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HomeMy WebLinkAboutBORROWER ARBITRAGE CERTIFICATE 38. 38, BORROWER ARBITRAGE CERTIFICATE The undersigned individual,for purposes of this Certificate being duly authorized to act on behalf of Orono Senior Housing, LLC (the "Borrower"), a Minnesota limited liability company, hereby certifies on behalf of the Borrower as follows: I. GENERAL 1.1. Purpose of Certificate. This Arbitrage Certificate is being provided pursuant to Section 148 of the Internal Revenue Code of 1986, as amended (the "Code") and Treas. Reg. § 1.148-2(b) for the purpose of certifying as of the date hereof the expectations of the City of Orono, Minnesota(the "City") concerning, among other things, the amount and use of gross proceeds of the City of Orono, Minnesota Senior Housing Revenue Bonds (Orono Woods Apartment Project), Series 2001A (the "Series 2001A Bonds"), the City of Orono, Minnesota Senior Housing Revenue Bonds(Orono Woods Apartment Project), Taxable Series 2001 (the "Series 2001 Bonds"), and the City of Orono, Minnesota Senior Housing Revenue Bonds(Orono Woods Apartment Project),Subordinate Series 2001 (the"Series 2001 C Bonds") to be issued by the City on the date hereof in the aggregate principal amount of$ according to the terms of an Indenture of Trust,dated as of November 1,2001 (the"Indenture"), between the City and U.S. Bank Trust National Association, as trustee thereunder (the "Trustee"). The City will loan proceeds of the Bonds to the Borrower pursuant to a Loan Agreement, dated as of November 1, 2001, between the City and the Borrower (the "Loan Agreement"). For purposes of this Certificate, the Series 2001A Bonds and the Series 2001C Bonds are referred to as the "Bonds". 1.2. Reasonable Expectations; Reliance. This certificate is made in reliance on, among other things, certain representations and covenants of the Borrower set forth in the Loan Agreement, certain representations and covenants of Wedum Foundation ("Wedum"), a Minnesota nonprofit corporation and sole member of the Borrower, of even date herewith, the obligations of the Trustee under the Indenture, certain certifications of Miller Johnson Steichen Kinnard, Inc. (the "Original Purchaser") of even date herewith, and any other factual matters evidenced by other certificates or agreements executed or delivered in connection with the issuance of the Bonds,including certain written certifications or representations of the City given in connection therewith. The Borrower in good faith believes that the foregoing reliance is reasonable and prudent under the circumstances and is not aware of any facts or circumstances that would cause it to question the accuracy or reasonableness of such reliance. 1.3. Definitions. All capitalized terms used but not defined herein are used with the meaning assigned to them in the Indenture or the Loan Agreement. Except as otherwise defined herein, uncapitalized terms herein that are used in Section 103 or Sections 141 through 150 of the Code, or in Treasury Regulations (including temporary regulations) applicable to Section 148 of the Code, are used herein with the same meanings as applicable in such Sections of the Code or such Treasury Regulations. 1.4. Bond Year. The bond year for all Bonds means the 12 month period beginning on November 1 in any calendar year and ending on October 31 of the next succeeding calendar year; provided that the first bond year shall commence on the issue date described below. II. THE BONDS AND THE ISSUE 2.1 The Issue. The Bonds and the Series 2001B Bonds constitute the entirety of the issue of which they are a part. No other tax-exempt bonds that are reasonably expected to be paid from substantially the same source of funds as the Bonds, determined without regard to guarantees from unrelated parties, are being sold at substantially the same time as the sale of the Bonds (within 15 days of each other) pursuant to the same plan of financing. 2.2. Governmental Purposes of the Bonds. The governmental purpose for which the Bonds are being issued is to finance a portion of the costs of developing, acquiring, constructing and equipping a housing facility for the elderly composed of 62 independent senior rental units (the "Project"). Proceeds of the Bonds also will be used (i) to fund a Debt Service Reserve Fund, (ii)to pay the interest accruing on the Bonds during construction and lease-up of the Project, and (iii) to pay a portion of the costs of issuing the Bonds. 2.3. Private Activity Bond Status. The Bonds are being issued as "qualified 501(c)(3)bonds" in compliance with the requirements of Section 145 of the Code and thus will be qualified private activity bonds under Section 141(e)(G) the Code. 2.4. No Multipurpose Issue. No proceeds of the Bonds will be used to pay the principal, interest or redemption price of any other obligation of a state or political subdivision of a state within the meaning of Section 103(c)(1) of the Code or for any other purpose except as described in Section 2.2 hereof. Therefore,none of the Bonds will be part of a multipurpose issue. III. Yield On Bonds and Purpose Investment; Related Matters 3.1. Sale Date, Issue Date and Issue Price. (a) Sale Date. The sale date of all Bonds was , 2001, the first date on which there was a binding contract in writing for the sale of the Bonds. (b) Offering. All Bonds were sold by the Original Purchaser pursuant to a bona fide public offering within the meaning of the Code. -2- • (c) Issue Date. The date hereof is the Issue Date for all Bonds. On this date the City will receive or has received the purchase price for all Bonds in exchange for delivery thereof. Interest begins to accrue on the all Bonds on or before the date hereof (d) Issue Price. Based on the foregoing,the Bonds are being sold on the issue date for an issue price equal to the sum of$ (par amount of the Bonds, less the underwriting discount of$ , less original issue discount of$ ), plus accrued interest in the amount of$ ,for a total issue price of$ The foregoing issue price does not include the price paid by bond houses,brokers,or similar persons acting in the capacity of underwriters or wholesalers. The issue price for the Bonds does not exceed the fair market value thereof as of the sale date or the date hereof 3.2. Plain Par Bonds. All Bonds are plain par bonds that (a) are issued with original issue discount or premium of not more than two percent of the stated redemption price at maturity; (b) are issued for a price that does not include accrued interest other than pre-issuance accrued interest; (c)are variable rate debt instruments under Section 1275 of the Code,with interest unconditionally payable at least annually; and(d)have a lowest stated redemption price that is not less than the outstanding stated principal amount subject to such redemption. 3.3. Yield on Bonds. (a) The Bonds do not have a yield that is fixed and determinable on the issue date, and therefore the Bonds constitute a variable yield issue, using the assumptions and rules provided in Treas. Reg. § 1.148-4(c). (b) The yield on the Bonds is computed separately for each computation period. Such yield is the discount rate that, when used in computing present value on the first day of the computation period of all payments of principal, interest and fees for qualified guarantees, if any, that are attributable to the computation period, produces an amount equal to the present value (using the same discount rate) of the aggregate issue price (or deemed issue price) of the Bonds as of the first day of the computation period. The deemed issue price as of the first day of the computation period is determined under Treas. Reg. § 1.148-4(c)(2)(iv). Because the Bonds constitute a variable yield issue,the Borrower may treat the last day of any bond year ending on or before the latest date on which the first rebate amount is required to be paid under Treas. Reg. 1.148-3(f) (the "first required payment date") as a computation date but may not change that treatment after the first payment date. After the first required payment date, the Borrower must consistently treat either the end of each bond year or the end of each fifth bond year as computation dates and may not change these computation dates after the first required payment date. (c) No transfer, waiver, modification or similar transaction with respect to any right that is part of the terms of a Bond or is otherwise associated with a Bond is -3- expected to occur in a transaction that is separate and apart from the original sale of the Bonds. No qualified hedge is expected with respect to the Bonds. (d) The Bonds are not hedge bonds within the meaning of Treas. Reg. § 1.148-4(h)(2)(iii). (e) All payments of interest and scheduled principal on the Bonds are unconditionally due. (0 Guarantees: There are no qualified guarantees for which fees are payable with respect to the Bonds. (g) Matters Related to Optional Redemptions. (i)No Bonds are subject to optional redemption within five years after the issue date; (ii)no issue price of any such Bond exceeds its stated redemption price at maturity by more than one-fourth of one percent multiplied by the product of its stated redemption price at maturity and the number of complete years to the first optional date for the Bond; and (iii) there is no increase in the interest rate of any such Bond after the issue date. (h) Matters Related to Mandatory Redemptions. The Bonds are not subject to mandatory early redemption or a reasonably expected contingent redemption except for mandatory sinking fund redemptions which unconditionally require payments equal to the principal amount of the Bonds so redeemed,plus accrued unpaid interest thereon (which payments are being taken into account in the calculation of yield on the Bonds). There is no excess proceeds call for any Bonds. The stated redemption price at maturity of each Bond subject to sinking fund redemption does not exceed the issue price of such Bond, if at all, by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity and the number of years to the weighted average maturity date of all substantially identical Bonds (calculated taking into account the mandatory redemptions). Consequently, upon any foregoing redemption of a Bond, for purposes of calculating yield, the Bond will be treated as being redeemed at its outstanding stated principal amount, plus accrued unpaid interest. 3.4. Yield on the Purpose Investment. (a) Payments for Purpose Investments. Investment. All sale proceeds of the Bonds will be paid to acquire the Loan Agreement,which will be the purpose investment for the Bonds. (b) Program Investment. The purpose investment is part of a governmental program in which: (i) The program involves the origination or acquisition of purpose investments; -4- (ii) At least 95 percent (90 percent for qualified student loans under section 144(b)(1)(A))of the cost of the purpose investments acquired under the program represents one or more loans to: (i) a substantial number of persons representing the general public,(ii)States or political subdivisions,(iii)501(c)(3) organizations,(iv)persons who provide housing and related facilities,or(iv)any combination of the foregoing; (iii) At least 95 percent of the receipts from the purpose investments are used to pay principal,interest,or redemption prices on issues that financed the program,to pay or reimburse administrative costs of those issues or of the program,to pay or reimburse anticipated future losses directly related to the program,to finance additional purpose investments for the same general purposes of the program, or to redeem and retire governmental obligations at the next earliest possible date of redemption; (iv) The program documents prohibit any obligor on a purpose investment financed by the program or any related party to that obligor from purchasing bonds of an issue that finance the program in an amount related to the amount of the purpose investment acquired from that obligor; and (v) The City has not waived the right to treat the investment as a program investment. (c) Purpose Investment Receipts; Offsets and Exclusions. (i) Scheduled Monthly Receipts from the Purpose Investments. Regularly scheduled Loan Repayments will be paid in amounts (with credit for the application of investment income from the Bond Trust Estate) that will equal the scheduled semi-annual interest payments due on the Bonds and the scheduled annual principal payments due upon maturity or by mandatory scheduled redemption of such Bonds.Until such Loan Repayments or investment income is applied to the payment of Bond interest or principal,the Borrower will receive the benefit of such payments and income, and accordingly, under Treas. Reg. §1.148-5(b), all Loan Repayments are deemed made on the dates and in the amounts that scheduled principal of and interest on the applicable Bonds are paid. (ii) Additional Receipts from the Purpose Investment. No separate issuer fee is being charged by the City. The Borrower will pay to the City as reimbursement for certain costs, including legal fees of the City, an amount not exceeding $15,000 (the "Reimbursed Payments"). The Reimbursed Payments, in addition to the Borrower's payment of other costs of issuance,will constitute receipts by the City from the Loan Agreement,and the Reimbursed Payments and other costs of issuance (the "Qualifying Costs") will be allocable to "costs of issuing, carrying, or repaying the Bonds" and will be qualified administrative costs under Treas. Reg. -5- §1.148-5(e)(3)(ii)(B). Under Treas.Reg. §1.148-5(e)(3)(i),qualified administrative costs, including underwriter's discount, are taken into account in determining the City's yield on the Loan Agreement (by increasing the payments thereon or decreasing the receipts for such payments).However,regardless of the timing of the actual payments by or on behalf of the Borrower for the Qualifying Costs,payment of the Qualifying Costs will be simply treated as reimbursements to payments of City costs without affecting the yield on the Loan Agreement,because the present value of those payments by the Borrower will not exceed the present value of the reasonable administrative costs payable by or on behalf of the City, using the yield on the applicable issue of Bonds as the discount rate. (d) Materially Higher Yield Compliance. The yield on a purpose investment equals the discount rate that,when used in computing the present value(as of the date the investment is first allocated to the issue) of all unconditionally payable receipts from the investment, produces an amount equal to the present value of all unconditionally payable payments for the investment. For the foregoing purposes, "payments"means amounts to be actually or constructively paid to acquire the investment (the sale proceeds of the applicable issue of Bonds), and"receipts" means amounts to be actually or constructively received from the investment, such as earnings and return of principal. Based on the foregoing, the yield on the Loan Agreement will not be materially higher than the yield on the Bonds. Under Treas.Reg. § 1.148-2(d)the definitions of"materially higher" with respect to the Loan Agreement is a yield that exceeds the yield on the Bonds by more than one and one-half percent(1 1/2%). IV. GROSS PROCEEDS AND FUNDS 4.1. Gross Proceeds, Generally. Gross proceeds of the Bonds will consist of sale proceeds, transferred proceeds, investment proceeds (collectively, "proceeds") and replacement proceeds. There will be no gross proceeds of the Bonds except for amounts in the funds or accounts described below. 4.2. Funds, Generally. The Indenture establishes the following funds or accounts with the Trustee: (a) the "Revenue Fund"; (b) the "Bond Fund," and therein a "Senior Debt Service Account" and a "Subordinate Debt Service Account"; (c) the "Optional Redemption Fund"; (d) the "Debt Service Reserve Fund"; -6- (e) the "Project Fund", and therein an account to be designated the "Costs of Issuance Account" and an account to be designated the "Construction Account"; (f) the "Taxes and Insurance Fund"; (g) the "Repair and Replacement Fund"; (h) the "Surplus Fund"; (i) the "Operating Reserve Fund"; (j) the "Insurance and Award Fund"; and (k) the "Rebate Fund". 4.3. Sale Proceeds; Minor Portion; Net Sale Proceeds. The sale proceeds of the Bonds, consisting of all amounts actually or constructively received from the sale of the Bonds, including amounts used to pay underwriter's compensation ($ ) and accrued interest ($ ) other than pre-issuance accrued interest, but less any original issue discount ($ ), are $ . The "minor portion" of the Bonds (being the lesser of 5% of the sale proceeds or $100,000) is $100,000. $ of sale proceeds will be invested in a reasonably required reserve or replacement fund as hereinafter described. The "net sale proceeds" of the Bonds equals the sale proceeds less the portion of the sale proceeds invested in a reasonably required reserve or replacement fund and as part of a minor portion, or $ 4.4. Application of Sale Proceeds and Moneys on the Issue Date. On the date hereof, the Trustee will deposit all sale proceeds of the Bonds (net of an Original Purchaser's discount of$ ) as follows: To the Bond Fund: $ To the Debt Service Reserve Fund: $ To the Costs of Issuance Account: $ To the Construction Account: $ 4.5. Transferred Proceeds. The Bonds are not refunding bonds, and consequently there will be no transferred proceeds. 4.6. Investment Proceeds. The amounts actually or constructively received from investing sale proceeds of the Bonds and which will constitute "investment proceeds" of the Bonds under Treas. Reg. § 1.148-1 cannot be determined at this time. Based upon the scheduled expenditures and assumed interest rates, it is presently estimated by the Borrower that the Construction Account and the Costs of Issuance Account of the Bond Fund and the Debt Service Reserve Fund investment proceeds during the construction period will be approximately -7- $ . Investment Proceeds from the Construction Account will remain in the Construction Fund and will be applied to costs of the Project. Investment proceeds from the Costs of Issuance Account and the Debt Service Reserve Fund will be transferred to the Reserve Fund and applied as provided in the Indenture. 4.7. Replacement Proceeds. (a) General. Under Treas. Reg. § 1.148-1(c), amounts are"replacement proceeds" of the Bonds if the amounts have a sufficiently direct nexus to the Bonds or the governmental purpose of the issue(including payment of principal or interest on the Bonds) to conclude that amounts would have been used for the governmental purpose of the issue if the proceeds of the Bonds were not used or to be used for that governmental purpose. Except as otherwise may be described herein, no amounts will arise that would have been used for the governmental purposes of the Bonds(including in such purpose the expected use of proceeds to pay debt service on such Bonds) if proceeds of the Bonds were not used for such purpose, or which will otherwise constitute sinking funds, pledged funds or other replacement proceeds held or derived from a substantial beneficiary of the Bonds. (b) Sinking Funds. The following funds or accounts constitute the only funds or accounts in which amounts other than sale, investment or transferred proceeds are reasonably expected to be used directly or indirectly to pay principal of or interest on the Bonds (i.e. the funds and accounts for which it is not unreasonable to expect that amounts therein will be so used): (i) the Revenue Fund; (ii) the Bond Fund and the Accounts therein; (iii) the Optional Redemption Fund; and (iv) the Debt Service Reserve Fund. (c) Pledged Funds. Except as described above as sale proceeds, investment proceeds, or sinking funds, there are no amounts that are directly or indirectly pledged to pay principal of or interest on the Bonds for which there is a reasonable assurance that such amount will be available to pay principal or interest on the Bonds, even if the Borrower encounters financial difficulties. However,all amounts in the funds,accounts and subaccounts described in Section 4.2 herein secure the Bonds. (d) Negative Pledges. With respect to the Bonds,because no amount is or is expected to be held under an agreement to maintain the amount at a particular level for the direct or indirect benefit of the bondholders or any guarantor of such Bonds (except for amounts held in funds created under the Indenture), there are no "negative pledges" within the meaning of Treas. Reg. § 1.148-1(c)(3)(ii). (e) Other Replacement Proceeds;Capital Project. The term of the Bonds is no longer than is reasonably necessary for the governmental purposes of such Bonds. The -8- safe harbor for "other replacement proceeds" is available under Treas. Reg. §1.148- 1(c)(4)(i)(B) since all proceeds of the Bonds will be used to finance(or refinance) a capital project(i.e.capital expenditures or working capital to which the de minimus rule under Treas. Reg. §1.148-6(d)(3)(ii)(A)applies)which will have an average economic life as set forth in a certain Borrower Tax Certificate of even date herewith. The weighted average maturity of the Bonds does not exceed 120% of the average reasonably expected life of the capital project. No part of the issue will be used,directly or indirectly,to finance restricted working capital expenditures or to fund a working capital reserve. Accordingly,there will be no other replacement proceeds with respect to the Bonds. V. YIELDS ON NONPURPOSE INVESTMENTS 5.1. Yield on Investments. Except as described below, all gross proceeds of the Bonds allocable to a nonpurpose investment will be invested in tax-exempt bonds or at a yield not materially higher than the yield on the Bonds. 5.2. Materially Higher Yield. A yield on a nonpurpose investment is materially higher than the yield on the issue of Bonds to which it is allocable if it exceeds the yield on such Bonds by more than one-eighth of one percent; provided that the yield on an investment allocable to replacement proceeds is materially higher if it exceeds such bond yield by more than one- thousandth of one percent. 5.3. Temporary Periods. (a) Three-year Temporary Period. The net sale proceeds and investment proceeds of the Bonds are reasonably expected to be allocated to expenditures for capital projects,subject to amounts of related working capital expenditures to which the de minimus rule in § 1.148-6(d)(3)(ii)(A) applies. Such proceeds qualify for the three-year temporary period of Treas. Reg. § 1.148-2(e)(2) because the Issuer reasonably expects to satisfy the expenditure test, the time test and the due diligence test, as described in this paragraph, because the Project is expected to be substantially completed by November 1, 2002. The expenditure test will be met because at least 85 percent of the net sale proceeds of the Bonds will be allocated to expenditures on the Project by said expected completion date. The time test is met because the Borrower has incurred, in the form of one or more contracts not subject to contingencies within the Borrower's control, a substantial binding obligation to a third party to expend at least 5 percent (5%) of the net sale proceeds of the Project on the Project by the date hereof The due diligence test is met because completion of the Project and the allocation of the net sale proceeds of the Bonds to expenditures thereon will proceed with due diligence. The timing of the issuance of the Bonds is in accordance with ordinary financial practices and the Bonds are not issued prematurely to avoid requirements of new federal, state or local laws, to earn additional arbitrage profits or for other reasons not consistent with ordinary financial practice. Amounts on deposit in the Construction Account of the Bond Fund will be invested without regard to rate of investment return. -9- (b) Thirteen Month Temporary Period for Bona Fide Debt Service Funds (Amounts in the Revenue Fund and the Bond Fund). (i) A bona fide debt service account is that portion of any fund or account, or any combination of funds or accounts, the amount in which (A) will be used primarily to achieve proper matching of revenues with principal and interest payments on the Bonds within each bond year;and(B)will be depleted at least once each bond year,except for a reasonable carry-over amount not to exceed the greater of(I)the earnings on the funds for the immediately preceding bond year; or(II)one- twelfth of the principal and interest payments on such Bonds for the immediately preceding bond year(the "Bona Fide Debt Service Limit"). (ii) Monthly installments of Loan Repayments in any Bond Year are required to be deposited in the Revenue Fund and subsequently transferred to the Bond Fund that(after credit for accrued interest and investment income)will equal the principal and interest payments due on the Bonds in the Bond Year. Amounts in the Bond Fund and the Revenue Fund will not exceed the Bona Fide Debt Service Limit and all amounts therein are not yield restricted for a temporary period of 13 months commencing upon receipt thereof by the Trustee. (c) Thirty Day Period. Replacement proceeds ofthe Bonds not addressed above are not yield restricted for a temporary period of 30 days beginning on the date that such amounts are first treated as replacement proceeds. (See also "Minor Portion" below). 5.4. Reasonably Required Reserve Fund. (a) Limitation on Use of Sale Proceeds. No more than 10% of the sale proceeds of an issue of tax exempt bonds may be deposited in a reasonably required reserve or replacement fund. Sale proceeds in an amount equal to$ will be deposited in such a fund. Such amount is less than 10% ($ ) of the sale proceeds of the Bonds. (b) Debt Service Reserve Fund is Reasonably Required. As represented by the Original Purchaser, the Debt Service Reserve Fund is reasonably required for the offering of the Bonds. (c) Maximum Amount for Unrestricted Yield. Under Treas.Reg.§1.148- 2(f)(2) gross proceeds in a reasonably required reserve or replacement fund are not yield restricted; provided however,that the amount of gross proceeds of an issue that will qualify for such investment is limited to the least of(i) 10% of the stated principal amount of the Bonds, (ii) the maximum annual principal and interest requirement on the Bonds, or (iii) 125%of the average annual principal and interest requirement of the Bonds(the"Maximum Unrestricted Reserve Amount"). Under the Indenture,the amount required to be maintained -10- in the Debt Service Reserve Fund will not exceed the Maximum Unrestricted Reserve Amount. 5.5. Minor Portion. In addition to other gross proceeds of an issue of Bonds that are not yield restricted, an amount of gross proceeds equal to the minor portion thereof is not yield restricted. Accordingly, an amount on deposit in the Project Fund equal to the minor portion ($100,000)will not be yield restricted. 5.6. Calculation of Yield on Nonpurpose Investments. (a) General Rule. For purposes of the foregoing, the yield on all nonpurpose investments will be calculated in accordance with Treas. Reg. §1.148-5. In general, the yield on an investment is the discount rate that, when used in computing the present value as of the date the investment is first allocated to an issue of all unconditionally payable receipts from the investment, produces an amount equal to the present value of all unconditionally payable payments for the investment. Such yield is computed under the economic accrual method, using the same compounding interval and financial conventions used to compute the yield on the issue. (b) Guaranteed Investment Contract. Gross proceeds may be invested in a guaranteed investment contract. For a guaranteed investment contract, a broker's commission or similar fee paid on behalf of either an issuer or the provider is treated as an administrative cost and,except in the case of an issue that satisfies section 148(f)(4)(D)(i)of the Code, is a qualified administrative cost to the extent that the present value of the commission,as of the date the contract is allocated to the issue,does not exceed the lesser of a reasonable amount within the meaning of paragraph Treas. Reg. § 1.148-5(e)(2)(i) or the present value of annual payments equal to .05 percent of the weighted average amount reasonably expected to be invested each year of the term of the contract. For this purpose, present value is computed using the taxable discount rate used by the parties to compute the commission or,if not readily ascertainable,the yield to the issuer on the investment contract or other reasonable taxable discount rate. Amounts in the Debt Service Reserve Fund may be invested in a guaranteed investment contract that complies with the foregoing. -11- VI.NO ABUSE OR OVERISSUANCE 6.1. No Abusive Arbitrage Device. Within the meaning of Treas. Reg. §1.148- 10(a)(2), no action is being taking in connection with any purpose of the Bonds to enable the City or the Borrower to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage and overburden the tax-exempt bond market. The issuance ofthe Bonds will not result in issuing more bonds than reasonably necessary(as described below), issuing bonds earlier than reasonably necessary(since temporary periods are available),and no bonds will remain outstanding longer than reasonably necessary(because the average maturity of the Bonds satisfies the 120% test of Treas. Reg. §148-1(c)(4)(i)(B)). The Bonds would be reasonably issued even if interest on the Bonds was not excludable from gross income(assuming the interest rate on the Bonds was the same). The primary purposes of the Bonds are bona fide governmental purposes within the meaning of the Act. 6.2 No Overissuance. All proceeds of the Bonds will be applied for capital expenditures of the Project, working capital expenditures described in Treas. Reg. Section 1.148- 6(d)(3)(ii)and to fund a reasonably required reserve fund; and such funds,together with investment income, do not exceed by a minor portion the amount necessary to accomplish the governmental purpose of the Bonds. VII.REBATE MATTERS 7.1 Payment ofRebate. Pursuant to the Loan Agreement,the Borrower is required to rebate to the United States of America when due all amounts required by Section 148(f) of the Code with respect to the Bonds. 7.2 Two-Year Expenditure Exception. All gross proceeds (within the special meaning of Treas. Reg. §1.148-7(c)) of the Bonds will be spent in accordance with the 2-year exception set forth in Treas.Reg. § 1.148-7(e).Accordingly,investment earnings on amounts in the Construction Account of the Project Fund will be exempt from the rebate requirements of Section 148(f). 7.3 Bona Fide Debt Service Fund Exception. Earnings on amounts in any bona fide debt service fund,after the initial temporary period,are not expected to exceed$100,000 in any Bond Year. Further,because the average annual debt service on the Bonds is less than$2,500,000, under Treas. Reg. §1.148-3(k) any bona fide debt service fund for the Bonds will be treated as satisfying the$100,000 limitation. Therefore the rebate requirements of Section 148(f)of the Code do not apply to amounts in Bond Fund or the Reserve Fund. -12- VIII. MISCELLANEOUS 8.1. Reimbursement. No portion of the Bonds will be allocated to reimburse an original expenditure paid before the date hereof,except(a)architectural,engineering,surveying,soil testing, bond issuance expenses and similar costs not exceeding in the aggregate 20% of the issue price of the Bonds, (b)reimbursement allocations for original expenditures for which the Borrower has adopted an official intent satisfying Treas.Reg. § 1.150-2 and(c)original expenditures made not more than 60 days before such official intent was adopted. Accordingly, any reimbursement allocations will be treated as expenditures on the date of the allocation under Treas.Reg. § 1.150-2. 8.2. No Hedge Bonds. It is reasonably expected that 85% of the spendable proceeds (within the meaning of Section 149(g) of the Code) for each issue of Bonds will be used to carry out the governmental purpose of the issue within the 3 year period beginning on the date hereof, and that not more than 50% of the proceeds of the Bonds will be invested in nonpurpose investments having a substantially guaranteed yield for 4 years or more. Therefore the Bonds will not be hedge bonds. [Remainder of Page Intentionally Blank] -13- • ORONO SENIOR HOUSING, LLC By Its [Signature Page to Borrower Arbitrage Certificate] Error!Unknown document property name. -14-