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Home My WebLink About1999-063 RESOLUTION NO. 1999-63 RESOLUTION OF THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO APPROVING CERTAIN TERMS AND CONDITIONS AND AUTHORIZING THE PAYMENT OF FINANCING COSTS IN CONNECTION WITH THE LEASElLEASEBACK FINANCING FOR THE SAN BERNARDINO INTERNATIONAL AIRPORT (SBIAA FINANCING) WHEREAS, the City of San Bernardino ("City") is a municipal corporation and charter city organized and existing pursuant to the constitution of the State of California; and WHEREAS, the City, the County of San Bernardino (the "County") and the San Bernardino International Airport Authority (the "Authority") (the City, the County and the Authority to be referred to jointly as the "Owners") propose to enter into a transaction in which they shall lease the land and improvements currently under the jurisdiction of the Authority (said land and improvements to be referred to as the "Airport") to a private entity, which will simultaneously sublease the Airport back to the City and the County jointly (said transaction to be referred to as the "Lease\Leaseback Transaction"); and WHEREAS, the Owners propose to enter into the Lease\Leaseback Financing Summary of Terms and Conditions, dated as of April I, 1999 (the "Term Sheet"), by and between the Owners and Merrill Lynch & Co. ("Merrill Lynch"), summarizing the terms and conditions of the Lease\Leaseback Transaction and setting forth the Owners' and Merrill Lynch's obligations in the event that the Lease\Leaseback Transaction is not consummated; and . Res 1999-63 WHEREAS, each Owner proposes to enter into an Engagement Letter (the "Counsel Engagement Letter") with O'Melveny & Myers LLP, whereby O'Melveny & Myers LLP will jointly represent the Owners as legal counsel for the LeaselLeaseback Transaction; and WHEREAS, each Owner proposes to enter into an Engagement Letter (the "Placement Agent Engagement Letter") with Merrill Lynch, whereby Merrill Lynch will act as advisor to, and placement agent for, the Owners for the LeaselLeaseback Transaction. NOW, THEREFORE, THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO, DO HEREBY RESOLVE, DETERMINE AND ORDER AS FOLLOWS: Section 1. The form of Term Sheet by and between the Owners and Merrill Lynch attached hereto as Exhibit A is hereby approved. The Mayor of the City ("Mayor') and the Mayor Pro-Tem are, and each of them acting alone is, hereby authorized and directed for and in the name of and on behalf of the City to execute and deliver the Term Sheet in substantially the form attached thereto as Exhibit A and presented to and considered at this meeting, with such changes therein as the Mayor or the Mayor Pro- Tem, as applicable, executing the same on behalf of the City may approve, in his or her discretion, as being in the best interest of the City, such approval to be conclusively evidenced by such execution and delivery thereof. Section 2. The form of Counsel Engagement Letter attached hereto as Exhibit B is hereby approved. The Mayor and the Mayor Pro- Tem are, and each of them acting alone is, hereby authorized and directed for and in the name of and on behalf of the City, to execute and Res 1999-63 deliver the Counsel Engagement Letter in substantially the form attached hereto as Exhibit B and presented to and considered at this meeting, with such changes therein as the Mayor or the Mayor Pro- Tem, as applicable, executing the same on behalf of the City may approve, in his or her discretion, as being in the best interest of the City, such approval to be conclusively evidenced by such execution and delivery. Section 3. The form of Placement Agent Engagement Letter attached hereto as Exhibit C is hereby approved. The Mayor and the Mayor Pro-Tem are, and each of them acting alone is, hereby authorized and directed for and in the name of and on behalf of the City, to execute and deliver the Placement Agent Engagement Letter in substantially the form attached hereto as Exhibit C and presented to and considered at this meeting, with such changes therein as the Mayor or the Mayor Pro- Tem, as applicable, executing the same on behalf of the City may approve, in his or her discretion, as being in the best interest of the City, such approval to be conclusively evidenced by such execution and delivery thereof. Section 4. The Mayor and the Mayor Pro- T em are, and each of them acting alone is, hereby authorized and directed to prepare such documents and certificates as may be necessary to effectuate the Lease\Leaseback Transaction; provided, however, (i) that all such documents are subject, prior to their execution, to the approval of the Mayor and Common Council of the City and (ii) that the net present value benefit (after payment of all transaction costs) of the transaction exceeds four percent (4%) of the appraised value of the Airport. Res 1999-63 Section 5. All actions heretofore taken by any officer or officers of the City with respect to any of the documents, agreement or matters referred to in Sections 1 through 3 hereof, are hereby approved, confirmed and ratified. Res. 1999-63 RESOLUTION OF THE MAYOR AND COMMON COUNCIL OF THE CITY OF SAN BERNARDINO APPROVING CERTAIN TERMS AND CONDITIONS AND AUTHORIZING THE PAYMENT OF FINANCING COSTS IN CONNECTION WITH THE LEASE\LEASEBACK FINANCING FOR THE SAN BERNARDINO INTERNATIONAL AIRPORT (SBIAA FINANCING) Section 6. This Resolution shall take effect from and after its passage and adoption. I HEREBY CERTIFY that the foregoing Resolution was duly adopted by the Mayor and Common Council of the City of San Bernardino at a joint regular meeting thereof, held on the 5th day of April , 1999, by the following vote, to wit: Council: ESTRADA LIEN MCGINNIS SCHNITZ DEVLIN ANDERSON MILLER AYES x NAYS ABSTAIN ABSENT x x x x x x ~~~/ Cit)i rlc The foregoing resolution is hereby appro e 1,l1i~'lHuday of Approved as to form and legal content: "r" tf~ City Attorney Apri 1 ,1999. ~ Res. 1999-63- EXHIBIT "An SUMMARY OF TERMS AND CONDITIONS Res_ 1999-63 Facility/AS8et Airport Operator Airport SponSOt' Total Aeaet Cost Airport Own.erelHead Leesor Head Leasee Issuer Counsel Soble5SOt' Sublessee Invest01' Investor Counael AdvisorlPlacement Agent Lender Lenders Counsel Bankruptcyffrue Sale Opinion L'd San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions Certain real property consisting of the various land, improvements, buildings, runways, taxiways, hangers, ele. that make up the San Bernardino International. Airport which was previously the Norton .Airforee Base. San Bernardino International Airport Authority (the "SBIAA"). San Bernardino International Airport Authority. Approximately $200 nilllion. SBIAA, the City of San llernardino and County of San Bernardino (the "Owners") will be the Head Lessor under the Head Lease. The Owners will obtain fee simple title to the San Bernardino InternAtional Airport (the "Airport") from the U.S. Airforee. The Owners will designate SBIAA the Sponsor of the Airport for FAA, grant assurance and other purposes. The Owners also will enter into a long-term Operating Agreement with SBIAA for operation of the Airport. After termination of the Head Lease, the Owners willlransfer title back to SBIAA. SBIAA shall be the sponsor of the Airport for FAA requirements. A special purpose Delaware business trust created by and wholly owned by the Investor (the "Trust") will be the Head Lessee. The Head Lessee will also be the Sublessor under the Sublease. O'Melveny &: Myers. The Trust. The Owners. The Owners obligation's under the sub-lease will be joint lU\d several. [To Be Determined} (To Be Determined by Investor) Merrill Lynch & Co. {To Be Determined} (To Be Determined) Issuer's Counsel will render a True Sale Opinion to address bankruptcy issues. Pa~e 1 04101199 ~M/~jd HJNAl llI~~3W W~L2:60 66, 50 ~d~ Res_ 1999-63 Coeins Date Conditione to Co.lnS San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions The Closing Date is expected to occur by June 30, 1999, but closing will not occur before all the Conditions to Closing are satisfied nor after Ausust31,1999. Closing of the transaction will be conditioned upon: (i) approval by the Investor and any required committees thereof, (il) satisfactory. completion of due diligence, (iii) receipt of atl appraisal from the Appraiser atld tax opinion from Investor Counsel each satisfactory to the Investor in its sole discretion, (iv) receipt of insurance and environmental reports, each satisfactory to the Investor, (v) documentation satisfactory to Tnvestor and Investor Counsel, (vi) custotnary material adverse change conditions, (vii) satisfactory survey of the Asset's boundaries, to the extent needed, (viii) evidence of title and other customary conditions for a transaction of this type, irlduding nO change or proposed change in tax or other applicable law or regulations having an adverse effect on Investor and (ix) receipt of satisfactory evidence of the enforceability of the Operative Documer,ts. against the respective parties. Transaction Costs will include, but not be limited to, the fees and expenses (including out-of-poc:ket expenses) of the Investor, Investor Counsel, Lender Counsel, the Head Lessor's Counsel, Equity and Loan Placement Agents ("Agents"), Ad visor, Investor's local counsel, trustee(s), title insuratlce, enviromnental consultant. engineer, insurance consultant, if any, surveys, U any, and the Appraiser. Transaction costs will be divided into costs appropriately borne by the Head Lessee (fees and expenses of the Investor, Investor Counsel, Lender Counsel, Investor's Local Counsel, Loan Placement Agent, Appraiser, environmental consultant, engineer, insurance consultant and the trul5tee) and those costs appropriately borne by the Head Lessor and the Sublessee (fees and expenses of the Head Lessor's Counsel, Advisor, title insurance, surveys, and the Owners if any). Transaction Costs will be paid by the party bearing such cost at Closing or within 90 days thereafter. If the Investor has assumed Tratlsaction Costs in the pricing which exceed the amount of Transaction Costs to be so paid by the Investor, then such additional assumed Transaction Costs shall be paid over to the Head Lessor as rent within 30 days of Oosing. In the event that the transaction does not close for any reason other than a breach by the Investor of its commitment, the Transaction Costs shall be bome by the Owners. The total Transactions Costs to be borne by the Owners in such event shall not exceed $800,000 (excluding the fees and expenses of Head Lessor's CounseL TrlULllsclion Costs S'd 2 ~M/~jd HJNAl llI~~3W W~8Z:60 66, 50 ~d~ Res. 1999-63 Head. Lease Sublease Head Lessee's Prepayment Option LOC Loan 1 Payment Undertaking 6'd San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions 1l1e Head Lessor will lease its interest in the Asset relating to approximately up to 5200 million, subject to the existing subleases, to the Head Lessee for a combined period equal to approximately 40 years. 1l1e Head Lease will have an initial term of approximately 20 years (the "Base Head Lease Term"). The Head Lessee will have the option to renew the Head Lease at any time on or before the end of the Base Head Lease Term for an additional term equal to approximately 20 years (the "Head Lease Renewal Term"). The length of the Base Head Lease Term and the Head Lease Renewal Term will be adjusted prior to Closing to the extent necessary so that the combined term is for a period calculated to be the shorter of (i) approximately 40 years or (ii) a period of time ending at a point when at least 20% of the appraised useful life and at least 20'1'0 of the uninflated fair market value 0/ the Asset remains. Residual value and useful life will need to be determined for the Asset. The Sublessor will sublease the Asset back to the Owners, as Sublessee. for a Base Sublease Term equal to the llase Head Lease Term. The Sublessee will have an option to purchase the Sublessor's remaining Head Lease interest at the end of the Base Sublease Term for a fixed price ("FPO") for the Asset. The FPO price will be fixed on the Closing Date and will exceed the currently estimated future faiT market value (after giving effect to inflation) of the remaining Head Lease interest on the FPO date by at least 5'1'0, as confirmed by the Appraisal. If the Sublessee elects not to exercise the FrO, then the Sublessor will have the option to require the Sublessee to renew the lease for a term equal to approximately 115) years (the "Sublease Renewal Term"). The Base Sublease Term when combined with the Sublease Renewal Term. will be for a period (calculated at the Closing Date, based on the Appraisal) equal to the shorter of: (i) approximately (35) years or (ii). a period of time ending at a point when at least 15% of the Head Lease life (including any renewal) and at least 20% of the uninfJated fair market value of the Head Lease (including any renewal) remain. 1l1e Head Lessee either on the Closing Date or on or before the 90th day after the Closing Date, will have the option(s) to prepay rent or portion thereof due during the Base Head Lease Term and the Head Lease Renewal Tenn. The Head Lessor will receive cash equal to at least the Net Present Value Benefit, the LOC Equity payment and the Sublessee's transaction costs on the Closing Date. '!he Owners will enter into an agreement with a financial institution (the LOC Loan Provider) which may be an affiliate of, and its obligations under this Agreement will be guaranteed by, the Parent Company of the Lender, which has a credit rating of not less than AAA by S&:P and Aaa by Moody's and is satisfactory to the Investor, the Owners and the Pa~e3 04/01199 ~M/~jd HJNAl llI~~3W W~82:60 66, S0 ~d~ Res. 1999-63 LOC Equity I Payment Undertaking I3rd San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions Lender. P\IIlluant to the LaC Loan (of which there may be more than one LOC Loan), the LOC Loan Provider will agree 10 make draws upon the LaC Loan 10 pay the Sublessor, on behalf of the Owners, the Loan portion oJ the Sublease Rent due (including such amounlll as are due by reason of an early termination of the sublease, including by reason of an Event of Default, including a bankruplcy default) and the Loan portion of the FPO. In order 10 purchase the LOC Loan, the awner will be obligated 10 make payments al Closing and periodically equal to the principal amount of the Loan(s) (see 'Delow), plus payment of on aim's length fee. The Owner's obligation to purchase the LOC Loan will be Iimiled to amounts received as pre-paid and regularly scheduled rents under the Head Lease. Once an LaC Loan is purchased, the. LOC Loan Provider will be unconditionally obligated to make such payment without set off or counterclaim and irrespective of any rights it (or the Lender) may have as the Lender. The Sublessee will be liable for the Sublease Rents if for any reason the toC Loan Provider fails 10 make such payments. The Investor will require support for the separateness and arm's length nature of the Loan and the Lender Payment Assumption Agreement (i.e. the market appropriateness of the debt interest rate and the Lender Payment deposit rates) which is not to be provided by the Owners. The Owner will enter Into an agreement with a financial institution (the Loe Equity Provider) which may be an affiliate of and its obligations under this Agreement will be guarmteed by the Parent Company of the Lender, which has a credit rating of not less than AAA by S&1' and Aaa by Moody's and is satisfactory to the Investor, the Owners and the Lender. Pursuant to the LOC Equity, the LOC Equity Provider will aST" to make draws upon the LOC Equity to pay the Sublessor on behalf of the Owners the Equity portion of the Sublease Rent (including such amounts as are due by reason of an early termination of the Sublease, including by reason of an Event of Default, including a bankruptcy defauil) and the eq1Jity portion of the FPO. To purchase the LOC Equity, the Owners will be obligated to make a payment at Closing equal to the present value of the Equity portion of the . Sublease Rents and FPO discounted at the LOC Equity rate of (to be determined) (as may be adjusted based on a change in Pricing Assumptions) plus !IIl arm's length fee. The Owners' Obligation to purchase the LOCEquity will be limited to amounts received as pre-paid and regularly scheduled Head Lease Rent. The LOC Equity Provider will be unconditionally obligated to make such payment without set off or counterclaim and irrespective of any rights it (or the Lender) may have as the Lender. The Sublessee will be liable for the Sublease Rentals if for any reason the LaC Equity Provider fails to make such payments. The Investor will require support for the separateness and arm's 1enSth nature of the LOC 4 ~M/~jd HJNAl llI~~3W w~62:613 66, S0 ~d~ Res. 1999-63 Ownera Substitution Rights Loan Appralaals n'd San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions Equity (i.e. the market appropriateness of the Equity Payment deposit rate) wlUch is not to be provided by the 0Wner8, In the event that the LOC Loan or LOe Equity 1'rovider(s) credit rating falls to A+ by S&P or Al by Moody's or below, the Owners will have the right and shall be obligated, if directed by the Owners or the Investor to request collateral be posted by the LOC Loan or LOC Equity Provider, or substitute another '1ua1ilied financial institution which has a credit rating of not less than AA by S&1' and Aa2 by Moody's and is satisfactory to the Investor and the OWners. Additionally, upon tIIIIlllfer of the Loe Loan, the Sublessor shall use best efforts to seek to obtain a replacement loan for the benefit of the Sublessor from an affiliate of the "New t.oe Loan Provider", the proceeds from which will be used to repay all outstanding principal balances plus any accrued and Utlpaid interest on the Loan. All fees and expenses associated with said transfers, inclusive of any costs assodated with a differential in the rates upon refinancing, will be at the cost of the party electing the substitution. The Lender will make a loan to the Head Lessee. The Loan will be non- recourse to the Investor and will be secured by an assignment of the Sublease (and the Sublease rentals payable thereunder) and the Head Lessee's interests under the Head Lease subject to usual exclusions. In addition, the Loan will be secured by an assignment of the Sublessor's security interest in the Loe Loan. but not the LOC Equity. The Investor will receive an appraisal from American Appraisal Associates with respect to the Asset. They will address issues relevant to the assessment of items such as the following: i. the expected fair morket value yeor-by-year and economic life of the Asset and the respective Leasehold Interest; that the terms and conditiotls of the Head Lease (taking into account the Head Lease Renewal Term) not transfer ownership of the Asset to the Head Lessee (i.e., that at the end of the Head Lease the Asset will still have a significant value and remaining useful life); ii. iii. that the terms and conditions of the Sublease (taking into account the Sublease Renewal Term) do not transfer ecotlomic ownership' of the Head Lease interest to the Sublessee (e.g., that at the end of the Sublease, the Head. Lessee will be able to profitably use the Head Lease inter..t by finding another sublessee or by operating the Asset itsel!); that the Sublessee will not be economically compelled to Fay the PFO amount and ~chase the remaining Head Lease interest at the end of the Suble811e Term; iv. Pal(f 5 04101199 ~M/5jd HJNAl llI~~3W W~62:60 66, 50 ~d~ _ Res. 1999-63 Participation Agreement Quiet Enjoymmt lIIld MaintmllIlce Insurance ModificatiDN 2rd San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions v. that the rents specified in the Sublease Renewal Term are expected to be less tfian 95% of the fair market value rents for the Asset after giving affect to inflation, that the Sublessor will not be economically compelled to exercise its Sublease Renewal Option with respect to any parcel, and that based on all facls md circumstances, it is not generally ex1?ecled that the Sublessor would so exercise its Sublease Renewal OptlOn; and that the Sublease Rents do not exceed fair market rentals. vi. 1be Investor may also require that the Appralsal support the mcome taX treatment of its deductions of the Head Lease Rent by concludmg that the formula used to calculate the amount due upon a prepayment of any Head Lease Rent does not compel such prepayment, or by addressing similar matters. Material chlUlges could affect the pricing and Net Present Value Benefit. All parties to the transaction will enter mto a Participation Agreement that sets forth each party's obligation to the others to proceed with the transaction, and the conditions that each party will require to be met before it will close the transaction. The participation Agreement will also contain customary representations and warranties by the parties, and other terms and conditions that affect all of the parties consistent with the terms hereof. The Sublessee will have the right to peaceably and quietly hold, possess and use the Asset during the Sublease Term free from interfaence by the Sublessor or those claiming by, through or for the Sublessor, but not otherwise, so long as no Event of Default by the Sublessee shall have . occurred and be continuing under the Sublease. The Sublessee will maintain the Asset m as good a condition as when delivered, normal wear and tear excepted, in compliance with all applicable laws, regulations and insurance requirements. The Owners will, at their own expense to be reimbursed under the Operating Agreement with SBIAA, cause to be carried and maintained, commercial all-risk property and casualty coverage, excluding earthquake and flood coverage, in an amount deemed advisable by a qualified insurance consultllrlt to cover certaln of the building's and hangers located on the Asset and liability insurance coverage. . The Sublessee will have the right to make modifications, alterations or improvements to the Asset as may be required expand and improve the Airport's operations, to improve safety and/or efficietlCy of Airport operations, or to maximize the long-term net operating revenue of the Airport. Any modifications or improvements to the Airport must be in 6 ~M/~jd HJNAl llI~~3W Wb0E:60 66, 50 ~db Res. 1999-63 Bxisting Leases wd Sub-Subleases Bnvironmental Title Net Sublease and AdclitiotW. Rent Erd San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions compliance with the Airport's Layout plan and can not interfere with the ability of the Airport to operate as a Public Use Airport. Modifications of the Asset, if any, by the Head LesllQt will be governed in a similar fashlon. No modifications, alteratiON or improvements . will be permitted that impair the long-term value, usefulllfe, residual value or utility of the Asset. Subject to customary contest rights and materiality standards, the Sublessee will also have the obligation to make any modificationS, alterations, or improvements to the parcels that are required by law or by any governmental authority having jurisdicllon over sucl\ parcel. In addition to the existing leases on portions of the Asset, the Sublessee will have the right to enter into futuIe sub.subleases for portions of the Asset. The SBIAA site has been subject to extensive envlrorunental reviews that are available upon request. As a previous Airforee base, the site cootained various types of environmental hazards. As a condition of transfer of the base, the Alrforee was required to clean up the site. All portions of the Airport property subject to the lease have been certified in compliance with CERCLi\ standards. In addition, the Airforce will continue to be obligated to clean up any future environmental ha~ards that are identified. Existing portioos of the base that are not in compliance have not been transferred. Title to the Airport shall be granted initially to SBIAA with the provillion that upon closing of the transaction, Title shall be transferred to the Owners. Title to the Airport will be encumbered by various Grant Assw:ances imposed by the FAA. Grant Assurances are imposed by the PAA in turn for receipt of federal tranllportation funds used to improve the Airport. Tn the event that the Airport fails to comply with such Grant Assurances, the FAA has a reversionary right to the Asset. If the FAA exercises its reversiottary rights an event of 10$5 shall occur. The Sublease will be a "triple net" sublease (meaning the Sublessee will be fully responsible for and shall indemnify against all cost and expenses relating to ownership, use, lease, sublease, repair, maintenance, lrIsurance and operation of the Asset) and the Sublessee will be obligated to pay all Sublea_e Rent payments unless the Sublease shall be terminated. The Sublessee will be required, subject to customary exclusions, to pay as Additional Rent, on an after tax basis, costs and expenses arislrlg out of the operation, ownership, leasing, subleasing. maintenance or other acl:lvity with regard to the Asset. Payments. to be made pursuant hereto are subject to certain limitations detailed below urider "Payments and Remedies in the Event of Abatement, Def"ult and Early Termination". Pall. 7 04101/99 ~M/~jd HJNAl llI~~3W W~0E:60 66, 50 ~d~ Res. 1999-63 Paymmll. aanec1iesln the E\'ent of Abatement, Default mcl Early Tmnination Additional Rent vt'd San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions In accordance with California general fund lease law, Subleaee payments ehall be abated and payments shall not be made from the Owners' respective general funds in an amount greater than the fair rental value of the Asset after abatement of the Sublease due to damage, destruction, condemnation or title defect where there is substantial interfet'E!flce of use of the Asset or portion thereof by the Sublessee. In addition, in an Event of Loss, Burdensome Buyout or Early Termination, future Sublease payments due from the Owners' respective general fund may not be accelerated to pay the required Termination Value. Notwithstanding the foregoing, there shall be no abatemeht of the Sublease rents to the extent that Insurance proceeds are available or to the extent the Loe Loan and LOe Equity payment! are available to pay the Sublease rents which would otherwise be abated. Notwithstanding the foregoing, upon the occurrence of an Event of Default by the Sublessee or the Owners, Events of Loss, Burdensome Buyout or Early Termination, the Sublessee shall be obligated to pay the Termination Value, but only from amounts available from insurance or condemnation proceeds, or pursuant to the LOe Loan and Loe Equity. To the extent the amount of the required "Termination Value" is greater than such proceeds, the Sublease shall not be terminated and the Sublease rents shall be payable from any and all legally available funds and the OWners covenant to make appropriation therefor. In the event of non-payment or other default the remedies available Include, i) ability to sue the Sublessee for annual rent as long as the Sublessee has beneficial use of the Asset and il) subject to necessary regulatory approvals, if any, evict the Sublessee and have the right to called payment! from AiIporl Opentions, subject to the termS and conditions of the Operating Agreement, after payment of all O&M expenses and on parity with other debt obligations of the Airport, in an amount not greater than the am01,J!\t of unpaid rent and if Airport operations do not generate suffic~t reVeI\ues In excess of expenses to pay such rent, remedies include the ability to select a neW Airport Operator as provided In the Operating Agreement. In no event shall SBlAA be removed as Sponsor. Under all cirCUmStances, the Airport is obligated to be operated as a public use airport. Subject to customary exclusions (induciltlg the exclusion for income taxes which are discussed below) and contest rights. the Owners will pay, on an after-tax basis, as Additional Rent, sales tax, property taxes and other rees or taxes relating to use of any of the parcels or resulting from the transaction to the party upon which such taxes or "fees are . imposed (the Impaired Party). Provided however, no Additional Rent or other obligation of the Owners will be due for, among others, any taxes bated upon net or gross income, net receipts, miniInum tax, alternative 8 ~M/~jd HJNAl llI~~3W W~,E:60 66, 50 ~d~ . Res_ 1999-63 Withholding Taxes srd San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions minimum taxes, excess profit, capital, franchlse, net worth or cOX\duct of buainess of Investor or Head Lessee. Customary contest rights means, among other things, the absence as condition to contest of any adzrrission of liability and any threshold amount of tax liability. Carve-outs from the payment of Additional Rent will include, among other things, without limitation: the gross negligence or willful misconduct of the Impaired Party, the Jnaa:uracy or breach of certain specified representations, warranties or covenants of the Impaired party and other . carve-outs to be agreed upon in the Operative Documents. Carve outs shall also include the imposition of a federal sales tax or Value Added Tax that if such federal sales tax or VAT reduces the bargained for benefit of both the Ownefli and the Investor, in which case, the Owners and the Investor agree to negotiate to restruCture the lIansaction to mitigate equally the harm to both parties. There shall not be any Additional Rent due in the event any capital charges or increases in capital charges axe imposed on the Lender. The transaction will be strUctured so that no withholding taxes will be applicable under existing laws. The Ownen agree that, except as provided below, all payments of :Rent and other payments, if any. payable to the Head Lessee, and all payments by the Head Lessee to the Trustee or the Lender, shall be free of all withholdings of any nature whatsoever on an after-tax basis, and in the event any withholding is required, and the Lender demands payment thereof, the Owners shall have the right to replace the Lender. If the OwneTS do not replace the Lender, the Sublessor shall have the right to terI1'Iinate the Sublease. In such event the Sublessor shall advise the Owners of the amount necessary to make the Sublessor whole, and the Owners may at their option pay such amount, in which event the Sublease shall not terminate. If the Owners pay an amount to any Lender, the Head Lessee or the Investor for a withholding tax for which the Owners are not ultimately responsible under the Operative Documents, the responsible party for such withholding tax will reimburse the Owners therefor. If a tax of a withholding nature is impOBed subsequent to the Closing Date, all parties shall negotiate to restructure the lIansaction so that such withholding tax is avoided or minimi~ed but no party shall be required to agree to any provision that may be adveTSe to it or its affiliates. Provided further, the Lender shall assume a duty, on a best efforts basis, to relocate its affiliates to avoid the imposition of withholding taxes. If the cost of such withholding tax exceeds $2.5 million the Owners may purchase the Leasehold Interest by executing a Burdensome Buyout. Pair" 9 04/0l/99 ~M/~jd HJNAl llI~~3W W~,E:60 66, S0 ~d~ Res_ 1999-63 Possessol)' Interest Tax San Bernardino International Airport Lease /Lease Back Financing Summary of Terms and Conditions Notwithstanding the foregoing, if a withholding tax is incurred by reason of a transfer by \:he Investor to another Investor or the Head Lessee to another trustee (in each case, other than while a Sublessee Event of Default has occurred and is continuing), the Investor shall be :espoIlllible for such withholding tax to \:he extent such tax exceeds the amount of any withholding tax that would have been imposed but for such transfer. The transaction will be structured so that no possessory interest taxes will be applicable under existing laws. The Owners a~ that all payments of Rent or Additional Rent to the Sub-Lessor or the Lender, shall be uee of all possessory interest tax of any nature whatsoever. In the event any possessory interest tax is required, \:he Owners shall pay to the Sub-Lessor or Lender (as Additional Rent under the Sublease Agreement), at the same lime that such possessory interest tax payment is due and payable, an additional amount such that the net amount . actually received by the person entitled to Rent or Additional Rent. will equal the amount then due absent such possessory interest tal(. The Owners shall pay such possessory interest taxes, if any, as Additional Rent under the Sub-Lease. The Burdensome Buyout option allows the Owners to termitlate the transaction in the event certain events cause the continuation of the tramaction to become overly burdensome on the Owners. The Owners may purchase the Head Lessee's interest in the Head Lease by paying on any Rent payment date the Burdensome Buyout Value if, among other reasons, (i) possessory interest tax shall be in'lposed on the Head Lessee giving rise to a payment obligation of $2.5 million or greater on a present value basis; (il) it shall have become illegal for the Owners to continue the Sublease or lor the Owners to make payments under the Sublease; or (ill) one or more events shall have occ:urted which are reasonably likely to give rise to an avoidable Additional Rent or Withholding Tax obligation in excess $2,5 million on a present value basis. For any buyout pursuant to clause (i) or (ill) hereof, the cost must be eliminated with the putchase and the Impaired Party must have the right to waive any additional rent in excess of $2.5 million on a present value basis and continue the transaction. The Burdensome BUY<:7Ut Value shall be the Termination Value. The Owners shall also Fay all Additional Rents and all costs and expenses covered by the Additional Rent associated with the exercise of its rights under this section. Upon any other early tennination of the Sublease Term, unless the Owners have purchased the Head Lessee's interest in the Head Lease, or if the fixed putchase option (PPO) under the Sublease is not eJ<etcised and the use of the Asset is transferred to the Head Lessee for the ' temaining term of the Head Lease, the leasehold interest represented by Burdensome Buyout Return of the Asset 9l'd 10 ~M/~jd HJNAl llI~~3W W~2E:60 66, 50 ~d~ ~.' 1999-63 Right of Substitution Transfer Restrictions Early Termination Lrd San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions the Head Lease will be subject to the use limitation of the assets as a public use Airport. the obligations imposed pursuant to the Grant Assurances and the payment limitation imposed such that the payment received by the Head Lessee from Airport operations will be capped st an amount equal to the recovery of Head Lease rent and other amounts owed. Under these cirCUIIllltances, the Head L~see will have the right to colled payments from Airport OperatioIls, after payment of all o~ expenses and OIl parity with other debt obllgations of the Airport, in an amount not greater than the amount of unpaid rent and if Airport Operations do not generate sufficimt revenues iIl excess of expenses to pay such rent, remedies include the ability to select a new Airport Operator, as provided in the Operatir\g Agreement. m no event shall SBIAA be removed as Sponsor. Upon return to the Owners, the Asset shall be in at least as valuable condition as it would have been iIl had it been tnaintained and repaired iIl compliance with the Sublease and the Asset shall be free and dear of all Liens other than Permitted Liens. At the Owners' option or in the Event of Loss due to condemnation or destIuction the Asset may be substituted with like-kind property of at least equal value, utility, residual value at the end of the lease term and . renewal term, remainirtg useful life and as supported by an independent appraiaal reasonably acceptable to the mvestar. The Owners shall pay all costs including without limitation any iIlcome tal< costs incurred by reason of the exercise of its Right of Substitution. Subject to certain objective restrictions to be agreed upon, the mvestor may transfer all or part o! its iIlterest in the Trust to a transferee that has executed an agreement by which any transferee assumes the duties and obligatiollll of the mvestor under the Operative Docummts. If during the Sublease Term the Sublessee determiI1es that the Auet is obsolete, surplus or uneconomic to the Sublessee's needs, the Sublessee will have the right to either (i) substitute a new Asset in accordance with the Right of Substitution or (ii) termiI1ate the SubleiUle and pay the Head Lessee an amount equal to the required "Termination Value" for such date, subject however to certain limitations specified under "Payments and Remedies iIl the Event of Abatement, Default and Early TermiI1ation". Upon an Early Termination, Sublessee (as agent for the Head Lessee) will be responsible for the cash resale of the Head Lessee's interest to a third party unaffiliated with the Sublessee. The Sublessee will receive credit against its Termination Value obligation for the net proceeds receIved from disposition of the Head Lease pursuant to an Early Termination. Proceeds (net of expense of sale) in excess of Termination Value will be for the account of the Investor. The Head. P,,~.11 04101/99 ~M/~jd HJNAl llI~~3W W~ZE:60 66. 50 ~d~ Res. 1999-63 San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions Lessee may, at any time prior to the date of such termination, elect to retain the Head Lease interest, in which case the Sublessee will be relieved of its obligation to pay Termination Value, Events of Loss In the event of the sale of the Head Lessee's interest or the election by the Head Lessee to retain the Head Lease interest, the leasehold interest represented by the Head Lease will be subject to the use limitation of the usets as a publlc use Airport, the obligations imposed pursuant to the Grant Assurances and the payment limitation imposed such that the payment received by the Head Lessee from Airport operations will be capped at an amount equal to the recovery of pre-paid Head Lease rent and other amounts owed. Under these cir=taI\ces, the Head Lessee will have the right to collect payments from the Airport Operations, aIter payment of all O~\1: expenses and on parity with other debt obligations of the Airport, in an amount not greater than the =ount of unpaid rent and if Airport Operations do not generate sufficient revenues in excess of expenses to pay such rent, remedies include the ability to select a new Airport Operator. In no event shall SBIAA be removed as Sponsor. Termination Value will be calculated SO as to be sufficient to repay the outstanding principal amount of the Loan plus accrued interest, and to provide for the recovery of the Investor's remaining investment and the preservation of the economic return expected by the Investor up to the date of termination in entering into the transaction aI\d will be provided as an attachxnentto the Sublease. In the event of a termination funds available to pay the Termination Value under the LOC Loan will first be paid to the Lender until the Loan obligation is paid-in.full. Events of Loss with respect to the Asset will include any of the following events: (1) the parcel becoming destroyed, or, in the reasonable good faith opinion of Sublessee, irreparably damaged or uneconomical to repair for any cause whatsoever, or (2) condemnation, revel"llion of title to the uset to FAA, confiscation or requisition for use of the Asset by any goverrunental authority or purported governmental authority for the lesser of (i) one year or (Ii) a period anticipated to, or which actually does, extend beyond the Sublease Term. Upon the occurrence of an Event of Loss with respect to the Asset, the Owners will be required to (i) pay to the Head Lessee the scheduled Termination Value subject to provisions herein, (il) exceptin the case of a reversion of title to the asset to the FAA, subject to customary conditions, rebuild and repair such parcel or (ill) substitute a new parcel of like-lcind with at least equal value, utility, residual value, remaining. useful life and a similar valuation curve. Any proceeds from the disposition of the . Head Lease interest paid to the Head Lessee will be credited against such payment of Termination Value. Sl'd 12 ~M/5jd HJN^l llI~~3W W~EE:60 66, S0 ~d~ Res. 1999-63 1!Vl!nts of Default San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions Events of Pefault under the Sublease will include the following: faUure by the Sublessee/Owner to pay Sublease Rent, supplemental rent or other amounts due under the Sublease, within an agteed upon time period after such payment is due; faUure by Sublessee to perform any other covenant in the Sublease or I{ead Lea.. in any material respect which shall continue umemedied for an agteed upon period; any representation (other than tax representations) shalll'rove to be incorrect in a material respect when made and the co;u:lition or circumstance with respect to which such representation was made shaU remain material and uncured or uncorrected for an agteed upon lime period; bankruptcy or reorg~ation proceedings being conunenced by the Sublessee, or bein~ commenced against the Sublessee and not discharged or stayed Wlthin an agreed upon time period; failure of the Sublessee to maintain required insurance (with grace periods to be aSTeed upon). '!he remedies available to the Sublessor/Head Lessee upon the occurrence of a Sublease Event of Default shall include, without limitation, the right to have its in~t in the Head Lease purchased by the Sublessee in an amount equal to the Termination Value, subject however to certain limitations specified under "Payments and Remedies In the Event of Abatement, Default and Early Termination". Other remedies available include: i) ability to sue the Sublessee for annual rent as long as the Sublessee has beneficial use of the Asset and ii) evict the Sublessee and assume operational control over the Airport with the right to collect payments from the Airport Operations, after payment of all O&M expenses and on parity with other debt obligations of the Airport, in an amount not greater than the lUIlount of unpaid rent and if Airport Operations do not generate sufficient revenues in excess of expenses to pay such rent, remedies include the ability to select a new Airport Operator. In no event shall SBIAA be removed as Sponsor. i. ii. ill. iv. v. Head Lessee Events of DeJault 6rd Any events or actions of the Head Lessee or any third party claiming by, through or for the Head Lessee which shall materially impair the Sublessee's rights under the Sublease to the use and possession of the Asset, including any material risk of sale, loss or forfeiture. ' Additionally, under the Head Lease in the event that the "optional" prepayment. ore not made to the Head Lessor, an Event of Default will . occur if the Head Lessee has breached its obligation to make Head Lease Rent payments in a timely manner which remains unremedied for 30 PaKe 13 04/01/99 ~M/~jd HJNAl llI~~3W W~EE:60 66, S0 ~d~ Res. 1999-63 Collateral and Lender and Head Lnsee Se<:urlty Interesta San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions daya (or if the Investor or Head Lessee is diligently attempting to cure 5Um bream and there is no material risk of the Sublessee defaulting under its obligations under the Sublease due to the delinquency of the Head Lease rents, within 180 days). Upon the occurrence of a Head Lessee Event of Default, following customary notice and cure periods, the Owners shall have the option to purmase the Sublessor's Head Lease interest for Special Termination Value. "Special Termination Value" shall equal to the current balances under the Equity and Lender Fayment Agreements Lender and Head Lessee Security Interests. Collateral will include the "Leasehold Interest" in the Asset, the rights under the LOC Equity and we Loan and any insurance or condemnation proceeds, to the extent permissible by law, upon an event of condemnation or desl1'Uctiot\. The Lender will be granted a first priority security interest in the Head Lessee's interest in the Head Lease and the Sublease subject to standard excepted rights and payments. The Investor will be granted a first pledge of the all amounts under the LOC Equity. 1M Head Lessee will be granted a pledge of all amounts UI1der the LOC Loan and the Head Lessee will repledge such amounts to the Lender for the benefit of the Lender. Sublease Assumptions 1. Investor's Tax Benefit Assum;>tions: 02'd The Owners will not make any representation, warranty or covenant with respect to any of the following assumptions. Except as expressly provided in the Sublease, the Owners will not make payments of Additional Rent tlor will an Event of Default ocwr by reason of any of the below assumptions proving to be incorrect. The Investor's Net Economic Return will be detennined by making the following iUlaumptions for United States Pederal and state income tax purposes ("U.S. Tax Assumptions"): (a) The Head Lease and the Sublease will be treated as a "true lease", the Trustee will be treated as the lessee and the sublessor of the Asset and Owners will be treated as the lessor and the sublessee thereof; (b) !he obligations evidenced by the Loan will conStitute indebtedness of the Trustee, and the Investor will be entitled to current deductions for interest and premium (if any) paid or ~ccrued on the Loan (the "Interest Deductions"); (c) The Investor's marginal tax rate is and will be [_'Yo] in the taxable year's ending in 1998 and thereafter, and the Investor will always have sufficient taxable income to utilize the Interest Deductions, Amortization Deductions and the Rent Deductions (as defined below); 14 ~M/5jd HJNAl llI~~3W W~~E:60 66, S0 ~d~ Res. 1999-63 San Bernardino International Airport Lease/Leaseback Financing Summary of Terms and Conditions (d) The Invl!$tor will be entitled to rental deductions under Section 162 of the Internal Revenue code of 1986 as ameIlded (the "Code") with respect to the Head Lease Rent not prepaid in each taxable year of the Head Lease Term in the actual amoUIlt of Head Lease Rent allocated in accordance with the Head Lease (in advance or arram, as the case may be) to the portion of the Head Lease period within such taxable year and the Head Lease Rent prepaid in the amo1lI\t allocated to each period so prepaid; (e) The Investor will amortize: (i) its Transaction Expenses attributable to the Head Lease on a straight-line basis over the term of the Head Lease (the "Head Lease Expenses"); (ii) its Transaction Expenses attributable to the Sublease on a straight-line basis over the Sublease Term ("Sublease Expenses"); (ill) the Transaction Expenses attributable to the Loan on a straight- line basis over the lenn of the Loan ("Loan Expenses", sueh Head Lease, Sublease and Loan Expenses are, together, the. "Amortization DeductioIlll"); (f) neither the Head Lease nor the Sublease will be subject to application of Section 467(b)(2) of the Code or be a "disqualified leaseback or long-tenn agreemen~' subject to the Proposed Treasury Regulation promulgated under Section 467 of the Code; (g) the Asset has been or will be "placed in service" by Owners not later than the Oosing Date; (h) the trust estate created for the benefit of the Investor will be treated as a grantor trust for U.S. Federal Tax purposes, and the Investor, as owner of the entire trust, will be entitled and required to take into account, in computing its taxable income, all items of income, gain, loss or deduction with respect to the Trustee's interest in the Head Lease; (I) the Investor is an accrual basis taxpayer with a calendar year end; 0) the Investor will not have any income by reason of entering into this transaction other than Sublease rent when scheduled, the FPO, Termination Values and payments specified to be made on an after- tax basis; and l2'd Pa~e 15 04l0V99 ~M/~jd HJNAl llI~~]W W~pE:60 66, S0 ~d~ Res. 1999-63 :z. The Ownen' Tax Reprnctation5, WiU1'8!lliES and C~enante: ZZ'd San Bernardino International Airport Lease/Lease Back Financing Summary of Terms and Conditions (1<) any other lax assumption used by the Investor in pricing the" transaction as incorporated in the computer time share pricing file. The Owners will make certain Npresentations, wafl'anties and covenants in the Sublease with respect to the following: (a) All written infonnation supplied by the Owners to the Appraiser was accurate and complete as of the date given and the Closing Date; (b) During the Subleee Term, the Owners will not talee positions that are inconsistent with the Investor's U.S. Tax Assumptions other than certain permitted positions; (cl Neither the Owners, nor any affiliate of any of them has or will (A) directly or indirectly acquire any interest in the Loan or make any loan to or deposit in or other arrangement with either the Lender or any party related to the Lender that funds the Lender or the Payment Sank that, in any such case, is related to the transaction contemplated by the Operative Documents, which loan, deposit or other arrangement directly or indirectly changes the rights "or interests of the Lender or the Payment Bank under the Payment Undertaking Agreement (in each case except as described herein or otherWise pursuant to the Operative Documents) or (B) relinquish, waive, abrogate or allow to lapse any of its rights (other than rights to accelerate payment) under any loan, deposit or other arrangement with the Lender or any party related to the Lender that funds the Lender or the Payment Bank if doing SO would directly or indirectly abrogate any rights to payment (other than to accelerate payment) or either of the Lender or the Payment Bank under the Payment Undertaking Agreement (in each case, except as described herein or otherwise pursuant to the Operative Documents); (d) On the Closing Date, there will not be any agreements," side leiters, or other li.\(e arrangements not disclosed in writing to the Investor between the Owners, or any entity controlled by either of them and any person pertaining to the exercise or non-exercise by the Owners of any purchase option W'lder the Sublease or of any Burdensome Buyout provision or Early Termination provision, nor has the Ownen adopted any resolution authorizing the exercise or non-exercise by the Owners of any Purchase Option or Burdensome Buyout or Early Termination Provision nor is the Ownen required by law to exercise any of the Purchase Option, Burdensome Buyout or Early Termination provisions; 16 ~M/~jd HJN^l llI~~3W W~5E:60 66, 50 ~d~ Res. 1999-63 San Bernardino International Airport Lease /Leaseback Financing Summary of Terms and Conditions Each of the iteml listed in (i) through (v) below, if ta}:el\ by the Ownen without the Invelter's consent and if the same causes the impooition of costs on the Investor, including without limitation any income tal< costa, will be a breach of the Sublease, giving the Investor the right to exercise leue remedies: (i) any act or fallure to act by the Owners that materially adversely affects the Investor as provided under the Operative Documents; (il) the bruch or inaccuracy of any of the Owners' represmtations, warrantieo or covenants; (ill) damage to, destruction, condemnation or retirement of any of the parcels, (Iv) prepayment of Sublease rent; or (v) default UrIder the Head Lease or Sublease, if any. The Investor shall estimate the tax e"Posute and the Owners may <:Ute the default by providing for payment on an after-tax basis, for the amount of any additional Federal income, state and local taxes that would be payable by the Investor as a result of certain events including but not limited to the loss of assumed tax benefits. 3. Contest Ri~t'l If the Investor, receives written notice of any action against any affiliate by the IRS, which, if sustained, would cause a curable default, the Investor will promptly notify the Owners in writing and, if requested by the Owners, will contest such action by the IRS (including appeals) under certain conditions. Pricing Adjuatment Pricitlg is based upon certain assumptions. There will be appropri.te Head Lease and Sublease Rent Adjustments (up or down) prior \0 the Oosing Date if the Sublessor determines that as of the Closing Date any of such assumptions including, but not limited to, Lessor's Cost, Transaction Expenses, AssUll\ed Tax Benefits, Interest Rate or Basic Lease Co=encement Date are other than as asswned. In all cues the Rent Adjustment will be calculated to preserve Sublessor's after-tax rate of return and aggregate net after-tax cash flow and to maximize the net present value benefit to the Sublessee in . maI1Iler consistent with the original pricing .ssumptions. Pricitlg adjustments will also include adjustments to the Termination Value schedules computed on a basis consistent with that used originally in the cakulation of Head Lease and Sublease Rent and TennJnation Values. Provided however, should such adjustments cause the net present value benefit (after payment of all transaction costs) of the transaotion to fall below 5.00%, the Subles6ee would have the option to terminate the traru;action before closing by paying all transaction cos16. All Pricing Adjustments will be subject to reasonable agreement. E:2'd Paf(e 17 '04/01199 ~M/~jd HJNAl llI~~3W W~SE:60 66, S0 ~d~ Res. 1999-63 EXHIBIT "B" COUNSEL ENGAGEMENT LETTER Res. 1999-63 0 0' MnVENY & MYERS LLP CENTURY CITY 400 South Hope Street HONG KONG NEWPORT BEACH Los Angeles, California 90071-2899 LONDON NEW YORK TELEPHONE (213) 430-6000 SHANGHAI SAN FRANCISCO FACSIMILE (213) 430-6407 TOKYO WASHINGTON, D.C. INTERNET: www.omm.com March 31,1999 OUR FILE NUMBER 747,836-001 WRITER'S DIRECT DIAL 213-430-6695 James F. Penman, Esq. City Attorney of San Bernardino 300 N. "D" Street" Sixth Floor San Bernardino, CA 92418 WRITER'S E-MAIL ADDRESS rjones@omm.com Dear Mr. Penman: Re: Enl!al!ement. Conflict Waiver a"d Relationshio Matters Weare pleased to have the opportunity to serve as attorneys for the City of San Bernardino (the "City"). Our firm is committed to providing efficient and responsive legal services to our clients in a professional relationship based on mutual trust, confidentiality, and prompt and candid communication. In that spirit, this letter sets forth our agreement with the City regarding the firm's billing practices and related representation and conflict of interest matters. We will be representing the City at the present time only as to certain matters relating to the lease and leaseback ofthe San Bernardino International Airport (the "Subject Matter"). We have not been asked to represent the City in other legal matters at this time. The City may limit or expand the scope of our representation from time to time, but there should be a clear mutual understanding as to any substantial expansion. As we have discussed, the City is aware that the firm represents many other companies and individuals. It is possible that during the time we are representing the City, some of our present or future clients will have disputes or tmnsactions with or involving the City. For example, we currently represent AIG Financial Products Corp. in a variety of matters not involving the City. We understand that AIG Financial Products Corp. is likely to be a party to the transaction to which this letter relates. Alternatively, we may be asked to represent another client in a legal matter unrelated to our present representation of the City, but with respect to which the City is an adverse party. For example, we regularly represent certain airlines such as United Airlines, USAir and others one or more of which might seek contractual relationships with the City or with the San Bernardino International Airport Authority (the "Authority") in the future. Res. 1.999-63. O'MELVENY & MYERS LLP James F. Penman, Esq., March 31,1999 - Page 2 Because our representation of the City is limited in scope to the Subject Matter, we wish to clarify the extent to which our present representation may affect our ability to represent other existing or future clients in other legal matters. In a separate legal matter not involving the City, we may be asked to represent a client that has an interest that is adverse to the City in our present representation. Alternatively, we may be asked to represent another client in a legal matter unrelated to our present representation of the City, but with respect to which the City is an adverse party. As a condition of our undertaking this matter, the City agrees that we may continue to represent, or may in the future represent, AIG Financial Products Corp. and any airlines in any matter that is not substantially related to our work for the City in the Subject Matter, even if those clients' interests are adverse to the City and existing or new clients in any matter that is not substantially related to our work for the City in the Subject Matter, even if those clients' interests are adverse to the City and that we may obtain confidential information of interest to the City that we would not be able to share with the City. By executing this letter and consenting to the arrangements described in it, the City will be waiving any conflict of interest that might arise in such a situation and agreeing not to seek to disqualify us in those engagements or assert a conflict. We agree, however, that the City's consent to conflicting representation in the preceding paragraph( s) does not apply to any matter where, as a result of our representation of the City, we have obtained proprietary or other confidential information of a nonpublic nature that, if known to the other client, could be used in the other matter by the other client to the City's material disadvantage, unless a "screen" is and can be imposed that assures the preservation of those confidences. The City agrees to such a "screen" and consents to that representation of the other client if the attorney who has the information can be effectively separated from the representation of the other client. If a conflict that is not covered by this waiver materializes, the City consents to our resignation from the representation of the City if resignation at that time is otherwise permissible under applicable professional rules. In that case. the City would need to engage separate counsel to represent its interests. * * * * * * * * * As the City knows, we will be jointly representing the Authority, the County of San Bernardino (the "County") and the City in this matter. Based upon the information available to us at this time, we do not believe that representing both parties involves an actual conflict of interest. However, a conflict of interest may develop if the parties' interests become inconsistent or adverse. If that occurs, we will promptly tell the City about any such conflict. Multiple representation can be both efficient and effective. It involves, however, risks of which the City should be aware. First, our responsibilities must apply equally to our joint clients, rather than exclusively to one client. Although we do not presently see actual or reasonably foreseeable adverse effects of that shared responsibility, issues may arise that affect Res. 1999-63 O'MElVENY & MYERS LLP James F. Penman, Esq., March 31,1999. Page 3 multiple clients in somewhat different ways. For example, if one of our joint clients asserts a claim against the other, or our joint clients give us conflicting instructions, we may be required to withdraw from representing any of them. Therefore, it is important to understand that our joint client responsibilities may directly or indirectly affect our ability to focus exclusively on the City's interests and may be materially limited by our representation of these other joint clients. In addition, during the course of our common representation of the City, the Authority and the County, as well as after such common representation, any information you share with us concerning the Subject Matter will not be kept confidential from the Authority or the County and may be disclosed to any other jointly-represented client. Finally, the City should be aware that this information could be used by the Authority or the County against the City in a proceeding between the City and the Authority or the County if a conflict of interest ever arises. At the same time, the City (as well as all of the joint clients) understands and agrees that such confidential information communicated to us will be subject to ajoint privilege which prevents any of the jointly-represented parties from disclosing such confidential information to any other person or entity without the prior consent ofthe party which originally provided the confidential information. This obligation will continue not only during the course of our common representation of the City, the Authority and the County, but also after such common representation ends. The City agrees, for our benefit and that of the other jointly-represented clients, that it will fully cooperate in this joint defense and will do all it reasonably can to protect the joint defendants' privileged communications. The City should also understand that, if a dispute or conflict of interest develops between the County or the Authority and the City, it is possible that we may be disqualified from continuing to represent the County, the Authority and the City jointly. In that event, separate counsel may be required. Depending on the circumstances, there remains some risk that we would be unable to represent any of the City, the Authority or the County in the event of a dispute. We anticipate that if such a dispute or conflict of interest were to develop, we would continue to represent the County as our continuing client, and that the City and the Authority would employ separate counsel. By executing this letter, the City agrees to our continued representation of the County in these circumstances, as well as in other matters and agrees not to assert any such conflict of interest or seek to disqualify us from representing the County, even if a dispute or conflict of interest develops between the County and the City in the future. I encourage the City to consult with other counsel regarding these matters, so that the City can fully consider the possible implications of our representation on the basis described in this letter. The City should also feel completely free to consult or otherwise engage independent counsel at any time, even if the City decides to consent to these matters and waive the actual and prospective conflicts referred to above. If, after any such consultation, the City agrees to consent to and waive those conflicts, its signature on the enclosed copy of this letter will evidence that agreement. Reg.. 1999-63 . O'MELVENY & MYERS UP James F. Penman, Esq., March 31,1999 - Page 4 For services rendered hereunder, we shall be paid a fee of$715,OOO exclusive of expenses, provided however that if the transaction is not consummated for any reason, we shall be compensated at a rate of $285 per hour for all attorney hours and $95 per hour for all legal assistant hours, exclusive of expenses. This fee is based upon the assumption that the transaction will close on or before June 30, 1999, and does not include litigation services, if any is required. Ifthe closing is delayed past June 30, 1999, we will agree on such additional compensation, if any, as may be appropriate. We will send the City on a quarterly basis commencing in April 1999 a statement for progress payments for our legal fees and expenses on the City's behalf. Our fees are determined on the understanding that the City will pay our statements within 30 days and I urge the City to call me at any time it has a question regarding any of our statements. These quarterly progress payments will be calculated on the basis of the hourly rates set forth above. Amounts paid pursuant to such statements will be credited against the total amount that may become due hereunder. In addition, we have sent prior invoices to the Authority pursuant to our legal services agreement dated February 7, 1998, which invoices remain unpaid and past due. Payment of those invoices is a condition precedent to our undertaking this representation, and payments received in respect of those invoices will be credited against the $715,000 contract amount set forth above. As far as expenses are concerned. we dl:lrge for travel (airfare, lodging, meals, and other incidentals), database searches, secretarial overtime when required by the urgency of a client's matter, long distance telephone calls, special deliveries, and other similar items. All such charges are billed at or below our estimated costs. We also charge for duplicating and facsimile transmission. These items are currently billed at $.15 and $1.25 per page, respectively. Our schedule of charges changes from time to time to reflect inflation and other factors. Those changes apply prospectively to all matters then being handled by the firm. Our engagement, conflict and billing practices reflect our desire to deal fairly with our clients in this as in all other aspects of our relationship. We welcome the opportunity to be retained by the City, and, assuming this letter is acceptable to the City, we look forward to providing our services to the City on a basis that is mutually satisfactory. Res. 1999-63 . . O'MELVENY & MYERS UP James F. Penman, Esq., March 31, 1999 - Page 5 If the terms of this engagement and related conflict waivers are acceptable to the City and reflect its understanding and agreement, please have the appropriate authorized officer sign and return the enclosed extra copy of this letter. Very truly yours, ACCEPTED AND AGREED WITH CONSENTS AND WAIVERS GRANTED: CITY OF SAN BERNARDINO LAl:840377.! Res. 1999-63 . EXHIBIT "C" PLACEMENT AGENT ENGAGEMENT LETTER Res. 1999-63 J. Timothy llomer Managing DIrector Manaser, Western RegIon Public Fleanee March 31, 1999 Corporate and IlUtitutlonal Client Group '!Wo Call1ol1lia Plaza 350 South Grand Avenue Suite 2830 Los Angeles, California 90071 213217 4506 FAX 2t3 217 4530 ~ Merrill Lynch County of San Bernardino 385 NOM Arrowhead Avenue San Bernardino, CA 92415 City of San Bernalllino 300 North D Street San Bernardino, CA 92418 Dear Ladies and Gentlemen; Merrill Lynch, Pierce, Fenner & Smith 1ocoljlorated ("Merrill Lynch") would be pleased to act as arranger, advisor and placement agent to the County of San Bernardino, the City of San Bernardino and the San Bernardino 1oternational Airport Authority (the "Agencies") to implement a tax oriented lease and leaseback or related financing of approximately $250 million on the Agencies' aiIport assets (the "Transaction"). The Agencies and Merrill Lynch s.hall mutually agree upon the assets currently owned by the Agencies that are eligible and designated for the Transaction (the "Property"). A!; the Agencies' advisor and placement agent, Merrill Lynch will assist the Agencies in, among other things, coordinating all aspeelS of the Transaction including strUcturing the head.lease and sub.lease, advising on lease funding and defeasance strategies, preparing a term sheet for the placement of equity and debt, finding equity and debt providers, evaluating bids, negotiating with all parties and closing the Tl8I\Sllction. In connection with our activities on behalf of the Agencies, Merrill Lynl:h may assist the Agencies in the preparation of a t= sheet or brochures (the "Brochure") which will describe the Transaction and the various parties associated therewith, including the Agencies, its operations, management and fillancial statu.9, and will incorporate other relevant information furnished to Merrill Lynch by the Agencies. It is understood that the Agencies may also make available to potential investol'! certain additional information and dara relating to the Agencies and the Transaction (the "Transaction Data"). The Agencies recognizes and confirms that, in assisting in the preparation of any such Brochure, Merrill Lynch will be using and relying on information and data furnished to Merrill Lynch by the Agencies (the "Information") as well as information available from generally recognized public sources. The Agencies further recognizes and coniinn5 that Merrill Lynch does not assume responsibility for the accuracy and completeness of the Brochure, the Information, such public information or the Transaction Data. Merrill Lynch will not undertake to verify independently the contents of the Brochure, the Information, the Transaction Data or such public information, nor will Merrill Lynch make an appraisal of the Properry or of any assets of the Agencies. 10 particular, it is intended that Merrill Lynch may rely on any reports of the Agencies' staff or advisors delivered to Merrill Lynch as well as the reports of any independent consultants rIltained by the Agencies. Any such Brochure will be utilized in discussions with potential investors, and the form and contents of the Brochure will be approved by and shall be sole responsibility of the Agencies. Merrill Lynch agrees not to distribute any written Information, Transaction nata or other written information to potential investors unless the same ha.l been approved by the Agencies. 2'd ~M/~jd HJNAl llI~~3W W~S2:60 66, S0 ~d~ Res. 1999-63 ~ Merrill Lyncb Mud 31,1999 Pace 2 If, during the perioci Merrill Lynch is retained by the Agencies or within six months thereafter, the Agencies completes a lease and leaseback or similar transaction or engages equity investors for the Property (i) with illvestors which Morrill Lynch identified \0 the Agencies verbally or in writing, and (ii) with investors which the Agencies or Merrill Lynch had discussions regarding an equity investment in such lease transaction, in any such case, Merrill Lynch shall be compensated with a fee for adviSOry and placement agent services of not to exceed 2.0% of the appraised value of the Property, including all legal and other expenses ofMmilI Lynch, payable upon sUl:cessful completion of the transaction only. Merrill Lynch will not be compensated in the <:vent the Transaction fails to close. If the trlUl5action closes, certain transaction expenses shall be born by the equity investor or the trustee on behalf of the equity investor and certain expenses will be borne by the Agencies. However, the bendit to the Agencies shall be net of all such expenses. Transaction expenses include the reasonable fees and . ellpell3Cs of (i) an appraiser, (ii) the trUStee and its counsel. (Hi) the lender and its counsel, (iv) the equity investor and its counsel(s), (v) the transaction counsel, (vi) placement agent fees for any debt and/or equity, (vii) the advisor, (viii) engineering and surveying ftes, (ix) and certain other transaction expenses. If the transaction is not col15UmIDated as a result of the failure of the equity investor to negotiate in good faith, the equity investor shall pay its own fees and expenses, including its counsel fees. If the transaction is not consummated because of any other reason, tho Transaction E~l'enses shall be born by the Agencies. To the extent permitted by law, the Agencies "8rees to indemnify Merrill Lynch and its aff'iliates, and its and their respective diI1:ctors, employees, agents and controlling persons (Merrill Lynch and each such person being an "Indemnified Party") from and against any and alllossos, claims, damages, and liabilities, joint or several, to which such Indemnified Party may become subject under any applicable feckral, state or flmign law, otherwise, related to or arising out of (i) any untrue statement or alleged untrue statement of a material fact contained in any information (whether oral or written) or documents. including without limitation any Brochure, Information, and the Transaction Data, in each case as furnished or made lIVailable by the Agencies, directly or through Merrill Lynch, to potential investors or any of their representatives or the omission or the alleged omission to state therein a material fact necessary in order to make the statements therein not misieading in the light of the circumstances under which they were made. or (ii) the engagement of and performance by Merrill Lynch pursuant to this asreement The Agencies also agrees to reimllurse any Indemnified Party for all expenses (including reasonable counsel fees and expenses) as they are inClined in connection with the investigation of, pre;>aration for or defense of any pending or threatened claim or any action or proceeding arumg therefrom, whether or not such Indemnified Party is a party and whether or not such claim, action or proceeding is initiated or brought by the Agencies; provided, however, that the Agencies will not be liable under clause (il) hereof to the extent that any loss, claim, damage, or liability is found in a fmal judgment by a court of COlllpetent jurisdiction, or by mutual consent agreement between the Agencies and Merrill Lynch, to have resulted from Merrill Lynch'S or, with Il:Spect to an Indemnified Party, an Indemnified Party's willful misconduct or gross negligence in performing the services dtscribed above The Agencies also agrees that no IndelItl\wed Party shall have any liability (whether direct or indireCt, in contract or tort or otherwise) to the Agencies related to or arising out of the engagement of Merrill Lynch pursuant to, or the performance by Merrill Lynch of the services contemplated by, this agreement excopt to the extent that any loss. claim, damage or liability is found in a final judgment by a court of competent jurisdiction to have resulted from Merrill Lynch's or, with respect to an Indemnified Party, an Indemnified Party's willful misconduct or gross negligence. E'd ~M/~jd HJNAl llI~~3W W~S2:60 66, S0 ~d~ Res. 1999-63 . .~lIeRIII Lynch March 31, 1999 Page 3 If the indemnification of an Indemnified Party provided for in this letter agreement is for any reason held unenforceable although otherwise applicable in accordance with its terms or insufficient in respect of any losses, claims, damages and liabilities referred to therein, the Agencies agrees to contribute to the losses, claims, dal1\ages and liabilities, as incurred, in proportion as is appropriate to reflect the relative benefits to the Agwcies. on the one hand, and Merrill Lynch, OIr the. other hand, of the transaction contemplated herein; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of 1l(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent mimprcsentation. The ~ncies agtees that for the Jl1UPOses of this paragraph, the relative benefits to the Agencies and to Merrill Lynch of the Transaction as contemplated herein shall be deemed to'be in the same proportion that the total value received or contemplated to be reCllived by the Agencies as a result of or in connection with the Transaction as contemplated herein bears to the fees paid or to be paid to Merrill Lynch under this agreement. Promptly after m:eipt by the Agencies or Merrill Lynch of notice of any claim or the commencement of any action or proceeding relating to the Transaction contemplated by this letter agreement, the party receiving such notice will notify the other party in writing of such claim or of the commencement of such action or proceeding; provided, however, that any failure to .do so will not result in loss of indemnification hereunder. The Agencies agrees that, without Merrill Lynch's prior written consent, which consent will not be WU'easonably withheld, it will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding in respect of which indemnification could be sought under the indemnification provisions of this letter agreement (whether or not Merrill Lynch or any Indemnified Party is an acmal or potential party to such claim, action or proceeding), unless such settlement, compromise or consent includes an unconditional release of such other party and each Indemnified Party from all liability arising out of such claim, action or proceeding, Merril1 Lynch agrees that, without the Agencies' prior written consent, which consent will not be unreasonably withheld, it will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or pro~ding ui fC3JlCct of which indemnification CQuld be sought under the inde.nmification provisions of this letter agreement (whether or not the Agencies or any Indemnified PartY is an aemal or potential party [0 such claim, action or proceeding), unIesa such settlernent, compromise or consent includes an unconditional release of such other partY and each Indemnified Party trom all liability arising out of such claim, action or proceeding. In the event Merrill Lynch or any lndemnilled party is (i) required to appear as a witness in any action brought by or against the Agencies or any participant in a transaction covered hereby in which an Indemnified Party is not nallled as a defendant, or (Ii) requested by the Agencies to appear as a witness or to assist the Agencies in the presentation of its position in any aclion brought by or against the Agencies or any participant in a transaction covered hereby in which an Indemnified Party is not named as a defendant, the Agencies agrees to reimburse Merrill Lynch for all expellses incurred by it in CQnnection with such party preparing and appearing as a witness or in its assistance to the Agencies for the preparation of the Agencies' position, ~'d ~M/~jd HJNAl llI~~3W W~92:60 66, S0 ~d~ Res. 1999-63 .~ Merrill Lynch March 31. 1999 Pap 4 Merrill Lynch agrees to keep all Information confidential except Information that (i) is or becomes generally available to the public (other than as a result of a disclosure by Mcrrilt Lynch), (il) was ilV8ilable to Merrill Lynch on a non-confidential basis prior to its disclosure by the Agencies, (iii) becomes available to Mmill Lynch on a non-<:onfidential basis from a person other than the Agencies who, to the knowledgl: of Merrill Lynch. is not boUlld by a confidentiality agreement with the Agencies or otherwise prohibited from transferring such information to Merrill Lynch, (iv) the Agencies agrees may be disclosed or (v) MeniU Lynch is requif':d by law, regulation, legal process or regulatory Agencies or requested by regulatory Agencies to disclose. No wai~r, amendment or other modification of this letter agreement shall be effective unless in writing and signed by each party to be bound thereby. This agreement shall inure to the benefit of and be binding upon Merrill Lynch, any other Indemnified Party, the Agencies, or any subsidiary or affiliate thereof, and their respective successors; this agreement and the conditions and provisions hereof being for the sole and exclusive benefit of such persons or entities and their respe~"e successors and for the benefit of no other person or entity. No assignment of this agreement by either party will be effective without lhe written consent of the other party Each of Merrill Lynch and the Agencies (in its own behalf and, to the extent permitted by applicable law. on behalf of its shareholders or partnerS) waives all right to trial by JUty in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) related to or arising out of the engagement of Merrill Lynch pursuant to, or the performance by Merrill Lynch of the services contemplated by, this letter agreement The obligations of the parties hereunder will terminate on June 30, 1998, but may be extended by mutual agreement of the parties. This agreement and Merrill Lynch's rights and obligations hereunder may be tenninated by the Agencies for any reason upon 30 days' prior written notice to Merrill Lynch. This ~ernent and the Agencies' rights and obligations hereunder may be terminated by Merrilt Lynch for any reason upon 90 days' prior notice to the Agenctcs, Notwithstanding any tennination of this agreement as provided herein, the Agencies understands and agrees that the provisions relating to the payment of expell8es, indemnification (to the extent permitted by law), limitations on the liability of Indemnified Panics, contribution, settlements. choice of law and waiver of the right to trial by jury will survive any such termination. With regard to the fees described in this letter agreement, the Agencies agrees to Ireat such information confidentially and take reasonable steps to insure such confidentiality is maintained, except where disclosure is required by law. All communications hereunder shall be in writing and if sent to Merrill Lynch, shall be mailed, delivered, or telecopied and confirmed to Menill Lynch at 5500 Sears Tower, 56th Floor, Chicago, Ulinois 60606, lelecopy nulllller (312) 906-6343, Attention of Stephen R. Coma, Managing DireclOT, Municipal Finance Group (telephone number (312) 906-6349for confmnation ofr~ipt). This letter agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts executed and to be Wholly performed therein. S'd ~M/~jd HJNAl llI~~3W W~92:60 66, 50 ~d~ Res. 1999-63 ~.erIUI LyDcll March 31, 1999 Page' If you are in agreement with the foregoing, please sign all copies ofthi& agreement retaining one copy for )'(lor tiles and retunling the rem.;n1ng copies to the undersigned. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED -~~~ By: Authorized SignatoI)' Agreed and Accepted: THE AGENCIES By: Name: Title: S'd ~M/~jd HJNAl llI~~3W W~LZ:60 66. S0 ~d~