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I Lsaw oFFIGES GILCHRIST&RUrr-UER - PROFRSSIONAL CORPORATION Rodney Estrada June 5, 2009 Page 2 of condominiums, entering into contracts and addressing the day-to-day operations of the property. The Park will be no different in that respect. Regarding your specific concerns about the funding of normal operations and extraordinary expenses, the HOA will have many tools at its disposal to ensure adequate funding. The Act requires homeowners' associations to establish operating budgets, including adequate reserves for unanticipated costs. Associations are also required to conduct certified reserve studies every three years in order to assure the adequacy of these reserves, and updates to the operating budget and reserve studies are performed on an annual basis. During the inception of a CID, the DRE oversees the initial funding of reserves and preparation of operating budgets for the HOA. Prior to the sale of any lots after conversion,the current Park owner must fund a reserve account for the future HOA in an amount equal to the already-expended portion of the useful lives of the Park's infrastructure. Such amount is determined through an initial reserve account requirements study, which is performed prior to the sale of any lots and (i) identifies the major components that have a useful life of less than 30 years, (ii) determines the remaining useful life of the major components, (iii) estimates the cost of repair, replacement, restoration, or maintenance of the major components, (iv) estimates the total annual contribution necessary to defray such costs during and at the end of the useful life of the major components, and (v)provides a reserve funding plan describing how the HOA will meet its obligation to repair and replace all major components with an expected remaining life of 30 years or less. The ultimate amount to be funded by the Park's owner is determined by the DRE. Day-to-day operations and reserve funding will be paid from the regular HOA assessments that each lot owner will be required to pay on a monthly basis. To ensure that the HOA will have sufficient funds during the early period of resident ownership and operation of the Park by the HOA, the current Park owner will be required by the DRE to furnish cash funds, a surety bond or other security convertible to cash to an escrow before the sale of any lots, so as to provide security for the Park owner's payment of the assessments against the lots it continues to own pending sale to residents. The amount required to be deposited is typically equal to six months of regular assessments for each space and is subject to terms ensuring that the Park owner pays all assessments levied by the HOA against spaces owned by the Park Owner (i.e., unsold spaces) until 80% of the spaces have been sold. The DRE also approves the initial regular assessment amounts based on the DRE's determination that the assessments will be sufficient to meet the HOA's budgetary requirements. In addition, the HOA will have the power to impose special assessments on lot owners in the event of extraordinary costs or the need to replenish reserves that are unexpectedly depleted. Finally, under the Act, the HOA will have the power to place liens on the property of lot owners