~ ~ ~~~ DRAFT DATE: DECEMBER 3,2.002 GENERAL CERTIFICATE OF KERR COUNTY, TEXAS STATE OF TEXAS COUNTY OF KERR We, the undersigned, County Judge and County Clerk of KERB COUNTY, TEXAS (the "County"), do hereby certify and represent as follows for the benefit of the Attorney General of the State of Texas {the "Attorney General") and all other persons interested in the issuance of "Hill Country Juvenile Facility Corporation Lease Revenue Bonds, Series 2002 (Kerr County, Texas Juvenile Detention Facilities Project) " (the "Bonds") in the principal amount of $5,140, 000, and the approval, authorization, execution and delivery of the Lease Agreement dated as of November 15, 2002 (the "Lease"), between the County and the Hill Country Juvenile Facility Corporation (the "Corporation), and the approval, authorization, execution and delivery of the Operating Agreement dated as of November 15, 2002 (the "Operating Agreement"), between the County and the Kerr County Juvenile Board (the "Juvenile Board") GENERAL MATTERS 1. The County has duly authorized the incorporation of the Corporation as a nonprofit public facility corporation created under Chapter 303, Texas Local Government Code, as amended (the "Act"). The Corporation's Articles of Incorporation were duly filed with the Secretary of State of the State of Texas, as evidenced by the Certificate of Incorporation issued by said office on August 29, 2001, and such Articles of Incorporation remain in full force and effect and have not been amended since the date of filing of the Articles of Incorporation. 2. An order (the "Order") authorizing the execution of the Lease and the Operating Agreement and approving the issuance ofthe Bonds by the Corporation and approving certain other matters related thereto, was duly adopted by the Commissioners Court of the County (the "Commissioners Court") on November 12, 2002, by the members thereof present and voting at the meeting at which a quorum was present and acted throughout; the Order is in full force and effect and has not been altered, amended, or repealed as of the date hereof; and the meeting at which the Order was adopted was duly called in accordance with law. 3. The Lease, the Operating Agreement and any and all other agreements and documents, including closing documents, necessary to be authorized, executed, and delivered by the County to carry out, give effect to, and consummate the transactions contemplated by such agreements (collectively, the "County's Documents"), as executed and delivered by the County Judge and/or County Clerk of the County are in substantially the same form and text as the copies of such instruments which were approved by the Commissioners Court in the Order, with such changes and revisions therein as have been approved by the officer executing each respective instrument. The County's Documents have been properly executed by the County and have not been amended or rescinded, and due performance has been authorized by the County. The terms and provisions of the County's Documents are not in conflict with any instrument, law or regulation to which the County is a party or is subject. 4. The persons named below were on the date or dates of all actions taken on or before November 12, 2002 in connection with the approval and execution of the County's Documents were the duly elected and qualified incumbents of the following offices of the County: COMMISSIONERS COURT MEMBERS: Fred Henneke, County Judge H.A. "Buster Baldwin, Commissioner, Precinct 1 William "Bill" Williams, Commissioner, Precinct 2 Jonathan Letz, Commissioner, Precinct 3 Larry Griffin, Commissioner, Precinct 4 COUNTY STAFF• Jannett Pieper, County Clerk Barbara Nemec, County Treasurer Paula Rector, Tax Assessor-Collector Tommy Tomlinson, County Auditor 5. The persons named below were on the date or dates of all actions taken on or after November 12, 2002 and to the date hereof in connection with the approval and execution of the County's Documents were the duly elected and qualified incumbents of the following offices of the County: COMMISSIONERS COURT MEMBERS: COUNTY STAFF: Fred Henneke, County Judge Jannett Pieper, County Clerk H.A. "Buster Baldwin, Commissioner, Precinct 1 Barbara Nemec, County Treasurer William "Bill" Williams, Commissioner, Precinct 2 Paula Rector, Tax Assessor-Collector Jonathan Letz, Commissioner, Precinct 3 Tommy Tomlinson, County Auditor Larry Griffin, Commissioner, Precinct 4 6. The following are the true and correct signatures of the County Judge, County Clerk and County Auditor of the County: NAMES/OFFICES Fred Henneke, County Judge Jannett Pieper, County Clerk Tommy Tomlinson, County Auditor S GNAT c~~K~~, / yl~h 7. The persons named below were on the date or dates of all actions taken on or before November 12, 2002 by the Corporation in connection with the issuance of the Bonds, the duly elected and qualified incumbents of the following offices of the Corporation: MEMBERS OF BOARD OF DIRECTORS: Fred Henneke, President Stephen B. Ables, Vice President Emil Karl Prohl, Secretary/Treasurer 8. The persons named below were on the date or dates of all actions taken on or after November 12, 2002 by the Corporation in connection with the issuance ofthe Bonds, the duly elected and qualified incumbents of the following offices of the Corporation: MEMBERS OF BOARD OF DIRECTORS: Fred Henneke, President Stephen B. Ables, Vice President Emil Karl Prohl, Secretary/Treasurer 9. No litigation of any nature has ever been filed pertaining to, affecting, questioning, or contesting the issuance, execution, delivery, payment, security, or validity of the Bonds or the Lease or the Operating Agreement, the authority of the governing body and the officers of the Corporation to issue, execute, and deliver the Bonds, the authority of the Commissioners Court and the officers of the County to execute and deliver the Lease or the Operating Agreement, the validity of the corporate existence of the County or the Corporation, the title of the present members and officers of the Commissioners Court of the County or of the Board of the Corporation to their respective offices, or the power and authority of the County to levy and collect taxes as permitted by law. 10. The County has received all necessary permits and approvals of governmental bodies or agencies with respect to the execution and delivery of the Lease and the Operating Agreement and the County or the Juvenile Board has received or expects to receive and has applied or shall apply with due diligence for all necessary permits and approvals with respect to the construction and operation of the Project. 11. No event has occurred since the date of the Order that would result in a material adverse change in the financial condition of the County or in the County's ability to perform its obligations under the County's Documents. 12. There is no default under any agreement to which the County is a party which would have a material adverse effect on the County; there is no litigation pending or threatened with respect to the authority of the County to enter into the agreements contained in the County's Documents or to perform its obligations thereunder. 13. The County has required the Corporation to comply, and the Corporation has complied, with all procurement statutes applicable to the County, including the Corporation's award of the Construction Contract through the competitive bidding process. AUTHORIZATION OF ATTORNEY GENERAL TO DATE CERTIFICATE 14. This Certificate is submitted pursuant to 1 TAC § 53.246. Upon the Attorney General's approval of the Bonds, he is authorized to date this Certificate as of the date of such approval. If any litigation should develop, or if any other event should occur which should make this Certificate inaccurate before the Attorney General's approval of the Bonds, we will notify the Attorney General at once by both telephone and telecopy. With this assurance, the Attorney General is entitled to rely on the accuracy of this Certificate at the time of approval of the Bonds unless we advise him otherwise. [The remainder of this page intentionally left blank] 4 IN WITNESS WHEREOF, the undersigned have hereunto set their signatures and the official seal of the County this /,2 - ~/-C'2- Ja ett Piepez, County Clerk (COUNTY SEAL) KERB COUNTY, TEXAS Fred Henn e, County Judge [SIGNATURE PAGE TO THE GENERAL CERTIFICATE OF KERB COUNTY, TEXAS] DRnr r Dn~: DECE~~ 3.2002 LEASE AGREEMENT RELATING TO THE KERB COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT Between KERB COUNTY, TEXAS as "Lessee" and the HII,L COUNTRY JUVENII~E FACILITY CORPORATION as "Lessor" Dated as of November 15, 2002 Certain rights of the Hill Country Juvenile Facility Corporation (the "Lessor ") under this Lease Agreement have been assigned and pledged to, and are subject to a security interest in favor of, The Bank of New York Trust Company of Florida, N.A., as Trustee under a Trust Agreement, dated as of November 1 S, 2002, between the Lessor and the Trustee, as may be amended or supplemented from time to time. Relating to the Issuance of $5,140,000 HILL COUNTRY JUVENILE FACILITY CORPORATION LEASE REVENUE BONDS, SERIES 2002 (KERB COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION SECTION 1.01. Definitions . .................................................. 2 SECTION 1.02. General Rules of Construction . ................................... 2 SECTION 1.03. Preamble . ................................................... 3 ARTICLE II GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES SECTION 2.01. General Representations, Covenants, and Warranties of Lessee............ 3 SECTION 2.02. General Representations, Covenants, and Warranties of Lessor............ 4 SECTION 2.03. General Assurances . ........................................... 5 SECTION 2.04. Compliance with Rule 15c2-12 ................................... 5 ARTICLE III LEASE ......................................................................... 8 ARTICLE IV THE PROJECT SECTION 4.01. Design, Construction, Acquisition, or Installation of Project . ............. 9 SECTION 4.02. Access to Project . ............................................ 11 SECTION 4.03. Maintenance of Project ........................................ 11 SECTION 4.04. Use of the Project ........................... ..... ............. 11 SECTION 4.05. Lessee's Negligence; Liability Insurance . ........................... 11 SECTION 4.06. Property Insurance . ........................................... 12 SECTION 4.07. Worker's Compensation Insurance . ............................... 13 SECTION 4.08. Requirements for Insurance Policies . .............................. 13 SECTION 4.09. Utility Charges . .............................................. 13 SECTION 4.10.Taxes ...................................................... 13 SECTION 4.11. Modification of Project by Lessee ................................. 14 SECTION 4.12. Liens . ..................................................... 14 SECTION 4.13. Damage, Destruction, and Condemnation ........................... 15 SECTION 4.14. Cooperation of Lessee . ........................................ 16 SECTION 4.15. Installation of Lessee's Equipment . ............................... 16 SECTION 4.16. Assignment of Warranties ....................................... 17 ARTICLE V TERM OF LEASE SECTION 5.01. Term of Lease . .............................................. 17 i ARTICLE VI LEASE PAYMENTS SECTION 6.01. Project Costs; Issuance Costs; Payment of Costs . .... ................ 17 SECTION 6.02. Lease Payments . ............................. ................ 18 SECTION 6.03. Current Expenses . ............................ ................ 19 SECTION 6.04. Lessee's Obligation ............................ ................ 19 SECTION 6.05. Reserve Account . ............................ ................ 19 ARTICLE VII OPTION TO PURCHASE SECTION 7.01. When Available . ............................................. 20 SECTION 7.02. Exercise of Option . ........................................... 20 SECTION 7.03. Release of Lessor's Interest ...................................... 20 ARTICLE VIII ASSIGNMENT, SUBORDINATION, SUBLEASING, MORTGAGING, SELLING AND ASSUMING LESSOR'S INTEREST IN PROJECT SECTION 8.01. Assignment by Lessor .......................................... 21 SECTION 8.02. Assignment by Lessee .......................................... 21 SECTION 8.03. Restriction on Mortgage or Sale of Project by Lessee .................. 21 ARTICLE IX THE BONDS SECTION 9.01. Issuance and Sale of the Bonds ................................... 21 SECTION 9.02. Cooperation by Lessee . ........................................ 21 SECTION 9.03. Maintaining Tax-Exempt Status of the Bonds ........................ 21 SECTION 9.04. Designation as Qualified Tax-Exempt Obligations .................... 21 ARTICLE X REMEDIES SECTION 10.01. Remedies on Event of Default of Lessee ........................... 24 SECTION 10.02. Notice of Appropriation . ...................................... 25 SECTION 10.03. Notice of Nonappropriation; Termination on Event of Nonappropriation. 25 SECTION 10.04. Remedies on Event of Default of Lessor .......................... 26 SECTION 10.05. Delay; Notice . .............................................. 26 SECTION 10.06. No Remedy Exclusive ......................................... 26 SECTION 10.07. No Additional Waiver Implied by One Waiver . ..................... 26 ARTICLE XI TITLE ........................................................................ 27 ii ARTICLE XII HAZARDOUS MATERIALS SECTION 12.01. Restrictions Regarding Hazardous Substances ...................... 27 SECTION 12.02. Compliance with Hazardous Substance Laws ....................... 28 SECTION 12.03. Lessee's Indemnification ...................................... 28 SECTION 12.04. Remedial Action ............................................ 28 SECTION 12.05. Discovery of Hazardous Substances .............................. 29 ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Notices .................................................... 29 SECTION 13.02. Binding Effect . ............................................. 29 SECTION 13.03. Severability ................................................. 30 SECTION 13.04. Amendments, Changes, and Modifications . ........................ 30 SECTION 13.05. Custody of Lease ........................................... 30 SECTION 13.06. Execution in Counterparts . .................................... 30 SECTION 13.07. Applicable Law .............................................. 30 SECTION 13.08. Complete Agreement . ........................................ 30 SECTION 13.09. Survival of Representations and Warranties . ....................... 31 SECTION 13.10. Time of Essence. ..... . ...................................... 31 SECTION 13.11. References to Lessor . ........................................ 31 SECTION 13.12. Performance of Lessee's Duties and Obligations by Juvenile Board. ...... 31 EXHIBIT A -DEFINITIONS EXHIBIT B -LEGAL DESCRIPTION EXHIBIT C -FORM OF FINAL ACCEPTANCE CERTIFICATE EXHIBIT D -LIST OF PERMITTED ENCUMBRANCES EXHIBIT E -INITIAL LEASE PAYMENT SCHEDULE EXHIBIT F -RESERVED AS A PLACEHOLDER EXHIBIT G -DESCRIPTION OF ANNUAL FINANCIAL DATA EXHIBIT H -TYPES AND AMOUNTS OF REQUIRED INSURANCE EXHIBIT I -FORM OF CHANGE ORDER NOTICE EXHIBIT J -FORM OF CERTIFICATE OF APPROPRIATION iii LEASE AGREEMENT RELATING TO THE KERR COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT THIS LEASE AGREEMENT RELATING TO THE KERR COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT (the "Lease"), dated as of November 15, 2002, by and between KERB COUNTY, TEXAS (the "Lessee" or the "County"), a duly created political subdivision of the State of Texas operating pursuant to the Constitution and laws of the State of Texas, together with its successors and permitted assigns, and the HILL COUNTRY JUVENILE FACILITYCOxPOrtATION, anonprofit public facility corporation duly organized under the laws of the State of Texas, together with its successors and assigns (the "Lessor" or the "Corporation"). WITNESSETH: WHEREAS, the Commissioners Court ofthe County created the Corporation as a nonprofit public facility corporation pursuant to the provisions ofChapter 303, Texas Local Government Code, as amended (the "Act"), to assist the County in financing, refinancing, or providing juvenile detention facilities for the County; and WHEREAS, the Kerr County Juvenile Facility Corporation (the "Current Owner") is a nonprofit public facility corporation created by the County in 1997 pursuant to Article 717s, Vernon's Texas Civil Statutes (now codified as the Act); and WHEREAS, the Current Owner owns certain public facilities in the County which are leased to the Kerr County Juvenile Board (the "Juvenile Board") for the purpose of operating juvenile detention facilities for the County (the "Existing Juvenile Detention Facilities"} pursuant to the terms of aLease-Purchase Agreement, dated as of March 31, 1994 (the "Original Lease"), between the Juvenile Board and Current Owner (as the successor in interest to ReCor, Inc., a Texas corporation which served as the original Lessor under the Original Lease pursuant to a General Warranty Deed dated as of August 6, 1997 and filed for record at Volume 0912, page 528, Real Property Records of Kerr County, Texas); and WHEREAS, pursuant to Section 18.1 ofthe Original Lease, the Juvenile Board has the option to purchase the Current Owner's interest in the Original Lease and the Existing Juvenile Detention Facilities at an amount equal to the applicable option purchase price shown in Exhibit "B" of the Original Lease; and WHEREAS, the Juvenile Board has advised the County that it has determined that it desires to refinance the Original Lease by exercising such option to purchase permitted for February I, 2003, which, based on Exhibit "B" of the Original Lease and discussions with the holder of the interests in the Original Lease, would require an option purchase price of $1,914,790, and the Juvenile Board has requested the Corporation and the County to assist with such refinancing and the financing of additional improvements to the Existing Juvenile Detention Facilities by issuing lease revenue bonds and entering into this Lease Agreement; and WHEREAS, pursuant to the terms of a Consent and Assignment Agreement, dated as of November 15, 2002, by and among the Juvenile Board, the Current Owner, the Corporation, Frankenmuth Mutual Insurance Company (the "Current Investor"), and LaSalle National Bank ("LaSalle"), (i) the Juvenile Board has assigned to the Corporation its rights under Section 18.1 of the Original Lease to purchase the Current Owner's interest in the Original Lease and the Existing Juvenile Detention Facilities in consideration for the Corporation issuing lease revenue bonds to refinance the Existing Juvenile Detention Facilities and finance the additional improvements thereto, all of which will be operated by the Juvenile Board in accordance with an Operating Agreement, dated as of November 15, 2002, between the County and the Juvenile Board (the "Operating Agreement"), (ii) the Existing Juvenile Detention Facilities will be sold by the Current Owner to the Corporation on the date of delivery of the Series 2002 Bonds (as defined herein), and (iii) the Current Owner, LaSalle and the Current Investor have consented to such assignment and sale as required by Section 9.1 of the Original Lease; and WHEREAS, it is the intent of the parties hereto that the Corporation assume all responsibilities and obligations of the Current Owner as lessor under the Original Lease, and to the extent permitted by law, the Current Owner be held harmless from all liabilities and obligations under this Lease; and WHEREAS, the County further desires to cause to be constructed and acquired improvements and extensions to the Existing Juvenile Detention Facilities, which improvements and extensions are further described in Exhibit B hereto and are currently estimated to cost approximately $2, 651, 000; and WHEREAS, the County and the Juvenile Board have requested the Corporation to issue a series of lease revenue bonds in order to provide funds to finance the purchase of the Existing Juvenile Detention Facilities from the Current Owner and to finance such improvements and extensions thereto; and WHEREAS, the Corporation is entering into a TRUST AGREEMENT RELATING TO KERR COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT, dated as of November 15, 2002, with The Bank of New York Trust Company of Florida, N.A., as Trustee (the "Trust Agreement") authorizing the issuance of $5,140, 000 in principal amount of Hill Country Juvenile Facility Corporation Lease Revenue Bonds (Kerr County, Texas Juvenile Detention Facilities Project), Series 2002 (the "Bonds") to finance the acquisition of the Existing Juvenile Detention Facilities and the construction and equipping of improvements and extensions to the Existing Juvenile Detention Facilities (collectively, the "Project"); and WHEREAS, the County acknowledges that the Corporation intends to issue the Bonds for such purposes and that the Corporation will assign all of its rights, title and interest, but none of its duties or obligations, to the Trustee (hereinafter defined) pursuant to the terms of the Trust Agreement; and WHEREAS, the Corporation and the County acknowledge and agree that certain of the obligations and duties of the County, as Lessee, will be performed by the Juvenile Board pursuant to the provisions of the Operating Agreement; NOW THEREFORE, in the joint and mutual exercise of their powers, and in consideration of the mutual covenants herein contained, the Corporation, as Lessor, hereby leases the Project to the County, as Lessee, and the Lessee hereby leases the Project from the Lessor upon the terms and conditions set forth in this Lease, and the parties hereto agree as follows: 2 ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION SECTION 1.01. DEFINITIONS. Unless the context otherwise requires, all capitalized terms not otherwise defined herein shall have the meaning as set forth in Exhibit A to this Lease. SECTION 1.02. GENERAL RULES OF CONSTRUCTION. (a) When in this Lease the context requires (i) a reference to the singular number includes the plural and vice versa, and (ii) a word denoting gender includes the masculine, feminine, and neuter. (b) The table of contents and the titles given to any article or section of this Lease are for convenience only and are not intended to modify the article or section. SECTION 1.03. PREAMBLE. The statements and findings in the preamble of this Lease are hereby adopted and made a part of this Lease. ARTICLE II GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES SECTION 2.01. GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES OF LESSEE. The Lessee represents, covenants, and warrants as follows: (a) the Lessee (i) is a duly formed and validly existing political subdivision of the State of Texas duly created and operating pursuant to the laws of the State; (b) the Lessee has full power and authority to execute this Lease and perform its obligations hereunder; (c) the Lessee has duly authorized the execution of this Lease and the performance of its obligations hereunder; (d) the execution of this Lease and the performance of its obligations hereunder, and compliance with the terms thereof by the Lessee will not conflict with, or constitute a default under, any law (including administrative rule), judgment, decree, order, permit, license, agreement, mortgage, lease, or other instrument to which the Lessee is subject or by which the Lessee or any of its property is bound; (e) the Lessee is not in violation of any law, including but not limited to any court orders, which violation could adversely affect the performance of its obligations under this Lease and the Lessee shall continue to remain in compliance with all applicable laws, regulations and court orders; (fj the Lessee presently expects to have sufficient funds to satisfy its obligations under this Lease; provided, however, the Lessee has no obligation to Appropriate, regardless of the amount of Appropriated Funds or other lawfully available funds, as applicable, in any Fiscal Year; (g) this Lease is the legal, valid, and binding obligation of the Lessee, enforceable in accordance with its terms; (h) concurrent with entering into this Lease, the Lessee will enter into the Operating Agreement with the Juvenile Board, pursuant to which the Juvenile Board will have the right to occupy and operate the Project and will agree to perform all covenants, obligations and responsibilities ofthe Lessee under this Lease, and pursuant to the Operating Agreement, the Juvenile Board will be the sole user of the Project; (i) the Project is essential to the Lessee's responsibilities to provide juvenile detention facilities and services to the public, and the Lessee will use the Project, or shall cause the Project to be used, during the term of this Lease for its essential purposes and in accordance with the provisions and limitations set forth in Section 4.04 of this Lease. (j) the Lessee agrees to keep the Project free and clear of all liens, encumbrances, and security interests (other than Permitted Encumbrances); (k) the Lessee has complied and will comply with all open meeting laws, all public contract procurement laws and all other State and federal laws applicable to the execution, delivery, and performance of this Lease and to the acquisition of the Project by the Lessee; (1) except for approval of the Attorney General of Texas, no further approval, consent, or withholding of obj ections is required from any governmental authority with respect to this Lease; and (m) The Juvenile Board has advised the Lessee that the Project, as reflected on the Plans and Specifications, will meet the needs of the Lessee and can be constructed within the boundaries of the Land. SECTION 2.02. GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES OF LESSOR. The Lessor represents, covenants, and warrants as follows: (a) the Lessor is a duly created and validly existing nonprofit public facility corporation authorized to operate under the Act; (b) the Lessor has the full power and authority to execute the Financing Documents and perform its obligations thereunder; (c) the Lessor has the full power and authority to issue, sell and deliver the Bonds and to use the proceeds thereof for the Project and agrees to take all steps legally required and incidental for the valid, lawful and enforceable authorization, issuance, sale and delivery thereof; (d) the Lessor and its Board ofDirectors have duly authorized the execution ofthe Financing Documents and the performance of the Lessor's obligations thereunder; (e) the execution of the Financing Documents and the performance of its obligations thereunder, and compliance with the terms thereof by the Lessor will not conflict with, or constitute a default under, any law (including administrative rule), judgment, decree, order, permit, license, agreement, mortgage, lease, or other instrument to which the Lessor is subject or by which the Lessor or any of its property is bound; 4 (f) the Lessor is not in violation of any law, which violation could adversely affect the performance of its obligations under this Lease; (g) upon termination of this Lease pursuant to Sections 5.01 (a) or (d) hereof, the Lessor will deliver to Lessee all documents which are or may be necessary to vest all of the Lessor's right, title, and interest in and to the Project in the Lessee and will release all liens and encumbrances in favor of the Lessor created under this Lease with respect to the Project as provided in Article VII; (h) the Lessor agrees to keep the Project free and clear of all liens, encumbrances, and security interests (other than the Permitted Encumbrances); (i) concurrent with the issuance of the Bonds, the Lessor will acquire fee simple title, subject to Permitted Encumbrances, to the real property described in Exhibit B to this Lease upon which the Project is or will be situated, and will, for the period of time commencing on the date of acquisition of such real property and expiring on the termination of this Lease, warrant and forever defend all and singular title to such property unto the Lessee, its successors, and permitted assigns against every person whomsoever lawfully claiming the same, or any part thereof by, through or under the Lessor but not otherwise, subject to the Permitted Exceptions. Subject to compliance by the Lessee with the provisions of this Lease, the Lessor hereby covenants to provide the Lessee during the term of this Lease with the quiet use and enjoyment of such property, and the Lessee shall peaceably and quietly have and hold and enjoy such property, without suit, trouble, or hindrance from the Lessor. (j) Except for the approval of the Attorney General of Texas, no further approval, consent, or withholding of objections is required from any governmental authority with respect to the execution, delivery, and performance of this Lease; (k) Lessor has complied and will comply with all open meetings, all public contract procurement laws and all other state and federal laws applicable to the Lessor relating to the approval and construction of the improvements to the Existing Juvenile Detention Facilities, and the payment of Project Costs; (1) This Lease is the legal, valid, and binding obligation of Lessor, enforceable in accordance with its terms; and (m) The Plans and Specifications will provide for the construction of the improvements to the Existing Juvenile Detention Facilities, and such improvements can be constructed within the boundaries of the Land. SECTION 2.03. GENERAL ASSURANCES. The Lessor and the Lessee, subject to Section 2.01(f), each agrees that (to the extent permitted by law) it will take or cause to betaken all actions necessary to preserve its existence in full force and effect and to carry out the terms of this Lease. SECTION 2.04. COMPLIANCE WITH RULE 15c2-12. (a) Annual Reports. In accordance with the provisions of SEC Rule 15c2-12 (the "Rule") the Lessee is an "obligated person", as that term is applied in the Rule, for whom financial or operating data has been presented in the "Final Official Statement," as defined in the Rule, prepared in connection with the authorization, sale and delivery of the Bonds. Consequently, the Lessee enters into the undertaking described in this Section 2.04 in compliance with the Rule. (i) The Lessee shall provide annually to each NRMSIR and any SID, within six months after the end of each Fiscal Year ending in or after 2002, financial information and operating data with respect to the Lessee of the general type included in the final Official Statement authorized by Section 3 of the Resolution of the Board of Directors authorizing the issuance, sale and delivery of the Bonds, being the information described in Exhibit G hereto. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit F hereto, or such other accounting principles as the Lessee may be required to employ from time to time pursuant to applicable laws or regulations, and (2) audited, if the Lessee commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the Lessee shall provide audited financial statements of the Lessee for the applicable fiscal year to each NRMSIR and any SID, when and if the audit report on such statements become available. (ii) If the Lessee changes its Fiscal Year, the Lessee will notify each NRMSIR and any SID of the change {and of the date of the new Fiscal Year end) prior to the next date by which the Lessee otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. (b) Material Event Notices. The Lessee shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Bonds, if such event is material within the meaning of the federal securities laws: A. Principal and interest payment delinquencies; B. Non-payment related defaults; C. Unscheduled draws on debt service reserves reflecting financial difficulties; D. Unscheduled draws on credit enhancements reflecting financial difficulties; E. Substitution of credit or liquidity providers, or their failure to perform; F. Adverse tax opinions or events affecting the tax-exempt status of the Bonds; G. Modifications to rights of holders of the Bonds; H. Bond calls; I. Defeasances; J. Release, substitution, or sale of property securing repayment of the Bonds; and K. Rating changes. The Lessee shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the Lessee to provide financial information or operating data in accordance with subsection (a) of this Section by the time required by such subsection. (c) Limitations, Disclaimers, andAmendments. (i) The Lessee shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the Lessee remains an "obligated person" or the agent of an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the Lessee in any event will give notice of any deposit made in accordance with this Lease and the Trust Agreement that causes Bonds no longer to be Outstanding. (ii) The provisions of this Section are for the sole benefit of the registered owners and beneficial owners of the Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The Lessee undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the Lessee's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The Lessee does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Bonds at any future date. (iii) UNDER NO CIRCUMSTANCES SHALL THE LESSEE BE LIABLE TO THE REGISTERED OWNER OR BENEFICIAL OWNER OF ANY BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE LES SEE, WHETHERNEGLIGENT ORWITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIlVIITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. (iv) No default by the Lessee in observing or performing its obligations under this Section shall comprise a breach of or default under this Lease or the Trust Agreement for purposes of any other provision of this Lease or the Trust Agreement. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the Lessee under federal and state securities laws. (v) The provisions of this Section may be amended by the Lessee from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Lessee, but only if (1) the provisions of this Section, as so amended, would have permitted an Underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (a) the registered owners of a majority in aggregate principal amount (or any greater amount required 7 by any other provision of the Bond Resolution, this Lease or the Trust Agreement that authorizes such an amendment) of the Outstanding Bonds consent to such amendment or (b) a person that is unaffiliated with the Lessee (such as nationally recognized Bond Counsel) determined that such amendment will not materially impair the interest of the registered owners and beneficial owners of the Bonds. If the Lessee so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with subsection (a) of this Section an explanation, in narrative form, of the reason for the amendment and of the impact of any change in the type of financial information or operating data so provided. The Lessee may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an Underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. (d) Definitions. As used in this Section, the following terms have the meanings ascribed to such terms below: "MSRB" means the Municipal Securities Rulemaking Board. "NRMSIR" means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. "Rude" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule from time to time. ARTICLE III LEASE In consideration of the mutual covenants and agreements set forth in this Lease, and other good and valuable consideration, the Lessor demises and leases the Project to the Lessee, and the Lessee leases the Project from the Lessor, all in accordance with the terms and provisions of this Lease. This Lease shall be subject and subordinate to the Trust Agreement and the Mortgage. Lessor acknowledges and agrees that certain obligations of the Lessee will be performed by the Juvenile Board pursuant to the Operating Agreement. 8 ARTICLE IV THE PROJECT SECTION 4.01. DESIGN, CONSTRUCTION, ACQUISITION, AND INSTALLATION OF PROJECT. (a) The Lessor hereby agrees to: (i) acquire and construct the Project in accordance with the terms and conditions hereof; (ii) cause the Project to be designed, constructed, acquired, or installed in compliance with all State and federal laws applicable to the design, construction, demolition, acquisition, or installation of the Project; and (iii) obtain all approvals necessary from the appropriate governmental authorities. (b) The Existing Juvenile Detention Facilities shall be acquired by the Corporation pursuant to a Special Warranty Deed given to the Corporation from the Current Owner. Improvements to the Existing Juvenile Detention Facilities shall be constructed and installed (i) to the extent of and with funds received by the Lessor from the sale of the Bonds and from any funds contributed by the Lessee or the Juvenile Board and deposited into the Lessee Contribution Subaccount ofthe Project Account established by the Trust Agreement, and (ii) pursuant to the Plans and Specifications and one or more Construction Contracts entered into by and between the Lessor and one or more Contractors or to be entered into subsequent to the date of this Lease. (c) The Lessor shall use its best efforts to comply with all reasonable requests of the Lessee or the Juvenile Board in connection with the design, construction, acquisition, or installation of the Project, including without limitation, review of the Plans and Specifications. The Lessor and Lessee agree that the Lessee, the Juvenile Board and the Inspecting Architect shall approve the Plans and Specifications, and the Lessor shall deliver to the Trustee a copy of such approval before the Closing Date. (d) The Lessor and the Lessee, upon consultation with the Juvenile Board, have determined that the Initial Improvement Costs shall not exceed $2, 651, 000. If the total Initial Improvement Costs shall exceed the amount set forth in the preceding sentence, such excess cost shall be paid either (i) directly by Lessee or the Juvenile Board prior to Lessee requesting any payment from the Project Account, or (ii) with funds contributed by the Lessee or the Juvenile Board for deposit in the Lessee Contribution Subaccount of the Project Account in an amount sufficient to cover such excess costs. In the event the Juvenile Board does not contribute such funds to the Lessee Contribution Subaccount ofthe Project Account, the Lessee agrees to pay from Appropriated Funds any amount of the Project Costs in excess of the amount on deposit in the Project Account which is set aside to pay Project Costs. (e) Any change orders with respect to the Construction Contracts and the Plans and Specifications shall be authorized only upon approval of the Lessor and the Lessee (and upon the written consent of the Juvenile Board) and upon satisfaction of all conditions and requirements of this paragraph. The Lessor and the Lessee agree that (i) no change order shall materially reduce the gross square footage to be contained in the Project, or materially alter the basic layout of the Project, 9 or involve the use of materials which will not be at least equal to the materials originally specified in or required by the Plans and Specifications, or the applicable Construction Contract, (ii) the cost of any change order when added to the costs of all prior change orders shall not result in a net increase in the Initial Improvement Costs unless, prior to the authorization of such change order by the Lessor, (a) the Lessee provides written certification to the Lessor and the Trustee that the amount then on deposit in the Project Account, and available for such purpose, is sufficient to fund the Initial Improvement Costs and such net increase, or {b) the Lessee or the Juvenile Board shall have deposited with the Trustee, for credit to the Lessee Contribution Subaccount of the Proj ect Account, lawfully available funds in an amount equal to the amount by which any such change order will cause the cost of completing the Project to exceed the Initial Improvement Costs, and (iii) prior to authorizing any change order, the Lessor and the Lessee shall deliver a "Change Order Notice", with an executed certification of the Inspecting Architect attached thereto, to the Trustee (with a copy to the applicable Contractor) in substantially the form attached as Exhibit I, and any amount required to be deposited with the Trustee by the Lessee or the Juvenile Board pursuant to clause (ii)(b) above, if necessary, shall be so deposited with the Trustee on or prior to the Trustee's receipt of such notice. All materials and other property of any nature whatsoever incorporated into the Project as a result of change orders shall become a permanent part of the Project for the purposes of this Lease. (f) The Lessee is entering into this Lease based primarily upon representations made by the Juvenile Board in the Operating Agreement and elsewhere to the effect that the Juvenile Board has an immediate need for the Project and that the Project is essential to the Juvenile Board's responsibilities to provide juvenile probation services for residents of the County and certain other counties of the State in which the Juvenile Board has contracted to provide juvenile probation services. Consequently, the Lessee represents that there is an immediate need for the Project prior to the time it or the Lessor executes any Construction Contracts for improvements to the Existing Juvenile Detention Facilities and that the use of the Project will be essential to the performance of public purposes and functions. (g) Immediately upon the execution and delivery of each Construction Contract and by executing an assignment in substantially the form of Exhibit K attached hereto, the Lessor shall be deemed to have assigned, and shall assign, to the Trustee all of its rights under such Construction Contract, but not its duties or responsibilities under such Construction Contract. (h) The Lessee shall exercise due care, and shall use its best efforts to cause the Juvenile Board to exercise due care, in the use, operation, and maintenance of the Project and shall not use, operate, or maintain the Project, and shall use its best efforts to not permit the Juvenile Board to use, operate or maintain the Project, improperly, carelessly, in violation of any State or federal law, or for a purpose, or in a manner contrary to that contemplated by this Lease. Additionally, the Lessee shall not unreasonably obstruct or hinder the Lessor in carrying out its duties under and pursuant to this Lease. Lessee shall obtain, or shall cause the Juvenile Board to obtain or assist the Lessor to obtain, all permits and licenses necessary for the construction, operation, possession, and use of the Project. Lessee shall comply, and shall use its best efforts to cause the Juvenile Board to comply, with all State and federal laws applicable to the use, possession, and operation of the Project and, if compliance with any such State and federal law requires changes or additions to be made to the Project, such changes or additions shall be made in accordance with Section 4.11 of this Lease. io SECTION 4.02. ACCESS TO PROJECT. The Lessor and the Lessee each agrees that the Lessor, any Lessor Representative, the Lessee, any Lessee Representative, the Trustee, any Trustee Representative, and the Inspecting Architect shall have the right at all reasonable times to enter upon and to examine and inspect the Project. The Lessee and the Lessor each further agrees that the Lessor and any Lessor Representative shall have such rights of access to the Project as may be reasonably necessary to cause the proper maintenance of the Project in the event of failure by the Lessee to perform its obligations hereunder or the failure by the Juvenile Board to perform its obligations under the Operating Agreement, or to carry out the Lessor's obligations and exercise the Lessor's rights under Article X hereof, or to determine whether the Lessee is in compliance with this Lease. SECTION 4.03. MAINTENANCE OF PROJECT. (a) During the Term of this Lease, the Lessee shall maintain, preserve, and keep the Project, or shall use its best efforts to cause the Juvenile Board to maintain, preserve, and keep the Project, in good repair, working order, and condition, and from time to time, make or cause to be made all repairs, replacements, and improvements necessary to keep the Project in such condition. To the extent such repairs, replacements, and improvements are made by the Lessee and not by the Juvenile Board, the Lessee agrees to pay such expenses from Appropriated Funds. The Lessor shall have no responsibility for such maintenance, or for any such repairs, replacements, or improvements. (b) Subject to the provision of Section 9.03 of this Lease, the Lessee shall have the right to contract with a third party to maintain, repair, replace, and improve the Project, as necessary to keep the Project in good repair, working order, and condition to the extent that such contract does not adversely affect the exclusion of interest on the Bonds for federal income tax purposes; provided that the Lessor, Lessee and Trustee may rely on an opinion of Bond Counsel that the exclusion of interest on the Bonds for federal income tax purposes will not be adversely affected by the agreements with such third party for maintenance, repair, replacements, and/or improvements; and provided further, that Lessee shall not be relieved of its obligation to maintain, repair, replace, and improve the Proj ect, or use its best efforts to cause the Juvenile Board to maintain, repair, replace and improve the Project, by designating a third party to perform such duties. SECTION 4.04. USE OF THE PROJECT. The Lessee and the Juvenile Board may use the Project for any lawful purpose consistent with the normal intended use of the Project so long as such use does not adversely affect the treatment of the Bonds as obligations described in section 103 of the Code, the interest on which is excludable from "gross income" for purposes of federal income taxation. SECTION 4.05. LESSEE'S NEGLIGENCE; LIABILITY INSURANCE. (a) LESSEE'S NEGLIGENCE. TO THE EXTENT PERMITTED BY THE LAWS OF THE STATE, THE LESSEE ASSUMES ALL RISKS AND LIABILITIES, WHETHER OR NOT COVERED BY INSURANCE, FOR LOSS OR DAMAGES TO THE PROJECT AND FOR INJURY TO OR DEATH OF ANY PERSON OR DAMAGES TO ANY PROPERTY, WHETHER SUCH INJURY OR DEATH BE WITH RESPECT TO AGENTS OR EMPLOYEES OF THE LESSEE OR OF THIRD PARTIES AND WHETHER SUCH PROPERTY DAMAGE BE TO THE LESSEE'S PROPERTY OR THE PROPERTY OF OTHERS, IF SUCH INJURY, DEATH, LOSS, OR DAMAGE BE PROXIMATELY CAUSED BY THE NEGLIGENT CONDUCT OF THE LE S SEE, 11 ITS OFFICERS, EMPLOYEES, AGENTS, GUESTS, AND INVITEES. TO THE EXTENT PERMITTED BY THE LAWS OF THE STATE, THE LESSEE HEREBY ASSUMES RESPONSIBILITY FOR AND AGREES TO REIlVIBURSE THE LESSOR, FOR ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, CLAIMS, ACTIONS, COSTS, AND EXPENSES OF WHATSOEVER KIND AND NATURE, IlVIPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE LESSOR (EXCEPT THOSE DIRECTLY RESULTING FROM THE LESSOR'S OWN NEGLIGENCE OR WILLFUL MISCONDUCT} THAT IN ANY WAY RELATE TO OR ARISE OUT OF A CLAIM, SUIT, OR PROCEEDING BASED IN WHOLE OR IN PART UPON THE CONDUCT OF THE LESSEE, ITS OFFICERS, EMPLOYEES, AGENTS, GUESTS, AND INVITEES. (b) Liability Insurance or Coverage. During the Term of this Lease, Lessee will procure from Appropriated Funds, and maintain continuously in effect, or use its best efforts to cause to be procured and maintained continuously in effect by the Juvenile Board, with respect to the Project, a policy of insurance or coverage of Comprehensive General (Public) Liability on an occurrence based form with a combined single limit set out in Exhibit H, against liability for injuries to or death of any person or damage to or loss of property arising out of or in any way relating to the maintenance, use, or operation of the Project or any part thereof, and shall furnish, or use its best efforts to cause the Juvenile Board to furnish, certificates evidencing such coverage to the Trustee. The Trustee and the Lessor shall be named as additional insureds. The insurance or coverage shall include coverage for premises/operations, independent contractors, products/completed operations, personal and bodily injury, contractual liability and explosion, collapse and underground property damage in the amounts set out in Exhibit H. The insurance required under this subparagraph may be provided through an "umbrella" policy which provides coverage for any one occurrence in the minimum coverage amount previously set forth. SECTION 4.06. PROPERTY INSURANCE. Throughout the Term of this Lease, to the extent permitted by law, all-risk and its equivalent property insurance shall be procured and maintained in effect continuously by the Lessee (or by the Juvenile Board), with regard to the Project, in a coverage amount not less than the greater of the replacement value of the Project or the Defeasance Amount; provided that all amounts due and payable under the Trust Agreement have been paid then applicable, subject only to the exceptions, limitations and exclusions customarily contained in such policies. The Lessee shall ensure that at all times the limits of coverage are sufficient to pay for the full replacement cost of the property at the time of loss, without deduction or depreciation. All policies of insurance or coverage required by this section shall be issued to Lessee or the Juvenile Board as the first named insured or such other term stipulating similar meaning. Additionally, all policies shall be carved in the names of the Lessor, the Trustee, and the Lessee as its interests may appear, but shall name the Trustee as loss payee as their interest may appear. The Lessor and Lessee agree to furnish certificates evidencing such coverage to the Trustee. If such insurance is obtained by the Lessee instead of by the Juvenile Board, the cost of such insurance shall be paid by the Lessee from Appropriated Funds. The Net Proceeds of insurance required by this Section shall be deposited by the Lessor, the Lessee or the Trustee to the Insurance and Condemnation Account pursuant to Section 4.04 of the Trust Agreement, and shall be applied as provided in Section 4.13 hereof. SECTION 4.07. WORKER'S COMPENSATION INSURANCE. (a) Worker's Compensation Insurance. During the Term of this Lease, to the extent required by State law, Lessee 12 shall, from Appropriated Funds, carry Worker's Compensation Insurance, or shall use its best efforts to cause the Juvenile Board to carry Worker's Compensation Insurance, covering all employees on, in, near, or about the Project and, upon request, shall furnish, or use its best efforts to cause the Juvenile Board to furnish, to the Lessor and the Trustee certificates evidencing such coverage throughout the Term of this Lease. Until the Completion Date and to the extent lawfully permitted, the Construction Contracts shall require the Contractors to maintain or cause to be maintained Worker's Compensation Insurance covering all employees working on, near, or about the Project and to furnish certificates to the Trustee evidencing such coverage. SECTION 4.08. REQUIREMENTS FOR INSURANCE POLICIES. (a) General Requirements. All policies of insurance or coverage required to be obtained pursuant to Sections 4.05, 4.06, and 4.07 may be tamed under a separate policy or a rider or endorsement; shall be written by an insurance company approved by a Lessor Representative, with written notice to the Trustee; shall be taken out and maintained with insurance companies organized under the laws of one of the states of the United States and qualified and licensed to write insurance or coverage in the State of the types and in the amounts required and have A.M. Best ratings of at least A-VIII. A program or plan qualifying under the Interlocal Cooperation Act, Chapter 791, Title 7, Texas Government Code, shall be deemed to meet these requirements. Additionally, all such policies or coverage shall contain a provision that the insurer shall not cancel or revise coverage thereunder without giving written notice to Lessor, Lessee and Trustee at least 30 calendar days before the cancellation or revision becomes effective. All insurance required to be obtained pursuant to Sections 4.05 and 4.06 shall name the Lessor, the Lessee, the Juvenile Board (if the Juvenile Board has obtained such insurance), and the Trustee as the insured parties and/or joint loss payees. Certificates, in a form on which the parties can rely as evidence of binding insurance or coverage, of any such insurance or coverage shall be deposited with the Trustee with a copy to the Lessor. At least 30 days before the expiration of any such policy, the Lessee shall furnish, or shall use its bests efforts to cause the Juvenile Board to furnish, to the Lessor and the Trustee evidence that the policy has been renewed or replaced by another policy conforming to the provisions of this Article IV, unless such insurance is no longer obtainable, in which event the Lessee shall notify, or shall use its best efforts to cause the Juvenile Board to notify, the Lessor and the Trustee of this fact. SECTION 4.09. UTII.ITY CHARGES. During the Term of this Lease, the Lessee shall pay from Appropriated Funds, or shall use its best efforts to cause the Juvenile Board to pay, directly to vendors and suppliers all deposits, charges, fees, and costs incurred for all utility equipment and services connected with the use and occupancy of the Project, including, but not limited to, water, sewer, refuse removal, electricity, gas, and telephone. SECTION 4.10. TAXES. The Lessee shall pay from Appropriated Funds, or shall use its best efforts to cause the Juvenile Board to pay, any sales, property, use, license, or other taxes from which the Lessee (or the Juvenile Board, if applicable) is not exempt, respecting the Project, imposed, assessed, levied, or becoming due and payable on or after the effective date of this Lease, together with any penalties, fines, or interest thereon. Any tax statement received by the Lessor for taxes payable by the Lessee or the Juvenile Board shall be promptly forwarded by the Lessor to the Lessee for payment. Each of the Lessee and the Juvenile Board may, at its own expense, in good faith contest any such taxes or payments in lieu of taxes and permit the items so contested to remain unpaid during the period of contest and any appeal therefrom, unless the Trustee shall first notify the Lessee 13 or the Juvenile Board, as appropriate, that, in the opinion of its counsel, by nonpayment of any such items the lien or security interests of the Trustee will be materially endangered or the Project or any part thereof will be subject to loss or forfeiture, in which case such taxes, assessments, or payments in lieu thereof shall be promptly paid. SECTION 4.11. MODIFICATION OF PROJECT BY LESSEE. During the Term of this Lease, and after delivery of the Final Acceptance Certificate to the Trustee, the Lessee shall have the right to remodel the Project or to make additions, modifications, and improvements thereto from any lawfully available funds and shall have the right to permit the Juvenile Board to remodel the Project or to make additions, modifications, and improvements thereto from any lawfully available funds; provided, however, all such additions, modifications, and improvements shall thereafter comprise part of the Project and shall be subject to the provisions ofthis Lease and the Mortgage and the Security Agreement. Such additions, modifications, and improvements must not damage the Project, cause it to be used for purposes other than those authorized under the provisions of State or federal law, or cause the interest on the Bonds to no longer be excludable for federal income tax purposes. The Project, upon completion of any additions, modifications, and improvements made pursuant to this Section, must be verified in writing by the Inspecting Architect to be of a value not less than the value of the Project immediately prior to the making of such additions, modifications, and improvements. Any property for which a substitution or replacement is made pursuant to this Section, may be disposed of by the Lessee in such manner and on such terms as determined by the Lessee. The Lessee will not permit, and shall use its best efforts to cause the Juvenile Board not to permit, any mechanic's, materialman's or other lien to be established or remain against the Project for labor or materials furnished in connection with any additions, modifications, improvements, repairs, renewals, or replacements made by the Lessee or the Juvenile Board pursuant to this Section or Sections 4.01 or 4.03, hereof. If any such lien is filed and the Lessor is notified of the Lessee's or the Juvenile Board's intention to do so, the Lessee may in good faith contest, and may permit the Juvenile Board to contest, any lien filed or established against the Project and, in such event, may permit the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom unless the Lessor shall notify the Lessee or the Juvenile Board, as appropriate, that, in the opinion of its counsel, by nonpayment of any such lien the interest of the Lessor in the Project will be adversely affected or materially endangered or the Project or any part thereof will be subject to loss or forfeiture; in such event, the Lessee shall, from any lawfully available funds, or shall use its best efforts to cause the Juvenile Board to, promptly pay and cause to be satisfied and discharged all such unpaid liens or provide the Lessor with full security against any such loss of forfeiture, inform satisfactory to the Lessor. The Lessor will cooperate fully with the Lessee in any such contest, upon request of the Lessee, if the Lessee agrees to pay the Lessor's expenses to the extent permitted by law. SECTION 4.12. LIENS. The Lessee shall not, and shall use its best efforts to cause the Juvenile Board to not, directly or indirectly, create, incur, assume, or suffer to exist any mortgage, pledge, lien, charge, encumbrance, or claim on or with respect to the Project or this Lease or the Lessee's interest herein, other than the respective rights of the Lessor and the Lessee as provided in this Lease and Permitted Encumbrances. The Lessee shall promptly take such action, or shall use its best efforts to cause the Juvenile Board to take such action, as may be necessary to discharge or remove any such mortgage, pledge, lien, charge, encumbrance, or claim if the same shall arise at any 14 time, and reimburse the Lessor from any legally available funds for any expense incurred by it in order to discharge or remove any such mortgage, pledge, lien, charge, encumbrance, or claim. SECTioN4.13. DAMAGE, DESTRUCTION, AND CONDEMNATION. (a) Ifthe Project or any portion thereof is destroyed or is damaged by fire or other casualty, and if the amount deposited into the Insurance and Condemnation Account is sufficient for the necessary repair and/or replacement of the Proj ect, the Lessor shall make all necessary repairs and/or replacements by making requisitions through the Trustee from the Insurance and Condemnation Account pursuant to Section 4.04 ofthe Trust Agreement. Ifthe amount deposited into the Insurance and Condemnation Account is insufficient for the necessary repair and/or replacement of the Project, the Lessee or the Juvenile Board may deposit into the Insurance and Condemnation Account, from available funds, the amount needed for the completion of all necessary repair and/or replacement of the Project. If the Project has been damaged to an extent which results in the inability to use 50% or more of the Project as juvenile detention facilities, the Lessee may exercise its option to purchase the Project in accordance with Article VII hereof, and in such event, any Net Proceeds on deposit in the Insurance and Condemnation Account shall be applied as a credit toward the Purchase Option Price. If the amount on deposit in the Insurance and Condemnation Account is insufficient for the complete repair and/or replacement of the Project, and the Lessee or the Juvenile Board does not, within 45 days of the date of such deposit of Net Proceeds with the Trustee, deposit into the Insurance and Condemnation Account the amount needed to complete the repair and/or replacement of the Project or exercise the Lessee's option to purchase the Project, the amount on deposit in the Insurance and Condemnation Account will be transferred into the Redemption Account by the Trustee and used in accordance with Section 4.06 of the Trust Agreement. Regardless of the insufficiency of the Net Proceeds for either the repair and/or replacement of the Proj ect or for the purchase ofthe Project, the Lessee shall remain obligated to continue to pay the Lease Payments from Appropriated Funds. (b) If title to or the temporary use of the Project or any part thereof, or the interest of Lessee, Lessor, or the Trustee in the Project or any part thereof, shall be taken under the exercise of the power of eminent domain by any governmental body or by any person, firm, or corporation acting under governmental authority, the Lessee shall have the rights and obligations specified in this Section with respect to the Net Proceeds of any condemnation award. The Lessor and Lessee shall promptly deposit the Net Proceeds of any condemnation award with the Trustee for credit to the Insurance and Condemnation Account. If the Net Proceeds of any condemnation award are sufficient to replace the Project or any portion thereof taken, the Trustee shall disburse amounts from the Insurance and Condemnation Account for such replacement in accordance with Section 4.04 of the Trust Agreement. If the Net Proceeds of any condemnation award are insufficient to replace the Project or the portion thereof taken, the Lessee or the Juvenile Board may deposit into the Insurance and Condemnation Account, from available funds, the amount needed for the replacement ofthe Project. If the Lessee or the Juvenile Board is unable to use 50% or more of the Project as juvenile detention facilities as a result of such eminent domain proceeding or taking, the Lessee may exercise its option to purchase the Project in accordance with Article VII hereof, and, in such event, the Net Proceeds of any condemnation award which have been deposited in the Insurance and Condemnation Account shall be applied as a credit toward the Purchase Option Price. If the Net Proceeds are insufficient to pay in full the cost of the replacement of all or any portion of the Project, and the Lessee does not within 45 days of such deposit ofNet Proceeds with the Trustee, purchase the Project or deposit into the Insurance and Condemnation Account an amount which together with the Net Proceeds so 15 deposited with the Trustee will be sufficient to replace the Project or the portion thereof taken, the amount on deposit in the Insurance and Condemnation Account will be transferred to the Redemption Account by the Trustee and applied in accordance with Section 4.06 of the Trust Agreement. Regardless of the insufficiency of the Net Proceeds for the replacement of the Project, the Lessee shall remain obligated to continue to pay the Lease Payments from Appropriated Funds. (c) Notwithstanding anything to the contrary contained in subparagraph (b) above, or anywhere else in this Lease, if title to or the temporary use of the Project or any part thereof, or the interest of the Lessor or the Trustee in the Project or any part thereof, shall be taken under the exercise of the power of eminent domain by the Lessee, the Lessor and the Lessee hereby expressly acknowledge and agree, to the extent permitted bylaw, and pursuant to the requirements of Section 21.012 of the Texas Property Code, that the damages payable to the Lessor or the Trustee, as the case may be, pursuant to such exercise of the power of eminent domain by the Lessee shall be an amount which will be sufficient on the date payment is made by the Lessee to the Lessor, the Trustee, or the clerk of the court of a court of competent jurisdiction, together with amounts, if any, on deposit in the Payment Account, the Redemption Account and the Project Account, to pay an amount equal to the Defeasance Amount. The Lessee agrees that the provisions of this subparagraph (c) shall survive the termination of this Lease, notwithstanding anything herein to the contrary. SECTION 4.14. COOPERATION OF LESSEE. The Lessee shall, and shall use its best efforts to cause the Juvenile Board to, cooperate fully with the Lessor in filing any proof of loss with respect to any insurance policy described in Sections 4.05, 4.06, or 4.07 and in the prosecution or defense of any prospective or pending condemnation proceeding with respect to the Project or any part thereof and will, to the extent it may lawfully do so, permit the Lessor to litigate in any proceeding resulting therefrom in the name of and on behalf of the Lessee. In no event will the Lessee voluntarily settle, or consent to the settlement of, any proceeding arising out of any insurance claim or any prospective or pending condemnation proceeding with respect to the Project or any part thereof without the written consent of the Lessor and the Trustee. The Lessee shall, and shall use its best efforts to cause the Juvenile Board to, file and pursue any claims it has under any insurance policies described in Sections 4.05, 4.06, and 4.07 hereof and shall not voluntarily settle, or consent to the settlement of, any proceeding arising out of any such insurance claim, without the Lessor's prior written consent. SECTION4.15. INSTALLATION OF LESSEE'S EQUIPMENT. Subject to the limitations set forth in the Construction Contracts, if any, the Lessee may at any time, in its sole discretion and at its own expense, install, or permit the Juvenile Board to install, items of movable furniture, fixtures, machinery and equipment in or upon the Project, which items shall be identified by Lessee {or the Juvenile Board as appropriate) as property not included in the Project. All such items so identified shall remain the sole property of Lessee (or the Juvenile Board, as appropriate), in which the Lessor shall have no interest, and may be modified or removed by the Lessee (or the Juvenile Board, as appropriate) at any time, provided that the Lessee shall repair and restore, or shall use its best efforts to cause the Juvenile Board to repair and install, any and all damage to the Project resulting from the installation, modification, or removal of any such items. Nothing in this Lease shall prevent the Lessee or the Juvenile Board from purchasing items to be installed pursuant to this Section under a conditional sale or lease with option to purchase contract, or subject to a vendor's lien or security agreement as security for the unpaid portion of the purchase price thereof, provided that no such lien 16 or security interest shall attach to any part of the Project. Notwithstanding this Section or any other provision of this Lease to the contrary, all items of personal property, including movable furniture, fixtures, machinery, and equipment which are acquired with funds provided by the Project Account established by the Trust Agreement, shall be subject to the liens imposed by the Trust Agreement, the Mortgage and the Security Agreement, and shall be considered a part of the Trust Estate. SECTION 4.16. ASSIGNMENT OF WARRANTIES. Subject to Section 4.01(g) hereof, the Lessor hereby assigns to the Lessee, for and during the Term of this Lease, all of its interest in all warranties and guarantees, express or implied, issued on or applicable to the Project, and the Lessor hereby authorizes the Lessee to obtain the customary services furnished in connection with such warranties and guarantees. ARTICLE V TERM OF LEASE SECTION 5.01. TERM OF LEASE. This Lease shall be and remain in effect with respect to the Project for a Lease term (the "Term"} commencing on the date hereof and continuing until February 1 S, 2023 or until earlier terminated upon the occurrence of the first of the following events: (a) upon the exercise by the Lessee of its option to purchase pursuant to Article VII of this Lease, and the payment of all amounts due and owing thereunder; (b) at the end of the Fiscal Year in which an Event of Nonappropriation occurs; (c) upon the occurrence of an Event of Default and the Lessor elects to terminate this Lease pursuant to Section 10.03; or (d} the payment by Lessee of all Lease Payments and all other amounts required to be paid by Lessee hereunder. ARTICLE VI LEASE PAYMENTS SECTION 6.01. PROJECT COSTS; ISSUANCE COSTS; PAYMENT OF COSTS. (a) The Lessor and the Lessee agree that the amount of Project Costs to be paid under the Construction Contracts shall not exceed the Initial Improvement Costs set forth in Section 4.01(d) hereof unless increased as a result of change orders to the Construction Contracts and the Plans and Specifications, and that no other Project Costs (excluding Issuance Costs and costs for furniture, fixtures and equipment related to the Project) are to be paid from the Project Account. The Lessor and the Lessee agree that, in order to ensure that sufficient funds will be available when required to pay all the Project Costs (including Issuance Costs}, on the Closing Date, there shall be deposited into the Project Account the sum of $2, 722, 709.00 from the proceeds of the Bonds. Other proceeds of the Bonds, together with any accrued interest on the Bonds from November 15, 2002 to the Closing Date, shall be deposited in the accounts held under the Trust Agreement or disbursed in the amounts set forth in the Trust Agreement, and the use and disbursement of such funds shall be governed by the Trust Agreement. 17 (b) Prior to disbursements from the Project Account under the Trust Agreement by the Trustee for Issuance Costs, the Lessor shall furnish the Trustee with a Requisition Requesting Disbursement of Issuance Costs in the form prescribed in Exhibit C to the Trust Agreement. (c) Prior to the initial disbursement (the "Initial Disbursement") from the Project Account under the Trust Agreement by the Trustee for payment directly to third parties for the payment of Project Costs other than the Contractors under the Construction Contracts, the Lessor shall furnish the Trustee with a Requisition Requesting Disbursement of Project Costs substantially in the form prescribed in Exhibit D to the Trust Agreement, accompanied by, if applicable, (i) a certificate of the Inspecting Architect substantially in the form attached to Exhibit D to the Trust Agreement, together with AIA Forms G702 and G703, (ii) an Affidavit and Partial Waiver of Lien substantially in the form attached to Exhibit D to the Trust Agreement, and (iii) at the time of the completion of the Project, a Final Acceptance Certificate substantially in the form attached as Exhibit C to this Lease executed by the Lessee. If such requisition and applicable accompanying instruments comply with the provisions of the (i) Construction Contracts, as certified by the Inspecting Architect, (ii) the Lease, and (iii) the Trust Agreement, the requisition shall be paid by the Trustee pursuant to the Trust Agreement. (d) Except as otherwise provided in this subparagraph, investment earnings of funds on deposit in the Project Account shall remain in the Project Account to pay Project Costs; provided, however, at any time prior to the completion of the Project, as provided in paragraph (e) below in this Section 6.01, the Lessor shall direct the Trustee, if requested by the Lessee, to transfer to the Payment Account income and profits from investments in the Project Account, to the extent such funds are not required for the payment of change orders authorized by Section 4.01(e) hereinabove, to be credited against the Lease Payments of the Lessee required hereunder. (e) On completion of the Project, and as a condition of the final disbursement of Project Costs from the Project Account, the Inspecting Architect shall certify to the Trustee that all work was performed to its satisfaction in accordance with the Plans and Specifications and that all necessary certificates, approvals, licenses, and permits required to be obtained from any governmental board, agency, or department have been obtained and that all releases or waivers of mechanic's and materialman's liens have been obtained in connection with the construction, installation and operation of the Project. SECTION 6.02. LEASE PAYMENTS. (a) During the term of this Lease, the Lessee shall pay to the Trustee for the account of the Lessor the Lease Payments from Appropriated Funds on the Lease Payment Dates. The Lessee further agrees to pay from Appropriated Funds other amounts related to the operation and maintenance of the Project, including without limitation, utility charges, ad valorem taxes (which shall be paid prior to their delinquency, except as provided in Section 4.10 hereof) which are imposed on the Project, if any, the operating and maintenance costs of the Project, and the premiums of insurance policies relating to the Project, each in the amounts and at the times as provided herein or in the Trust Agreement. The Lessee agrees to pay, from Appropriated Funds, the fees for ordinary services and expenses of the Trustee based upon the Trustee's Fee Schedule attached as Exhibit E to the Trust Agreement. The Lessee shall be entitled to a credit against such Lease Payments, at the times and in the amounts set forth in, and determined in accordance with, the Trust Agreement, if any. The Lease Payments shall be payable in immediately available funds to the Trustee at its address specified in the Trust Agreement, or to such other person or entity and at such 18 other address as the Trustee may designate by written notice to the Lessee, in lawful money of the United States of America no later than 10:00 a.m. Eastern Time on the date Lease Payments are due. All Lease Payments received by Trustee shall be applied in the manner required by the Trust Agreement. (b) Pursuant to Section 4.01(b) of the Operating Agreement, the Juvenile Board has agreed, and is obligated, to pay the Lease Payments and other payments and expenses in the amounts, at the times and in the manner set forth in Section 6.02(a) hereof. In the event that the Juvenile Board makes such Lease Payments or pays such expenses in the full amounts, at the times and in the manner required in Section 6.02(a), such payments shall be considered full and complete satisfaction of the Lessee's obligation to make such payments under Section 6.02(a) hereof. In the event that the Juvenile Board does not make such Lease Payments or pays such expenses in the full amounts required by Section 6.02(a) or at the times required in Section 6.02(a), the amount of such payments not made by the Juvenile Board shall continue as an obligation of the Lessee until such amount has been paid in full. SECTION 6.03. CURRENT EXPENSES. The obligations of the Lessee under this Lease, including its obligation to pay the Lease Payments, shall constitute a current expense of the Lessee in each Fiscal Year, and shall not constitute an indebtedness of the Lessee within the meaning of the laws of the State. Nothing herein shall constitute a pledge by the Lessee of any money, other than Appropriated Funds for the current Fiscal Year, to the payment of Lease Payments due hereunder. SECTION 6.04.LESSEE'SQBLIGATION. (a) Subject to subsection(b) ofthis Section, the obligation of the Lessee to make Lease Payments shall be absolute and unconditional. Notwithstanding any dispute arising with regard to the Project, the Lessee shall make all Lease Payments when due and shall not withhold Lease Payments pending final resolution of any dispute related to the Project, nor shall Lessee assert any right of set-offor counterclaim against its obligation to make such Lease Payments. The Lessee's obligation to make Lease Payments shall not be abated through accident or unforeseen circumstances. (b) The obligation of the Lessee to make Lease Payments is subject to the sufficiency of Appropriated Funds. The Lessee presently intends to continue this Lease for the entire Term and to pay all Lease Payments or other payments required hereunder. The Lessee reasonably believes, based upon current State law, the Lessee's financial practices, and other factors (including the obligations of the Juvenile Board under the Operating Agreement), that Appropriated Funds in an amount sufficient to make all such Lease Payments or other payments will be available for such purposes. The Lessee's obligation under this Section 6.04 is subject to Section 2.01(f). SECTION 6.05. RESERVE ACCOUNT. (a) On the Closing Date, the Trustee shall deposit in the Reserve Account established in Section 4.05 of the Trust Agreement from Bond proceeds an amount equal to the Reserve Requirement. The Trustee will disburse funds within the Reserve Account in accordance with the terms of the Trust Agreement. (b) In the event that the amount on deposit in the Reserve Account is reduced below an amount less than the Reserve Requirement, for purposes permitted under the Trust Agreement, the Lessee shall replenish, or shall use its best efforts to cause the Juvenile Board to replenish, the Reserve Account to an amount equal to the Reserve Requirement within one year of its receipt from 19 the Trustee of notice of the amount to be paid; provided, however, payments by the Lessee under this Section 6.OS(b) shall only be made from Appropriated Funds. ARTICLE VH OPTION TO PURCHASE SECTION7.01. WHEN AVAILABLE. On each Purchase Option Date, the Lessee shall have the option to purchase the Lessor's interest in the Project for an amount equal to the Purchase Option Price. SECTION 7.02. EXERCISE OF OPTION. The Lessee shall give notice to the Lessor and Trustee of its intention to exercise its option to purchase not less than 60 calendar days prior to the Purchase Option Date on which the option to purchase is to be exercised and shall deposit with the Trustee not less than 4S calendar days prior to such Purchase Option Date an amount equal to any and all unpaid Lease Payments to the extent not otherwise included within the calculation of Purchase Option Price, and any other amounts then due or past due and the applicable Purchase Option Price less the funds held by the Trustee in the Project Account, the Reserve Account, the Payment Account, the Insurance and Condemnation Account and the Redemption Account, on such Purchase Option Date and available to redeem the Bonds pursuant to the terms of the Trust Agreement. The Trustee shall use the money so deposited to redeem the Bonds in accordance with the terms of the Trust Agreement. SECTION 7.03. RELEASE OF LESSOR'S INTEREST. Upon Lessor's and Trustee's receipt of Lessee's notice of intention to exercise its option to purchase, the Lessor and the Trustee shall, concurrently therewith or as soon as practicable thereafter, take all reasonable actions at the request and expense of Lessee, necessary to authorize, execute, and deliver to the Lessee any and all documents necessary to vest in the Lessee all of the Lessor's right, title, and interest in and to the Project, free and clear of all liens, leasehold interests, and encumbrances not created by the Lessee, including, if necessary, a release of any and all items or interests created under the provisions of this Lease, the Trust Agreement, the Mortgage and the Security Agreement. Upon deposit by Lessee in full of all amounts required by Section 7.02 hereinabove and upon satisfaction of all requirements under Section 8.02 of the Trust Agreement, the Lessee shall have no further obligations under this Lease, and the Lessor and Trustee shall concurrently therewith or as soon as practicable thereafter deliver to the Lessee any and all documents necessary to vest in the Lessee all of the Lessor's right, title, and interest in and to the Project, free and clear of all liens, leasehold interests, and encumbrances not created by the Lessee, including, if necessary, a release of any and all liens or interests created under the provisions of this Lease, the Trust Agreement, the Security Agreement and the Mortgage. 20 ARTICLE VIII ASSIGNMENT, SUBORDINATION, SUBLEASING, MORTGAGING, SELLING AND ASSUMING LESSOR'S INTEREST IN PROJECT SECTION 8.01. ASSIGNMENT BY LESSOR. (a) The Lessor may assign its right, title, and interest in this Lease. The Lessee acknowledges that the Lessor will assign its right, title, and interest, but not its obligations, responsibilities, or liabilities, in this Lease to the Trustee for the benefit ofthe Bondholders. The Lessee shall pay all Lease Payments and all other amounts required to be paid by this Lease to or at the direction of Trustee. The Lessor and the Lessee each represents, warrants, covenants, and agrees that it will do, execute, acknowledge, and deliver all and every further act, deed, conveyance, transfer, and assurance necessary or proper for the perfection of any and all of the liens or security interests in the Project provided for in the Trust Agreement, the Mortgage or the Security Agreement including, but not limited to, executing or causing to be executed such financing statements and continuation statements as shall be necessary under applicable law to perfect and maintain such security interests. (b) Any rights of and obligations owed hereunder to the Trustee by the Lessee or the Lessor shall be owed to the Trustee in its capacity as assignee of Lessor's rights hereunder except for the Lessee's obligation to pay the Trustee's fees and expenses in accordance with Exhibit E to the Trust Agreement. SECTION 8.02. ASSIGNMENT BY LESSEE. During the Term of this Lease, and other than as contemplated by the Operating Agreement, the Lessee's interest in the Project may not be assigned or subleased by the Lessee without the prior written consent of the Lessor and the Trustee. SECTION 8.03. RESTRICTION ON MORTGAGE OR SALE OF PROJECT BY LESSEE. Other than as contemplated by the Operating Agreement, the Lessee may not mortgage, sell, assign, transfer, convey, or otherwise encumber, its interest in the Project or any substantial portion thereof during the Term of this Lease without the prior written consent of the Lessor and the Trustee. ARTICLE IX THE BONDS SECTION 9.01. ISSUANCE AND SALE OF THE BONDS. Subject to applicable terms, limitations, and procedures, the Lessor will issue and sell the Bonds to finance the Project at such interest rate and/or discount, and other terms as approved by the Lessee and in accordance with applicable law. SECTION 9.02. COOPERATION BY LESSEE. The Lessee shall take the action(s), enter into the agreement(s), provide the certification(s) contemplated by this Lease, and otherwise cooperate with the Lessor and its agents to effect the lawful issuance and sale of the Bonds. SECTION 9.03. MAINTAINING TAX EXEMPT STATUS OF THE BONDS. The Lessee and Lessor shall at all times do and perform all acts permitted by law and necessary or desirable in order to ensure that the interest on the Bonds shall be excludable from gross income for federal income tax purposes. 21 (a) The Lessee and Lessor covenant to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the Bonds as obligations described in section 103 of the Code, the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Lessee and Lessor covenant as follows: (i) to take any action to assure that no more than 10 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than 10 percent ofthe proceeds or the projects financed therewith are so used, such amounts, whether or not received by the Lessee and Lessor, with respect to such private business use, do not, under the terms of this Lease or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of section 141(b)(2) of the Code; (ii) to take any action to assure that in the event that the "private business use" described in subsection (a) hereof exceeds 5 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used fora "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) ofthe Code, to the governmental use; (iii) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; (iv} to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (v) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of section 149(b) of the Code; (vi) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) ofthe Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with -- (1) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less or, in the case of a refunding bond, for a period of 30 days or less until such proceeds are needed for the purpose for which the bonds are issued, (2) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1(b) of the Treasury Regulations, and 22 (3) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Bonds; (vii) to otherwise restrict the use ofthe proceeds ofthe Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); and (viii) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(fj of the Code. In order to facilitate compliance with the above covenant (viii), a "Rebate Fund" has been established by the Lessor with the Trustee for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the Bondholders. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. The Lessee and Lessor understand that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Bonds. It is the understanding of the Lessee and Lessor that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U. S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Bonds, the Lessee and Lessor will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of Bond Counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the Lessee and Lessor agree to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized Bond Counsel, to preserve the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In furtherance of such intention, the Lessee and Lessor hereby authorize and direct an authorized officer of the Lessee or the Lessor to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Lessee and Lessor, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. (b) The Lessor covenants to account for the expenditure of sale proceeds and investment earnings to be used for the Project on its books and records in accordance with the requirements of the Internal Revenue Code. The Lessee and Lessor recognize that in order for the proceeds to be considered used for the reimbursement of costs, the proceeds must be allocated to expenditures within 18 months of the later of the date that (1) the expenditure is made, or (2) the Project is completed; but in no event later than three years after the date on which the original expenditure is 23 paid. The foregoing notwithstanding, the Lessee and Lessor recognize that in order for proceeds to be expended under the Code, the sale proceeds or investment earnings must be expended no more than 60 days after the earlier of (1) the fifth anniversary of the delivery of the Bonds, or (2) the date the Bonds are retired. The Lessee and Lessor agree to obtain the advice of nationally-recognized Bond Counsel if such expenditure fails to comply with the foregoing to assure that such expenditure will not adversely affect the tax-exempt status of the Bonds. For purposes hereof, the Lessee and Lessor shall not be obligated to comply with this covenant if the Lessee or the Lessor obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (c) The Lessee and Lessor covenant that the property constituting the Project will not be sold or otherwise disposed of in a transaction resulting in the receipt by the Lessee and/or Lessor of cash or other compensation, unless the Lessor obtains an opinion ofnationally-recognized Bond Counsel that such sale or other disposition will not adversely affect the tax-exempt status of the interest due on the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed of in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. For purposes hereof, the Lessee and Lessor shall not be obligated to comply with this covenant if the Lessee or the Lessor obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. SECTION 9.04. DESIGNATION AS QUALIFIED TAX-EXEMPT OBLIGATIONS. The Lessor has designated the Bonds as "qualified tax-exempt obligations" as defined in section 265(b)(3) of the Code. In furtherance of such designation, the Lessor and the Lessee represent, covenant, and warrant the following: (a) during the calendar year in which the Bonds are issued, the Lessor and the Lessee (including any subordinate entities) have not designated nor will designate obligations, which when aggregated with the Bonds, will result in more than $10,000,000 of "qualified tax-exempt obligations" being issued; (b) the Lessor and the Lessee reasonably anticipate that the amount of tax-exempt obligations issued during the calendar year in which the Bonds are issued by the Lessor and the Lessee (including any subordinate entities) will not exceed $10,000,000; and (c) the Lessor and the Lessee will take such action which would assure, or will refrain from such action which would adversely affect, the treatment of the Bonds as "qualified tax-exempt obligations." ARTICLE X REMEDIES SECTION 10.01. REMEDIES ON EVENT OF DEFAULT OF LESSEE. (a) Upon an Event of Default of the Lessee, the Lessor, or the Trustee as the assignee of the Lessor under the Mortgage, shall have the right, to the extent permitted by law, to take one or any combination of the following remedial steps: (i) with or without terminating this Lease but only with the prior written consent of the Insurer, declare all Lease Payments due or to become due during the then current Fiscal Year to be immediately due and payable by Lessee to the extent of Appropriated Funds, whereupon such Lease Payments shall be, to the extent permitted by State law, immediately due and payable; or 24 (ii) with or without terminating this Lease, re-enter and take possession of the Proj ect and exclude the Lessee or the Juvenile Board from using the Project; however, if this Lease has not been terminated, the Lessor shall return possession of the Project to the Lessee when the Event of Default is cured (including payment of all costs and expenses incurred by the Lessor, the Trustee, or the Bondholders resulting therefrom), and, further, the Lessee shall, during such period of repossession by the Lessor without termination of this Lease, to the extent of Appropriated Funds, continue to be responsible for the Lease Payments due or to become due during the Term of this Lease; (iii) terminate this Lease upon giving 30 days written notice to the Lessee at the expiration of which period of time the Lessee shall immediately surrender possession and control of the Project to Trustee and the Trustee shall have the right, thereafter, to sell, lease, sublease, or otherwise dispose of the Project; or (iv) take whatever action at law or in equity may appear necessary or desirable to collect the Lease Payments then due and thereafter to become due during the Term of this Lease or to enforce performance and observance of any other obligation, agreement, or covenant of the Lessee under this Lease; or (v) sell, transfer, or otherwise dispose of the Project or any interest in the Project, including, but not limited to, any interest in the real property, personal property, or mixed property constituting any component or portion of the Project and including any lease, sublease, license, privilege, or right acquired as the result of the exercise of any of the other remedies specified in this Lease. (b) Upon the termination of this Lease by the Lessor, the Lessee shall immediately surrender possession of the Project to the Lessor. SECTION 10.02. NOTICE OF APPROPRIATION. On or before the last day of each Fiscal Year, the Lessee shall deliver to the Lessor and the Trustee written certification of the Lessee's Appropriation (or the Juvenile Board's appropriation) of available funds sufficient to pay Lease Payments and other payments required, if any, to be made by the Lessee under this Lease during the succeeding Fiscal Year, such certification to be in substantially the form attached as Exhibit "J" hereto (the "Certificate of Appropriation"). SECTION 10.03. NOTICE OF NONAPPROPRIATION; TERMINATION ON EVENT OF NONAPPROPRIATION. (a) In the event that the Lessee has received a notice of nonappropriation from the Juvenile Board in accordance with Section 4.03 of the Operating Agreement, the Lessee shall provide the Lessor and the Trustee with written notice within 72 hours of (i) action by the Commissioners Court which would constitute a failure to Appropriate funds in an amount sufficient to pay Lease Payments, and any other payments, if any, required to be made by the Lessee in accordance with this Lease due during the succeeding Fiscal Year or (ii) a legal inability to adopt a budget. (b) In the event that the Trustee does not receive the Certificate of Appropriation from the Lessee within the time period required in Section 10.02 hereof, the Trustee shall promptly give 25 written notice thereof to the Lessee and the Lessor. Thereafter, if the Lessee fails to deliver the Certificate of Appropriation within ten days of its receipt of the foregoing notice from the Trustee, the Trustee shall promptly give written notice to the Bondholders of its failure to timely receive the Certificate of Appropriation. The Trustee shall also give prompt written notification to the Bondholders of its receipt of a notice from the Lessee pursuant to paragraph (a) of this Section. (c) Upon the occurrence of an Event of Nonappropriation, without further demand or notice, this Lease shall terminate at the end of the Fiscal Year for which sufficient Appropriations have been made, and the Lessee shall immediately, upon the expiration of the said Fiscal Year, surrender possession and control of the Project to the Lessor or the Trustee. (d) Upon termination of this Lease pursuant to Section 10.03(c), if the Lessee has not delivered possession and control of the Project to the Lessor and conveyed or released its interest in the Project as therein required, the termination shall nevertheless be effective, but the Lessee shall be responsible, from and to the extent of Appropriated Funds as provided in this Lease and the Trust Agreement, for the payment of damages in an amount equal to the amount of Lease Payments which thereafter would have come due in the absence of an Event of Nonappropriation which are attributable to the number of days during which the Lessee fails to take such actions. (e) Upon receipt of written notice that the Lessee is legally unable to adopt a budget, the Trustee shall have the right, but not the obligation, to (i) terminate the Lease and the Lessee shall immediately surrender possession and control of the Project to the Lessor or the Trustee and the Lessor {or the Trustee at the Lessor direction) shall have the right, thereafter, to sell, lease, sublease, or otherwise dispose of the Project, or (ii) without terminating the Lease, permit the Lease to continue in effect, to the extent permitted by law, and continue to permit Lessee to exercise and enjoy its rights of quiet enjoyment, use, occupancy and control of the Project. SECTION 10.04. REMEDIES ON EVENT OF DEFAULT OF LESSOR. Upon an Event of Default of the Lessor, the Lessee or the Trustee shall have the right, to the extent permitted by law, at its option, upon ten days written notice delivered to the Lessor, by the Lessee or the Trustee, to take one or any combination of the following remedial steps: (a) bring suit for specific performance requiring Lessor to complete construction of the Project in accordance with the terms and provisions hereof; or (b) take whatever action at law or in equity may appear necessary or desirable to enforce performance and observance ofany other obligation, agreement, or covenant ofthe Lessor under this Lease. SECTION 10.05. DELAY; NOTICE. No delay or omission to exercise any right or power accruing upon any Event of Default or Event of Nonappropriation shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle any party to exercise any remedy reserved to it in this Lease it shall not be necessary to give any notice, other than such notice as may be required in this Lease. 26 SECTION 10.06. NO REMEDY EXCLUSIVE. No remedy herein conferred upon or reserved to the Lessor or Trustee is intended to be exclusive, and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Lease or now or hereafter existing at law or in equity. SECTION 10.07. NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event any agreement contained in this Lease should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. ARTICLE XI TITLE During the Term of this Lease, legal title to the Project and any and all repairs, replacements, substitutions, and modifications to the Project shall be in the Lessor. The Lessee shall not permit, and shall use its best efforts to cause the Juvenile Board not to permit, any lien or encumbrance of any kind to exist against the title to the Project, other than the Permitted Encumbrances. Upon termination of this Lease under Sections 5.01(a) hereof, full and unencumbered, with the exception of the Permitted Encumbrances, legal title to the Project shall immediately be conveyed by Lessor to the Lessee, and the Lessor and the Trustee shall execute and deliver to the Lessee such documents as the Lessee may request to evidence the conveyance of such title to the Lessee and the termination of the Lessor's and the Trustee's interest in the Project. ARTICLE XII HAZARDOUS MATERIALS SECTION 12.01. RESTRICTIONS REGARDING HAZARDOUS SUBSTANCES. The Lessee, its agents, employees, contractors, affiliates, licensees, or invitees (hereinafter collectively designated the "Lessee") shall not generate, manufacture, store, dispose of, or otherwise use or hold on or under or about the Project or transport to, from, or across the Project any Hazardous Substances (as defined below in this Section 12.01) without the prior written consent of the Lessor and Trustee, which consent shall not be unreasonably withheld. The Lessee shall at no time permit, suffer, or acquiesce in any other person undertaking the foregoing without the Lessor's and Trustee's written consent, which shall not be unreasonably withheld. For purposes of this Article XII and to the extent permitted by law, any acts or omissions of the Lessee or others acting for or on behalf of the Lessee (whether or not they are negligent, intentional, willful, or unlawful) shall be strictly attributable to the Lessee. The Lessee shall give the Lessor and the Trustee at least 30 days' written notice of the Lessee's intention to generate, manufacture, store, use, dispose of, or transport any Hazardous Substance. The Lessor and Trustee shall have 10 days in which to approve or disapprove such actions in writing. The Lessor acknowledges and agrees that the Lessee will be operating a juvenile detention facility on each respective site of the Project, and that in the ordinary course of operating the facility, the Lessee may have need to use and store above ground reasonable quantities of Hazardous Substances. The Lessor further acknowledges and agrees that nothing herein shall prohibit, and the consent of the Lessor is hereby expressly granted, and no further notice is required to the Lessor or Trustee, for, the use, disposal, storage, or possession on under or about the Project of such Hazardous Substances as are necessary for or incidental and related to the Lessee's 27 performance of its obligations contained in this Lease related to the operation of a juvenile detention facility on each respective site of the Project and to the maintenance, repair and preservation of the Project. The Lessee agrees to provide the Lessor and Trustee upon the Lessor's or Trustee's reasonable request, any and all information concerning Hazardous Substances used or stored in connection with the operation of the Project, including without limitation, inventory records, manifests, and material safety data sheets. The Lessor's or Trustee's acknowledgment of the Lessee's possible storage or use of Hazardous Substances on the Project does not release the Lessee from any of its obligations under this Lease. If the Lessee receives notice from any local, State, or federal governmental agency of any proposed action against the Lessee under or in violation of any Hazardous Substance law pertaining to the Project, the Lessee shall promptly provide the Lessor and Trustee with a copy of such notice. As used herein, "Hazardous Substances" means any oil, flammable materials, explosives, asbestos, radioactive materials or wastes, medical waste, or other hazardous, extremely hazardous, toxic, contaminated or polluting materials, substances, chemicals, or wastes including, without limitation, any "hazardous" or "toxic" substances, wastes, or materials under any federal, state, or local law, ordinance, or regulation (including Hazardous Material Law, as defined in the Mortgage) relating to industrial hygiene, environmental protection, or the use, analysis, generation, manufacture, storage, or transportation of such substances (collectively, "Hazardous Substances Law(s)"). SECTION 12.02. COMPLIANCE WITH HAZARDOUS SUBSTANCE LAWS. The Construction Contracts shall require the Contractors, at its own expense, to comply with all Hazardous Substance Laws. The Lessee shall, at its own expense, (i) comply with all Hazardous Substance Laws, including, without limitation, those controlling the discharge of materials or wastes into or through any sanitary sewer serving the Project; (ii) shall cause any and all Hazardous Substances removed from the Project to be removed and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such materials and wastes, except as discharged into the sanitary sewer in strict accordance and conformity with all applicable Hazardous Substance Laws; and (iii) cause all contamination to be cleaned up, or all Hazardous Substances to be removed from the Project and transported for use, storage, or disposal, in accordance and compliance with all Hazardous Substance Laws. SECTION 12.03. LESSEE'S INDEMNIFICATION. THE LESSEE, TO THE EXTENT PERMITTED BY LAW, HEREBY INDEMNIFIES THE LESSOR, ITS DIRECTORS, OFFICERS, EMPLOYEES, CONTRACTORS, AGENTS, SUCCESSORS PERSONAL AND LEGAL REPRESENTATIVES AND ASSIGNS, INCLUDING THE TRUSTEE (COLLECTIVELY, THE "INDEMNIFIED PARTIES") AND, TO THE EXTENT PERMITTED BY LAW, AGREES TO DEFEND (WITH COUNSEL PREVIOUSLY APPROVED BY THE LESSOR IN WRITING) AND HOLD THE INDEMNIFIED PARTIES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LOSSES, COSTS, DEMANDS, SUITS, COURT OR ADMINISTRATIVE PROCEEDINGS, OR EXPENSES (INCLUDING WITHOUT LIlVIITATION, ATTORNEYS' FEES), INCURRED BY, ARISING OUT OF, OR BASED UPON, OR RESULTING FROM (A) THE FAILURE BY THE LESSEE TO PERFORM OR OBSERVE ANY OF ITS OBLIGATIONS OR AGREEMENTS UNDER THIS ARTICLE XII; (B) THE PRESENCE, RELEASE, THREATENED RELEASE, USE, ANALYSIS, GENERATION, DISCHARGE, STORAGE, DISPOSAL, OR TRANSPORTATION OF ANY HAZARDOUS SUBSTANCE UNDER, IN OR ABOUT, TO OR FROM THE PROJECT OCCURRING OR RESULTING FROM ACTS OR 28 OMI S SIONS OF THE LESSEE (AND NOT DIRECTLY RESULTING FROM ANY NEGLIGENT OR INTENTIONAL ACTS OF THE INDEMNIFIED PARTIES SEEKING INDEMNITY); AND (C) THE LESSEE'S FAILURE TO COMPLY WITH ANY HAZARDOUS SUBSTANCE LAW. THE FOREGOING INDEMNIFICATION SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE. SECTION 12.04. REMEDIAL ACTION. Notwithstanding the foregoing, upon 30 days' written notice to the Lessee, the Lessor may, at its sole option (but without any obligation to do so), and, to the extent permitted bylaw, at the Lessee's sole cost and expense, (a) undertake any remedial action to remove any Hazardous Substance from the project orclean-up any contamination resulting from the Lessee's violation of any of the requirements of this Article and/or (b) participate in any proceeding under any Hazardous Substance Law against the Lessee or relating to the Project arising from the Lessee's violation of any of the requirements of this Article. SECTION 12.05. DISCOVERY OF HAZARDOUS SUBSTANCES. If the Lessee determines or has reasonable cause to believe that any Hazardous Substance is located on or beneath the Project, then upon such discovery or suspicion of the presence of the Hazardous Substance the Lessee shall immediately give written notice of that condition to the Lessor and to the Trustee. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. NOTICES. (a) All notices, certificates, or other communications hereunder shall be in writing and delivered by certified mail, return receipt requested, telex, telegram, or other electronic transmission, or by express or personal delivery, prepaid, and addressed as follows: (i) If to the Lessee or the Lessor, to the address, telephone, or facsimile set forth on the signature page hereof; (ii) If to the Trustee: The Bank of New York Trust Company of Florida, N.A. 10161 Centurion Parkway, 2nd Floor Jacksonville, Florida 32256 Attention: Corporate Trust Division (iii) If to the Juvenile Board: Kerr County Juvenile Board P.O. Box 291216 Kerrville, Texas 78029 Attention: Chairman (b) Any party to this Lease may designate any additional or different address to which communications under this Lease shall be delivered by giving at least five days' advance notice thereof to the affected party(ies). (c) A provision of this Lease that provides for a different method of giving notice or otherwise conflicts with this Section supersedes this Section to the extent of the conflict. 29 (d) A copy of all notices delivered hereunder shall be delivered to the Trustee. Notices sent by mail shall be deemed delivered five days after deposit in the U. S. mail, certified, return receipt requested, postage prepaid. Notices sent by any means other than the U.S. mail shall be deemed delivered upon receipt. SECTION 13.02. BINDING EFFECT. This Lease shall inure to the benefit of and shall be binding upon Lessor and Lessee and their respective successors and assigns, as and to the extent permitted by law and the terms of this Lease. SECTION 13.03. SEVERABILITY. In the event any provision of this Lease shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. SECTION 13.04. AMENDMENTS, CHANGES, AND MODIFICATIONS. The Lessee and the Lessor, by mutual agreement, may amend this Lease if, before the amendment takes effect: (a) the Lessee and the Lessor obtain an opinion of their legal counsel to the effect that such amendment is permitted under the law governing the Lessee and the Lessor; (b) the Lessor obtains an opinion ofBond Counsel to the effect that such amendment will not adversely affect the status of the Bonds as obligations described by section 103 of the Code, the interest on which is excludable from "gross income" for federal income tax purposes; and (c) either of the following requirements is satisfied: (i) the Lessor obtains an opinion of Bond Counsel that such amendment will not adversely effect the rights of the Bondholders; or (ii) the owners of at least 51 % in aggregate principal amount of the Outstanding Bonds affected by such amendment consent thereto, except that the consent of the owner of each Outstanding Bond affected by such amendment is required if such amendment would decrease the minimum percentage of Bondholders required for effective consent to such amendment, or if such amendment affects the amount of the Lease Payments or the Lease Payment Dates. SECTION 13.05. CUSTODY OF LEASE. The County Judge of the Lessee is hereby authorized to have control of this Lease and all necessary records and proceedings pertaining to this Lease pending the investigation, examination, and approval of the Bonds by the Attorney General of the State of Texas and the delivery of this Lease to the Lessor. After approval of the Bonds by the Attorney General, this Lease shall remain in the custody of the County Judge of the Lessee (or his designee) until delivered to the Lessor. SECTION 13.06. EXECUTION IN COUNTERPARTS. This Lease may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 30 SECTION 13.07. APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the laws of the State. SECTION 13.08. COMPLETE AGREEMENT. This Lease supersedes and takes the place of any and all previous agreements entered into between the parties hereto with respect to the subject matter hereof. SECTION 13.09. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, covenants, and warranties contained in this Lease shall survive the termination ofthis Lease. SECTION 13.10. TIME OF ESSENCE. Time is of the essence in this Lease. SECTION 13.11. REFERENCES TO LESSOR. References to Lessor with respect to rights, title, and interest of Lessor shall mean the Trustee. References to Lessor with respect to obligations, responsibilities, and liabilities shall mean the Hill Country Juvenile Facility Corporation and shall not include the Trustee. SECTION 13.12. PERFORMANCE OF LESSEE'S DUTIES AND OBLIGATIONS BY JUVENILE BOARD. The Lessee has entered into the Operating Agreement with the Juvenile Board pursuant to which the Juvenile Board has agreed to comply with certain of the provisions of this Lease that are to be performed by the Lessee during the Term ofthis Lease, including, but not limited to, providing funds to the Trustee on or before the dates and in the amounts sufficient to pay all Lease Payments on each Lease Payment Date under this Lease. The performance by the Juvenile Board of any of such provisions shall be considered full and satisfactory performance of the Lessee's obligations to perform such provisions under this Lease. [The remainder of this page intentionally left blank] 31 IN WITNESS WHEREOF, the Lessor has caused this Lease to be executed in its corporate name by its duly authorized officer, and the Lessee has caused this Lease to be executed in its name by its duly authorized officer, as of the date first written above. ATTEST: 'Z,a~ Secretary/Treasurer LESSOR: HILL COUNTRY JUVENILE FACILITY CORPORATION P esident Address: 700 Main Street Kerrville, Texas 78028 LESSEE: Address: 700 Main Street Kerrville, Texas 78208 [SIGNATURE PAGE TO LEASE] STATE OF TEXAS § COUNTY OF KERB § On this day of December, 2002, before me, a Notary Public in and for the State of Texas, personally appeared Fred Henneke and Emil Karl Prohl, the President and Secretary/Treasurer, respectively, of the Board of Directors of the HILL COUNTRY JUVENILE FACILITY CORPORATION, known to me to be the persons whose names are subscribed to the within Lease Agreement, and acknowledged to me that they executed the same in their respective capacities on behalf of such Corporation. Notary Public in and for the State of Texas [NOTARY SEAL] STATE OF TEXAS § COUNTY OF KERB § On this day of December, 2002, before me, a Notary Public in and for the State of Texas, personally appeared Fred Henneke and Jannett Pieper, the County Judge and County Clerk, respectively, of KERB COUNTY, TEXAS, known to me to be the persons whose names are subscribed to the within Lease Agreement, and acknowledged to me that they executed the same in their respective capacities on behalf of the Ken County, Texas. Notary Public in and for the State of Texas [NOTARY SEAL] EXHIBIT A DEFINITIONS Unless the context shall indicate a contrary meaning or intent, the terms below defined, for all purposes of the Lease and the Trust Agreement, as defined below, shall be construed, are used, and are intended to have the following meanings, to wit: Appropriate or Appropriated -The adoption by the Commissioners Court of the Lessee of a budget or an amendment to the budget for a Fiscal Year which includes the Lease Payments and other payments required, if any, to be made by the Lessee under the Lease during the respective Fiscal Year. Appropriated Funds -Funds Appropriated by the Lessee from any money that may lawfully be used with respect to any payment obligated or permitted under the Lease. Board of Directors -The Board of Directors of the Lessor. Bond or Bonds -Any bond issued pursuant to the Trust Agreement, the form of which is attached thereto as Exhibit A for the definitive bonds and Exhibit B for the Initial Bond therein defined. Bond Counsel - An attorney at law or a firm of attorneys, acceptable to the Corporation, the Lessee, and the Trustee, ofnationally-recognized standing in matters pertaining to the issuance oftax- exempt bonds by states and their political subdivisions, duly admitted to the practice of law before the highest court of any state of the United States of America or the District of Columbia. Bond Payment -The semiannual payments made to each Bondholder in accordance with the Trust Agreement. Bond Payment Date -August 15 and February 15 of each year, commencing February 15, 2003, and continuing for so long as any Bonds are Outstanding. Bond Register -The register of owners of the Bonds, maintained by the Trustee. Bondholder -The person in whose name any Bond is registered in the Bond Register. As used herein, an "owner" or a "holder" of Bonds means a Bondholder. Bondholder Representative -Any individual Bondholder or any director or officer of a Bondholder who is designated as such in writing for the purposes of the Trust Agreement. County -Kerr County, Texas, a duly created political subdivision of the State of Texas, operating pursuant to the Constitution and laws of the State of Texas, together with its successors and permitted assigns. Commissioners Court -The Commissioners Court of the County. Closing Date -The date of initial delivery of and payment for the Bonds. A-1 Code - The United States Internal Revenue Code of 1986, as amended, and the regulations and revenue rulings and procedures promulgated thereunder. Completion Date -The date upon which the Project is complete, as evidenced by the Lessee's execution and delivery to the Lessor and the Trustee of a Final Acceptance Certificate. Corporation Representative -Any director or officer of the Corporation who is designated in writing by resolution of the Board of Directors as a Corporation Representative for purposes of the Trust Agreement. Construction Contract -Any contract between the Lessor and one or more Contractors for the construction and installation of improvements to the Project. Contractor -Any person or entity that contracts with the Lessee or the Lessor to construct or install improvements to the Project. Current Owner -The Ken County Juvenile Detention Facility Corporation, a nonprofit public facility corporation created by the County in 1997 pursuant to Article 717s, Vernon's Texas Civil Statutes, as amended (currently codified at Chapter 303, Texas Local Government Code, as amended). Defeasance Amount - An amount which will be sufficient, together with amounts, if any, on deposit in the Payment Account, Insurance and Condemnation Account, Redemption Account, Project Account, and Reserve Account, to pay the principal of all Bonds then Outstanding, the redemption premium, if any, and accrued interest thereon to the next succeeding date fixed for redemption, together with any other amounts then due or past due under the Trust Agreement, including the fees and expenses of the Trustee, less the funds held by the Trustee in any account of the Trust Fund (excluding the Rebate Account) as of the redemption date of the Bonds. Event of Default - (i) As used in the Trust Agreement, those events of default provided for in Section 5.01 of the Trust Agreement. (ii) As used in the Lease: (a) failure by the Lessee to make a Lease Payment from Appropriated Funds within ten calendar days after the due date thereof. (b) failure by the Lessor or the Lessee to construct the Project in accordance with the terms and conditions hereof; (c) failure by the Lessee or the Lessor to observe and perform any covenant, condition, or agreement, on its part to be observed or performed by it hereunder, other than as referred to in (a) or (b) above, and such failure is not cured within 30 A-2 calendar days after written notice thereof is provided to the party in default by the other party hereto or the Trustee; (d) any material statement, representation, or warranty made by the Lessee in the Lease or in any writing ever delivered by the Lessee pursuant to or in connection with the Lease is false, misleading, or erroneous in any material respect; (e) the filing by the Lessee of a voluntary petition in bankruptcy, or failure by the Lessee promptly to lift any execution, garnishment, or attachment of such consequence as would impair the ability of the Lessee to carry on its operations at the Project, or adjudication of the Lessee as a bankrupt, or assignment by the Lessee for the benefit of creditors, or the entry by the Lessee into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the Lessee in any proceedings instituted under the provisions of the Federal Bankruptcy Code, as amended, or under any similar federal or State laws which may hereafter be enacted; (f) any event which shall occur or any condition which shall exist the effect of which is to cause (i) more than $100,000 of aggregate indebtedness of the Lessee to become due prior to its stated due date (exclusive of any optional or mandatory redemptions permitted by the applicable documents related to such indebtedness), or (ii) a lien to be placed on the Project or the Lessee's interest in the Project, and not released within sixty (60) days; (g) a final judgment against the Lessee for an amount in excess of $100,000 shall be outstanding for any period of sixty (60) days or more from the date of its entry and shall not have been discharged in full or stayed pending appeal, and a lien is placed on the Project or the Lessee's interest in the Project; or (h) the occurrence of an event of default under Section 6.01 of the Operating Agreement. Event of Nonappropriation -The failure of the Lessee to appropriate in its budget adopted prior to the commencement of any Fiscal Year sufficient funds to pay the Lease Payments for such Fiscal Year, or the reduction of any Appropriation to an amount insufficient to permit the Lessee to pay the Lease Payments (in which event, the Event of Nonappropriation shall be retroactive to the beginning of the Fiscal Year in which the reduction is made) from any money that may lawfully be used with respect to any payment obligated or permitted under the Lease. Existing Juvenile Detention Facilities -The juvenile detention facilities located within the County at 3501 Legion Drive, Kerrville, Texas, existing as of the date of the Lease which currently are operated by the Juvenile Board. Financing Documents -Collectively, the Lease, the Trust Agreement, the Mortgage, and the Security Agreement and the Operating Agreement. A-3 Final Acceptance Certificate - A certificate, in the form attached as Exhibit C to the Lease Agreement, executed by the Lessee and approved by the Juvenile Board. Fiscal Year -Each 12 month fiscal period of the Lessee commencing on October 1 and ending on September 30 of the following year, or such other annual accounting period as the Lessee may hereafter adopt. Improvements -All existing improvements and improvements hereafter constructed and installed on the Land. Initial Improvement Costs -The amount set forth in Section 4.01(d) of the Lease as the amount initially determined by the Lessee to make the intended improvements to the Existing Juvenile Detention Facilities which are to be financed with amounts on deposit in the Project Account. Inspecting Architect -The registered professional engineer or licensed architect, employed by the Lessee, the Lessor or the Juvenile Board to inspect the Project for conformity with the Plans and Specifications, to approve periodic draws described in Section 4.02(d} of the Trust Agreement, and to approve any change orders and perform initial reviews, and shall also include any independent professional engineer or licensed architect, employed by the Corporation to perform the functions of the Inspecting Architect as may be necessary in the event of default or termination of the Lease. Insurance and Condemnation Account -That certain account so designated and established in accordance with Section 4.04 of the Trust Agreement. Issuance Costs -The costs of issuance incurred in connection with the sale of the Bonds and the execution and delivery of the Lease, including but not limited to the initial and first year's Trustee's fees and expenses (including fees of Trustee's Counsel), fees and expenses of the Rating Agency, Bond Counsel, Lessee's legal counsel, Corporation's financial advisor and legal counsel, printing and other costs, the Underwriters' discount (including fees and expenses of Underwriters), the examination fees ofthe Attorney General ofTexas, filing fees, fees ofthe Municipal Advisory Council of Texas, the Depository Trust Company, CUSIP Bureau, and other miscellaneous costs and expenses. Juvenile Board -The Kerr County Juvenile Board, a juvenile board created pursuant to Section 152.1391, Texas Human Resources Code, as amended, and operating pursuant to the laws of the State, including Chapters 142 and 151, Texas Human Resources Code. Land -The real property in the County described in Exhibit B of the Lease upon which the Improvements are situated or are to be constructed or installed. Lease -This Lease Agreement Relating to the Kerr County, Texas Juvenile Detention Facilities Project, dated as of November 15, 2002, by and between the Corporation and the Lessee and any duly authorized and executed amendment thereto. Lease Payment - (a) on February 15, 2003, and on each August 15 and February 15 thereafter, while any Bonds are Outstanding under the Trust Agreement, (i) an amount of money A-4 equal to the full amount of the principal installment coming due on the Bonds on such date, either pursuant to a mandatory sinking fund redemption or upon stated maturity of the Bonds; and (b) on each Lease Payment Date while any Bonds are Outstanding under the Trust Agreement, (i) an amount of money which, when added to the amount then on deposit in the Payment Account, will equal the amount of interest to become due on the Bonds on such Lease Payment Date, (ii) the amount of any interest on overdue principal and interest required to be paid pursuant to Section 3.11(a) of the Trust Agreement, and (iii) the amount, if any, required to replenish the Reserve Account in accordance with Section 6.05(b) of the Lease. Attached as Exhibit E-1 to the Lease is an initial schedule of Lease Payments. Lease Payment Date -February 15, 2003, and each August 15 and February 15 thereafter for so long as the Lease is in effect. Lessee -Kerr County, Texas, and its successors and permitted assigns. Lessee Change Order - A change order with respect to the Plans and Specifications or the Construction Contracts described in Section 4.01(e) of the Lease. Lessee Representative -The County Judge of the Lessee, and any other officer or employee of the Lessee who is designated in writing by resolution or order of the Commissioners Court of the Lessee as a Lessee Representative for the purposes of the Lease. Lessor or Corporation -The Hill Country Juvenile Facility Corporation, and its successors and permitted assigns. Lessor Representative -The President or Vice President of the Board of Directors of the Lessor. Mortgage -The Deed of Trust and Assignment ofRents and Leases, dated as ofNovember 1, 2002, from the Corporation to Tamara Ellis, as mortgage trustee for the use and benefit of the Trustee. Net Proceeds -Any insurance proceeds or condemnation award paid with respect to the Project remaining after payment of all expenses incurred in the collection thereof. Operating Agreement -The Operating Agreement Relating to the Kerr County, Texas Juvenile Detention Facilities, dated as ofNovember 15, 2002, by and between the Lessee and the Juvenile Board. Original Lease -The Lease-Purchase Agreement, dated as of March 31, 1994, between the Current Owner (as successor in interest to ReCor, Inc., a Texas corporation which served as the original Lessor thereunder) and the Lessee. Outstanding - As of the date of deternunation, all Bonds theretofore issued and delivered under the Trust Agreement, except: A-5 (1) Bonds theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (2) Bonds for whose payment or redemption money in the necessary amount has been theretofore deposited in an account, other than the "Payment Account" identified in Article IV of the Trust Agreement, with the Trustee holding such money in trust irrevocably for the holders of such Bonds; (3) Bonds in exchange for or in lieu of which other Bonds have been registered and delivered pursuant to the Trust Agreement; and (4) Bonds alleged to have been mutilated, destroyed, lost, or stolen which have been paid as provided in the Trust Agreement. Payment Account -That certain account so designated and established by the Trustee pursuant to Section 4.03 of the Trust Agreement. Permitted Encumbrances -The matters described on Exhibit D to the Lease. Permitted Investments -Any of the following, to the extent permitted by applicable law, including but not limited to Chapter 2256 of the Texas Government Code, and the Corporation's investment policy: (i) bonds, bills, interest-bearing notes, or other direct obligations of the United States, including United States Treasury State and Local Government Series, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest; (ii) obligations issued, or fully guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof; (iii) certificates of deposit issued by a nationally or state chartered bank (which may include the Trustee), provided either that (A) such bank is currently rated not lower than "AA" by the Rating Agency, and the principal amount of any such certificate of deposit in excess of the amount insured by the FDIC or by the FDIC as manager for the Savings Association Insurance Fund, shall be fully secured in accordance with Section 2256.010, Texas Government Code, and collateralized by the pledge and deposit of securities described in (i) and (ii) of this definition in an amount and with maturities that meet all applicable standards established by the Rating Agency for funds held for payment of securities rated "AAA" by it, that the Trustee has a perfected first priority security interest in the collateral, that the Trustee or any agent has possession of the collateral, and that such obligations are free and clear of claims by third parties, or (B) the principal amount of and interest to be earned on any such certificate of deposit does not exceed the amount insured by the FDIC or by the FDIC as manager for the Savings Association Insurance Fund; {iv) fully collateralized direct repurchase agreements having a defined termination date, secured by obligations of the United States of America or its agencies and instrumentalities, in market value of not less than the principal amount of such agreement and accrued interest thereon, pledged and deposited with a third party acting solely for the Trustee, selected or approved by the A-6 Corporation, and placed through a primary government securities dealer, as defined by the Board of Governors of the Federal Reserve System, or a nationally or state chartered bank (which may include the Trustee), provided that such dealer or bank is currently rated not lower than "AA" by the Rating Agency, the Trustee has a perfected first priority security interest in the collateral, and that such obligations are free and clear of claims by third parties; and (v) money market funds whose assets are invested exclusively in those investment vehicles set forth in (i) or (ii) of this definition, provided that such money market fund is currently rated not lower than "AA" by the Rating Agency. Plans and Specifrcations -Architectural and engineering drawings and specifications approved by the Lessor, the Lessee, the Juvenile Board and the Inspecting Architect describing the Project and any similarly approved changes thereto. Principal Office when used with respect to the Trustee -The office of the Trustee situated at 10161 Centurion Parkway, Jacksonville, Florida 32256, at which the Trustee conducts its corporate trustee business. Project -The real property described on Exhibit B of the Lease, together with the Existing Juvenile Detention Facilities and all improvements to be constructed thereon, as more fully described in the Construction Contracts, and also including any and all items of personal property situated respectively thereon by the Corporation whether now owned or hereafter acquired with proceeds of the Bonds for and on behalf of the Lessee (but to be operated by the Juvenile Board pursuant to the Operating Agreement), including but not limited to any and all furniture, fixtures, machinery and equipment and any and all other items of personal property as described in the Security Agreement and all items included within the definition of "Collateral" therein. Project Account -That certain account so designated and established in accordance with Section 4.02 of the Trust Agreement. Project Costs -All costs or payment of design, acquisition, construction, installation, and financing of the Project, including but not limited to acquisition of the Existing Juvenile Detention Facilities, including the Land; architectural, engineering, installation, and management costs; project coordination and supervisory costs; administrative costs; capital expenditures relating to design, construction, and installation; financing payments; sales tax, ifany, on the Project; costs offeasibility, environmental, appraisal, and other reports; inspection costs; permit fees; filing and recording costs; title insurance premiums; survey costs; Issuance Costs; fees and expenses of legal counsel to the Lessor, the Lessee and the Juvenile Board; and all other costs related to the Project or the financing thereof, authorized by the Act; provided; however, that the term Project Costs does not include any costs to operate and maintain the Project beginning one year after construction of the Project is completed. Purchase Option Date - (i) February 15, 2013, and on any date thereafter, and (ii) in the event of damage, destruction, or condemnation of the Project, a date established pursuant to Section 4.13 of the Lease. Purchase Option Price -The Purchase Option Price shall, for each Purchase Option Date prior to February 15, 2023, be an amount which will be sufficient to pay the principal of all Bonds A-7 then Outstanding, the redemption premium, if any, and accrued interest thereon to the date fixed for redemption in accordance with Section 6.01(b) of the Trust Agreement, together with any other amounts then due or past due hereunder, including the fees and expenses of the Trustee, less the funds held by the Trustee in any account of the Trust Fund (other than the Rebate Account) as of the redemption date of the Bonds. A schedule showing the Purchase Option Price, based on the original principal amount of the Bonds, is attached to the Lease as Exhibit E-2. Rating Agency - Standard & Poor's Rating Services, A Division of The McGraw-Hill Companies, Inc. Rebate Account -That certain account so designated by the Trustee pursuant to Section 4.08(a)(ii} of the Trust Agreement, and referred to herein in Section 9.03(a). Rebate Analyst - A certified public accountant, financial analyst, Bond Counsel, or any firm of the foregoing selected by the Corporation, experienced in making the arbitrage and rebate calculations required under the Code. Record Date -The last business day of the month next preceding the month in which a Bond Payment Date occurs. Redemption Account -That certain account so designated and established in accordance with Section 4.06 of the Trust Agreement. Regulations - Any proposed, temporary, or final income tax regulations issued pursuant to sections 103 and 141 through 150 of the Code, which are applicable to the Bonds. Any reference to any specific Regulation shall also mean, as appropriate, any proposed, temporary, or final income tax regulation designed to supplement, amend, or replace the specific Regulation referenced. Reserve Account -That certain account so designated and established in accordance with Section 4.05 of the Trust Agreement. Reserve Account Obligation -means, to the extent permitted by law, as evidenced by an opinion of nationally recognized Bond Counsel, a surety bond or insurance policy (which, under applicable law, may not entitle the provider thereof to any right of reimbursement or repayment other than a right to subrogation upon payments being made to Bondholders) deposited in the Reserve Account to satisfy the Reserve Requirement whereby the issuer is obligated to provide funds up to and including the maximum amount and under the conditions specified in such agreement for instrument. Reserve Requirement -means the amount required to be deposited and maintained in the Reserve Account while the Bonds are Outstanding, which amount is equal to $411, 463.00 (i.e. equal to average annual debt service requirement on the Bonds). Security Agreement -The Security Agreement, dated as of November 15, 2002, by and between the Corporation and the Trustee. State -The State of Texas. A-8 Term -The term of the Lease as determined pursuant to Section 5.01. Trust Agreement -The Trust Agreement Relating to the Kerr County, Texas Juvenile Detention Facilities Project, dated as of November 15, 2002, between the Corporation and the Trustee, and any duly authorized and executed amendment thereto. Trust Estate -All right, title, and interest of the Corporation (i) in and to the Project, the Construction Contracts, and the Plans and Specifications, (ii) in and under the Lease and the other Financing Documents and (iii) in and to all Lease Payments and other payments paid or payable by the Lessee pursuant to the Lease (or the Juvenile Board pursuant to the Operating Agreement) and other income, charges, and funds realized from the lease, sale, transfer, or other disposition of the Project, together with all funds and investments in the Trust Fund and all funds deposited with the Trustee pursuant to the Financing Documents, all subject to and in accordance with the Trust Agreement. Trust Fund -The "Trust Fund" so designated and established pursuant to Section 4.01 of the Trust Agreement, consisting ofthe Project Account, the Payment Account, the Reserve Account, the Insurance and Condemnation Account and the Redemption Account. Trustee -The Bank of New York Trust Company of Florida, N.A., its successors and permitted assigns. Trustee Representative -Any Executive Vice President, any Senior Vice President, any Vice President, or any other trust officer, who by virtue of his position with the Trustee has been authorized by the board of directors of the Trustee to execute trust agreements similar to the Trust Agreement and related documents. Underwriter -First Southwest Company. A-9 EXHIBIT B LEGAL DESCRIPTION Land -The tract of real property in Kerr County, Texas upon which the Improvements are situated or are to be constructed or installed, and which real property is more specifically described and defined in Attachment A attached hereto and incorporated herein by reference for all purposes as if copied herein verbatim: [Legal description of the Land to be attached as Attachment AJ Improvements -The improvements to be made to the Existing Juvenile Detention Facilities are generally described as follows: B-~ EXHIBIT C FORM OF FINAL ACCEPTANCE CERTIFICATE KERR COUNTY, TEXAS (the "Lessee"), as lessee under that certain LEASE AGREEMENT RELATING TO THE KERB COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT dated as ofNovember 15, 2002 (the "Lease") with the HILL COUNTRY JUVENILE FACILITY CORPORATION (the "Lessor"), hereby acknowledges receipt in good condition of all of the property and improvements located on the land described in Exhibit B to the Lease and which are further described in the Lease and in the Plans and Specifications, hereby accepts such property and improvements and hereby certifies that the Lessor has fully and satisfactorily performed all covenants and conditions to be performed by it under the Lease with regard to the acquisition, design, construction, and installation of such property and improvements and that such property and improvements constitute all of the Project as that term is defined in the Lease. There is no litigation, action, suit, or proceeding, pending, or to the best of my knowledge, threatened before any court, administrative agency, arbitrator, or governmental body, that challenges the organization or existence of the Lessee; the authority of its respective officers and officials; the proper authorization, approval, or execution of the Lease and the other documents contemplated thereby; or the ability of the Lessee otherwise to perform its obligations under the Lease and the other documents and the transactions contemplated thereby. This Certificate does not and shall not prejudice any rights against third parties presently extant on the day hereof or which may come into existence hereafter. DATE: 200 LESSEE: KERR COUNTY, TEXAS By: Title: County Judge APPROVED: KERR COUNTY JUVENILE BOARD By: Title: Chairman C-1 EXHIBIT D LIST OF PERMITTED ENCUMBRANCES "Permitted Encumbrances" means, as of any particular time, (i) the Lease, the Trust Agreement, the Mortgage, the Security Agreement and the Bonds; (ii) presently existing utility, access, and other easements and rights of way, restrictions, and exceptions (other than liens) described in the mortgagee's title policy delivered to the Trustee at the time of acquisition of the Land; and (iii) inchoate mechanics' and materialmen's liens which arise by operation of law, but which have not been perfected by the required filing of record, for work done or materials delivered after the date of recording the Lease in connection with the Project (provided that no such liens will be permitted which will be superior to the liens of the Lease). D-1 EXHIBIT E-1 INITIAL LEASE PAYMENT SCHEDULE <: LEASE PAYMENT DATE LEASE PAYMENT AMOUNT LEASE PAYMENT DATE LEASE PAYMENT AMOUNT February 15, 2003 $ 62,608.75 August 15, 2013 $ 84,173.75 August 15, 2003 125,217.50 February 15, 2014 334,173.75 February 15, 2004 290,217.50 August 15, 2014 78,236.25 August 15, 2004 122,742.50 February 15, 2015 338,236.25 February 15, 2005 292,742.50 August 15, 2015 71,736.25 August 15, 2005 119,980.00 February 15, 2016 346,736.25 February 15, 2006 294,980.00 August 15, 2016 64,861.25 August 15, 2006 116,698.75 February 15, 2017 354,861.25 February 15, 2007 296,698.75 August 15, 2017 57,430.00 August 15, 2007 113,098.75 February 15, 2018 362,430.00 February 15, 2008 303,098.75 August 15, 2018 49,500.00 August 15, 2008 109,180.00 February 15, 2019 369,500.00 February 15, 2009 304,180.00 August 15, 2019 40,700.00 August 15, 2009 104,914.38 February 15, 2020 380,700.00 February 15, 2010 309,914.38 August 15, 2020 31,350.00 August 15, 2010 100,173.75 February 15, 2021 391,350.00 February 15, 2011 315,173.75 August 15, 2021 21,450.00 August 15, 2011 95,067.50 February 15, 2022 401,450.00 February 15, 2012 320,067.50 August 15, 2022 11,000.00 August 15, 2012 89,723.75 February 15, 2023 411,000.00 Februa 15, 2013 329,723.75 ***** **** E-1 EXHIBIT E-2 PURCHASE OPTION PRICE PURCHASE OPTION DATES PURCHASE OPTION' ,.,.PRICE"... PURCHASE OPTION'DATES PURCHASE OPTION: PRICE'. 02/15/2013 through 02/14/2014 $3,180,000 02/15/2018 through 02/14/2019 1,800,000 02/15/2014 through 02/14/2015 2,930,000 02/15/2019 through 02/14/2020 1,480,000 02/15/2015 through 02/14/2016 2,670,000 02/15/2020 through 02/14/2021 1,140,000 02/15/2016 through 02/14/2017 2,395,000 02/15/2021 through 02/14/2022 780,000 02/15/2017 throu h 02/14/2018 2,105,000 02/15/2022 throu h 02/14/2023 400,000 *Plus unpaid accrued interest to the Purchase Option Date E-2 EXHIBIT F RESERVED AS A PLACEHOLDER F-1 EXHIBIT G DESCRIPTION OF ANNUAL FINANCIAL DATA The following information is referred to in Section 2.04 of this Lease. Annual Financial Statements and Operating Data The financial information and operating data with respect to the Lessee to be provided annually in accordance with such Section are as specified (and included in the Appendix or under the headings of the Official Statement referred to) below: 1. The annual audited financial statements of the Lessee or the unaudited financial statements of the Lessee in the event audited financial statements are not completed within six months after the end of any fiscal year. 2. All quantitative financial information and operating data with respect to the Lessee of the general type included in the Official Statement under Tables 1 through 8. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the financial statements referred to in paragraph 1 above. G-1 EXHIBIT H TYPES AND AMOUNTS OF REQUIRED INSURANCE Types Comprehensive General (Public) Liability Amount H-1 EXHIBIT I FORM OF CHANGE ORDER NOTICE CHANGE ORDER NOTICE [date) The Bank of New York Trust Company of Florida, N.A. 10161 Centurion Parkway, 2"d Floor Jacksonville, Florida 32256 Attention: Corporate Trust Division RE: LEASE AGREEMENT RELATING TO THE KERR COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT, DATED AS OF NOVEMBER 15, 2002 (THE "LEASE' BY AND BETWEEN THE HILL COUNTRY JUVENILE FACILITY CORPORATION (THE "LESSOR' AND THE KERB COUNTY, TEXAS (THE "LESSEE' Ladies and Gentlemen: Pursuant to section 4.01(e) ofthe Lease, in connection with the attached change order (attach Change Order form) (the "Change Order', the Lessor and the Lessee hereby certify as follows: Terms capitalized but not defined in this letter shall have the meaning given such terms in the Lease. 1. The cost of the Change Order when added to the costs of all prior change orders for the Project (check one): (a) / /will not result in a net increase in the Initial Improvement Costs; or (b) / /will result in a net increase in the Initial Improvement Costs. 2. If the cost of the Change Order when added to the costs of all prior change orders for the Project will result in a net increase in the Initial Improvement Costs (paragraph 1(b) above has been checked), the Lessee (check one): (a) /_/ hereby certifies that the amount currently on deposit in the Project Account, and available for such purpose, is sufficient to fund the Initial Improvement Costs and such net increase; or (b) /_/ has, or the Kerr County Juvenile Board on behalf of the Lessee has, on or before the date of delivery of this notice, deposited with the Trustee, for credit to the Project Account, available funds in the amount of $ ,which is an amount equal to the amount by which the Change Order will cause the cost of completing the Project to exceed the amount of funds on deposit in the Project Fund, and available for such purpose, to pay the Initial Improvement Costs of the Project and such net increase. I-I 3. The Change Order and the Lessee's contribution of available funds, if applicable, have been approved by resolutions of the governing bodies of the Lessor and the Lessee on the following date(s): HILL COUNTRY JUVENILE FACILITY CORPORATION, as Lessor By: Name/Title: KERB COUNTY, TEXAS as Lessee By: Name/Title: APPROVED AND CONSENTED TO: KERB COUNTY JUVENILE BOARD By: Name/Title: ***** CERTIFICATE OF INSPECTING ARCHITECT I, the undersigned being the Inspecting Architect of record for the Project, hereby certify as follows with respect to the attached Change Order: 1. The work to be performed pursuant to the Change Order will not materially reduce the gross square footage to be contained in the Project, materially alter the basic layout of the Project, nor involve the use of materials which will not be at least equal in quality to the materials originally specified in or required by the Plans and Specifications or the Construction Contracts. 2. The cost of the Change Order when added to the costs of all prior change orders for the Project (check one): / /will not result in a net increase in the Initial Improvement Costs; or / /will result in a net increase in the Initial Improvement Costs in the amount of Dated: Inspecting Architect By: Name: I-2 EXHIBIT J FORM OF CERTIFICATE OF APPROPRIATION CERTIFICATE OF APPROPRIATION I, the undersigned, being the County Judge of Kerr County, Texas (the "County" or the "Lessee', do hereby certify as follows: 1. This certificate is given in accordance with Section 10.02 ofthat certain "Lease Agreement Relating to the Kerr County, Texas Juvenile Detention Facilities Project" dated as of November 15, 2002 (the "Lease) by and between the Hill Country Juvenile Facility Corporation (the"Lessor") and the Lessee. All capitalized terms used herein and not otherwise defined have the meanings assigned in the Lease. [Include only one of the following certifications] 2. The Commissioners Court of the County has received an executed Certificate of Appropriation in substantially the form set forth as Exhibit A to the Operating Agreement to the effect that on the day of , 20~ the Board ofDirectors ofthe Juvenile Board adopted a budget for the Fiscal Year commencing October 1, and ending September 30, , which includes the Lease Payments and other payments required, if any, to be made by the Juvenile Board on behalf of the Lessee under the Lease during such Fiscal Year. Such action by the Juvenile Board is in accordance with, and satisfies the requirements of, Section 4.02 of the Operating Agreement; consequently, it is not necessary for the Commissioners Court to include, and the Commissioners Court has not included, in the Lessee's budget any amount to pay Lease Payments for such Fiscal Year. OR 2. On the _ day of ,the Commissioners Court of Kerr County, Texas adopted a budget for the Fiscal Year commencing October 1, and ending September 30, ,which includes the Lease Payments and other payments required, if any, to be made by the Lessee under the Lease during such Fiscal Year. Date: Title: County Judge Kerr County, Texas J-1 EXHIBIT K [To come) K-1 DRAFT DATE: DECEMBER 3, 2002 OPERATING AGREEMENT RELATING TO THE KERR COUNTY, TEXAS JUVENILE DETENTION FACILI'T'IES PROJECT Between KERR COUNTY, TEXAS and the KERR COUNTY JUVENILE BOARD Dated as of November 15, 2002 TABLE OF CONTENTS Page RECITALS ............................................................... 1 ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION SECTION 1.01. Definitions ................................................... 2 SECTION 1.02. General Rules of Construction .................................... 2 SECTION 1.03. Preamble . ................................................... 2 ARTICLE II GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES SECTION 2.01. General Representations, Covenants, and Warranties of the County ....... 2 SECTION 2.02. General Representations, Covenants, and Warranties of the Juvenile Board 3 SECTION 2.03. General Assurances ........................................... 4 ARTICLE III RIGHT TO OCCUPY AND OPERATE PROJECT ......................................................................... 4 ARTICLE IV OBLIGATIONS OF THE JUVENILE BOARD SECTION 4.01. Compliance with County's Covenants and Obligations Under the Lease .... 5 SECTION 4.02. Notice of Appropriation ....................................... 6 SECTION 4.03. Notice of Nonappropriation; Termination on Event of Nonappropriation ... 6 SECTION 4.04. Additional Specific Obligations Related to Construction and Operation of the Project ..................................... 7 SECTION 4.05. Signs; Furniture and Fixtures .................................... 8 SECTION 4.06. Assignment and Leasing ........................................ 8 SECTION 4.07. Compliance with Rule 15c2-12 ................................... 8 SECTION 4.08. Maintaining Tax Exempt Status of the Bonds ....................... 11 ARTICLE V LIlVIITATION OF LIABILITY AND INDEMNITY ........................................................................ 14 ARTICLE VI DEFAULT SECTION 6.01. Event of Default ............................................. 14 SECTION 6.02. Remedies Upon Event of Default ................................ 15 ARTICLE VII MISCELLANEOUS SECTION 7.01. Notices .................................................... 16 SECTION 7.02. Binding Effect .............................................. 16 SECTION 7.03. Severability ................................................. 17 SECTION 7.04. Amendments, Changes and Modifications .......................... 17 SECTION 7.05. Custody of Agreement ........................................ 17 SECTION 7.06. Execution in Counterparts ..................................... 17 SECTION 7.07. Applicable Law ............................................. 17 SECTION 7.08. Complete Agreement ......................................... 17 SECTION 7.09. Survival of Representations and Warranties ........................ 18 SECTION 7.10. Time of Essence ............................................. 18 Exhibit A -Form of Juvenile Board's Certificate of Appropriation Exhibit B -Description of Annual Financial Data from Juvenile Board ii OPERATING AGREEMENT RELATING TO THE KERB COUNTY, TEXAS JUVENILE DETENTION FACILITY THIS OPERATING AGREEMENT RELATING TO THE KERB COUNTY, TEXAS JUVENILE DETENTION FACILITY (this "Agreement"), dated as ofNovember 15, 2002, by and between KERB COUNTY, TEXAS (the "County"),apolitical subdivision of the State of Texas duly created and operating pursuant to the Constitution and laws of the State of Texas, together with its successors and permitted assigns, and the KERB COUNTY .JUVENILE BOARD, a juvenile board duly created and operating pursuant to the laws of the State of Texas, together with its successors and assigns (the "Juvenile Board"). WITNESSETH: WHEREAS, the Commissioners Court of the County created theHILL CoUNTRYJUVENILE FACILITY CORPORATION (the "Corporation") as a nonprofit public facility corporation pursuant to the provisions of Chapter 303, Texas Local Government Code, as amended (the "Act"), to assist the County in financing, refinancing, or providing juvenile detention facilities for the County; and WHEREAS, the Juvenile Board is a juvenile board created pursuant to Section 152.1391, Texas Human Resources Code, as amended, and operates pursuant to the laws of the State of Texas, including Chapters 142 and 151, Texas Human Resources, Code, as amended; and WHEREAS, the Kerr County Juvenile Facility Corporation (the "Current Owner"), a nonprofit public facility corporation created by the County in 1997 pursuant to Article 717s, Vernon's Texas Civil Statutes (now codified as the Act), owns certain public facilities in the County which are leased to the Juvenile Board for the purpose of operating juvenile detention facilities for the County (the "Existing Juvenile Detention Facilities") pursuant to the terms of aLease-Purchase Agreement, dated as of March 31, 1994 (the "Original Lease"), between the Current Owner (as the successor in interest to ReCor, Inc., a Texas corporation which served as the original Lessor thereunder) and the Juvenile Board; and WHEREAS, the Juvenile Board has advised the County that it desires to refinance the Original Lease by exercising an option granted in Section 18.1 of the Original Lease to purchase the Existing Juvenile Detention Facilities (referred to in the Original Lease as the "Leased Premises") on February 1, 2003, at an option price equal to $1,914,790, and the Juvenile Board has requested the Corporation and the County to assist with such refinancing and the financing of additional improvements thereto by issuing a series of lease revenue bonds; and WHEREAS, the Juvenile Board has executed a Consent and Assignment Agreement, dated as of November 15, 2002, pursuant to which the Juvenile Board has assigned to the Corporation its rights under Section 18.1 of the Original Lease to purchase the Current Owner's interest in the Original Lease and the Existing Juvenile Detention Facilities in consideration for the Corporation issuing lease revenue bonds to refinance the Existing Juvenile Detention Facilities and finance certain additional improvements thereto, all of which will be operated by the Juvenile Board in accordance with this Agreement; and WHEREAS, the Corporation will enter into a TRUST AGREEMENT RELATING TO KERR COUNTY, TEXAS JUVENILE DETENTION FACILITIES PROJECT, dated as of November 15, 2002, with The Bank of New York Trust Company of Florida, N.A., as Trustee (the "Trust Agreement") authorizing the issuance of $5,140, 000 in principal amount of Hill Country Juvenile Facility Corporation Lease Revenue Bonds (Kerr County, Texas Juvenile Detention Facilities Project), Series 2002 (the "Bonds") to finance the acquisition of the Existing Juvenile Detention Facilities and the construction and equipping of improvements and extensions to the Existing Juvenile Detention Facilities (collectively, the "Project"); and WHEREAS, the County and the Juvenile Board have been advised and acknowledge that, in order to provide additional security for the Bonds, the Corporation will (i) execute and deliver a Deed of Trust and Assignment of Rents and Leases, dated as of November 15, 2002, to Tamara Ellis as Mortgage Trustee for the use and benefit of the Trustee, pursuant to which the real property portion the Proj ect will be mortgaged, and (ii) enter into a Security Agreement, dated as ofNovember 15, 2002, between the Corporation and the Trustee pursuant to which a purchase money first priority security interest in the personal property portion of the Project will be granted in favor of the Trustee; and WHEREAS, pursuant to Section 142.003, Texas Human Resources Code, the Juvenile Board and the County have authority to contract with each other for "juvenile probation services" (as defined in Section 142.001, Texas Human Resources Code, which include services related to the operation of a preadjudication or post-adjudication juvenile facility), and this Agreement is being entered into pursuant to such statutory authority and other applicable laws of the State of Texas; NOW THEREFORE, in the joint and mutual exercise of their powers, and in consideration of the mutual covenants herein contained, the County and the Juvenile Board hereby agree as follows: [The remainder of this page intentionally left blank] ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION SECTION 1.01. DEFINITIONS. Unless the context otherwise requires, all capitalized terms not otherwise defined herein shall have the meaning as set forth in Exhibit A to the Lease. SECTION 1.02. GENERAL RULES OF CONSTRUCTION. (a) When in this Agreement the context requires (i) a reference to the singular number includes the plural and vice versa, and (ii) a word denoting gender includes the masculine, feminine, and neuter. (b) The table of contents and the titles given to any article or section of this Agreement are for convenience only and are not intended to modify the article or section. SECTION 1.03. PREAMBLE. The statements and findings in the preamble of this Agreement are hereby adopted and made a part of this Agreement. ARTICLE II GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES SECTION 2.01. GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES OF COUNTY. The County represents, covenants, and warrants as follows: (a) the County (i) is a duly formed and validly existing political subdivision of the State of Texas duly created and operating pursuant to the laws of the State; (b) the County has full power and authority to execute the Lease and this Agreement and perform its obligations thereunder and hereunder; (c) the County has duly authorized the execution of the Lease and this Agreement and the performance of its obligations thereunder and hereunder; (d) the execution of the Lease and this Agreement and the performance of its obligations thereunder and hereunder, and compliance with the terms thereofby the County will not conflict with, or constitute a default under, any law (including administrative rule), judgment, decree, order, permit, license, agreement, mortgage, lease, or other instrument to which the County is subject or by which the County or any of its property is bound; (e) the County is not in violation of any law, including but not limited to any court orders, which violation could adversely affect the performance of its obligations under the Lease or this Agreement, and the County shall continue to remain in compliance with all applicable laws, regulations and court orders; (f) the Lease and this Agreement are legal, valid, and binding obligations of the County enforceable in accordance with their respective terms; (g) the County has complied and will comply with all open meeting laws, all public contract procurement laws and all other State and federal laws applicable to the execution, delivery, and performance of the Lease and this Agreement and to the acquisition of the Project by the County; (h) except for approval of the Attorney General of Texas, no further approval, consent, or withholding of objections is required from any governmental authority with respect to the Lease or this Agreement; and SECTION 2.02. GENERAL REPRESENTATIONS, COVENANTS, AND WARRANTIES OF JUVENILE BOARD. The Juvenile Board represents, covenants, and warrants as follows: (a) the Juvenile Board is a duly created and validly existing juvenile board created pursuant to Section 152.1391, Texas Human Resources Code, as amended, and operates pursuant to the laws of the State, including Chapters 142 and 151, Texas Human Resources, Code, as amended. (b) the Juvenile Board has full power and authority to execute this Agreement and perform its obligations hereunder; (c) the Juvenile Board has duly authorized the execution of this Agreement and the performance of its obligations hereunder; (d) the execution of this Agreement and the performance of its obligations hereunder, and compliance with the terms thereof by the Juvenile Board will not conflict with, or constitute a default under, any law (including administrative rule), judgment, decree, order, permit, license, agreement, mortgage, lease, or other instrument to which the Juvenile Board is subject or by which the Juvenile Board or any of its property is bound; (e) the Juvenile Board is not in violation of any law, which violation could adversely affect the performance of its obligations under this Agreement; (f) the Juvenile Board, while operating the Project under the terms of this Agreement, agrees to keep the Project free and clear of all liens, encumbrances, and security interests (other than the Permitted Encumbrances); (g) the Juvenile Board presently expects to have sufficient funds to satisfy its obligations under this Agreement; provided, however, the Juvenile Board has no obligation to appropriate funds during any fiscal year of the Juvenile Board to make Lease Payments; (h) the Juvenile Board has an immediate need for the Project, and the Project is essential to the Juvenile Board's responsibilities to provide juvenile probation services, and the Juvenile Board will operate the Project during the term of this Agreement for its essential purposes and in accordance with the provisions and limitations set forth in Section 4.04 of the Lease. (i) The Project, including the construction of the improvements to the Existing Juvenile Detention Facilities as reflected on the Plans and Specifications, will meet the needs of the Juvenile Board and can be constructed within the boundaries of the Land. 4 (j) The Juvenile Board has complied and will comply with all open meetings, all public contract procurement laws and all other state and federal laws applicable to the Juvenile Board relating to the approval and construction of the improvements to the Existing Juvenile Detention Facilities and the payment of Project Costs; (k) This Agreement is the legal, valid, and binding obligation of the Juvenile Board, enforceable in accordance with its terms. SECTION 2.03. GENERAL ASSURANCES. The County and the Juvenile Board, subject to Section 2.02(g), each agrees that {to the extent permitted by law) it will take or cause to be taken all actions necessary to preserve its existence in full force and effect and to carry out the terms of this Agreement. ARTICLE III RIGHT TO OCCUPY AND OPERATE PROJECT In consideration of the mutual covenants and agreements set forth in this Agreement, and other good and valuable consideration, the County hereby authorizes the Juvenile Board to occupy and operate the Project, and the Juvenile Board hereby agrees to occupy and operate the Project during the Term of the Lease, all in accordance with the terms and provisions of this Agreement. Subject to compliance by the Juvenile Board with the provisions of this Agreement, the County hereby covenants to provide the Juvenile Board during the term of this Agreement (which shall be concurrent with the term of the Lease) with the quiet use and enjoyment of the Project, and the Juvenile Board shall peaceably and quietly have and hold and enjoy the Project, without suit, trouble, or hindrance from the County. ARTICLE IV OBLIGATIONS OF THE JUVENILE BOARD SECTION 4.01. COMPLIANCE WITH COUNTY'S COVENANTS AND OBLIGATIONS UNDER THE LEASE. (a) In the Lease, the County has agreed, or is obligated, to perform numerous duties and obligations, or use its best efforts to cause the Juvenile Board to perform such duties and obligations, all as more specifically described in the Lease which is incorporated herein by reference. The Juvenile Board hereby agrees to perform such duties and obligations without the necessity of the County having to take any further action to use its best efforts to cause the Juvenile Board to perform such duties and obligations. (b) In addition to, and without limiting the generality of the duties and obligations assumed by the Juvenile Board in Section 4.01(a) hereof, the Juvenile Board specifically and further agrees to perform all covenants, obligations and duties imposed on the County as Lessee under the following provisions of the Lease: Section 4.05(b) (relating to providing liability insurance); Section 4.06 (relating to providing property insurance); Section 4.07 (relating to providing Worker's Compensation Insurance); Section 4.08 (relating to requirements for insurance policies); Section 4.09 (relating to payment of utility fees and charges); Section 4.10 (relating to taxes); Section 4.11 (relating to modifying the Project); Section 4.12 (relating to liens on the Project); Section 4.13 (relating to damage to and condemnation of the Project); Section 4.14 (relating to filing and settling insurance claims and condemnation awards); Section 4.15 (relating to installing furniture, fixtures and equipment); Section 6.02 (relating to paying Lease Payments and other expenses of the Project; provided, however, that the payment of such Lease Payments and other payment obligations imposed on the Juvenile Board by this Operating Agreement is subject to the provisions of Section 4.03 of this Agreement); Section 6.03(b) (relating to replenishing the Reserve Account); Article XI (relating to legal title to the Project); Section 12.01 (relating to Hazardous Substances); Section 12.02 (relating to complying with Hazardous Substance laws;) and Section 12.05 {relating to notification of Hazardous Substances). (c) The obligations of the Juvenile Board under this Agreement, including but not limited to its obligation to pay Lease Payments and other expenses related to the Project in accordance with Section 4.01(a) and (b) hereof, shall constitute a current expense of the Juvenile Board in each fiscal year of the Juvenile Board, and shall not constitute an indebtedness of the Juvenile Board within the meaning of the laws of the State. Nothing herein shall constitute a pledge by the Juvenile Board of any money, other than funds for such purpose which have been appropriated and included in the budget for such fiscal year that has been adopted and approved by the Board of Directors of the Juvenile Board. (d) Subject to subsection (c) of this Section, the obligation of the Juvenile Board to make Lease Payments shall be absolute and unconditional. Notwithstanding any dispute arising with regard to the Project, the Juvenile Board shall make all Lease Payments when due and shall not withhold Lease Payments pending final resolution of any dispute related to the Project, nor shall the Juvenile Board assert any right of set-offor counterclaim against its obligation to make such Lease Payments. The Juvenile Board's obligation to make Lease Payments shall not be abated through accident or unforeseen circumstances. (e) The obligation of the Juvenile Board to make Lease Payments and other payments hereunder is subject to the sufficiency of funds lawfully appropriated each fiscal year by its Board of Directors. The Juvenile Board presently intends to continue this Agreement for the entire Term of the Lease and to pay all Lease Payments and other payments required hereunder. The Juvenile Board reasonably believes, based upon current State law, the Juvenile Board's financial practices, and other factors, that appropriated funds in an amount sufficient to make all such Lease Payments or other payments will be available for such purposes; however, the Juvenile Board has no obligation to appropriate funds during any fiscal year to make such payments, regardless of the amount or source of funds available to the Juvenile Board during any fiscal year. 6 SECTION 4.02. NOTICE OF APPROPRIATION. In order for the County to comply with its obligations under Sections 10.02 and 10.03 of the Lease, on or before the 20"' day prior to the last day of each Fiscal Year of the County, the Juvenile Board shall deliver to the County written certification ofthe Juvenile Board's appropriation ofavailable funds sufficient to pay Lease Payments and other payments required, if any, to be made by the Juvenile Board under this Agreement during the succeeding Fiscal Year of the County, such certification to be in substantially the form attached as Exhibit "A" hereto (the "Juvenile Board's Certificate of Appropriation"). SECTION 4.03. NOTICE OF NONAPPROPRIATION; TERMINATION ON EVENT OF NONAPPROPRIATION. (a) The Juvenile Board shall provide the County with written notice within 72 hours of (i) action by its Board of Directors which would constitute a failure to appropriate funds in an amount sufficient to pay Lease Payments, and any other payments, if any, required to be made by the Juvenile Board in accordance with this Agreement due during the succeeding Fiscal Year of the County or (ii) a legal inability to adopt a budget. (b) In the event that the County does not receive the Juvenile Board's Certificate of Appropriation from the Juvenile Board within the time period required in Section 4.02 hereof, the County shall promptly give written notice thereof to the Juvenile Board. Thereafter, if the Juvenile Board fails to deliver the Juvenile Board's Certificate of Appropriation within ten days of its receipt of the foregoing notice from the County, the County shall promptly give written notice to the Trustee of the County's failure to timely receive the Certificate of Appropriation. The County shall also give prompt written notification to the Trustee of its receipt of a notice from the Juvenile Board pursuant to paragraph (a) of this Section. (c) In the event the Juvenile Board fails to appropriate funds by the beginning of a fiscal year ofthe Juvenile Board in an amount sufficient to pay the Lease Payments and other payments required under this Agreement for the ensuing Fiscal Year of the County, or reduces any previous appropriation to an amount insufficient to permit the full payment of the Lease Payments during such fiscal year, then, without further demand or notice, this Agreement shall terminate at the end of the fiscal year of the Juvenile Board for which sufficient appropriations have been made, and the Juvenile Board shall immediately, upon the expiration ofthe said fiscal year, surrender possession and control of the Project to the County (or to the Corporation if so directed by the County). (d) Upon termination of this Agreement pursuant to Section 4.03(c), if the Juvenile Board has not delivered possession and control of the Project to the County (or to the Corporation as the case maybe) and conveyed or released its interest in the Project as therein required, the termination shall nevertheless be effective, but the Juvenile Board shall be responsible, from and to the extent of appropriated funds as provided in this Agreement, for the payment of damages in an amount equal to the amount of Lease Payments and other payments required hereunder which thereafter would have come due in the absence of an event of nonappropriation which are attributable to the number of days during which the Juvenile Board fails to take such actions. (e) Upon receipt of written notice that the Juvenile Board is legally unable to adopt a budget, the County shall have the right, but not the obligation, to (i) terminate this Agreement and the Juvenile Board shall immediately surrender possession and control of the Project to the County (or to the Corporation at the County's direction), and the County shall have the right, thereafter, to sell, lease, sublease, or otherwise dispose of the County's interest in the Project, subject to the provisions of the Lease, or (ii) without terminating this Agreement, permit this Agreement to continue in effect, to the extent permitted by law, and continue to permit the Juvenile Board to exercise and enjoy its rights of quiet enjoyment, use, occupancy and control of the Project so long as the Lease Payments are kept current. SECTION 4.04. ADDITIONAL SPECIFIC OBLIGATIONS RELATED TO CONSTRUCTION AND OPERATION OF THE PROJECT. (a) The Juvenile Board will cooperate with the County and the Corporation to review the Plans and Specifications and the Construction Contracts for the Project, and if such Plans and Specifications and Construction Contracts are acceptable to the Juvenile Board, will take action on a timely basis to approve or consent to such Plans and Specifications as so requested by the County or the Corporation. (b) On the Closing Date, the Juvenile Board will contribute $37,985,63 to prepay interest which is due and payable under the Original Lease on January 1, 2003 and the optional purchase date of February 1, 2003. Such amount will be deposited with the Trustee and immediately transferred by the Trustee to Frankenmuth Mutual Insurance Company ("Frankenmuth"), as the holder of the interest in the Original Lease, in accordance with transfer instructions provided by Frankenmuth. (c) IN CONNECTION WITH THE JUVENILE BOARD'S OBLIGATION TO COMPLY WITH THE PROVISIONS OF SECTIONS 12.01, 12.02 AND 12.05 OF THE LEASE WITH RESPECT TO HAZARDOUS SUB STANCES AT THE PROJECT, THE JUVENILE BOARD, TO THE EXTENT PERMITTED BY LAW, HEREBY INDEMNIFIES THE COUNTY, ITS OFFICERS, EMPLOYEES, CONTRACTORS, AGENTS, SUCCESSORS PERSONAL AND LEGAL REPRESENTATIVES AND ASSIGNS, INCLUDING THE TRUSTEE (COLLECTIVELY, THE "INDEMNIFIED PARTIES") AND, TO THE EXTENT PERMITTED BY LAW, AGREES TO DEFEND (WITH COUNSEL PREVIOUSLY APPROVED BY THE COUNTY IN WRITING) AND HOLD THE INDEMNIFIED PARTIES HARMLES S FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LOSSES, COSTS, DEMANDS, SUITS, COURT OR ADMINISTRATIVE PROCEEDINGS, OR EXPENSES (INCLUDING WITHOUT LIlVIITATION, ATTORNEYS' FEES), INCURRED BY, ARISING OUT OF, OR BASED UPON, OR RESULTING FROM (A) THE FAILURE BY THE JUVENILE BOARD TO PERFORM OR OBSERVE ANY OF ITS OBLIGATIONS OR AGREEMENTS UNDER THIS AGREEMENT RELATING TO HAZARDOUS SUBSTANCES AT THE PROJECT; (B) THE PRESENCE, RELEASE, THREATENED RELEASE, USE, ANALYSIS, GENERATION, DISCHARGE, STORAGE, DISPOSAL, OR TRANSPORTATION OF ANY HAZARDOUS SUBSTANCE UNDER, IN OR ABOUT, TO OR FROM THE PROJECT OCCURRING OR RESULTING FROM ACTS OR OMISSIONS OF THE JUVENILE BOARD (AND NOT DI]ZECTLY RESULTING FROM ANY NEGLIGENT OR INTENTIONAL ACTS OF THE INDEMNIFIED PARTIES SEEKING INDEMNITY); AND (C) THE JUVENILE BOARD'S FAILURE TO COMPLY WITH ANY HAZARDOUS SUBSTANCE LAW. THE FOREGOING INDEMNIFICATION SHALL SURVIVE THE EXPIRATION OR EARLIER TERNIINATION OF THIS AGREEMENT. (d) Notwithstanding the foregoing, upon 30 days' written notice to the Juvenile Board, the County may, at its sole option (but without any obligation to do so), and, to the extent permitted by law, at the Juvenile Board's sole cost and expense, (a) undertake any remedial action to remove any Hazardous Substance from the Project or clean-up any contamination resulting from the Juvenile Board's violation of any of the requirements of the Juvenile Board to comply with the requirements 8 of Sections 12.01, 12.02 and 12.05 of the Lease and/or (b) participate in any proceeding under any Hazardous Substance Law against the Juvenile Board or relating to the Project arising from the Juvenile Board's violation ofany ofthe requirements of Sections 12.01, 12.02 and 12.05 ofthe Lease. SECTION 4.05. SIGNS; FURNITURE AND FIXTURES. The Juvenile Board may erect or attach to the Project such signs as it considers proper and necessary. The Juvenile Board may remove any sign placed on or about the exterior of the Project when this Agreement expires or terminates. Any damage to the building or premises resulting from the removal will be repaired at the Juvenile Board's sole cost and expense. In addition, all furniture and fixtures and equipment placed in or on the Project by the Juvenile Board will remain the Juvenile Board's property, subject to the County's rights as provided by law. The Juvenile Board may, when this Agreement expires, remove the furniture and fixtures it owns if removal is done so as not to damage the premises. SECTION 4.06. ASSIGNMENT AND LEASING. (a) The Juvenile Board will not assign or lease the Project or any part thereof without (i) the County's prior written consent, (ii) receiving a legal opinion (which shall be delivered to the County, the Corporation and the Trustee) that the Juvenile Board has authority under State law, and the Juvenile Board has taken all necessary actions, to assign or lease the Project, and (iii) receiving an opinion of Bond Counsel {which shall be delivered to the County, the Corporation and the Trustee) that such action will not adversely affect the excludability from federal income taxation of interest on the Bonds. (b) If there is an assignment, the assignee will agree in writing to assume all the terms and covenants of this Agreement to be performed by the Juvenile Board. A duplicate original of that agreement will be delivered to the County within ten (10) days following the date of its execution or its effective date, whichever is earlier. The Juvenile Board's liability under this Agreement, and that of any assignee of this Agreement, will survive any such assignment or lease, and such liability will be unaffected by any extension of time that the County may grant to any assignee of the Juvenile Board for paying Lease Payments or other charges due under this Agreement and the Lease, or for performing any other term or covenant of this Agreement. SECTION 4.07. COMPLIANCE WITH RULE 15c2-12. (a) Annual Reports. In accordance with the provisions of SEC Rule 15c2-12 (the "Rule")the Juvenile Board is an "obligated person", as that term is applied in the Rule, for whom financial or operating data has been presented in the "Final Official Statement," as defined in the Rule, prepared in connection with the authorization, sale and delivery of the Bonds. Consequently, the Juvenile Board enters into the undertaking described in this Section in compliance with the Rule. (i) The Juvenile Board shall provide annually to each NRMSIR and any SID, within six months after the end of each fiscal year ending in or after 2002, financial information and operating data with respect to the Juvenile Board of the general type included in the final Official Statement relating to the Bonds, being the information described in Exhibit B hereto. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit B hereto, or such other accounting principles as the Juvenile Board may be required to employ from time to time pursuant to applicable laws or regulations, and (2) audited, if the Juvenile Board commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the Juvenile Board shall provide audited financial statements of the Juvenile Board for 9 the applicable fiscal year to each NRMSIR and any SID, when and if the audit report on such statements become available. (ii) Ifthe Juvenile Board changes its fiscal year, the Juvenile Board will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the Juvenile Board otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. (b) Material Event Notices. The Juvenile Board shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Bonds, if such event is material within the meaning of the federal securities laws: A. Principal and interest payment delinquencies; B. Non-payment related defaults; C. Unscheduled draws on debt service reserves reflecting financial difficulties; D. Unscheduled draws on credit enhancements reflecting financial difficulties; E. Substitution of credit or liquidity providers, or their failure to perform; F. Adverse tax opinions or events affecting the tax-exempt status of the Bonds; G. Modifications to rights of holders of the Bonds; H. Bond calls; I. Defeasances; _ Release, substitution, or sale of property securing repayment of the Bonds; and K. Rating changes. The Juvenile Board shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the Juvenile Board to provide financial information or operating data in accordance with subsection (a) of this Section by the time required by such subsection. (c) Limitations, Disclaimers, and Amendments. (i) The Juvenile Board shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the Juvenile Board remains an "obligated person" or the agent of an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the Juvenile Board in any event will give notice of any deposit made in accordance with this Lease and the Trust Agreement that causes Bonds no longer to be Outstanding. 10 (ii) The provisions of this Section are for the sole benefit of the registered owners and beneficial owners ofthe Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The Juvenile Board undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the Juvenile Board's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The Juvenile Board does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Bonds at any future date. (iii) UNDER NO CIRCUMSTANCES SHALL THE JUVENILE BOARD BE LIABLE TO THE REGISTERED OWNER OR BENEFICIAL OWNER OF ANY BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE JUVENILE BOARD, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, 1N CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. (iv) No default by the Juvenile Board in observing or performing its obligations under this Section shall comprise a breach of or default under this Lease or the Trust Agreement for purposes of any other provision of this Lease or the Trust Agreement. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the Juvenile Board under federal and state securities laws. {v) The provisions of this Section maybe amended by the Juvenile Board from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Juvenile Board, but only if (1) the provisions of this Section, as so amended, would have permitted an Underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (a) the registered owners of a majority in aggregate principal amount (or any greater amount required by any other provision of the Bond Resolution, this Lease or the Trust Agreement that authorizes such an amendment) of the Outstanding Bonds consent to such amendment or (b) a person that is unaffiliated with the Juvenile Board {such as nationally recognized Bond Counsel) determined that such amendment will not materially impair the interest of the registered owners and beneficial owners of the Bonds. If the Juvenile Board so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with subsection (a) of this Section an explanation, in narrative form, of the reason for the amendment and of the impact of any change in the type of financial information or operating data so provided. The Juvenile Board may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an Underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. 11 (d) Definitions. As used in this Section, the following terms have the meanings ascribed to such terms below: "MSRB" means the Municipal Securities Rulemaking Board. "NRMSIR" means each person whom the SEC or its staff has determined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. "SID" means any person designated by the State of Texas or an authorized department, officer, or agency thereof as, and determined by the SEC or its staff to be, a state information depository within the meaning of the Rule from time to time. SECTION 4.08. MAINTAINING TAX EXEMPT STATUS OF THE BONDS. The Juvenile Board shall at all times do and perform all acts permitted by law and necessary or desirable in order to ensure that the interest on the Bonds shall be excludable from gross income for federal income tax purposes. (a) The Juvenile Board covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the Bonds as obligations described in section 103 of the Code, the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Juvenile Board covenants as follows: (i) to take any action to assure that no more than 10 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than 10 percent ofthe proceeds or the projects financed therewith are soused, such amounts, whether or not received by the Juvenile Board, with respect to such private business use, do not, under the terms ofthis Lease or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of section 141(b)(2) of the Code; (ii) to take any action to assure that in the event that the "private business use" described in subsection (a) hereof exceeds 5 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used fora "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) of the Code, to the governmental use; (iii) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds oftheBonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; 12 (iv) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (v) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of section 149(b) of the Code; (vi) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) ofthe Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with -- (1) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less or, in the case of a refunding bond, for a period of 30 days or less until such proceeds are needed for the purpose for which the bonds are issued, (2) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1(b) of the Treasury Regulations, and (3) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Bonds; (vii) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as maybe necessary, so that the Bonds do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refixndings); and (viii) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148{f) of the Code. In order to facilitate compliance with the above covenant (viii), a "Rebate Fund" has been established with the Trustee for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the Bondholders. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. The Juvenile Board understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Bonds. It is the understanding of the Juvenile Board that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U. S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Bonds, the Juvenile Board will not be 13 required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of Bond Counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the Juvenile Board agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized Bond Counsel, to preserve the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In furtherance of such intention, the Juvenile Board hereby authorize and direct an authorized officer ofthe Juvenile Board to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Juvenile Board, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. (b) The Juvenile Board covenants to account for the expenditure of sale proceeds and investment earnings to be used for the Project on its books and records in accordance with the requirements of the Internal Revenue Code. The Juvenile Board recognizes that in order for the proceeds to be considered used for the reimbursement of costs, the proceeds must be allocated to expenditures within 18 months of the later of the date that (1) the expenditure is made, or (2) the Project is completed; but in no event later than three years after the date on which the original expenditure is paid. The foregoing notwithstanding, the Juvenile Board recognizes that in order for proceeds to be expended under the Code, the sale proceeds or investment earnings must be expended no more than 60 days after the earlier of (1) the fifth anniversary of the delivery of the Bonds, or (2) the date the Bonds are retired. The Juvenile Board agrees to obtain the advice of nationally- recognizedBond Counsel if such expenditure fails to comply with the foregoing to assure that such expenditure will not adversely affect the tax-exempt status of the Bonds. For purposes hereof, the Juvenile Board shall not be obligated to comply with this covenant if the Juvenile Board obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (c) The Juvenile Board covenants that the property constituting the Project will not be sold or otherwise disposed of in a transaction resulting in the receipt by the Juvenile Board of cash or other compensation, unless the Juvenile Board obtains an opinion of nationally-recognized Bond Counsel that such sale or other disposition will not adversely affect the tax-exempt status of the interest due on the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed of in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. For purposes hereof, the Juvenile Board shall not be obligated to comply with this covenant if the Juvenile Board obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. ARTICLE V LIMITATION OF LIABILITY AND INDEMNITY Notwithstanding any contrary provision of the Lease, neither the Corporation nor the County will be liable to the Juvenile Board, or any of its agents, employees, servants, or invitees, for any damage to persons or property due to the condition, design, or any defect in the Project or its 14 mechanical systems that may exist or subsequently occur. The Juvenile Board, with respect to itself and its agents, employees, servants, and invitees, assumes all risks and damage to persons and property, either proximate or remote, by reason of the present or future condition of the Project. To the extent it legally may, the Juvenile Board will indemnify and hold the County and the Corporation harmless from all suits, claims, and actions of every kind by reason of any breach, violation, or nonperformance of any term on the part of the Juvenile Board under this Agreement. Additionally, to the extent it legally may, the Juvenile Board will indemnify and hold the County and the Corporation harmless from all claims, actions, damages, liabilities, and expenses asserted against the County or the Corporation on account of injuries to person or damage to property to the extent that any such damage or injury may be caused, either proximately or remotely, by any act or omission, whether negligent or not, of the Juvenile Board or any of its agents, servants, employees, contractors, patrons, or invitees (while such invitees are on the premises of the Project) or of any other person entering upon the Project under or with the Juvenile Board's express or implied invitation, or if any such injury or damage may in any other way arise out of the occupancy or use of the Juvenile Board, its agents, employees, and invitees ofthe Project. This paragraph is for the benefit ofthe County and the Corporation only, and no right of action will accrue under this paragraph to any third party by way of subrogation or otherwise. ARTICLE VI DEFAULT SECTION 6.01. EVENT OF DEFAULT. The County may terminate this Agreement upon the happening of any one, or more, of the following events: (a) failure by the Juvenile Board to make a Lease Payment within ten calendar days after the due date thereof. (b) failure by the Juvenile Board or the County to observe and perform any covenant, condition, or agreement, on its part to be observed or performed by it hereunder, other than as referred to in (a) above, and such failure is not cured within 30 calendar days after written notice thereof is provided to the party in default by the other party hereto or the Trustee; (c) any material statement, representation, or warranty made by the Juvenile Board in this Agreement or in any writing ever delivered by the Juvenile Board pursuant to or in connection with the Lease or this Agreement is false, misleading, or erroneous in any material respect; or (d) the filing by the Juvenile Board of a voluntary petition in bankruptcy, or failure by the Juvenile Board promptly to lift any execution, garnishment, or attachment of such consequence as would impair the ability of the Juvenile Board to carry on its operations at the Project, or adjudication of the Juvenile Board as a bankrupt, or assignment by the Juvenile Board for the benefit of creditors, or the entry by the Juvenile Board into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the Juvenile Board in any proceedings instituted under the provisions of the Federal Bankruptcy Code, as amended, or under any similar federal or State laws which may hereafter be enacted. 15 SECTION 6.02. REMEDIES UPON EVENT OF DEFAULT. (a) Upon any termination of this Agreement pursuant to Section 6.01 above, the County may reenter the premises, with or without process of law using such force as necessary, and remove all persons and chattels. The County will not be liable for damages or otherwise by reason of reentry or termination of the terms of this Agreement. Notwithstanding any termination by the County, the Juvenile Board's liability for the Lease Payments and charges under this Agreement through the date the Juvenile Board has legally appropriated funds to pay such Lease Payments and charges hereunder will not be relinquished, diminished, or extinguished. The Juvenile Board will pay, in addition to the Lease Payments and other sums agreed to be paid under this Agreement, any additional sums as the court may adjudge reasonable as attorney's fees in any suit or action instituted by the County to enforce this Agreement, or the collection of the payments due hereunder if the County prevails in the suit or action. Any property belonging to the Juvenile Board or any persons holding by, through, or under the Juvenile Board, or otherwise found upon the Project, maybe removed and stored in any public warehouse at the cost of and for the account of the Juvenile Board. Should the Juvenile Board abandon, vacate, or surrender the premises or be dispossessed by process of law, any personal property left at or in the premises maybe deemed abandoned, at the County's option. (b) If the Juvenile Board breaches this Agreement, the County may immediately or at any time thereafter, without notice, cure the breach for the account and at the expense of the Juvenile Board. If the County at any time, by reason of the breach, must pay, or elects to pay, any sum of money or do any act that will require paying any sum of money, or must incur any expense, including reasonable attorney's fees, in instituting or prosecuting any action or proceeding to enforce the County's rights under this Agreement, the sums paid by the County, with interest at the annual rate of three percent over the national prime rate as reported in The Wall Street Journal during the period such sum remains unpaid (but in no event may such rate exceed the maximum rate permitted by applicable State law), will be considered an additional payment obligation hereunder and will be due from the Juvenile Board to the County on the first day of the month following payment of the respective sums or expenses. (c) All the County's rights and remedies enumerated in this Agreement are cumulative and will not exclude any other right or remedy allowed by law. These rights and remedies may be exercised and enforced concurrently, whenever necessary. If the County is in default under this Agreement, the County will have reasonable and adequate time to cure the default after written notice to the County by the Juvenile Board. 16 ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.01. NOTICES. (a) All notices, certificates, or other communications hereunder shall be in writing and delivered by certified mail, return receipt requested, telex, telegram, or other electronic transmission, or by express or personal delivery, prepaid, and addressed as follows: (i) If to the County or the Juvenile Board, to the address, telephone, or facsimile set forth on the signature page hereof; (ii} If to the Trustee: The Bank of New York Trust Company of Florida, N. A. 10161 Centurion Parkway, 2°d Floor Jacksonville, Florida 32256 Attention: Corporate Trust Division (iii) If to the Corporation: Hill Country Juvenile Facility Corporation 700 Main Street Kerrville, Texas 78028 Attention: President (b) Any party to this Agreement may designate any additional or different address to which communications under this Lease shall be delivered by giving at least five days' advance notice thereof to the affected party(ies). (c) A provision of this Agreement that provides for a different method of giving notice or otherwise conflicts with this Section supersedes this Section to the extent of the conflict. {d) A copy of all notices delivered hereunder shall be delivered to the Trustee. Notices sent by mail shall be deemed delivered five days after deposit in the U.S. mail, certified, return receipt requested, postage prepaid. Notices sent by any means other than the U.S. mail shall be deemed delivered upon receipt. SECTION 7.42. BINDING EFFECT. This Agreement shall inure to the benefit of and shall be binding upon County and the Juvenile Board and their respective successors and assigns, as and to the extent permitted by law and the terms of this Lease. SECTION 7.03. SEVERABILITY. In the event any provision ofthis Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. SECTION 7.04. AMENDMENTS, CHANGES, AND MODIFICATIONS. The County and the Juvenile Board, by mutual agreement, may amend this Agreement if, before the amendment takes effect: 17 (a) the County and the Juvenile Board obtain an opinion of their respective legal counsel to the effect that such amendment is permitted under the law governing the County and the Juvenile Board; (b) the County and the Juvenile Board obtain an opinion of Bond Counsel to the effect that such amendment will not adversely affect the status of the Bonds as obligations described by section 103 of the Code, the interest on which is excludable from "gross income" for federal income tax purposes; and (c) either of the following requirements is satisfied: (i) the County and the Juvenile Board obtain an opinion of Bond Counsel that such amendment will not adversely effect the rights of the Bondholders; or (ii) the owners of at least 51% in aggregate principal amount of the Outstanding Bonds affected by such amendment consent thereto, except that the consent of the owner of each Outstanding Bond affected by such amendment is required if such amendment would decrease the minimum percentage of Bondholders required for effective consent to such amendment, or if such amendment affects the amount of the Lease Payments or the Lease Payment Dates. SECTION 7.05. CUSTODY OF AGREEMENT. The County Judge of the County is hereby authorized to have control of this Agreement and all necessary records and proceedings pertaining to this Agreement pending the investigation, examination, and approval ofthe Bonds by the Attorney General of the State of Texas and the delivery of this Agreement to the Juvenile Board. After approval of the Bonds by the Attorney General, this Agreement shall remain in the custody of the County Judge of the County (or his designee) until delivered to the Juvenile Board upon issuance of the Bonds. SECTION 7.06. EXECUTION IN COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. SECTION 7.07. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State. SECTION 7.08. COMPLETE AGREEMENT. This Agreement supersedes and takes the place of any and all previous agreements entered into between the parties hereto with respect to the subject matter hereof. SECTION 7.09. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, covenants, and warranties contained in this Agreement shall survive the termination of this Agreement. SECTION 7.10. TIME OF ESSENCE. Time is of the essence in this Agreement. 18 IN WITNESS WHEREOF, the County and the Juvenile Board have caused this Agreement to be executed by their duly authorized officers as of the date first written above. KERB COUNTY, TEXAS ATTEST: ~' ~ my Clerk C my Judge Address: 700 Main Street Kerrville, Texas 78028 Telephone: (830) 792-2211 Telecopy: (830) 792-2218 KERR COUNTY JUVENILE BOARD ATTEST: Secretary h rman Address: 3501 Legion Drive Kerrville, Texas 78028 Mail: P.O. Box 291216 Kerrville,~Texas 78029 Telephone: (830) 257-6110 Telecopy: (830) 257-6147 [SIGNATURE PAGE TO OPERATING AGREEMENT] STATE OF TEXAS § COUNTY OF KERB § On this ~ day of December, 2002, before me, a Notary Public in and for the State of Texas, personally appeared Fred Henneke and Jannett Pieper, County Judge and County Clerk, respectively, of KERB COUNTY, TEXAS, known to me to be the persons whose names are subscribed to the within Operating Agreement, and acknowledged to me that they executed the same in their respective capacities on behalf of Kerr County, Texas. Notary Public in and or the State of Texas STATE OF TEXAS § COUNTY OF KERB § THE~1 SOVII [NOTARY SEAL] ~ ~ MY COMMISSgN p(pIRES Jarx+ary 09, ~! lONO~p by On this ~ day of December, 2002, before me, a Notary Public in and for the State of Texas, personally appeared Fred Henneke and X1.1__, Chairman and Secretary, respectively, of the KERR COUNTY NILE BOARD, known to me to be the persons whose names are subscribed to the within Operating Agreement, and acknowledged to me that they executed the same in their respective capacities on behalf of the Kerr County Juvenile Board. Notary Public in and for the State of Texas [NOTARY SEAL] EXHIBIT A FORM OF JUVENILE BOARD'S CERTIFICATE OF APPROPRIATION JUVENILE BOARD'S CERTIFICATE OF APPROPRIATION I, the undersigned, being the "Juvenile Board', do hereby certify as follows: of the Kerr County Juvenile Board (the 1. This certificate is given in accordance with Section 4.02 of that certain "Operating Agreement Relating to the Ken County, Texas Juvenile Detention Facilities Project" dated as of November 15, 2002 (the "Agreement") by and between Kerr County, Texas (the "County") and the Juvenile Board. All capitalized terms used herein and not otherwise defined have the meanings assigned in the Agreement. 2.On the day of ,the Board of Directors ofthe Juvenile Board adopted a budget for the fiscal year commencing October 1, and ending September 30, ,which includes all Lease Payments and other payments required, if any, to be made by the Juvenile Board under the Agreement during such fiscal year. Date: Title: Kerr County Juvenile Board EXHIBIT B DESCRIPTION OF ANNUAL FINANCIAL DATA FROM JUVENII~E BOARD The following information is referred to in Section 4.07 of this Agreement. Annual Financial Statements and Operating Data The financial information and operating data with respect to the Juvenile Board to be provided annually in accordance with such Section are as specified (and included in the Appendix or under the headings of the Official Statement referred to) below: 1. The annual audited financial statements of the Juvenile Board the unaudited financial statements of the Juvenile Board in the event audited financial statements are not completed within six months after the end of any fiscal year. 2. All quantitative financial information and operating data with respect to the Juvenile Board of the general type included in the Official Statement under Tables 1 through 8. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the financial statements referred to in paragraph 1 above.