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FROM BRIGGS & MORGAN (NED)07. 08' 98 15:25/ST. 15:23/N0. 3561732864 P 4 BRIGGS AND 0 R aeal7 Joel Hanson July 8, 1998 Page 3 advanced to assemble the site. In proceeding with the Ground Lease concept, the City is implicitly accepting this credit risk. In addition to the unavoidable creation of credit risk, the Developer's form of Ground Lease shifts a significant portion of the development risk to the City. The mechanism in the Ground Lease that shifts development risk to the City is the significant use of contingencies. Cinemark USA, Inc. reserves the right to terminate the Lease for numerous causes. The discoveryofunanticipated environmental contamination; the inability to obtain construction contracts for the construction of the theater at prices Cinemark USA, Inc. deems acceptable; the failure to receive necessary governmental approvals, unanticipated costs to correct unsuitable soil conditions and uninsured casualty loss to the improvements are a few examples. If Cinemark USA, Inc. exercises a contingency and terminates the Lease, the City will lose the source of funds to repay the Bonds issued to finance the acquisition. Another area of significant concern regarding Cinemark USA, Inc.'s form of Ground Lease was the treatment of reciprocal covenants, restrictions and easements between the leased property and the surrounding development property. It will be necessary to establish and record a Declaration of Covenants, Restrictions and Basements creating reciprocal easements between the leased property and the surrounding development property and imposing reciprocal covenants and restrictions on the use of the leased property and the surrounding development property. Cinemark USA, Inc.'s form of Ground Lease makes the City liable to Cinemark USA, Inc. if the developer of the'surrounding development property does not abide by these covenants and restrictions. It is unreasonable for Cinemark USA, Inc, to require the Cityto " guarantee" the adjacentdeveloper's performance ofhis obligations under the Declaration of Covenants, Restrictions and Basements. The forcer of Lease which I have prepared requires Cinemark USA, Inc. and the developer of the adjacent property to prepare a Declaration of Covenants, Restrictions and Basements which is acceptable to each of them (and also acceptable to the City) and to draft the Declaration of Covenants, Restrictions and Basements in a manner that permits the parties to enforce the agreement directly against one another without placing the City in the middle. While I believe that it is reasonable for the City to assume some credit risk by agreeing to the Ground Lease format, I believe it is inappropriate for the Developer to use 956328.1 Page 3