otherwise entitled. If termination of this Lease Is obleined through the provisional remedy of unlawful detainer, Lessor shell

have the right to recover in such proceeding any unpaid Rent end damages as are recoverable therein, or Lessor may reserve the right lo recover all or

any part thereof in a separate suit. If a notice end grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or

to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notlce required by Paragraph 13.1. In such case, the

applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, end the failure of Lessee to cure the

Default within the greater of the two such grace periods shalt constitute both en unlawful detainer and a Breach of this Lease entitling Lessor to the

remedies provided for In this Leese and/or by said statute.

(b) Continue the Lease and Lessee's right to possession end recover the Rent as II becomes due, in which event Lessee may

sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the

Lessor's interests, shall not constitute a termination of the Lessee's right to possession.

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are

localed. The expiration or termination of this Lease and/or the termlnetlon of Lessee's right to possession shell not relieve Lessee from liability under

any Indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by re83on of Lessee's occupancy of the Premises.

13.3 lndueaFl'laRt Resapture. Any agFeemaRI fa fl:ea er all:atea rent er atl=!er sl=!arsss, er f.sr !Re gi Ing sr payiRg ll:) besssr ts er far

basses ef any sasl=! SF stl=!sr ll:SRblS ind: ISBA'IBRI SF sr;msideFatisR fer bsssee's eRteRRg iFIIS tl=!ls beau, all sf wl=!isR ssRsessisRs are l=!srelRaf:ter Faf.srreG

1G as 0 lndusamsnt ProulsieRs," sl=!all ll:s 8eeA':a£1 seRditilmeEI YflSR bsssss's full aR8 faitRfbll peFfarmaRse ef all ef 11=:a temis, ss• eRaRls BREI seRditisRs

sf tl:1is baase. I lpsn 13reasl=! sf tRis I.sass by L.essee, aRy SYsl=r lREIYSBA'ISRt Pre••isleR sRall abllsmatisally ll:e ElesmsQ Qsletsd freFl'l Ill.is b.eass and sf RS

fl.lFtl=rer fsrsa er effest, aRd aR) reRt, etRer sRarve, Bam,1s, iRelYsen:ieRI sr ssRsiEleratisR 11!.eretafsre aBaleEI, gl •eR er paid by besssr blR'cler Bbl&!=: an

IR'clblsen:ieRI PFG••sien ell.all Be in:in:ieEllately El Ye anel pa) able B) basses le besssr, Rel> ilRetandlRg a Ry Sblll:seqYeRt SY Fe ef said li!reasl=! b) basses. Tl=!e

asseptaRss ll:) besser sf raRI er tl=re s1,1rs sf tl=!s 13reasR wl=!isl=! initiate El t,l:;e speFBIISR sf 11:!is pa::ag::apl=! si::all Rat ll:e EleemeEl a wai• ar ll:~ besser sf 11:!e

pre•<isisRs sf tRis parag::apl=! blRless spesifleal~ as state El iFI <FillR!iJ lly besser at tl=!e tiFl'IB ef Sblsi:: aeseplaRss.

13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to Incur costs not

contemplated by this Lease, the exact amount of which will be extremely difficult lo ascertain. Such costs include, but are not limited lo, processing and

accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, If any Rent shall not be received by Lessor

within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immedlelely pay to Lessor a one-time

late charge equal to 40 5% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a

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©2001 • AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18-04J14E

fair and reasonable estimate of the costs Lessor will Incur by reason of such late payment. Acceptance of such late charge by Lessor shall In no event

consutute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies

granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive Installments of Base Rant, than

notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly In advance.

13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due shall bear

interest from the 31st day after it was due. The interest ("Interest") charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

13.6 Breach by Lessor.

(a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform

an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be !ess than 30 days after

receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying

wherein such obligation of Lessor has not been performed; provided, however, that If the nature of Lessor's obligation is such that more than 30 days

are reasonably required for Its performance, then Leasor shall not be in breach if performance is commenced within such 30 day period and thereafter

diligently pursued to completion.

(b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lander cures said breach within 30 days

after receipt of said notice, or If having commenced said cure they do not diligently pursue JI to comp!etlon, than Lessee may elect to cure said breach

al Lessee's expense and offset from Rent the actual and reasonable cost to perform such cure, provided, however, that such offset shall not exceed an

amount equal to the greater of one month's Basa Rant or the Security Deposit, reserving lessee's right to seek reimbursement from Lessor for any

such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14. Condemnation. If the Premises or any portion thereof are taken under Iha power of eminent domain or sold under the threat of the exercise

of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the data the condemning authority takes title or

possession, whichever fire! occurs. If more then 10% of the Building, or more than 25% of that portion of the Premises not occupied by any building, is

taken by Condemnation, Lessee may, at Lessee's option, to ba exercised in writing within 10 days after Lessor shall have given Lessee written notice of

such taking (or In the absence of euch notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the

data the condemning authority takes such possession. If Lessee does not tarminate this Lease In accordance with the foregoing, this Lease shall

remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion lo the reduction in

ullllty of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award

shall be made as compensation for diminution In value of the leasehold, the value of the part taken, or for severance damages; provided, however, that

Lessee shall be entitled to any compensation paid by the condemner for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures,

without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to

Iha Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all

compensation which is payable therefor. In the event that this Leesa le not terminated by reason of the Condemnation, Lessor shall repair any damage

to the Premises caused by such Condemnation.

15. Brokerage Fees.

1§ 1 Addltlenal CemmlssieR IA aelelitieR ta tl=is paymeRts eweEI p1,1rs1:1ant ta Paragra11R 1.Q al;ra, a, BFIEI .inless bessar BREI tRe 1iFGl1ers

alheA• ise agree iFI ritiRg, basser agrees tl=iat (a) if bessee eHeFSises a~ 911tieR, (la) if basses er BR)BRe affilialeel u'itR basses ase;1,1irB8 BAY rlgl=its le

tRa PreFRlses er atRer premises e uneEI l;ry bass er anei !esateEI itRiFI tRe same Prejesl, if aF1y, u "tRiR RisR !Re Premises is leeateei, (s) if bsssBB

FBmaiRs iR passass·aR sf !Re Premises, u /IR !Re saRSBRt ef basser, aft:ar !Ra eapiratlsR ef IR!s baase, er (El) if Elase ReRI Is IRsrsaseEI, whether by

agrBBmeRt er epeFBIIBR ef BR essalalieR ela.isa heFBiR, lhsR, besser shall pay Elreker:s a fee iR asserdai:,se with the fee seher;lr:le sf the ElFSkerB IA affest

at tRa tiFRe !Re bease was sJ!8s.itee.

11i.a A.ss1,1mptleR ef 01;:llgatl:;ns A Ry l;r1,1yar er traRsferBB af besssr's iRterest iR this I.ease shall be r;lsemeial le hli're ass.imed besser's

abligaliaA here1:1Relsr. liFBl<ers sRall be third paFty banafisiaries efths pre ·s·ens ef Paragraphs 1.9, 1§, aa aRial 31. [;f besserfails l8 payte E!FSkers a~

ame1mts 91,10 as BREI fur brokerage fees pei:ta·RiRg la IRis bease whaA El.is, then s.ish ama1,1nls shall assrne Interest. IA a99ilieR, if bassar fails le pay

a~ ame.iRte ts besaee's Brel1er wheFI due, bassas's !!ral1sr R'!B'f BSFl9 urfttaR Reties ta bssser aR9 besSBe af s1:1ah fail.ire and if bsssar fails le llB)

s.ish aR'!a1:1nls ithin 19 8a)s after sai8 Relles basses shall pa) saiei Manias ts Its Brel1er anEI effsal s.ish ame.ints asainst ReRt lFI a9ElitieFI, bass a e's

lire leer a Rall l;rs eeeR'!sr;I le be a 1RirEI pai:ly baRefiaial) sf anr BBR'lR'lissieR agreemeRI a Rte reel inl8 by andler bettereeR b.esser a Ad I.ass a r's lirsl,er fer 11:ie

limited p1,1r11ess ef eellesUne any l:rrel1erage fee eurec:I

15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it

has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, end that no one other than said

named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and lessor do each hereby agree to Indemnify, protect,

defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder

or other similar party by reason of any dealings or actions of the indemnifying Party, Including any costs, expanses, attorneys' fees reasonably incurred

with respect thereto.

16. Estoppel Certificates.

(a) Each Party (as "Responding Party'') shall within 10 days after written notice from the other Party (the "Requesting Party'')

execute, acknowledge and deliver to the Requesting Party a statement in writing !n form similar to the than most current "Estoppel Certificate" form

publfshad by the AIR Commercial Real Estate Association, plus such additional Information, confirmation and/or statements as may be reasonably

requested by the Requesting Party.

(b) If the Responding Party shall fall to execute or deliver the Estoppal Certificate within such 10 day period, the Requesting Party

may execute an Estoppel Certificate stating that: (i) the Lease is In full force and affect without modification except as may be represented by the Requesting Party, (If) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor ls the Requesting Party, not more than one

month's rent has been paid in advance. Prospective purchaser.;; and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the

Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. In addition, Laeeaa acknowledges that any failure on its part to provide such an Estoppal Certificate will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this

Leesa, the extant of which will be extremely difficult to ascertain. Accordingly, should the Lessee fall to execute and/or deliver a requested Estoppel

Certificate in a timely fashion the monthly Base Rant shall be automatically increased, without any requirement for notice to Lessee, by an amount

PAGE 12 OF 17 ,Ji @2001 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18-04114E

equal to 10% of the then existing Base Rent or $100, whichever is greater for remainder of the Lease. The Parties agree that such increase in Base

Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee's failure to provide the

Estoppel Certificate. Such increase in Base Rent shall Jn no event constitute a waiver of Lesses's Default or Breach with respect to Iha failure to provide the Estoppal Certificate nor prevent the exercise of any of the other rights and remedies granted hereunder.

(c) If Lessor daaires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within 10 days

after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably

required by such lender or purchaser, Including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall

be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein sat forth.

17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at Iha time in question of the fee title to the

Premises, or, If this is a sublease, of Iha Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or Interest in the Premises or this

Lease, Lessor shall deliver to the transferee or assignee (In cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or

assignment and delivery of the Securlty Deposit, as aforesaid, the prior Lessor shall be rel!eved of all liability with respect to the obligations and/or

covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations andfor covenants in this Lease to be

performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18. Severabfllty. The invalidfty of any provision of this Lease, as determined by a court of competent Jurisdiction, shall in no way affect the

validity of any other provision hereof.

19. Days. Unless otherwise speclncally indicated to the contrary, the word "days" as used In this Lease shall mean and refer to calendar days.

20. Limitation on Llablllty. The obligations of Lessor under this Lease shall not constllute personal obligations of Lessor or its partners,

members, directors, officers or shareholders, and 50 long as Lessor carries a minimum of $1 million of commercial general liability lm;urance

coverage with respect to Le55or's actiom; at the Premise5, then Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor's partners, members, directors, officers or

shareholders, or any of their personal assets for such satisfaction.

21. Tlme of Essence. Time Is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under

this Lease.

22. No Prior or Other Agreements; Broker Dfsclalmer. This Lease contains all agreements between the Parties with respect to any matter

mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each repreeente and

warrants to the Brokers that it has made, and ls relying solaly upon, its own Investigation as to the nature, quality, character and financial responsibility

of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or

with respect to any default or breach hereof by either Party.

23. Notices,

23.1 Notice Requirements, All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in

person (by hand or by courier) or may be sent by regular, certified or registered mall or U.S. Postal Service Express Mail, with postage prepaid, or by

facsimile transmission, or by email, and shall be deemed sufficiently given if served in a manner spaclned In this Paragraph 23. The addresses noted

adjacent lo a Party's signature on Ihle Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the

other specify a different address for notice, except that upon Lessee's taking possession of Iha Premises, the Premises shall constitute Lessee's

address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time

to time hereafter designate In writing.

23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of

delivery shown on the receipt card, or If no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72

hours after the same Is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight

courier that guarenlees next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices

transmitted by facsimile transmission or by email shall be deemed dellvered upon telephone confirmation of receipt (if by fax, a confirmation report from

fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be

deemed received on the next business day.

24. Waivers.

(a) No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a

waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or

condition hereof. Lessor's consent lo, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or

approval of, any subsequent or s!milar act by Lessee, or be construed ae the basis of an esloppel to enforce the provision or provisions of this Lease

requiring such consent.

(b) The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lasses

may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in

connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless speclflcally agreed to In writing by

Lessor at or before the time of deposit of such payment.

(c) THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS

RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH

STATUTE IS INCONSISTENT WITH THIS LEASE.

25. Disclosures Regarding The Nature of a Real Estate Agency Relatfonshlp.

(a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should

from the outset understand what type of agency relationship or representation It has with the agent or agents in the transaction. Lessor and Lessee

acknowledge being advised by the Brokers in this transaction, es follows:

(I) Lessor's Agent. A Lessor's agent under a listing agreement with the Lessor eels es the agent for the Lessor

only. A Lessor's agent or subagent has the following affirmative obligatrons: To the Leasor: A fiduciary duty of utmost care, integrity, honesty, and

loyalty !n dealings with the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent's

dutles. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the velue or desirebility

PAGE 13 OF 17

:.~ ©2001 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18-04/14E

of the property that are not known to, or within the diligent attention and obsarvatlon of, the Parties. An agent Is not obligated to reveal to either Party

any confidential information obtained from the other Party which does not Involve the affirmative duties set forth above.

(Ii) Lessee's Agent. An agent can agree lo act as agent for the Lessee only. In these situations, the agent is not

the Lessor's agent, even if by agreement the agent may receive compensation for services rendered, either In full or In part frcm the Lessor. An agent

acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty In

dealings with the Lessee. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills and care in performance of Iha agent's duties. b. A

duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the

property that are not known lo, or wtthin the dl[1gent attention and observation of, the Parties, An agent Is not obligated to reveal to either Party any

confidential Information obtained from the other Party which does not Involve the affirmative duties set forth above.

(Ill) Agent Representlng Both Lessor and Lessee. A real estate agent, either actlng directly or through one or more

associate licenses, can legally be the agent of both the Lessor end the Lessee in a transaction, but only with the knowledge and consent of both the

Lessor and the Lessee. In a dual agency situation, the agent has the followJng affirmative obligations to both the Lessor and the Lessee: a. A fiduciary

duty of utmost care, integrity, honesty and loyalty In the dealings with either Lessor or the Lessee. b. Other duties to the Lessor and the Lessee as

slated above in subparagraphs (i) or (ii). In representing both Lessor end Lessee, the agent may not without the express permission of the respective

Party, disclose to the other Party that the Lass or v.111 accept rent in an amount less than that indicated in the listing or that the Lessee is willing lo pay a

higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to

protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the

transaction. A real estate agent is a person qualified lo advise about real estate. If legal or tax advice is desired, consult e competent professional.

(b) Brokers have no responsibility with respect to any default or breach hereof by either Party. Tl:is PaFl:ies S!JF&B tl=lat Re

la• sYit er etl:ier legal prosssEliR!J iR>ra~r'Rg aRy Broasl:i af dYt'h BFFBF er GR'llssleR rslatlR9 ts tl:iis bease R'la~ Be BF8Y9l:it a98iRst BROl'.sr FflBF0 tRaR 8R&

}Sar af:l.er the Start blate aREI 11:iat the lia~illtr (iRslY9iRg ee1,1rt easts olRd a\:leFF1e}&' fess), sf aRr .E!raksr uU:l:i r=espeet te aRy s1,1eR lsurs1,1l! aREl'er ls9al

preseeSiRg sl:iall Rel e:1sesd tl:ie fee rsssi red by susR irolrar ~11rs1,1aRt te ~is Le~ei pre ided, ~gwe>rer, tt.iat +J1e :kire§e'i:19 liw'tat'eFi SF easl:i 'eR?l<e1'8

liaGilit'.I' sl:iall R1;t be spplisal:lle le a~ srnss RB!Jll§'eRee er wlllhil R'liseeR81,1e! 8f s1,1s~ iroker

(c) Lessor end Lessee agree to identify lo Brokers as "Confidential" any communication or Information given Brokers the! is

considered by such Party to be confidential.

26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of

this Lease. In the event that Lessee holds over, then the Base Rent shall be increased lo ~ 125o/c of the Base Rent applicable immediately

preceding the expiration or tennlnation. Holdover Base Rent shall be calculated on a monthly basis. Nothing contained herein shall be construed as

consent by Lessor to any holding over by Lessee.

27. Cumulatlve Remedies, No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all

other remedies at law or In equity.

28. Covenants and Conditions; Construction of Agreement. All provisions of !his Lease to be observed or performed by Lessee are both

covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a

part of this Lease. Whenever required by the context, the singular shall include the plural and vice varsa. This Lease shall not be construed as if

prepared by one of Iha Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared ii.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and

be governed by the laws of the Slate In which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be

initiated in the county in which the Premises are located.

30. Subordination; Attornment; Non-Disturbance.

30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed

of trust, or other hypolhecatlon or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances

made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee'agreea that the holders of any such Security Devices

(in this Lease together referred to as "Lendern) shall have no liabflity or obligation to perform any of the obligations of Lessor under this Lease. Any

Lender may elect lo have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to

Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the

documentation or recordalion thereof. Les5or shall obtain a Non-D1sclo5ure Agreement from any beneficiary of a security device exi5ting

as of the Commencement Date with respect to Les5ee'fi lntere5t in this Lease including Paragraph 64 of the Addendum.

30.2 Attornment. In the event that Lessor transfer& title to the Premises, or Iha Premises are acquired by another upon the foreclosure

or termination of a Security Device to which this Lease ls subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3,

attorn lo such new owner, and upon request. enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for

the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new

owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall asaume all of Lessor's obligations,

except that such new owner shall not: (a) be liable for any act or omlasion of any prior lessor or with respect to events occurrtng prior to acquisition of

ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one

month's rent, or (d) be liable for the return of any security deposit paid to any prior lessor which was not paid or credited lo such new owner.

30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's

subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a nNon-Dlsturbance Agreement")

from the Lander which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and !hie Lease, Including any options lo extend

the term hereof, will nol be disturbed so long as Lessee Is not in Breach hereof and attoms to Iha record owner of the Premises. Further, within 60

days after the execution of this Lease, Lessor shell, if requested by Lessee, use Its commercially reasonable efforts to obtain a Non-Disturbance

Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable lo provide the

Non-Disturbance Agreement within said 60 days, than Lessee may, at Lessee's option, directly contact Lander and attempt to negotiate for the

executlon and delivery of a Non-Disturbance Agreement.

30.4 Self-Executing. The agreements contained Jn this Paragraph 30 shall be affective without the execution of any further documents;

provid!ld, however, that, upon written request from Lessor or a Lender In connection with a sale, financing or refinancing of the Premises, Lessee and

Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attomment and/or

PAGE 140f 17

I~

©2001 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-1B-04114E

Non-Disturbance Agreement provided for herein.

31. Attorneys' Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or

to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable

attorneys' fees. Such fees may be awarded In the same suit or recovered in a separate suit, whether or not such action or proceeding is puniuad to

decision or Judgment, The term, "Prevailing Party'' shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief

sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense.

The attorneys' fees award shall not be computed In accordance with any court fee schedule, but shall be such as to fully reJmburs.e all attorneys' fees

reasonably Incurred. In addition, Lessor shall be entitled lo attorneys' fees, costs and expenses Incurred in the preparation and service of notices of

Default and consultations In connection therewith, whether or not a legal actron is subsequently commenced In connection with such Default or resulting

Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

32. Lessor's Access; Showing Premises; Repairs. Suject to app!lcable law and Lessee's reasonable requirements of non·school

personnel on school grounds during school hours, Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers,

lenders, or le~anls, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and

the erecting, using and maintaining of utilities, services, pipes and conduils through the Premises and/or other premises ea long as there is no material

adverse effect to Lessee's use of the Premises. All such activities shall bs without abatement of rent or liability to Lessee.

33. Auctions. Except for char!table auctions for echool fundralsing, which shall be permitted, Lessee shall not conduct, nor permit to

be conducted, any other auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an euc!ion.

34. Signs. Lessor may place on the Premises ordinary nFor Salen signs at any lime and ordinary "For Lease" signs during the last 6 months of

the term hereof. Except for ordinary "for sublease" signs, Lessee shell not piece any sign upon Iha Premises without Lessor's prior written consent. All

signs must comply with all Applicable Requirements.

35. Termlnetion; Mergar, Unless specifically staled otherwise in writing by Lessor, Iha voluntary or other surrender of this Lease by Lessee, the

mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser

estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days

following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have

such event constitute the termination of such Interest.

36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party Is required to an act by or for the other Party,

such consent shall not be unreasonably withheld or delayed, Lessor's actual reasonable costs and expenses (including but not limited to architects',

attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent,

Including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon

receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shell not constitute an

acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or

Breech, except as may be otherwise spaclfically stated in writing by Lessor et the time of auch consent. The failure to specify herein any particular

condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions es are then

reasonable with reference to the particular matter for which consent Is being given. In the event that either Party disagrees with any determination

made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and

In reasonable detail within 10 business days following such request.

37. CY&FaR1er

listate AsseslafeR, aRd sasi' s1a1st,, Gblar:anter sRaU Ra, s ttcis BaR'IB eElli9alleF1s as basses blRSs• tRls baas a

37.a Clefaylt It sRall ssnslil1a1ts a Clsfault ef ttcie basses if any G1a1ai:antsr fails er Fel'uses, blpen rseiussl ta i;rsuiSe: fa) a iS0F1se ef tt,,e

anss1a1tieR ef tRe §lbleraRt,.,, iRsl1a1SIR9 tt,,s a1a1ttcisrit,., ef ti's paFt) sigRlflg BR G1a1aranlsr's 9etcialf ta s91igats GwaraRler, ans in !Rs ease ef a SllFJIS•ats

C.iara1=1ter, a eemf:isB ss13y ef a rsselbllieR st its BearEl ef airseleFS abl#leFii!iRg tr:ie R'!aldRg sf s1a1st,, guar:a.RI)', (B) GblFrcBRt flRaRsial statsR'IBRls, (s) an

Eslepi;el Gel'l:iflsate, er fa) ur:itteR eenfll=FT!atieR tt,,at 11:is euarant,.,• Is still iR attest.

38. Quiet Possession. Subject lo payment by Lessee of the Rent and performance of ell of the covenants, conditions and provisions on

Lessee's part to be observed and performed under this Lease, Lessee shell have quiet possession encl quiet enjoyment of the Premises during the term

hereof.

39. Options. If Lessee is granted any Option, as defined below, then the following provisions shall apply:

39.1 Definition. noptlon" shall mean: (a) Iha right to extend or reduce the term of or renew this Lease or lo extend or reduce the term

of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property

of Lessor; (c) the right to purchase, the right of first offer to purchase or the right of first refusal to purchase Iha Premises or other property of Lessor.

39.2 Options Personal To Orlglnal Lessee. Any Option granted to Leesee in this Laase is pan;onal to the original Lessee, and cannot

be assigned or exercised by anyone other than said original Lassee and only while the original Lessee Is in full possession of the Premises end, if

requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Leeee, a later Option cannot be

exercised unless the prior Options have been validly exercised.

39.4 Effect of Default on Options.

(a) Lessee shall have no right lo exercise en Option: (i) during the period commencing with the giving of any notice of Default and

continuing until said Default Is cured, (ii) during Iha period of lime any Rent Is unpaid (without regard to whether notice thereof Is given Lessee), (Iii)

during the time Lessee Is In Breach of this Lease, or (iv) in the event that Lessee hes been given 3 or more notices of separate Default, whether or not

the Defaults are cured, during the 12 month period immsdlately preceding the exercise of the Option.

(b) The period of time within which an Option may be exercised shell not be extended or enlarged by reason of Lessee's inability to

exercise en Option because of the provisions of Paragraph 39.4(a).

(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, If,

PAGE 15 OF 17

©2001 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18...04/14E

after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) lessee falls to pay Rent for a period of 30

days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (Ii) if Lessee commits a Breech of this Lease.

40. Hultllille BulldlF1gs It Ille Prsfflises a e a pa Ft ef a graup ef J:rnJlellR§'S saRtrellee' lly besssr, basses agrees !Rat It u ill abiela Ii}' a A el saRfGFFR te

all r=saseRal;ile fbll9B aFlel f8§'1 rlalieAB u Risi=! I.easer ma~• fflake f.fsm tlffle tg tlffle fer tRe fflaRa9effleRt, safely, aAel sate ef salel prepeFl!es, iAsludiR§' 111.e

B8:f8 apQ slea!'llii:,ess Gf "'1e 9ro1,1ic,Q9 aRQ ii:isl 1QiF19 ~e ptukiR§', laaQiR9 aRd URleaQiA§' ef eR'sles, aRel' tg sauB!I its Bfflplsyees, suppliers, sRlppere,

er !Siemers GeRtraster:s a!'lel' IRuitees ta es alliQs aAQ ssRferm Lessee alse agrees le pay its f.air sl:iare ef semmel'I 8>1jl8RS8B IRsur•eel JR seRAestiel'l uitR

susll rules aRel re9YlatieRs.

41. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard sel'Vfce or

other security measures, and that Lessor shall have no obligation whatsoever lo provide same. Lessee assumes all responsibllity for the protection of

the Premises, Lessee, its agents and invitees and their property from the acts of lhlrd parties.

42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements,

rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights,

dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by lessee. lessee agrees to sign any documents

reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

43. Perfonnance Under Protest. If at any llme a dispute shall arise as to any amount or sum of money to be paid by one Party to the other

under the provisions hereof, the Party against whom the obligation to pay the money Is asserted shall have the right to make payment "under protesr

end such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of

such sum. If II shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any pert thereof, said Party shall be

entitled to recover such sum or so much thereof as rt was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid

"under protest" with 6 months shall be deemed to have waived its right to protest such payment.

44. Authority; Multiple Parties; Execution.

(e) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual

executing this Lease on behalf of such ent)ly represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf.

Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authOrity.

(b) If this lease is executed by more than one person or entity as "Lessee", each such person or entity shall be jointly and

severalty liable hereunder. It is agreed that any one of the named Lessees shall be empowered lo execute any amendment to this Lease, or other

document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named lessees had executed such

document.

(c) This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which

together shall constitute one and the same Instrument.

45. Conflict. Any conflict between the printed provisions of this lease and typewritten or handwritten provisions shall be controlled by the

typewritten or handwritten provisions.

46. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to

lease to the other Party. This Leese is not Intended to be binding until executed and delivered by ell Parties hereto.

47. Amendments. This Leese may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they

do not materially change Leesee's obllgations hereunder, lessee agrees to make such reasonable non-monetary modifications to this Lease as may be

reasonably required by a Lender in connection with the obtaining of normal financing or raflnancing of the Premises.

4B. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR

PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

49. Arbitration of Disputes. An Addendum requiring the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease

0 is O Is not attached to !his Leese.

50. Accessibility; Americans with Dlsabilltles Act.

{a) The Premises: @" have not undergone an Inspection by a Certlfled Access Specialist (CASp). D have undergone an

inspection by a Certified Access Specialist (CASp) and ii was determined that the Premises met all applicable conatruction-rslated accessibility

standards pursuant to California Civil Code §55.51 et seq. D have undergone an Inspection by a Certified Access Specialist (CASp) and It was

determined that the Premises did not meet all applicable construction-related accessibility standards pursuant to Calrfornia CJvil Code §55.51 et seq.

(b) Since compliance with the Americans with Disabilities Act {ADA) Is dependent upon Lessee's specific use of the

Premises, Lessor makes no warranty or representation es to whether or not the Premises comply with ADA or any similar legislation. In the event that

Lessee's use of the Premises requires modifications or additions to the Premises In order to be in ADA complfance, Lessee agrees to make any such

necessary modifications and/or additions at Lessee's expense.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND

BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE

THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE

INTENT AND PURPOSE OF LESSOR AND LESSEE WJTH RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AjR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY

BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH

IT RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE,

2. RETAIN APPROPRJATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION

SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES,

THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR

LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO

BE REVISED TO COMPLY WITH THE LAWS Of THE STATE t,f WHICH THE PREMISES IS LOCATED.

PAGE 16 OF 17

INITIALS

©2001 • AIR COMMERCIAL REAL ESTATE ASSOCIATION • FORM STN-18-04/14E

The parties hereto have executed this Lease al the place and on the dates specified above their respective signatures.

E,o'"t,d at Lor A"'le.K !\, 1 (A E,oo,~d at l DS /l,.J 6' (al f.S C fl

On: • kaw+b.'-'I 30 , «H?f ~ On: / / L I ·I_ Cl ( ::i-

By LESSOR: By LESSEE:

=B~y='=a=n=t=i=n=e=''-L=L==c, ________________ Value Schools, a California Non-Profit a California limited liability company corporation

By ~ A~ By J;4,ve...4,A~ 0~ Name Printed: a,; C: Lt a...l f e.cli,; Name Printed: Gffl)Zol/4i.iri2 C B, --, Tille: },l"'tU\,.91t1t Ml•!,~.,. Tille: PIZ f'51 j)p II.JI / ( ff 0 By: ___________________ By: __________________ _

Name Printed: Name Printed: __________________ _

Tille: TIiie: ---------~---~~--c--c-~-:-----Address: °/6S" W~ \/11,fl\·,c.c. 0\.. Address: {,i\i:l) \Alli SHl({f PLAC.'t I 5/f: )15

I.A CA 'l•••.r LoJ OiJ6t:Ltcc., c r-t 9n"'o<, Telephone:(lo\)) ':l., t9'- 80t.f-o Telephone:(~_~__) 6 C q, 8 '-14-1 '-i Facsimile:(_) Facsimile:( ) ----~-~-----------

Email: Email: 8 ~{' fJ 1-) ', @ \JC.. j U. l;' .!>Che.:. ).S, CUI'¥\

Email: ----.--=--:--r.::-=c.t--------- Email: 0

Federal ID No. --l/'1-'J~-~J.h==O~Ji~~a~"------- Federal JD No. (\ 5 ,. 4 8 j j I 5, 5

BROKER: BROKER: Charles Dunn Company, Inc. InSite Efs Inc.

Attn: Christopher Steck Attn: Dan Morrar Title: Senior Director TIiie: Partner

Address: 800 West 6th Street, Suite 800 Address: 8895 Towne Centre Drive, Suite 105-480

Los Angeles, CA 90017 0S~a~n,__,D~i~e~g~o"-'--'---"CA":-"9~2~1~2~2c_ ____________ _ Te!ephone:(213) =4=8=1_-=1=8=0=0 ____________ Telephone:(~) .,_Bs.6s.6_-.,_8.,_8:,_43"----------------Facsimlle:@) 4 81-0758 Facsimile:( __ )_,----_____________ _

Emel): [email protected] Email: drnarrar@insi teefs. com Federal ID No. Federal ID No. __________________ _

Broker/Agent BRE License #: 042016 41 Broker/Agent BRE License #: ,0~1~7~1~9=1=3~2~---------

NOTICE: These forms are often modified to meet changing requirements of law end industry needs. Always write or call to make sure you are utlllzlng the moat current form: AIR Commercial Real Estate Association, 500 N Brand Blvd, Suite 900, Glendale, CA 91203.

~<:..

INITIALS

Telephone No, (213) 687-8777, Fax No.: (213) 687-8816.

© Copyright 2001 - By AIR Commerclal Real Estate Association. All rtghts reserved.

No part of these works may be reproduced in any form without permission In writing.

PAGE 17 OF 17

©2001 • AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM STN-18.04/14E

(le,.,

ADDENDUM NO. 1 TO LEASE

THIS ADDENDUM NUMBER ONE (#1) TO LEASE (the "Addendum") is attached to and made part of that certain Standard Industrial/Commercial Single-Tenant Lease - Net (the "Standard Lease") dated January 16, 2015 (the "Effective Date"), entered into by and between Byzantine, LLC, a California limited liability company ("Lessor''), and Value Schools, a California Non-profit corporation {"Lessee"). In the event of any conflict between the provisions of the Standard Lease and the provisions of this Addendum, the provisions of the Addendum shall prevail. Any references herein, or in the Standard Lease, to the "Lease" or this "Lease" shall be deemed to refer to the Standard Lease and this Addendum. Except as provided to the contrary herein, all capitalized terms used in this Addendum shall have the meaning ascribed thereto in the Standard Lease.

51. Base Rent Schedule.

Months Year Monthly Rent Paid Annual Rent

1 $ 22,222.23 9 $ 200,000.07

2 $ 27,443.90 10 $ 274,439.00

3 $ 28,061.39 10 $ 280,613.88

4 $ 28,692.77 10 $ 286,927.69

5 $ 29,338.36 10 $ 293,383.56

6 $ 29,998.47 12 $ 359,981.63

7 $ 30,673.43 12 $ 368,081.22

8 $ 31,363.59 12 $ 376,363.05

9 $ 32,069.27 12 $ 384,831.21 10 $ 32,790.83 12 $ 393,489.92

11 $ 33,528.62 12 $ 402,343.44

12 $ 34,283.01 12 $ 411,396.17

13 $ 35,054.38 12 $ 420,652.58

14 $ 35,843.11 12 $ 430,117.26

15 $ 36,649.58 12 $ 439,794.90

16 $ 37,474.19 12 $ 449,690.29

17 $ 38,317.36 12 $ 459,808.32

18 $ 39,179.50 12 $ 470,154.01

19 $ 40,061.04 12 $ 480,732.47

20 $ 40,962.41 12 $ 491,548.95

21 $ 41,884.07 12 $ 502,608.80

22 $ 42,826.46 12 $ 513,917.50

23 $ 43,790.05 12 $ 525,480.65

24 $ 44,775.33 12 $ 537,303.96

25 $ 45,782.77 12 $ 549,393.30

26 $ 46,812.89 5 $ 234,064.45

1 )J<l

52. Tenant Improvement Allowance; Completion of Lessee's Work. Lessee intends to perform certain improvements ("Lessee's Work") in the Premises to meet the operational needs of its intended use of the Premises as a charter school. Lessor agrees to pay to Lessee, if Lessee is not then in default beyond any applicable notice and cure period, insolvent or bankrupt, NinetySeven Thousand Six Hundred and No/100 Dollars ($97,600.00) ("Tenant Improvement Allowance") for the cost of Lessee's Work, but not more than that amount, within fifteen (15) days after the later to occur of (a) receipt of written notice from Lessee requesting payment of same together with copies of paid invoices showing that the amount requested by Lessee has been spent by Lessee on the Premises in connection with Lessee's Work; and (b) Lessor's receipt of Lessee's written waiver of all rights to terminate the Lease pursuant to Paragraph 56 below.

If Lessor disputes any payment request made by Lessee with respect to the Tenant Improvement Allowance or withholds any unpaid amount due to a material default by Lessee, Lessor shall give notice to Lessee of such dispute within fifteen (15) days of receipt of the request. Such notice shall identify the matters in dispute and the basis of Lessor's position on such disputed matters and describe in reasonable detail the steps which Lessee must take in order to resolve any deficiencies.

The Tenant Improvement Allowance shall be paid to Lessee only for Lessee's payment for Lessee's Work performed in the Premises, including the cost of raw materials, labor, architects' fees, permits, and related costs of construction.

Prior to opening the Premises for business to the public, Lessee shall deliver to Lessor (a) a certificate of occupancy for the Premises from all applicable governmental authorities; and (b) one ( 1) complete set of As-Built plans and specifications describing all portions of Lessee's Work.

53. Option to Extend Term. Subject to the terms and conditions of Paragraph 39 of the Standard Lease and this Paragraph 53 below, Lessee shall have Two (2), Five (5) year options to extend the Term of this Lease with no less than nine (9) months advanced written notice to Lessor ("Option Notice"). All terms, provisions, obligations and rights set forth in this Lease shall apply to each option period, except that (a) the exercise of an option shall not increase the number of option periods, (b) the Base Rent shall be adjusted at the commencement of each option period in accordance with Exhibit A attached hereto, and (c) Lessor shall have no obligation to pay any tenant improvement allowance as a result of the exercise of any option.

54. Rent Abatement. As described in Paragraph 51 above, so long as Lessee is not then in default of the Lease, the Base Rent for months one (1) through three (3), thirteen (13) through fourteen (14), twenty-five (25) through twenty-six (26), thirty-seven (37) through thirty-eight (38) and forty-nine (49) through fifty (50) of the initial Term shall be abated.

55. Assignment and Sublease

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Subject to the terms and conditions of Paragraphs 12.2 and 12.3 of the Standard Lease and this Paragraph 55 below, Lessee shall have the right, without first obtaining Lessor's prior written consent, to: (a) assign this Lease to an entity that is formed as a result of an Approved Reorganization; and (b) sublease a portion of the Premises lo third parties that conduct related educational services, after school enrichment programs and summer day camp activities. The term "Approved Reorganization" means any merger, reorganization or consolidation of Lessee (whether or not Lessee is the surviving entity) where Lessee's successor shall have a net worth following the consummation of such transaction, as reasonably determined by Lessor, that is equal to or greater than (x) the net worth of Lessee immediately prior to such transaction, and (y) the net worth of the originally named Lessee on the Effective Date. In addition to the terms and conditions contained in Paragraph 12 of the Standard Lease, Lessee shall pay lo Lessor monthly on or before the first (1st) day of each month fifty percent (50%) of the rent or other consideration received from such assignee(s) or subtenant(s) over and above the concurrent underlying rent payable by Lessee to Lessor for that portion of the Premises being assigned or sublet, and after deduction for the amortized portion of the reasonable expenses actually paid by Lessee to unrelated third parties for brokerage commissions and reasonable legal fees incurred as a direct consequence of the assignment or sublease.

56. Contingency Periods Lessee shall have the right lo terminate the Lease in the manner described in this Paragraph 56:

a. Initial Contingency: Lessee shall have forty-five (45) days from the Effective Date (the "Initial Contingency Period") to: (a) investigate all physical aspects of the Premises including conducting all environmental and physical testing; and (b) confirm with its architect and general contractor that Lessee's Work will not be cost prohibitive. If Lessee delivers to Lessor written notice ("Initial Contingency Notice") of Lessee's election to terminate this Lease, and such Initial Contingency Notice is received prior to the expiration of the Initial Contingency Period, then this Lease shall terminate and Lessor and Lessee shall have no further rights or obligations pursuant to this Lease, except those rights and obligations that have accrued prior to the effective date of such termination, which rights and obligations shall survive the termination of this Lease. If Lessee fails to deliver the Initial Contingency Notice lo Lessor prior to the expiration of the Initial Contingency Period, then Lessee shall be deemed to have elected to terminate this Lease pursuant to this Paragraph 56(a).

b. Finance Contingency: Lessee shall have sixty-five (65) days from the Effective Date (the "Finance Contingency Period") to confirm Lessee will be able to finance the contemplated Lessee's Work on terms that will be acceptable lo Lessee. If Lessee is unable to confirm the ability lo finance the contemplated Lessee's Work on terms acceptable to Lessee, and Lessee delivers to Lessor written notice ("Finance Contingency Notice") of Lessee's election to terminate this Lease as a result thereof, and such Finance Contingency Notice is received prior to the expiration of the Finance Contingency Period, then this Lease

3

shall terminate and Lessor and Lessee shall have no further rights or obligations pursuant to this Lease, except those rights and obligations that have accrued prior to the effective date of such termination, which rights and obligations shall survive the termination of this Lease. If Lessee fails to deliver the Finance Contingency Notice to Lessor prior to the expiration of the Finance Contingency Period, then Lessee shall be deemed to have elected to terminate this Lease pursuant to this Paragraph 56(b ).

c. Approval Contingency: Lessee shall have Twelve (12) months (subject to Paragraph 58 below) from the Effective Date (the "Approval Contingency Period") to obtain all approvals from the City of Los Angeles required for the construction of Lessee's Work and the operation of a charter school on the Premises, which approvals shall be final and not subject to appeal (the "Final Approvals"). At Lessee's sole cost and expense, Lessee shall apply for and diligently pursue the Final Approvals to completion. If Lessee is unable to obtain the Final Approvals within the Approval Contingency Period, then Lessee shall have the right to terminate this Lease by delivering to Lessor written notice ("Approval Contingency Notice") of Lessee's election to terminate this Lease within five (5) days after the expiration of the Approval Contingency Period (the "Approval Termination Deadline"). If Lessor receives the Approval Contingency Notice on or before the Approval Termination Deadline, then this Lease shall terminate and Lessor and Lessee shall have no further rights or obligations pursuant to this Lease, except those rights and obligations that have accrued prior to the effective date of such termination, which rights and obligations shall survive the termination of this Lease. If Lessee receives the Final Approvals during the Approval Contingency Period, then Lessee's right to terminate this Lease pursuant to this Paragraph 56(c) shall be null and void and have no further force and effect. If Lessee does not receive the Final Approvals during the Approval Contingency Period and fails to deliver the Approval Contingency Notice to Lessor prior to the expiration of the Approval Contingency Period, then Lessee shall be deemed to have terminated this Lease pursuant to this Paragraph 56(c). All Base Rent payable by Lessee pursuant to this Lease with respect to portions of the Term prior to the effective date of any such termination shall be non-refundable to Lessee and shall be fully earned by Lessor, and Lessee acknowledges and agrees that Lessor shall have no obligation to return any such Base Rent to Lessee.

57. Additional Costs: On and after the Commencement Date, Lessor and Lessee intend for Lessee to be responsible for all costs of the Premises, including, without limitation, any and all real property taxes, insurance, assessments, utilities, personal property taxes and any and all other charges, fees and other governmental levies of any kind and nature whatsoever, including, without limitation, water and sewer charges, rates and rents, utility charges and license and permit fees relating to the use, occupancy and maintenance of the Premises; except that, notwithstanding anything to the contrary contained in this Lease or in this Addendum, during the period commencing on the Commencement Date and ending on the date that is

4

ninety (90) days thereafter, Lessor shall, al its sole cost and expense and without reimbursement from Lessee, (a) pay for all Real Property Taxes assessed on the Premises; and (b) obtain and keep in force a policy of property insurance insuring loss or damage to the Premises, which insurance shall be in the amount of the full insurable replacement cost of the Premises. Notwithstanding anything to the contrary contained in this Lease or in this Addendum, Lessor acknowledges and agrees that during such aforementioned 90-day period Lessee shall have no obligation to pay Real Property Taxes assessed on the Premises or to obtain a policy of property insurance with respect to the Premises.

58. Contingency Extension So long as Lessee is not then in default of the Lease, in the event that Lessee has not obtained Final Approvals prior to the expiration of the Approval Contingency Period, then Lessee shall have the option to extend ("Approval Contingency Period Extension Option") the Approval Contingency Period for up to two (2) 30-day periods ( each such 30-day period, an "Approval Contingency Extension Period") by delivering written notice to Lessor of Lessee's exercise of same. If Lessor receives Lessee's notice to exercise the Approval Contingency Period Extension Option, which notice must be received within five (5) days after the expiration of the then applicable Approval Contingency Period, then (I) the Approval Contingency Period shall be extended for thirty (30) days, and (II) after the exercise of the first Approval Contingency Period Extension Option, Lessee shall have one (1) remaining Approval Contingency Period Extension Option exercisable in the manner described in this Paragraph 58.

59. Lessor's Cooperation During Contingency Period Lessor shall reasonably cooperate with Lessee (at no cost to Lessor) in connection with Lessee's investigations during the Approval Contingency Period, including with respect to any applications to the City of Los Angeles or other approval processes required in connection with Lessee's development of the Premises for use as a charter school. In addition, Lessor shall do the following:

(a) Lessor shall complete and provide to Lessee within ten (10) days from the Effective Date a Property Information Sheet and Mandatory Disclosure Statement with respect to the Premises, each in the form published by the AIR Commercial Real Estate Association.

(b) Lessor shall furnish a copy of all non-confidential documents that i/ has in its possession that relate to the condition of the Premises.

(c) Lessor shall deliver to Lessee a copy of all agreements or leases that will be in effect with respect to the Premises as of the Commencement Date.

Lessor shall deliver and execute (at no cost to Lessor) such other commercially reasonable documents as may be required for a title company selected by Lessee to issue to Lessee a title policy insuring Lessee's leasehold interest in the Premises.

60. Lessor's Delivery

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Lessor shall deliver the Premises free and clear of all tenants upon the Commencement Date.

61. Parking Lessee shall have exclusive use of the parking lot and all parking stalls at no additional cost throughout the Term.

62. Signage Lessee shall have the right to install building signage to the maximum allowable permitted by the city of Los Angeles and all applicable law.

63. Right of First Offer During the Term, and so long as no uncured event of default or breach by Lessee is then occurring hereunder, Lessor shall not sell the Premises to any person or entity without first giving Lessee the opportunity to purchase the Premises upon the terms, covenants and conditions described in this Paragraph 63. If Lessor desires to sell the Premises, Lessor shall give written notice ("ROFO Notice") of that decision to Lessee, which notice shall include the purchase price that Lessor would be willing to sell the Premises to Lessee. Lessor and Lessee shall thereafter negotiate in good faith for a period of thirty (30) days, a purchase and sale agreement upon mutually agreeable terms and conditions upon which Lessor shall sell the Premises to Lessee (such negotiation period referred to as the "Negotiation Period"). If Lessor and Lessee reach agreement, then Lessor and Lessee shall execute the same and Lessor shall sell to Lessee and Lessee shall purchase from Lessor the Premises pursuant to the terms and conditions of such agreement. If Lessor and Lessee fail, despite their good faith efforts, to reach agreement within such Negotiation Period, then Lessor shall be free to sell the Premises to any third party or parties upon any terms whatsoever that are acceptable to Lessor; except that if Lessor wishes to sell the Premises for a purchase price ("Purchase Price") that is less than ninety percent (90%) of the lowest purchase price that Lessor offered to Lessee during the Negotiation Period, then Lessor shall give Lessee a new ROFO Notice specifying such Purchase Price and Lessee shall have the rights described in this Paragraph 63 with respect to such Purchase Price. At Lessor's request, Lessee shall execute a letter or other writing to confirm the lowest purchase price offered by Lessor to Lessee during any applicable Negotiation Period.

64. Leasehold Mortgage; Subordination; Attornment; Non-Disturbance

Lessee shall be entitled to subject its leasehold estate and all of its rights, titles and interests in and to the Premises created pursuant to this Lease (sometimes referred to herein as the "Leasehold Interest'') to a mortgage, mortgages, deed of trust or deeds of trust from time to time on the Leasehold Interest ( each a "Leasehold Mortgage"), for the benefit of, and to secure financing from, any mortgage lender(s) (each a "Leasehold Mortgagee") from time to time providing construction, interim, or permanent financing or refinancing for the equipment, personal property, fixtures and improvements installed in the Premises (collectively, the "Improvements") and/or the business of Lessee being conducted on the Premises, provided that no such Leasehold Mortgage shall impair or abridge the rights of Lessor, as provided herein. There may be one or more

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Leasehold Mortgages and Leasehold Mortgagees, at Lessee's discretion. To facilitate the financing of the Improvements, Lessor agrees to the following:

A. Consent to Leasehold Mortgages. Lessor's consent and approval shall not be required in connection with any Leasehold Mortgage, the transfer of Lessee's interest in this Lease and the Premises in connection with a judicial or non-judicial sale proceeding pursuant to the Leasehold Mortgage, any transfer pursuant to a deed or assignment in lieu of foreclosure, any sale or transfer in any bankruptcy or insolvency proceedings, or any similar transfer pursuant to any exercise of remedies under any Leasehold Mortgage (collectively, a "Foreclosure"), subject to compliance with the terms of this Paragraph 64 and subject to such transferee expressly assuming all of the Lessee's obligations under the Lease, including, but not limited to, the obligation to cure any default by Lessee then existing. Notwithstanding anything to the contrary contained in this Paragraph 64, Lessee shall provide Lessor with prompt written notice of the creation of any Leasehold Mortgage, and failure to provide such written notice shall excuse Lessor from complying with the notice requirements to the Leasehold Mortgagee contained in this Paragraph 64 until such written notice is provided.

B. Effect on Lessor's Interests. The Leasehold Mortgage and any other documents entered into for the benefit of a Leasehold Mortgagee shall be subject to the terms of this Lease, and nothing contained in herein or in any Lessor Agreement (as defined below at Paragraph 64(U) and substantially in the form attached to this Addendum as Exhibit B) shall be construed as consent by Lessor that any Leasehold Mortgage granted or permitted to exist by Lessee shall encumber Lessor's fee interest in the Premises, or affect Lessor's rights hereunder or under the Lease, except as specifically provided herein.

C. Forbearance by Lessor. For as long as any Leasehold Mortgage remains in effect, Lessor will provide notice to each such Leasehold Mortgagee prior to exercising its remedies (including the acceleration of rentals) as hereinafter provided in Sections D., E., F., G. and H.

D. No Changes to Lease. Lessor will not make or accept any voluntary surrender, cancellation, modification or amendment of or to this Lease at any time while the Leasehold Mortgage is in effect without first notifying each Leasehold Mortgagee, nor will Lessor convey all or any part of the property subject to the Leasehold Interest to Lessee, or Lessee accept such conveyance without first notifying each Leasehold Mortgagee. In no event shall any assignment of the Leasehold Interest by Lessee to Lessor result in a merger or termination of this Lease so long as any Leasehold Mortgage shall be in effect, and in the event of any such assignment, Lessor, Lessee and Leasehold Mortgagee shall remain bound by the provisions of this Paragraph 64 and this Lease.

E. Voluntary Termination. In no event shall any abandonment of the Premises or any action by Lessee to terminate this Lease be effective without delivering written notice thereof to each Leasehold Mortgagee who has provided Lessor written notice of such mortgage and the address and other contact information of such Leasehold Mortgagee. Lessor agrees that it shall give notice of any such abandonment or action by Lessee to Leasehold Mortgagee of which Lessor has knowledge of and contact information for, and Leasehold Mortgagee shall

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thereupon be entitled to exercise its rights and remedies under its Leasehold Mortgage and the provisions of this Paragraph 64.

F. New Lease. In the event that, for any reason, this Lease terminates prior to satisfaction of all indebtedness and obligations secured or intended to be secured by any Leasehold Mortgage, and subject to Paragraph 64(R) below, the holder(s) of any such Leasehold Mortgage shall be entitled to enter into a new lease with Lessor, for the balance of the term of this Lease (including rights to all extension or renewal options that have not been exercised), and on the same terms as set forth in this Lease (a "New Lease"). In no event shall Lessor be required to enter into any lease of the Premises pursuant to this Paragraph 64(F) to the extent any other lease of the Premises is in full force and effect. Such right shall be exercisable by Leasehold Mortgagee within thirty (30) days following written notice by Lessor to Leasehold Mortgagee of the termination of this Lease, by written notice from Leasehold Mortgagee to Lessor given within such 30-day period. Upon exercise of such right, Lessor and Leasehold Mortgagee (or an affiliate or nominee of Leasehold Mortgagee, as Leasehold Mortgagee may elect) shall enter into the New Lease within thirty (30) days thereafter. Upon execution of any such New Lease, the tenant thereunder shall be required to cure outstanding defaults of the Lessee under this Lease in the same manner, and within the same time period, as required under the provisions of this Paragraph 64, provided any monetary default and any other sum that may be due from Lessee to Lessor under the Lease or by reason of Lessee's default thereunder shall be cured and/or paid at the time Leasehold Mortgagee, its affiliate or nominee executes the New Lease.

G. Notices by Lessor. Lessor's obligations pursuant to this Paragraph 64 shall be conditioned upon each Leasehold Mortgagee promptly providing Lessor written notice of when the Leasehold Mortgage is made or released. Until such time as the Leasehold Mortgage whose Leasehold Mortgage is most senior in priority (unless otherwise directed in writing by such senior Leasehold Mortgagee and delivered to Lessor) is released or canceled of record, Lessor agrees that it will provide such Leasehold Mortgagee whose Leasehold Mortgage is most senior in priority (unless otherwise directed in writing by such senior Leasehold Mortgagee and delivered to Lessor) with a copy of any notices sent to Lessee under this Lease, including any default notices, within three (3) business days of delivery of such notices to Lessee. Lessor agrees that no notice to Leasehold Mortgagee shall be effective unless it is reduced to writing and delivered to Lessee and such Leasehold Mortgagee, at the address and in the manner indicated in this Lease (in the case of Lessee) and at the address and in the manner indicated in the Lessor Agreement (in the case of Leasehold Mortgagee), and no grace or cure periods for Lessee's cure of a default of its obligations under this Lease or the time permitted to a Leasehold Mortgagee to cure such default shall be deemed to commence unless and until such notice is so delivered. Within fifteen (15) days after Lessor's request therefor, Lessee shall deliver to Lessor in writing a complete list of all Leasehold Mortgagee's then holding a security interest in the Premises, a copy of each Leasehold Mortgage then in effect and the mailing address for notices for each such Leasehold Mortgagee.

H. Leasehold Mortgagee Performance and Cure Rights. Lessor hereby agrees to accept from any Leasehold Mortgagee any and all payments and performance of Lessee's obligations under this Lease, whether before or after default (but

8

within the applicable periods provided for in this Paragraph 64), with the same force and effect as if paid or performed by Lessee. Lessor agrees that in the event that Lessee shall not cure or remedy any default or breach of covenant by Lessee under this Lease within the curative period provided for such cure or remedy in this Lease, then Leasehold Mortgagee shall have the right, at its sole option, to exercise any one or more of the following rights:

(i) to cure or remedy, or cause to be cured or remedied, for an additional period following the "Leasehold Mortgagee Curative Commencement Date" (as hereinafter defined), such default or breach of covenant, and Lessor shall accept such cure or remedy; it being agreed that (a) in the case of any default in the payment of any sum of money, Leasehold Mortgagee shall have ten (10) business days following the Leasehold Mortgagee Curative Commencement Date in which to cure such default, (b) in the event that the default of Lessee is not a default in the payment of a sum of money, Leasehold Mortgagee shall have thirty (30) days following the Leasehold Mortgagee Curative Commencement Date in which to cure such default, provided that if such default cannot reasonably be cured within such thirty (30) day period and that Leasehold Mortgagee has commenced efforts to cure such default (or efforts to exercise remedies to enable it to cure such default) within thirty (30) days following the Leasehold Mortgagee Curative Commencement Date, Leasehold Mortgagee shall have an additional reasonable period of time following the end of such thirty (30) day period within which to cure such default, and so long as Leasehold Mortgagee shall be diligently pursuing its efforts to cure, Lessor shall accept such cure or remedy when effected, (c) in no event shall any Leasehold Mortgagee be required to cure any defaults by Lessee that by their nature are not susceptible to cure by Leasehold Mortgagee, and with respect to such defaults, the same shall be deemed cured by Leasehold Mortgagee if Leasehold Mortgagee has commenced efforts to exercise remedies under its Leasehold Mortgage and succeeding to the Leasehold Interest in accordance with the provisions of this Paragraph 64; it being agreed that Lessor shall not terminate this Lease, commence eviction proceedings or accelerate rent during the foregoing curative periods extended to Leasehold Mortgagee; provided, that it is hereby expressly agreed that the time permitted to the Leasehold Mortgagee to cure defaults shall include and shall be extended by the time required to pursue any remedies necessary to enable Leasehold Mortgagee to effect such cure, and the time permitted to the Leasehold Mortgagee to cure defaults shall include and shall be extended by any period in which Leasehold Mortgagee is prevented from curing by reason of any stay in any bankruptcy of Lessee or other stay of enforcement proceedings to which Leasehold Mortgagee may be subject (but such extension shall apply only to those defaults that Leasehold Mortgagee is so prevented from curing); and

(ii) to require Lessor to terminate Lessee's rights under this Lease by reason of such default, and to substitute Leasehold Mortgagee as lessee of the Premises with Lessor for the balance of the term of this Lease (including any renewal options) by entering into a New Lease (as defined above) and upon payment to Lessor of Lessor's reasonable attorneys' fees in connection therewith and payment of Rent, damages and other sums due under the Lease at the time of execution of the New Lease by Leasehold Mortgagee, its affiliates or nominees, Lessee hereby agreeing to execute such cancellations as may be reasonably required in connection therewith; and

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(iii) to acquire pursuant to any Foreclosure the Leasehold Interest and Lessee's rights under this Lease and assume the obligations of Lessee under this Lease as required under this Paragraph 64, and in such event, Lessor shall not exercise its right of termination with respect to such default, provided that upon such acquisition, Leasehold Mortgagee shall cure any and all defaults within the curative periods provided above other than payment of Rent, damages and other sums due under the Lease at the time of execution of the New Lease, which shall be paid by Leasehold Mortgagee, its affiliates or nominees no later than ten (10) days following such acquisition.

As used herein, "Leasehold Mortgagee Curative Commencement Date" shall mean (a) in the case of monetary defaults, upon receipt of written notice from Lessor of the lapse of Lessee's curative period; or (b in the case of non-monetary defaults for which a curative period is provided under this Lease, when both the following have occurred: (x) Leasehold Mortgagee's receipt of notice of such default, and (y) receipt of written notice from Lessor of Lessee's failure to cure such default within the applicable curative period provided in this Lease. Leasehold Mortgagee may cure any monetary default under this Lease by payment of the Rent and other sums or damages then due and owing under the Lease, but Lessor will not require Leasehold Mortgagee to pay any accelerated or future rents in curing such a payment default and will accept such payment as full satisfaction and cure of the outstanding default with respect to the payment of Rent, damages or other sums due under the Lease.

I. Recognition of Leasehold Mortgagee. Upon any Foreclosure and resulting transfer of the Leasehold Interest, Lessor will recognize (i) Leasehold Mortgagee, (ii) ariy affiliate or nominee or Leasehold Mortgagee, or (iii) any other person, firm or corporation acquiring the Leasehold Interest as lessee under this Lease pursuant to any foreclosure, deed or assignment in lieu of foreclosure, or similar transfer pursuant to any exercise of remedies under any Leasehold Mortgage (collectively, a "Purchaser"), on the same terms and provisions for the remaining term of the Lease, including any unexpired option periods, and with all of the rights and privileges of Lessee, provided such Purchaser agrees to assume and be bound by all of the terms, covenants and conditions of this Lease pursuant to an assumption agreement in a form reasonably acceptable to Lessor (subject to the provisions of Paragraph 64(Q). below), and provided that Purchaser shall cure all defaults under this Lease as required under the provisions of this Paragraph 64, including those with regard to the payment of Rent, damages and other sums then due and owing under the Lease (which payment of defaults shall be cured within ten (10) days of such Foreclosure). No consent or approval by Lessor shall be required in connection with the commencement or completion of any Foreclosure or any assignment or transfer of Lessee's rights under this Lease in connection with any such Foreclosure.

J. Allomment. In the event that any Purchaser shall acquire the rights of Lessee pursuant lo the provisions of this Paragraph 64, such Purchaser will attorn to Lessor in a writing reasonably acceptable to Lessor, and Lessor will thereupon recognize Purchaser as the lessee under this Lease. In the attornment document, the Purchaser shall agree to assume all of the obligations of the Lessee to Lessor under this Lease, subject to the provisions of Paragraph 64(Q). below.

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K. Transfer Nol a Default. In the event of the assignment or transfer of Lessee's Leasehold Interest pursuant lo any Foreclosure, no such Foreclosure shall constitute a default by Lessee under this Lease, and any Purchaser of the Leasehold Interest shall be entitled to all the benefits of this Lease. Lessor agrees to execute such documents as may be reasonably necessary to evidence such Purchaser's rights as lessee under this Lease upon Purchaser's payment of Lessor's reasonable attorney's fees lo review or revise such documents.

L. Exercise of Lease Options. II is expressly agreed that if the Leasehold Mortgage includes a pledge and assignment of all rights and options of Lessee to extend or renew the Lease, then upon any assignment or transfer of the Leasehold Interest pursuant to any Foreclosure, such assignment or transfer shall include any such rights and options. No option granted lo Lessee to extend or renew this Lease shall be exercisable without the prior, written consent of Leasehold Mortgagee, and in the event of any exercise thereof without such consent, (i) Leasehold Mortgagee shall not be bound thereby and (ii) the option shall not have been validly exercised and Lessee shall be a holdover tenant. In addition, in any case in which Lessee has failed to exercise any option to extend or renew this Lease within the time required under this Lease, Lessor shall give Leasehold Mortgagee written notice of such failure, and at the written request of Leasehold Mortgagee, (i) Lessor shall extend the period for such exercise by a period of up to sixty (60) days, and (ii) during such 60-day period, if the Leasehold Mortgagee shall cure all defaults that Leasehold Mortgagee is capable of curing and, as to any other defaults, commences the exercise of remedies against Lessee and thereafter diligently pursues the same to completion within the applicable time periods set forth in this Paragraph 64, the right to exercise such option shall continue throughout the curative period provided in Paragraph 64(H). above, and upon succeeding lo the Leasehold Interest from Lessee, Leasehold Mortgagee or other assignee thereof shall be entitled lo exercise such option within fifteen (15) days of succeeding lo Lessee's Leasehold Interest.

M. Exercise of Purchase Options. II is expressly agreed that if the Leasehold Mortgage includes a pledge and assignment of all rights and options of Lessee to purchase Lessor's interests in and to the Land and the Premises, then upon any assignment or transfer of the Leasehold Interest pursuant to any Foreclosure, such assignment or transfer shall include any such rights and options. No exercise of such right or option by Lessee shall be effective without the prior, written consent of Leasehold Mortgagee, and in the event of any exercise thereof without such consent, Leasehold Mortgagee shall not be bound thereby and Lessee shall be deemed to have failed to exercise its right of first refusal timely. In connection with any conveyance to Lessee of Lessor's interests in and to the Premises pursuant to Lessee's exercise of such right or option, Lessor agrees to cooperate with Leasehold Mortgagee to ensure that the lien and provisions of the Leasehold Mortgage encumber the Lessor's interests in and to the Land and the Premises upon conveyance thereof to Lessee upon Leasehold Mortgage's payment of Lessor's reasonable attorney's fees in connection with such cooperation, including the review or revision such documents.

N. Assignments by Leasehold Mortgagee. In the event that the Leasehold Mortgagee or any affiliate or nominee thereof shall acquire the Leasehold Interest pursuant to the Leasehold Mortgage and the provisions set forth above, Leasehold Mortgagee or such affiliate or nominee shall be entitled to further

11

assign the Leasehold Interest in connection with the sale and assignment of such interest and the Improvements, with the consent or approval of the Lessor and subject to the terms conditions of this Lease and only to a transferee who expressly agrees to be bound by the terms of this Lease. Any subsequent assignment of the Leasehold Interest shall be subject to such consent as required under the terms of this Lease.

0. Leasehold Mortgagee as Beneficiary. Each Leasehold Mortgagee is an express third party beneficiary of the provisions of this Paragraph 64 and shall be entitled to enforce the same directly against Lessor.

P. Bankruptcy of Lessor. In the event that the Lessor shall become subject to any bankruptcy or insolvency proceeding and subject to applicable Jaw, any rights, elections, or actions available to Lessee therein shall be subject to the rights of Leasehold Mortgagee under the Leasehold Mortgage to consent to, or to exercise on behalf of Lessee, such rights, elections, or actions. Without limiting the foregoing but subject to applicable law, no consent or acquiescence by Lessee to any rejection of this Lease by Lessor or any successor or trustee in such proceeding shall be binding or effective without the prior, written consent thereto by each Leasehold Mortgagee, and the rights, liens, and claims of Leasehold Mortgagee shall extend to, encumber, and include all rights to damages for any such rejection and all rights to continued possession of the Premises.

Q. Liabilny of Leasehold Mortgagee. In no event shall Leasehold Mortgagee have or be deemed to assume any personal liability under this Lease or any personal liability for performance of any of Lessee's obligations under this Lease prior to becoming the Lessee under the Lease, it being agreed that (i) Leasehold Mortgagee's commencement of any Foreclosure or any efforts to cure any default under this Lease shall be for its own protection and shall not by itself constitute an assumption of the Lease nor obligate Leasehold Mortgagee to complete any such proceedings or cure, and (ii) in the event Leasehold Mortgagee or any affiliate or nominee thereof shall have acquired the Leasehold Interest, upon any subsequent assignment of this Lease, Leasehold Mortgagee or any such affiliate or nominee shall be released from any further liability under this Lease accruing after the date of such assignment, other than any unsatisfied indemnification obligations of Lessee under the Lease or any responsibility or liability to any third party for any liabilities or obligations of the Lessee under this Lease, accruing during the assignor's tenancy period or otherwise assumed by assignor.

R. Rights As Among Leasehold Mortgagees. In any case in which there shall be more than one Leasehold Mortgage, each Leasehold Mortgagee shall be entitled to the benefit of the provisions of this Paragraph 64, provided, that (i) any actions or elections permitted to be taken or made hereunder shall be determined and exercised by the Leasehold Mortgagee whose Leasehold Mortgage is most senior in priority (unless otherwise directed in writing by such senior Leasehold Mortgagee and delivered to Lessor), and (ii) the time periods in this Paragraph 64 for any action or response by a Leasehold Mortgagee shall run concurrently for all Leasehold Mortgagees.

S. No Encumbrances by Lessor. Lessor agrees not to mortgage or otherwise encumber its interests in the Premises and this Lease following the date hereof,

12

unless all holders of any such mortgage, deed of trust, or other encumbrance (each a "Lessor Mortgagee") expressly agree to be subject to and bound by the terms of this Lease (expressly including this Paragraph 64) and that no foreclosure or other enforcement of such mortgage, deed of trust or other encumbrance in and of itself will disturb or effect this Lease or the rights of Leasehold Mortgagees hereunder. At Lessor's request and to the extent reasonably required by a Lessor Mortgagee, Lessee shall cause all Leasehold Mortgagees to enter into a commercially reasonable form of subordination, nondisturbance and attornment agreement (or other similar document) with respect to any Leasehold Mortgage.

T. Casualty and Condemnation. In the event of any casualty or condemnation affecting the Premises, and notwithstanding any other provision of this Lease to the contrary, no election by Lessee to terminate this Lease upon any such casualty or condemnation shall be effective without the prior written consent of each Leasehold Mortgagee.

U. Lessor Agreement. At the request of any Leasehold Mortgagee (or prospective Leasehold Mortgagee) and upon payment of Lessor's reasonable attorney's fees in connection therewith, Lessor will enter into a commercially reasonable agreement with such Leasehold Mortgagee (as executed, together with any amendments thereto and renewals and replacements therefor, the "Lessor Agreement"), containing in substantial substance the following assurances or undertakings, or such additional provisions as may be mutually acceptable to Lessor, Lessee and Leasehold Mortgagee: .

(i) Stating that, as of the date of the Lessor Agreement, this Lease is valid and in full force and effect, and has not been altered, amended or modified, in any respect whatsoever, other than pursuant to disciosed amendments delivered to Leasehold Mortgagee;

(ii) Stating, if true, that (a) no notice of any default by Lessee under the Lease has been issued by Lessor, other than with respect to defaults that have been cured by Lessee or waived by Lessor, and (b) to the best of Lessor's knowledge with no duty of investigation, no default, nor any event that, with the passage of time or the giving of notice, or both, would constitute a default under this Lease has occurred and is continuing as of the date of the Lessor Agreement;

(iii) Confirming the commencement and termination dates of this Lease, the amount of Base Rent then currently payable by Lessee and the date through which such payments have been made, and whether any options to renew or extend the Lease or to purchase the Lessor's interests in the Premises have been exercised or have lapsed; and

(iv) For each Leasehold Mortgage and Leasehold Mortgagee of which Lessor has knowledge of and contact information for, expressly identifying each such Leasehold Mortgage and Leasehold Mortgagee and setting forth the address( es) of Lessor and each such Leasehold Mortgagee for purposes of notices to be given and received pursuant to the provisions of this Paragraph 64.

In addition, in the event that there is any transfer of Lessor's interests in the Premises, in connection with the execution of all documents required in

13

connection therewith, Lessor will cause any such transferee to provide a Lessor Agreement and acknowledge the rights of Leasehold Mortgagee pursuant to this Paragraph 64.

V. Self Help. Nothing in this Paragraph 64 shall prevent or hinder Lessor from exercising its right under the Lease or at law to self-help or to cure Lessee's breach or default under the Lease following issuance of written notice of such default to Lessee and Leasehold Mortgagee. Lessor need not wait until the Leasehold Mortgagee Curative Commencement Date before exercising such rights to self-help or cure. Lessor shall provide to Leasehold Mortgagee written notice of Lessor's election to exercise such rights as soon as reasonably practicable under the circumstances. Lessee shall deliver and cause the applicable Leasehold Mortgagee to deliver any commercially reasonable documents requested by Lessor to reconvey the lien of a Leasehold Mortgage upon the expiration or earlier termination of the Lease, and/or the maturity and full repayment of the loan or other satisfaction of the obligations of the loan secured by such Leasehold Mortgage.

65. Memorandum of Lease Concurrent with the execution of this Lease, the parties shall execute and cause to be recorded a Memorandum of Lease in a form approved by Lessor, which shall include the name of the parties, a legal description of the Premises, the Term and a statement that the Premises has been leased by Lessor to Lessee. Upon the expiration or earlier termination of this Lease, Lessee shall (at Lessee's expense) execute such reasonable documents Lessor may request to remove the recorded memorandum from the title records.

[CONTINUED ON NEXT PAGE]

14

This Addendum is executed by Lessor and Lessee as evidence of their agreement to be bound by the terms hereof. Should there be any conflict between the terms of this Lease and this Addendum, this Addendum shall control.

IN WITNESS WHEREOF, this Addendum has been executed as of the Effective Date.

LESSOR:

LESSEE:

BYZANTINE, LLC, a California limited liability company

Its: --'-"1-'--'"---'"--...,.~-'--i "..,.e __ ,.,.,_~_..,,._i-.,.. ________ _

VALUE SCHOOLS, a California non-profit corporation

By: )Lc'lA-1,,l,,,:_,,_ Fk'!)~ Its: Pl?f 5 I DC NT ( Ceo

15

ARBITRATION AGREEMENT Standard Lease Addendum

Dated -----------~J=a=n=u=a=r~-'=6~,~2~0_1_4 ___________ _

By and Between (Lessor) Byzantine, LLC, a Califorinia limited liability

com an

Paragraph ~6~6 __ _

(Lessee)Value Schools, a California Non-profit

Car oration

Address of Premises: 1929 West Pica Boulevard

Los Angeles, CA 90006

A. ARBITRATION OF DISPUTES: Except as provided in Paragraph B below, the Parties agree to resolve any and all claims, disputes or disagreements arising under this Lease, Including, but not limited to any matter relating to Lessor's failure to approve an assignment, sublease or other transfer of Lessee's interest In the Lease under Paragraph 12 of this Lease, any other defaults by Lessor, or any defaults by Lessee by and through arb!lration as provided below and irrevocably waive any and all rights to the contrary. The Parties agree to at all limes conduct themselves In strict, full, complete and timely accordance with the terms hereof and that any attempt to circumvent the terms of this Arbitration Agreement shall be absolutely null and void and of no force or effect whatsoever.

8. DISPUTES EXCLUDED FROM ARBITRATION: The following claims, disputes or disagreements under this Lease are expressly excluded from the arbitration procedures set forth herein: 1. Disputes for which a different resolution determination is specifically set forth in this Lease, 2. All claims by either party which (a) seek anything other then enforcement or determination of rfghts under this Leese, or (b) ere primarily founded upon mattern of fraud, willful misconduct, bad faith or eny other allegations of tortious action, end seek the award of punllive or exemplary damages, 3. Claims relating to (a) Lessor's exercise of any unlawful detainer rights pursuant to applicable law or (b) rights or remedies used by Lessor to gain possession of the Premises or terminate Lessee's right of possession to the Premises, ell of which disputes shall be resolved by suit filed In the eppllcab!e court of jurisdiction, the decision of which court shell be subject lo appeal pursuant to applicable law 4. Any claim or dispute that is within the jurladiclion of the Small Claims Court end 5. All claims arising under Paragraph 39 of this Lease.

C. APPOINTMENT OF AN ARBITRATOR: All disputes subject to this Arbitration Agreement, shall be determined by binding arbitration before: D a retired judge of the appRcable court of jurisdiction (e.g., the Superior Court of the Stale of Cellfomia) affiliated with Judicial Arbitration & Mediation Services, Inc. ("JAMS"), 621 the American Artlitretlon Association ("AAA") under lts commercial erbllralion rules, D ________________________ _

or as mey be otherwise mutually agreed by Lessor and Lessee (the "Arbitrator"). Such erbllration shall be initiated by the Parties, or either of them, within ten (10) deys after either party sends written notice (the "Arbitration Notice") of e demand to arbitrate by registered or certified mall to the other party and to the Arbitrator. The Arbitration Notice shall contain a description of the subject matter of the arbitration, the dispute with respect thereto, the amount involved, if any, end the remedy or determination sought. If the Parties have agreed to usa JAMS they mey agree on a retired judge from the JAMS panel. If they are unable to agree wtthln ten deys, JAMS will provide a list of three available judges and each party mey strike one. The remaining judge (or if there are two, the one selected by JAMS) w/11 serve es the Arbitrator. If the Parties have elected to utll!ze AAA or some other organization, the Arbitrator shall be selected in eccordence with said organization's rules. In the event the Arbitrator Is not selected as provided for above for eny reason, the party Initiating artlitration shall apply lo the appropriate Court for the appointment of a qualified retired judge to ect as the Arbitrator.

D. ARBITRATION PROCEDURE: 1. PRE-HEARING ACTIONS, The Artlilrator shall schedule a pre-hearing conference to resolve procedural matters, arrange for the

exchange of Information, obtain stipulations, and narrow the issues. The Parties will submit proposed discovery schedules to the Arbitrator et the pre-hearing conference. The scope end duration of discovery will be within the sole discretion of the Arbitrator. The Arbitrator shell have the discretion to order e pre-hearing exchange of information by the Parties, Including, without Jimrtellon, production of requested documents, exchange of summaries of testimony of proposed witnesses, and examination by depositlon of partiaa and third-party witnesses. This discretion shall be exercised In favor of discovery reasonable under the circumstances. The Artlitrator shall issue subpoenas and subpoenas duces tecum as provided for In the applicable statutory or case law (e.g., in California Code of Civil Procedure Section 1262.6).

2. THE DECISION. The arbitration shall be conducted in the cily or county within which the Premises are located at e reasonably convenient site. Any Party may be represented by counsel or other authorized representative. In rendering e decision(s), the Artlitretor shall determine the rights end obligations of the Parties according to the substantive laws and the terms and provisions of this Leese. The Arbitrator's decision shell be based on the evidence introduced at the hearing, including all logical end reasonable inferences therefrom. The Arbilrelor may make any determination end/or grant eny remedy or relief thet Is just and equitable. The decision must be based on, end accompanied by, e written statement of decision explaining the factual end le gel basis for the decision as to each of the princlpal controverted ieeues. The decision shall be conclusive end binding, and it may thereafter be confirmed as e Judgment by the court of applicable jurisdiction, subject only to challenge on the grounds set forth in the applicable statutory or case lew (e.g., In Califom/e Code of Civil Procedure Section 1286.2). The velldlly and enforceeblllly of the Arbitrator's decision rs to be determined exclusively by the court of appropriate jurisdiction pursuant to the provisions of this Lease. The Arbitrator may award costs, including without limitation, Artlilrator's faee end coste, attorneys' fees, and expert and witness costs, lo the prevellfng party, If any, ea determined by the Arbitrator Jn his discretion.

Whenever a matter which hes been submitted to ertiltration involves a dispute as to whether or not e particular eel or omission (other than e failure to pey money) constitutes a Default, the lime to commence or cease euch action shall be tol/sd from the dete that the Notice of Arbitration is served through and untU the date the Arbitrator renders hls or her decision. Provided, however, that this provision shell NOT apply fn the event the! the Artlilrator determines that the Arbitration Notice was prepared In bad faith.

PAGE1 OF2 • ©1997 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM ARB-2-2/13E

Whenever a dispute arises between the Parties concerning whether or not the failure to make a payment of money constitutes a default, the service of an Arbitration Notice shall NOT toll the time period In which to pay the money. The Party allegedly obligated to pay the money may, however, elect to pay the money "under protesr by accompanying said payment with a written statement setting forth the reasons for such protest. If thereafter, the Arbitrator determines that the Party who received said money was not entitled to such payment, said money shall be promptly returned lo the Party who paid such money under protest together with Interest thereon as defined in Paragraph 13.5. If a Party m~es a payment •under protest" but no Notice of Arbitration Is filed within thirty days, then such protest shall be deemed waived. (See also Paragraph 42 or 43)

NOTICE: These forms are often modified to meet changing requirements of law and Industry needs. Always write or call to make sure you are utllizing the most currentfonn: AIR Commerclal Real Estate Association, 500 N Brand Blvd, Suite 900, Glendale, CA 91.203.

Telephone No. {213) 6B7-8777. Fax No.: (213) 687-8618.

~ INl'TIALS

PAGE 2 OF2 -©1997 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM ARB•2-2/13E

ENERGY DISCLOSURE LEASE ADDENDUM (For California Only)

Date: January 16, 2015

By and Between (Lessor) Byzantine, LLC, a California limited liability

(Lessee)value Schools, a California Non-profit Corporation

Address of Premises: 1929 West Pico Boulevard

Los An eles, CA 90006

PREFACE:

AB 1103, which first went into effect on January 1, 2014, requires the disclosure of energy consumption information for leases involving certain types and sizes of non-resldential buildings. These new rules apply only where the lease in question is for the entire building. Buildfngs containing less than 5000 square feet are exempt as are buildings being utilized for certain uses. In this regard it is the use specified in the certificate of occupancy or the equivalent of the current or previous tenant/occupant that Is important. While the use classifications are defined under the statewide California Building Code, the local municipality selects the use classification for a particular bullding when it issues the occupancy permit. Consequently, local interpretations and applications of the use classificallons can vary. In the case of Industrial bulldings utilfzed for manufacturing, assembly or fabricallon activities (Group F), the exemption will clearly apply. However, warehouses, depots and distribution centers are likely to be classified as Group Sand, therefore, subject lo the regulations. The occupancy permit documentation is the best mesns of determining whether AB 1103 applies.

Besides F and S there are a number of other use classifications - some of which are exempt and some are not. We recommend that you familiarize yourself with the types of businesses that fall under each use classification since AB 1103 encompasses retail, office, institutional, hospitarrty and other commercial uses as well. For your reference, the foHowlng use classifications that are NOT exempt:

i. Assembly (A) (for example: restaurants, theaters, and lecture halls) IL Business (B) iii. Education (E) iv. Institutional -Assisted Living (1-1, R-2) v. Institutional - Nonambulalory (1-2) vi. Mercantile (M) 0e. retail) vii. Residential- Transient (R-1) (for example, a hotel) viii. Storage (S) ix. Utility - Parking Garage (U)

Please see the International Code Council website that lists the various use classifications with links to the types of businesses that are included in each classification. http://publicecodes.cyberregs.com/st/ca/st/b200y10/st ca st b200v10 3 sec001.btm

A. ACKNOWLEGEMENTS:

Lessee acknowledges that, prior to the execution of this Lease, Lessor timely delivered lo Lessee the energy consumption and benchmarking disclosure documents for the Premises building in compliance with Pubfrc Resources Code Section 25402.10, and Lessee expressly waives any and all claims against Lessor, its agents and representatives relating to such disclosures or otherwise in connection with the applicable requirements of Public Resources Code Section 25402.10.

8. UTILITIES:

If any of the services or utflities listed in paragraph 11 of the Lease are separately billed or metered to Lessee, then Lessee hereby authorizes the release by such utlHty service providers to Lessor of any and all energy usage data and other Information related to the disclosure requirements under Public Resources Code Section 25402.10 and shall promptly execute any authorizations, consents or other documentation required by any such utility service provider for the release to Lessor of such information. In addition, Lessee shell promptly denver to Lessor copies of any utility bills requested by Lessor.

Tenant Name:V c=•=l=u=e~S~c=h~o~o~l~s~, ~~======Nco~n0 --p=r=o=f=i=t~O=r~g~a0n=i~,~·~t~1~· o~n0

By: .,,/ ,C vv

NOTICE: These forms are often modi , d to meet chan ng requirements of law and industry needs. Always write or call to make sure you are utlllzlng the most currant fonn: AIR Commercial Real Estate Association, 500 N Brand Blvd, Suite 900, Glendale, CA 91203. Telephone

No. (213) 687-8777. Fax No.: (213) 687-8618.

© Copyright 2014 By AIR Commerclal Real Estate Association.

All rights reserved. No part of these works may be reproduced in any form without pennisslon in writing.

PAGE 1 OF 1

INmALS

©2014 -AJR COMMERCIAL REAL ESTATE ASSOCIATION FORM EDAL.0.04114E

EXHIBIT A

Option Term Base Rent

[Attach AIR Form "Rent Adjustments"]

16

EXHIBIT A

RENT ADJUSTMENT(S) STANDARD LEASE ADDENDUM

Dated ------------'J'-'a"n"u"a"r"---'1-'6~,~2-'D-'1-'S __________ _

By and Between (Lessor} Byzantine, LLC, a California limited liability

com an

Paragraph

(Lessee) Value Schools, a California Non-profit

car oration

Address of Premises: 1929 West Pico Boulevard

Los An eles, CA

A. RENT ADJUSTMENTS:

The monthly rent for each month of the adjustment period(s) specified below shall be Increased using the method(s) indicated below:

(Check Method(s) to be Used and FIii in Appropriately)

D Cost of Living Adjustment(s) (COLA)

a. On (Fill In COLA Dates): __________________________________ _

the Base Rent shall be adjusted by the change, If any, from the Base Month specified below, in the Consumer Price lrdex of the Bureau of Labor

Statistics of the U.S. Department of Labor for (select one):D CPI W (Urban Wage Earners and Clerical Workers) or D CPI U (All Urban Consumers),

for (Fill in Urban Area):

--------------------------------------------~· All Items (1982-1984 = 100), herein referred to as "CPI".

b. The monthly Base Rent payable in accordance with paragraph A.I.a. of this Addendum shall be calculated as follows: the Base Rent set forth In paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPl of the calerdar month 2 months prior to the month(s) specified in paragraph A.I.a. above during which the adjustment is to take effect. and the denominator of which shall be the CPI of the calendar month which is 2 months prior lo (select one): the D first month of the term of this Lease as set forth in paragraph 1 .3 ("Base Month") or D (Fill In Other"Base Month"): . The sum so calculated shall constitute the new monthly Base Rent hereunder, but in no event, shall any such new monthly Base Rent be less than the Base Rent payable for the month lmmedlately preceding the Base Rent adjustment.

c. In the event the compilalfon and/or publication of the CPI shall be transferred lo any other governmental department or bureau or agency or shall be discontinued, then the Index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative Index, then Iha matter shall be submttted for decision lo Iha American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Parties.

0 II. Market Rental Value Adjustmsnt(s) (MRV) a. On (Fill in MRV Adjustment Date(s): the first (1st) day of each option period,

the Base Rent shall be adjusted to the "Markel Rental Value" of the property, which 5hall reflect the prevailing rent 5tructure !ncludfng periodic

rental increaee5, as follows:

1) Four months prior to each Market Rental Value Adjustment Date described above, the Parties shell attempt to agree upon what the new MRV will be on the adjustment date. If agreement cannot be reached within thirty days, then:

(a) besser a11S basses shall imFl'l:ae'iatsly appeint a m1,1!1,1all) asse,itallle appFaiset er llFeker ta estallllsR tl1e new HRJ/" ilAir:i tRe neut 3Q Says. il,F1y asseeiateel aest& mill Ile s,ilit eqi.alPJ llet,,;eeA tRe P~ae, ar

(b) Both Lessor and Lessee shall each immediately make a reasonable determination of the MRV end submit such determination, in writing, lo arbitration in accordance with the fol!owlng provisions:

(i) Within 15 days thereafter, Lessor and Lessee shall each select an D appraiser or 0 broker (nconsultant" -check one) of their choice to act es an arbitrator. The two arbitrators so appointed shell immediately select a third mutually acceptable Consultant to act as a third arbitrator.

PAGE 1 OF 2

INITIALS .~ ©2000 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM RA-5-04/14E

(ii) The 3 arbitrators shall within 30 days of the appointment of the third arbitrator reach a decision as to what the actual MRV for the Premises Is, and whether Lessor's or Lessee's submitted MRV Is the closest thereto. The decision of a majority of the arbitrators shall be binding on the Parties. The submitted MRV which Is determined lo be the closest to the actual MRV shall thereafter be used by the Parties.

(iii) If either of the Perties fails lo appoint an arbitrator within the specified 15 days, the arbitrator Umely appointed by one of them shall reach a decision on his or her own, and said decision shell be binding on the Parties.

(IV) The entire cost of such arbitration shall be paid by the party whose submitted MRV is not selected, i.e., the one that rs NOT the closest to the actual MRV.

2) When determining MRV, the Lessor, Lessee and Consultants shall consider the terms of comparable market transactions which shall include, but no limited to, rent, rental adjustments, abated rent, lease term and financial condition of tenants.

3) Notwithstanding the foregoing, the new Base Rent shall not be less than the rent payable for the month immediately preceding the rent adjustment.

b. Upon the establishment of each New Market Rentel Value: 1) the new MRV will become the new "Base Ranf' for the purpose of calculating any further Adjustments, end 2) the first month of each Market Rental Value term shall become the new 'Base Month' for the purpose of calculating any further

Adjustments.

0 Ill, Fixed Rental Adjustment{s) (FRA)

The Base Rent shall be increased to the following amounts on the dates set forth below:

On (Fill in FRA Adjustment Dale(s)): The New Base Rent shall be:

0 IV, Initial Term Adjustments, The formula used lo calculate adjustments lo the Base Rete during the original Term of the Lease shall continue to be used during the extended term.

B. NOTICE: Unless specified otherwise herein, notice of any such adjustments, other than Fixed Rental Adjustments, shall be made as specified in

paragraph 23 of the Lease.

C. BROKER'S FEE: The Brokera shall be paid a Brokerage Fee for each adjustment speclfled above in accordance with paragraph 15 of the Lease or if

applicable, paragraph 9 of the Sublease.

NOTICE: These forms are often modified to meet changing requirements of law and industry needs, Always write or call to make sure you are utilizing the most current form: AIR Commercial Real Estate Association, 500 N Brand Blvd, Suite 900, Glendale, CA 91203.

Telephone No. (213) 687-8777. Fax No.: (213) 687-8616,

PAGE 2 0F2

INITIALS ~ ©2000 -AIR COMMERCIAL REAL ESTATE ASSOCIATION FORM RA-5-04114E

- 1 –

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (“Amendment”) is entered into as of February 25, 2015 (“Effective Date”), by and between BYZANTINE, LLC, a California limited liability company (“Lessor”), and VALUE SCHOOLS, a California non-profit corporation (“Lessee”).

RECITALS

This Amendment is based upon the following facts, understandings and intentions of the parties:

A. Lessor owns that certain real property commonly known as 1929 W. Pico Boulevard, Los Angeles, California (the “Premises”).

B. Lessor and Lessee are parties to that certain Standard Industrial/Commercial Single-Tenant Lease – Net dated as of January 16, 2015, and addenda thereto (collectively, the “Existing Lease”) with respect to the Premises.

C. Lessor and Lessee now desire to amend the Existing Lease as more particularly described in the terms and conditions hereinafter set forth.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Definitions. All capitalized terms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Amendment differently from the definition given in the Existing Lease, the definition utilized in this Amendment shall be controlling.

2. Amendment to Lease. This Amendment shall constitute an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Amendment, all of the terms and conditions of the Existing Lease shall remain unmodified and in full force and effect and are hereby ratified by the parties.

3. Contingency Periods. Notwithstanding anything to the contrary contained in the Existing Lease, Lessor and Lessee acknowledge and agree that: (a) the Initial Contingency Period shall expire on March 16, 2015; (b) the Finance Contingency Period shall expire on April 6, 2015; and (c) the Approval Contingency Period shall expire on January 29, 2016 and remains subject to extension as described in Paragraph 58 of the Existing Lease.

4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

- 2 –

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written.

“LESSEE” “LESSOR”


By: _____________________________

Name: _____________________________

Its: _____________________________


By: __________________________

Name: __________________________

Its: __________________________

SECOND AMENDMENT TO LEASE

THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is entered into as of April 1, 2015 ("Effective Date"), by and between BYZANTINE, LLC, a California limited liability ·company ("Lessor") and VALUE SCHOOLS, a California non-profit corporation ("Lessee" ).

RECITALS

This Second Amendment is based upon the following facts, m1derstandings and intentions of the parties:

A. Lessor owns that certain real property commonly known as 1929 W. Pico Boulevard, Los Angeles, California (the "Premises").

B. Lessor and Lessee are parties to that certain Standard Industrial/ Commercial Single-Tenant Lease - Net dated as of January 16, 2015, and addenda thereto with respect to the Premises, which was amended by Lhat First Amendment to Lease dated February 25, 2015 (collectively, the "Existing Lease").



1. Definitions. All capitalized terms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Second Amendment differently from the definition given in the Existing Lease, the definition utilized in this Second Amendment shall be controlling.

2. Amendment to Lease. This Second Amendment shall constitute an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Second Amendment, ~ of the terms and conditions of the Existing Lease shall remain ID1modified and in full force and effect and are here by ra ti.fled by the parties.

3. Contingency Periods. Notwithstanding anything to the contrary contained in the Existing Lease, Lessor and Lessee acknowledge and agree that the Finance Contingency Period shall expire on May 8, 2015.

4. Counterparts. This Second Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall

938666.1 - 1-

THIRD AMENDMENT TO LEASE

THIS THIRD MENDMENT TO LEASE ("Third Amendment") is entered into as of May 8, 2015 ("Effec ve Date"), by and between BYZANTINE, LLC, a California limited liability company ("Le sor1') and VALUE SCHOOLS, a California non-profit corporation ("Lessee").

RECITALS

This Third Am ndment is based upon the following facts, understandings and intentions of the parti s:

A. Lessor o ns that certain real property commonly known as 1929 W. Pico Boulevard, Los Angel s, California (the "Premises").

B. Lessor d Lessee are parties to that certain Standard Industrial/ Commercial Single-Tenant Lease- et dated as ofJanuary 16, 2015, and addenda thereto with respect to the Premises, which as amended by that First Amendment to Lease dated February 25, 2015, and Second Am ndment to Lease dated April 1, 2015 (collectively, the "Existing Lease").

C. Lessor particularly described

d Lessee now desire to amend the Existing Lease as more the terms and conditions hereinafter set forth.

NOW, THERE ORE, for good and valuable consideration, the receipt and sufficiency of which ar hereby acknowledged, the parties agree as follows:

1. =....;;;=="+=-· All capitalized terms not otherwise defined herein shall have the in the Existing Lease; provided, however, that to the extent any

capitalized term is de · ed in this Third Amendment differently from the definition given in the Existing Lease, e definition utilized in this Third Amendment shall be controlling.

2. ent to Lease. This Third Amendment shall constitute an amendment to the Exi · g Lease effective as of the Effective Date. Except as specifically modified by this Third Amendment, all of the terms and conditions of the Existing Lease

· shall remain unmodifi d and in full force and effect and are hereby ratified by the parties.

3. Contin e c Periods. Notwithstanding anything to the contrary contained in the Existing Lease, Les or and Lessee acknowledge and agree that the Finance Contingency Period shall expire on uly 22, 2015.

4. Counter arts. This Third Amendment may be executed in one or more counterparts, each of hich shall be deemed-an original, but all of which together shall constitute one and the ame instrument.

944351.l -1 -

IN WITNESS REOF, the parties hereto have executed this Third Amendment as of the day and year first above written.

"LESSEE" "LESSOR"

VALUE SCHOOLS, BYZANTINE, LLC, a California non-profi corporation a California limited liability company

By: ~!1~~~~~~ By: ./ . 7

Name: G f.rt_(.}L. 1' 1 Name:_(?.........,_; e,"'""'h ___ C\..,__~----'--f-· cA.._0 __

Its: Its:

944351.1 -2-

960389.1 - 1 –

FOURTH AMENDMENT TO LEASE

THIS FOURTH AMENDMENT TO LEASE (“Fourth Amendment”) is entered into as of September ___, 2015 (“Effective Date”), by and between BYZANTINE, LLC, a California limited liability company (“Lessor”) and VALUE SCHOOLS, a California non-profit corporation (“Lessee”).

RECITALS

This Fourth Amendment is based upon the following facts, understandings and intentions of the parties:

A. Lessor owns that certain real property commonly known as 1929 W. Pico Boulevard, Los Angeles, California (the “Premises”).

B. Lessor and Lessee are parties to that certain Standard Industrial/Commercial Single-Tenant Lease – Net dated as of January 16, 2015, and addenda thereto with respect to the Premises, which was amended by that First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, and Third Amendment to Lease dated May 8, 2015 (collectively, the “Existing Lease”).



1. Definitions. All capitalized terms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Fourth Amendment differently from the definition given in the Existing Lease, the definition utilized in this Fourth Amendment shall be controlling.

2. Amendment to Lease. This Fourth Amendment shall constitute an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Fourth Amendment, all of the terms and conditions of the Existing Lease shall remain unmodified and in full force and effect and are hereby ratified by the parties.

3. Demolition Work. Lessor shall perform that certain demolition work depicted in the demolition plan attached hereto as Exhibit A (the “Demolition”). Lessor shall commence such Demolition promptly following the execution of this Fourth Amendment and shall complete such Demolition on or before ________________, 2015; provided further that following completion of the Demolition, the Premises shall be in condition for Lessee to commence performance of the Lessee’s Work. All such Demolition

960389.1 - 2 –

shall be performed by Lessor, at its sole expense and without credit against the Tenant Improvement Allowance and in accordance with Applicable Requirements. Notwithstanding any terms in the Lease to the contrary, Lessee shall have no obligation for claims for labor or material furnished or alleged to have been furnished in connection with the Demolition. Lessor acknowledges that in the event completion of the Demolition is delayed through no fault of Lessee, the Base Rent shall be abated the period of such delay.

4. Counterparts. This Fourth Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment as of the day and year first above written.

“LESSEE” “LESSOR”


By: _____________________________

Name: _____________________________

Its: _____________________________


By: __________________________

Name: __________________________

Its: __________________________

FIFTH AMENDMENT TO LEASE

THIS FIFTH AMENDMENT TO LEASE ("Fifth Amendment") is entered into as of f e b ru o.,... 'I 1'l , 2016 ("Effective Date"), by and between BYZANTINE, LLC, a California limited liability company ("Lessor") and VALUE SCHOOLS, a California nonprofit corporation ("Lessee").

RECITALS

This Fifth Amendment is based upon the following facts, understandings and intentions of the parties:


B. Lessor and Lessee are parties to that certain Standard Industrial/ Commercial Single-Tenant Lease - Net dated as of January 16, 2015, and addenda thereto with respect to the Premises, which was amended by that First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, Third Amendment to Lease dated May 8, 2015, and Fourth Amendment to Lease dated Decembet 14, 2015 (collectively, the "Existing Lease").



1. Definitions. All capitalized terms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Fifth Amendment differently from the definition given in the Existing Lease, the definition utilized in this Fifth Amendment shall be controlling.

2. Amendment to Lease. This Fifth Amendment shall constitute an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Fifth Amendment, all of the terms and conditions of the Existing Lease shall remain unmodified and in full force and effect and are hereby ratified by the parties.

3. Contingency Periods. Notwithstanding anything to the contrary contained in the Existing Lease, Lessor and Lessee acknowledge and agree that the Approval Contingency Period shall expire on May 31st, 2016.

4. Counterparts. This Fifth Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall

9811 72. 1 - 1 -

constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment as of the day and year first above written.

"LESSEE" "LESSOR"

VALUE SCHOOLS, BYZANTINE, LLC, a California non-profit corporation a California limited liability company

By A.7~ Name: Ger;" 'I ~13\.1

By:

Name: __________ _

Its: Its:

98 1172.1 -2 -

SIXTH AMENDMENT TO LEASE

THIS SIXTH AMENDMENT TO LEASE ("Sixth Amendment") is entered into as of ______ , 2016 ("Effective Date"), by and between BYZANTINE, LLC, a California limited liability company ("Lessor") and VALUE SCHOOLS, a California non-profit corporation ("Lessee").

RECITALS

This Sixth Amendment is based upon the following facts, understandings and intentions of the parties:


B. Lessor and Lessee are parties to that certain Standard Industrial/Commercial Single-Tenant Lease - Net dated as of January 16, 2015, and addenda thereto with respect to the Premises, which was amended by that First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, Third Amendment to Lease dated May 8, 2015, Fourth Amendment to Lease dated December 14, 2015 and Fifth Amendment to Lease dated February 29, 2016 (collectively, the "Existing Lease").



l . Definitions. All capitalized terms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Sixth Amendment differently from the definition given in the Existing Lease, the definition utilized in this Sixth Amendment shall be controlling.

2. Amendment to Lease. This Sixth Amendment shall constitute an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Sixth Amendment, all of the tenns and conditions of the Existing Lease shall remain unmodified and in full force and effect and are hereby ratified by the parties.

3. Contingency Periods. Notwithstanding anything to the contrary contained in the Existing Lease, Lessor and Lessee acknowledge and agree that the Approval Contingency Period shall expire on August 25, 2016.

4. Counterparts. This Sixth Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment as of the day and year first above written.

"LESSEE"


By:

Its:

Name: Gey Yj Saco b 1 C E b/f(l"E:>rDEINT

2

"LESSOR"


By:

Name:

Its:

SEVENTH AMENDMENT TO LEASE

THIS SEVENTH AMENDMENT TO LEASE ("Seventh Amendment") is entered into as of ~4Yi\A'?-± 1.5; , 2016 ("Effective Date"), by and between BYZANTINE, LLC, a California imited liability company ("Lessor") and VALUE SCHOOLS, a California non-profit corporation ("Lessee").

RECITALS

This Seventh Amendment 1s based upon the following facts, understandings and intentions of the parties:


B. Lessor and Lessee are parties to that certain Standard Industrial/ Commercial Single-Tenant Lease- Net dated as of January 16, 20 15, and addenda thereto with respect to the Premises, which was amended by that First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, Third Amendment to Lease dated May 8, 2015, Fourth Amendment to Lease dated December 14, 2015, Fifth Amendment to Lease dated February 29, 2016, and Sixth Amendment to Lease dated May 5, 2016 (collectively, the "Existing Lease'').

C. Lessee desires and intends to fmance ce11ain tenant improvements to the Premises through tax exempt bonds issued by the California School Finance Authority (the "CSF A") which would be secured by, among other matters, a Leasehold Mortgage on Lessee's Leasehold Interest (the "Leasehold Financing").

D. To satisfy the CSF A's requirements for such Leasehold Financing, Lessee desires and intends to assign the Existing Lease, as modified hereby, to a single purpose Affiliate (as defined below) of Lessee, which will in turn sublease the Premises back to Lessee, and to fm1her amend and modify the Existing Lease as set forth herein.

E. Lessor and Lessee now desire to amend the Existing Lease as more particularly described in the te1ms and conditions hereinafter set forth.


1. Definitions. All capitalized te1ms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Seventh Amendment differently from the definition given in the Existing Lease, the definition utilized in this Seventh Amendment shall be controlling. All references to the "Lease" shall refer to the Existing Lease, as modified hereby.

2. Consent to Assignment. Notwithstanding any terms in the Existing Lease to the contrary, Lessor hereby consents to Lessee's assignment of Lessee's right, title and interest in

1004615.3

and to the Lease (the "Approved Assignment") to VSF School Facilities # 1 LLC, a California limited liability company ("VSF"). Lessee represents and wa1rnnts to Lessor that VSF is an Affiliate of Lessee. The term ':Affiliate" refers to an entity that controls, is controlled by, or is under common control with Value Schools, a California non-profit corporation. Within ten (10) days after the Approved Assignment is fully executed, Lessee shall deliver to Lessor a true, correct, complete and fully executed copy of the Approved Assignment. At such time that VSF is the lessee pursuant to the Lease, then upon request of VSF, Lessor and VSF shall execute a Memorandum of Lease, in substantially the form of Exhibit A, attached hereto, and if VSF elects to record such Memorandum of Lease, VSF shall have the right to do so at its sole cost and expense.

3. Consent to Sublease. Notwithstanding any terms in the Existing Lease to the contrary, at such time that VSF is the lessee pursuant to the Lease, Lessor hereby consents to VSF's subleasing of the Premises (the "Approved Sublease") to Value Schools, a California nonprofit corporation. Within ten (l 0) days of the execution of the Approved Sublease, Lessee shall

. deliver to Lessor a true, correct, complete and fully executed copy of the Approved Sublease. Lessor further consents to VSF's assignment of such Approved Sublease to the Leasehold Mortgagee as security for, and in c01mection with, the Leasehold Financing, and fu1ther agrees that neither Lessee nor VSF shall have any obligation to pay Lessor the processing fee described in Section 12.2(e) of the Lease nor the rent or other consideration payable by Lessee to VSF under the Approved Sublease which exceeds the underlying rent payable under this Lease as provided in Section 55 of the Lease. Notwithstanding the Approved Assigmnent and the Approved Sublease, so long as VSF is the lessee pursuant to the Lease and is not in default thereunder which has not been cured within the cure period provided in the Lease, then VSF shall have the right to exercise the Options to Extend the Tenn set forth in the Lease.

4. No Release of Lessee. Notwithstanding any te1ms herein to the contrary, no assignment, including, but not limited to, the Approved Assignment, shall release Lessee from any obligations under the Lease or alter the primary obligation of Lessee for payment of the Rent or the performance of any other obligations of the Lessee under the Lease.

5. Lessee-Owned Alterations and Utility Installations. Notwithsfanding any terms of the Existing Lease to the contrary, at all times during the term of the Lease, all Alterations and Utility Installations made by Lessee shall be the prope1ty of Lessee, but considered pait of the Premises, provided that upon expiration or termination of the Lease, such Lessee Owned Alterations and Utility Installations shall become the prope1ty of Lessor and be smTendered by Lessee with the Premises.

6. Amendment to Lease. This Seventh Amendment shall constitute an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Seventh Amendment, all of the terms and conditions of the Existing Lease shall remain unmodified and in full force and effect and are hereby ratified by the patties.

7. Counterparts. This Seventh Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

1004615.3 2

IN WITNESS ,WHEREOF, the parties hereto have executed this Seventh Amendment as /of the day and year first apove written.

"LESSEE" "LESSOR"

VALUE SCHOOLS, BYZANTINE, LLC, a California non-profit corporation

::e1~1:~0S'i a California limited liability company

By, ~[K'~vc~ Name: 12.~ Ut.A- C. hQ

Its: C. ED Its:

1004615.3 3

EXHIBIT A

WHEN RECORDED, MAIL TO:

MEMORANDUM OF LEASE

This MEMORANDUM OF LEASE dated as of A~w:i± I~ , 2016 (the "Effective Date"), is made by BYZANTINE, LLC, a California limited liability company ("Landlord") and ·vsF SCHOOL FACILITIES #1 LLC, a California limited liability company, successor to Value Schools, a California non-profit corporation ("Tenant").

NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged,

Landlord hereby leases lo Tenant and Tenant hereby leases from Landlord, the property described in Exhibit A hereto (the "Premises") for a term which commenced on February 1, 2015 ("Commencement Date") and tc1minating on June 30, 2040 ( or such later date if Lessee exercises its rights to extend the Term for two additional five (5) year options) (such date as it may be extended, "Expiration Date"), upon the terms and conditions of that certain unrecorded Lease Agreement dated January 16, 2015, as amended by that First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, Third Amendment to Lease dated May 8, 2015, Fourth Amendment to Lease dated December 14, 2015, Fifth Amendment to Lease dated February 29, 2016, Sixth Amendment to Lease dated May 5, 2016, and Seventh Amendment to Lease dated R~½Sd 1~, ~ l!:i herewith between Landlord and Tenant (the "Lease"), the terms and condit10ns of which are incorporated herein by this reference, as if fully set forth below.

[SIGN A TURES ON NEXT PAGE]

1004615.3

The terms of this instrument shall be deemed a Memorandum of the Lease. In the event of any inconsistency between this Memorandum and the Lease, the Lease shall control.

"LANDLORD":


~ /

By:_;/ t ~

Name: l4 bet.:± .CL. o

Its: )v\pi !X2§ j n_£ tv\ f it'\ lfeL::

[SIGN A TURES CONTINUED ON NEXT PAGE]

1004615.3 2

[SIGN A TURES CONTINUED FROM PRIOR PAGE]

1004615.3

TENANT:

VSF SCHOOL FACILITIES 31 LLC, a California limited liability company

By: VALUE SCHOOLS FOUNDATION, a California non-profit public benefit corporation,

its sole memb~ Q By: ~ / vtr~..,

Name: G-1nz,8 L/)/ "1 t; ;) {l t.Ob'j

Its: CE D

3

A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document.

ST A TE OF CALIFORNIA

COUNTY OF

On Avifl I I, ' 2-0 1 b, before me, Hye L f WI d-i O e___ (here insert nam~ nd title of officer), personally appeared rRe>hevl ~ c; VJ_ f) y;, ( Cl,-\ o , who proved to me on the basis of satisfactory evidence to be the erson ) whose~)@are subscribed to the within instrument and acknowledged to me tha e she/they executed the same in ~er/their authorized~ies), and that by@er/their~s) on the instrument the~), or the entity upon behalf of which t~s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

(SEAL)

1004615.3 4

A notary public or other officer completing this certificate verifies only the identity of the individual who signed the document to which this certificate is attached, and not the truthfulness, accuracy, or validity of that document.

STATE OF CALIFORNIA

COUNTY OF

On __________ , before me, ______________ __ (here insert name and title of officer), personally appeared _____________ _ who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person( s ), or the entity upon behalf of which the person( s) acted, executed the instrument.

I ce1iify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

(SEAL)

1004615.3 5

1004615.3

EXHIBIT A

Legal Description

[To be attached]

6

EIGHTH AMENDMENT TO LEASE

THIS EIGHTH AMENDMENT TO LEASE ("Eighth Amendment") is entered into as of . AUj~-:d- ...l..:l.. , 2016 ("Effective Date"), by and between BYZANTINE, LLC, a California limited liability company ("Lessor") and VALUE SCHOOLS, a California non-profit corporation ("Lessee").

RECITALS

This Eighth Amendment is based upon the following facts, understandings and intentions of the parties:

A. Lessor owns that certain real property commonly known as i 929 W. Pico Boulevard, . Los Angeles, California (the "Premises") .

B. Lessor and Lessee are part:J.es to that certain Standard Industrial/Commercial Single-. Tenant Lease - Net dated as of January 16, 2015, and addenda thereto with respect to the Premises, which was amended by that First Amendment to Lease dated February 25, 2015, Second Amendment to Lease dated April 1, 2015, Third Amendment.to Lease dated May 8, 2015, Fourth

· Amendment to Lease dated December 14, 2015, Fifth Amendment to Lease dated February 29, . 2016, Sixth Amendment to Lease dated May 5, 2016 and Seventh Amendment to Lease dated . August 15, 2016 (collectively, the "Existing Lease").


NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of . which are hereby acknowledged, the parties agree as follows:

1. Definitions. All capitalized terms not otherwise defined herein shall have the same meanings utilized in the Existing Lease; provided, however, that to the extent any capitalized term is defined in this Eighth Amendment differently from the definition given in the Existing Lease, the definition utilized in this Eighth Amendment shall be controlling.

2. Amendment to Lease. This Eighth Amendment shall constitµte an amendment to the Existing Lease effective as of the Effective Date. Except as specifically modified by this Eighth Amendment, all of the terms and conditions of the Existing Lease shall remain urunodified and in full force and effect and are hereby ratified by the parties. ·

3. Contingency Periods. Notwithstanding anything to the contrary contained in the Existing Lease, Lessor and Lessee acknowledge and agree that the Approval Contingency Period shall expire on November 18, 2016.

1006897.1

!· .•

4. C,ounterparts. This Eighth Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. ·

IN WITNESS WHEREOF, the parties hereto have executed this Eighth Amendment as of the day and year first above written.

"LESSEE"


Its: CE Q

1006897.1 2

"LESSOR"


By: _ __,_~__;_:;;.._' _;__'-_o-{___,_;--'---"""oL=----Name: {?,'e- b "...-A P, Gl Q

Its:

NEW ISSUES—BOOK-ENTRY ONLY RATING: S&P: …cdiacdocs.sto.ca.gov/2016-3196.pdf · NEW...

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