8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): September 16, 2004

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)

Delaware	0-18001	33-0864902
(State or other jurisdiction of incorporation or organization	(Commission file number)	(I.R.S. Employer Identification No.)

4490 Von Karman Avenue Newport Beach, California	92660 (Zip Code)
(Address of principal executive offices)

(949) 833-3600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name and former address if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

INFORMATION TO BE INCLUDED IN THE REPORT

Item 1.01    Entry into a Material Definitive Agreement

$50 Million Amended and Restated Revolving Credit Agreement

On September 16, 2004, William Lyon Homes, Inc. (“California Lyon”), a California corporation and wholly-owned subsidiary of William Lyon Homes (“Delaware Lyon” or the “Company”), entered into an Amended and Restated Revolving Line of Credit Loan Agreement (the “$50 Million Facility”) with California Bank & Trust. The $50 Million Facility has a maximum commitment of $50 million and an initial maturity date of September 21, 2006. After that date: a) the maximum commitment under the $50 Million Facility reduces at the rate of $12.5 million per quarter beginning December 31, 2006, and b) advances may only be used to complete previously approved projects subject to the borrowing base as of the initial maturity date. Interest under the $50 Million Facility is payable monthly at a rate equal to the lender’s “prime rate” or LIBOR plus 2.40% to 2.60%, in each instance depending on California Lyon’s ratio of total liabilities to tangible net worth. Effective as of September 16, 2004, interest under the $50 Million Facility was being charged at the rate of 4.2325%. Also, prior to initial maturity California Lyon must pay an annual commitment fee of $250,000, payable in quarterly installments, with the commitment fee reducing thereafter to an amount calculated as 0.50% of the reduced commitment amount after the initial maturity date. The $50 Million Facility includes a $6.0 million sub-limit for the issuance of letters of credit to support residential projects owned and developed by California Lyon. The $50 Million Facility will provide funding for the acquisition, development and construction of current and future residential homebuilding projects. The $50 Million Facility replaces a same size facility from the same lender that had an “initial maturity” in September 2004.

$150 Million Amended and Restated Loan Agreement

On September 17, 2004, California Lyon entered into an Amended and Restated Loan Agreement (the “$150 Million Facility”) with RFC Construction Funding Corp. The $150 Million Facility has a maximum commitment of $150 million and a maturity date of September 24, 2008, although after September 24, 2006, advances under this facility may only be made to complete projects approved on or before such date. The maximum commitment under the $150 Million Facility is reduced by the aggregate amount of loan commitments under separate project loans issued by the lender or its affiliates to California Lyon or its affiliates with respect to projects that are not cross-collateralized with the collateral under the $150 Million Facility. Amounts outstanding under the $150 Million Facility bear interest, payable monthly, at prime plus 0.25%. Effective as of September 17, 2004, interest under the $150 Million Facility was being charged at the rate of 4.75%. The annual commitment fee payable by California Lyon in quarterly installments is $750,000. The $150 Million Facility replaces a same size facility from the same lender that had a final maturity date in September 2006.

California Lyon has entered into separate secured project loans with the lender under the $150 Million Facility. The amount available under the $150 Million Facility is reduced by the amount that the lender has committed to the separate project loans. The terms of the separate project loans are substantially similar to those of the $150 Million Facility. A default under the separate project loans would constitute a cross-default under the $150 Million Facility. Delaware Lyon and California Lyon consider the separate project loans as outstanding under the $150 Million Facility and include amounts outstanding under the separate project loans within indebtedness outstanding under their revolving credit facilities.

Additional Covenants and Provisions

Availability under the $50 Million Facility and the $150 Million Facility (collectively, the “Facilities”) is subject not only to the maximum amount committed under the respective facility as described above, but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the Facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of California Lyon investment in a project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each Facility is secured by deeds of trust on the real property and improvements thereon owned by California Lyon in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. California Lyon has also provided each lender with an unsecured environmental indemnity that is a contingent obligation in addition to its obligation to repay loans under the Facilities.

Some of California Lyon’s obligations under the Facilities are guaranteed on an unsecured basis, and an environmental indemnity has been given, by Delaware Lyon.

Under the revolving Facilities, California Lyon is required to comply with a number of covenants, the most restrictive of which require Delaware Lyon to maintain:

• A tangible net worth, as defined, of $200.0 million, adjusted upwards quarterly by (x) 50% of net income after June 30, 2004 and (y) 75% of additional future equity offerings;

• A ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1; and

• Minimum liquidity, as defined, of at least $10.0 million.

Each of the Facilities contains various representations and warranties, covenants and events of default typical for credit facilities of this type. These include cross-defaults relating to certain other obligations of California Lyon for borrowed money; a cross-default relating to a credit agreement between one of the lenders and a limited partnership subsidiary of Delaware Lyon; and defaults or covenants with respect to such matters as the posting of cash or letters of credit in certain circumstances, the application or deposit of excess net sales proceeds, maintenance of specified ratios, limitations on investments in joint ventures, maintenance of fixed charge coverages, maintenance of profitability, stock ownership changes, changes in management, lot ownership, and average sales prices of homes.

As of September 17, 2004, California Lyon had approximately $28.4 million of borrowings outstanding under the $50 Million Facility and approximately $82.9 million outstanding under the $150 Million Facility. In addition, as of September 17, 2004, California Lyon had commitments available to permit it to borrow an additional approximately $79.5 million under the Facilities.

The terms of the Facilities were established in arms-length negotiations with the respective lenders thereunder. As described above, RFC Construction Funding Corp., the lender under the $150 Million Facility, and its affiliates also act as lenders to California Lyon and its affiliates under other credit facilities. California Bank and Trust, the lender under the $50 Million Facility, also acts as the lender to certain affiliates of California Lyon under other credit facilities. In addition, the lenders under the Facilities and their affiliates may act as lenders to California Lyon and its affiliates in the future. They receive, and expect to receive, customary fees for these services.

The $50 Million Facility and the $150 Million Facility are attached hereto as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by this reference. The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the respective Facilities. Any information disclosed in this Current Report on Form 8-K or the exhibits hereto shall not be construed as an admission that such information is material.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Forward-looking information involves important risks and uncertainties that could significantly affect future results and accordingly, such results may differ from those expressed in forward-looking statements made by or on behalf of the Company. The Company cautions that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by forward-looking statements. Factors that could cause these statements to differ materially include those discussed in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K

Item 2.03    Creation of a Direct Financial Obligation

To the extent applicable, the contents of Item 1.01 above are incorporated into this Item 2.03 by this reference.

Item 9.01    Exhibits

(c)  Exhibits

Exhibit No.	Description
10.1	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.2	Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: September 22, 2004

WILLIAM LYON HOMES
By:	/s/    MICHAEL D. GRUBBS
Name: Its:	Michael D. Grubbs Senior Vice President, Chief Financial Officer and Treasurer

2

EXHIBIT INDEX

Exhibit No.	Description
10.1	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.2	Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation.

EX-10.1

Exhibit 10.1

AMENDED AND RESTATED

REVOLVING LINE OF CREDIT LOAN AGREEMENT

(Borrowing Base Loan)

By and Between

CALIFORNIA BANK & TRUST

a California banking corporation

1900 Main Street, Suite 200, Irvine, California 92614

(“Lender”)

And

WILLIAM LYON HOMES, INC.,

a California corporation

4490 Von Karman Avenue (P.O. Box 7520), Newport Beach, California 92658-7520

(“Borrower”)

Dated as of September 16, 2004

MAXIMUM REVOLVING LINE OF CREDIT AMOUNT: $50,000,000.00

TABLE OF CONTENTS

				Page
1.	DEFINITIONS AND GENERAL PROVISIONS			1
	1.1	Definitions		1
	1.2	General Provisions		21
2.	BORROWING BASE			22
	2.1	Loan Facility		22
		2.1.1	Commitment	22
		2.1.2	Purpose of the Loan	23
		2.1.3	Purpose of the Project Loans	23
		2.1.4	Approval of Qualified Projects	24
		2.1.5	Interest Payments	25
		2.1.6	Principal Payments	26
		2.1.7	Loan Term	27
		2.1.8	Terms of Project Advances	27
	2.2	Available Commitment; Borrowing Base		27
		2.2.1	Available Commitment	27
		2.2.2	Amount of Borrowing Base and Borrowing Availability	28
		2.2.3	Determination of Borrowing Availability	28
	2.3	Letter of Credit Advances		30
		2.3.1	Issuance of Letter of Credit	30
		2.3.2	Issuance Procedure	30
		2.3.3	Purpose of Letter of Credit; General Letter of Credit Terms and Conditions	30
		2.3.4	Reimbursement of Lender for Payment of Drafts Drawn or Drawn and Accepted Under the Letter of Credit	30
		2.3.5	Reimbursement Obligations	31
		2.3.6	Nature of Reimbursement Obligations	31
	2.4	Loan Advances; Project Monitoring		32
		2.4.1	Method for Advances	32
		2.4.2	Use of Advances	32
		2.4.3	Draw Requests	32
		2.4.4	Limitations on Borrower’s Rights to Advances	32
		2.4.5	Excess Loan Balance Repayment	33
		2.4.6	Appraisals and Evaluations	33
		2.4.7	Borrower’s Accounts	33
		2.4.8	Project Cost Savings and Excess Costs	34
		2.4.8.3	Cost Savings	34

i

	2.5	Fees		35
		2.5.1	Commitment Fee	35
		2.5.2	Letter of Credit Fee	35
		2.5.3	Other Fees	35
3.	THE COLLATERAL			35
	3.1	Security		35
	3.2	Releases of Collateral		35
		3.2.1	General Requirements for Releases	36
		3.2.2	Sales of Lots or Homes Pursuant to a Purchase Contract	36
		3.2.3	Dedications	37
4.	CONDITIONS PRECEDENT			37
	4.1	Conditions Precedent to Effectiveness of this Agreement and to the Effectiveness of the Commitment		37
		4.1.1	Representations and Warranties Accurate	37
		4.1.2	Defaults	37
		4.1.3	Documents	37
		4.1.4	Plat and/or Survey	38
		4.1.5	Restrictive Covenants	38
		4.1.6	Soils Test	38
		4.1.7	Environmental Assessment	38
		4.1.8	Environmental Indemnity	39
		4.1.9	Preliminary Title Report	39
		4.1.10	Flood Report	39
		4.1.11	Deed of Trust/Title Policy	39
		4.1.12	Completion of Filings and Recordings	39
		4.1.13	Payment of Costs, Expenses, and Fees	39
		4.1.14	Appraisal	39
		4.1.15	Other Items or Actions by Borrower	39
	4.2	Conditions Precedent to Admission of Land as Entitled Land		39
		4.2.1	Request	39
		4.2.2	Defaults	40
		4.2.3	Map	40
		4.2.4	Zoning Approvals	40
		4.2.5	Other	40
	4.3	Conditions Precedent to Admission of Land as Lots Under Development		40
		4.3.1	Request	40
		4.3.2	Defaults	40
		4.3.3	Documents and Information	40
		4.3.4	Inspection	40

ii

		4.3.5	Map	41
		4.3.6	Utilities	41
		4.3.7	Lot Limitations	41
		4.3.8	Other	41
	4.4	Conditions Precedent to Admission of Land as Developed Lots		41
		4.4.1	Request	41
		4.4.2	Defaults	41
		4.4.3	Documents and Information	41
		4.4.4	Lot Limitations	41
		4.4.5	Other	41
	4.5	Conditions Precedent to Admission of Land as Presold, Spec and/or Model Homes		42
		4.5.1	Request	42
		4.5.2	Defaults	42
		4.5.3	Documents and Information	42
		4.5.4	Home Construction Information	42
		4.5.5	Other	44
	4.6	Additional Conditions Precedent to All Advances		44
	4.7	Waiver of Conditions Precedent		44
5.	BORROWER’S REPRESENTATIONS AND WARRANTIES			44
	5.1	Closing Representations and Warranties		44
		5.1.1	Corporate Existence and Authorization	44
		5.1.2	No Approvals, etc.	44
		5.1.3	No Conflicts	44
		5.1.4	Execution and Delivery and Binding Nature of Loan Documents	45
		5.1.5	Legal Proceedings; Hearings, Inquiries, and Investigations	45
		5.1.6	No Event of Default	45
		5.1.7	Approvals and Permits; Assets and Property	45
		5.1.8	ERISA	45
		5.1.9	Compliance with Law	45
		5.1.10	Full Disclosure	45
		5.1.11	Use of Proceeds; Margin Stock	46
		5.1.12	Governmental Regulation	46
		5.1.13	Material Agreements; No Material Defaults	46
		5.1.14	Title to Property	46
		5.1.15	Payment of Taxes	47
		5.1.16	No Condemnation	47
		5.1.17	Borrowing Base	47
	5.2	Representations and Warranties Upon Requests for Advances		47

iii

	5.3	Representations and Warranties Upon Delivery of Financial Statements, Documents, and Other Information		47
6.	BORROWER AFFIRMATIVE COVENANTS			47
	6.1	Corporate Existence		47
	6.2	Books and Records; Access By Lender		48
	6.3	Special Covenants Relating to Collateral		48
		6.3.1	Defense of Title	48
		6.3.2	Further Assurances	48
		6.3.3	Plats, Annexations and Approvals	49
		6.3.4	Utilities	49
		6.3.5	Plans and Specifications	50
		6.3.6	Compliance with Permitted Exceptions	50
		6.3.7	Project Development	50
		6.3.8	Title Policy Endorsements	51
		6.3.9	Improvement Districts	51
		6.3.10	Appraisals	52
	6.4	Information and Statements		52
		6.4.1	Monthly Sales Reports	52
		6.4.2	Quarterly Financial Statements	52
		6.4.3	Annual Financial Statements	53
		6.4.4	Annual 24-Month Projection	53
		6.4.5	Compliance Certificates	53
		6.4.6	Borrowing Base Certificate	53
		6.4.7	Other Items and Information	53
	6.5	Law; Judgments; Material Agreements; Approvals and Permits		53
	6.6	Taxes and Other Debt		54
	6.7	Assets and Property		54
	6.8	Insurance		54
		6.8.1	Property	54
		6.8.2	Liability	54
		6.8.3	Flood	55
		6.8.4	Worker’s Compensation	55
		6.8.5	Contractors	55
		6.8.6	Additional Insurance	55
	6.9	Commencement and Completion		56
	6.10	Rights of Inspection; Agency		56
		6.10.1	Generally	56
		6.10.2	Inspector(s)	56
	6.11	Verification of Costs		57

iv

	6.12	Use of Proceeds		57
	6.13	Costs and Expenses of Borrower’s Performance of Covenants and Satisfaction of Conditions		57
	6.14	Notification		57
	6.15	Financial Covenants		57
	6.16	Books and Records; Names; Place of Business and Chief Executive Office		58
	6.17	Proceeds of Purchase Contracts		58
		6.17.1	After Event of Default or Unmatured Event of Default	58
		6.17.2	Payments to Lender	58
7.	BORROWER NEGATIVE COVENANTS			58
	7.1	Corporate Restrictions		58
	7.2	Name, Fiscal Year, Accounting Method, and Lines of Business		58
	7.3	Change in Ownership		59
	7.4	Loans		59
	7.5	Liens and Encumbrances		59
	7.6	Indebtedness		59
	7.7	Acquisition of Assets		59
8.	EVENTS OF DEFAULT AND REMEDIES			59
	8.1	Events of Default		59
	8.2	Rights and Remedies of Lender		61
9.	BANK’S OBLIGATIONS TO BORROWER ONLY AND DISCLAIMER BY BANK			63
10.	NO BROKERS			63
11.	PROVISIONS IN THE NOTE GOVERN THIS AGREEMENT			63
12.	COUNTERPART EXECUTION			63
13.	MISCELLANEOUS			63
	13.1	Assignment		63
	13.2	Notices		64
	13.3	Authority to File Notices		64
	13.4	Inconsistencies with the Loan Documents		64

v

	13.5	No Waiver	64
	13.6	Lender Approval of Instruments and Parties	64
	13.7	Lender Determination of Facts	64
	13.8	Incorporation of Preamble: Recitals and Exhibits	65
	13.9	Third-Party Consultants	65
	13.10	Payment of Expenses	65
	13.11	Disclaimer by Lender	65
	13.12	Indemnification	65
	13.13	Titles and Headings	66
	13.14	Brokers	66
	13.15	Change, Discharge, Termination or Waiver	66
	13.16	Choice of Law	66
	13.17	Disbursements in Excess of Loan Amount	66
	13.18	Participations	66
	13.19	Time Is of the Essence	67
	13.20	Attorneys’ Fees	67
	13.21	Signs	67
	13.22	Subordination to Certain Easements, Dedications and Restrictions	67
	13.23	Waiver of Right to Trial by Jury	67
14.	EXHIBITS		68
15.	ADDITIONAL ADVANCES		68

vi

AMENDED AND RESTATED

REVOLVING LINE OF CREDIT LOAN AGREEMENT

(Borrowing Base)

THIS AMENDED AND RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT (“Agreement”), is entered into as of the date set forth above by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”).

RECITALS

A. Pursuant to that certain Revolving Line of Credit Loan Agreement (Borrowing Base) dated as of September 21, 2000, by and between Borrower and Lender, as amended by that certain Agreement to Modify Loan Agreement Promissory Note and Deed of Trust dated as of September 18, 2002, and as further amended by that certain Second Amendment to Modify Loan Agreement Promissory Note and Deed of Trust dated as of December 13, 2002 (collectively “Current Loan Agreement”), Borrower agreed to borrow from Lender a sum not to exceed Fifty Million Dollars ($50,000,000.00) for the purpose of providing Borrower with funds for the acquisition and development of residential lots, the construction of existing and future residential home projects, and the issuance of letters of credit for the payment of costs incurred or associated with said projects (“Current Loan”).

B. The Current Loan is evidenced by a Second Amended and Restated Construction Loan Promissory Note (Construction Revolving Line of Credit) dated as of December 13, 2002, given by Borrower to Lender (as the same has been and may be amended from time to time, the “Current Note”).

C. The Current Loan is secured by, among other things, each and every “Deed of Trust” and certain other “Security Documents” (both as defined in the Current Loan Agreement).

D. The parties have agreed to amend and restate the Current Loan Agreement and the Current Note to provide for, among other things, (i) an extension of the “Initial Line Term” and “Maturity Date” (as such terms are defined herein), (ii) a modification of the covenants concerning Borrower’s “Net Worth” (as such term is defined herein, and (iii) a modification of the “Interest Rate” due and payable for “Advances” under the “Note” (all as defined below).

AGREEMENT

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender agree as follows:

1. DEFINITIONS AND GENERAL PROVISIONS.

1.1 Definitions. In this Agreement, the following terms shall have the following meanings:

“A&D Budget” shall mean, for each Qualified Project for which A&D Improvements are to be constructed, the cost breakdown/budget for such A&D Improvements, which budget shall be satisfactory to Lender in all respects. For purposes of this Agreement, all such budgets shall be referred to individually and collectively in the singular.

1

“A&D Improvements” shall mean, for each and every Qualified Project financed hereunder, (i) those certain offsite improvements on the Property (including without limitation curbs, grading, storm and sanitary sewers, paving, sidewalks, landscaping, hardscaping, sprinklers, electric lines, gas lines, telephone lines, cable television lines, fiber optic lines, pipelines and other utilities) necessary to make the Property suitable for the construction of single family residential homes thereon, and (ii) any common area improvements to be constructed on the Property. For purposes of this Agreement, all such improvements for each and every Qualified Project funded by a Loan made hereunder shall be referred to individually and collectively in the singular.

“Account Pledge Agreement” shall mean that certain Account Pledge and Security Agreement dated as of September 21, 2000, executed by Borrower in favor of Lender, pursuant to which Borrower has granted to Lender, subject to the conditions of and obligations of Lender thereunder, a first and prior lien on and security interest in all money, investment securities and other instruments on deposit from time to time in the Borrower’s Funds Account.

“Advance” means an advance of Loan proceeds by Lender to Borrower hereunder, including without limitation Project Advances and Letter of Credit Advances.

“Affiliate” of any Person means (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person and (ii) any other Person that beneficially owns at least ten percent (10%) of the voting common stock or partnership interest or limited liability company interest, as applicable, of such Person. For the purposes of this definition, “control” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, partnership interests, by contract or otherwise: and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Agreement” means this Amended and Restated Revolving Line of Credit Loan Agreement, as it may be amended, modified, extended, renewed, restated, or supplemented from time to time.

“Appraisal” means each appraisal of the Land and the Improvements (a) ordered by Lender, (b) prepared by an appraiser satisfactory to Lender, (c) in compliance with all federal and state standards for appraisals, (d) reviewed by Lender, and (e) in form and substance satisfactory to Lender based on its standards and practices applied in reviewing real estate appraisals.

“Appraised Value” shall mean, for each Qualified Project to be financed hereunder, the fair market value of each Lot and/or Home as set forth in the Appraisal.

“Approvals and Permits” means, for each and every Qualified Project financed hereunder, each and all approvals, authorizations, bonds, consents, certificates, franchises, licenses, permits, registrations, qualifications, and other actions and rights granted by or filings with any Persons necessary, or appropriate, for the improvement and development of the Land or for the conduct of the business and operations of Borrower.

2

“Architect” shall mean the architect for each Qualified Project to be financed hereunder, which architect shall be reviewed and approved by Lender in its discretion. For purposes of this Agreement, all such architects shall be referred to individually and collectively in the singular.

“Architect’s Agreement” shall mean any agreement between the Architect and Borrower for each Qualified Project to be financed by a Loan to be made hereunder. For purposes of this Agreement, all such agreements shall be referred to individually and collectively in the singular.

“Assignment of Architect’s Agreement” shall mean, for each Qualified Project financed by a Loan to be made hereunder, that certain Assignment of Architect’s Contract, Plans and Specifications executed by Borrower for the benefit of Lender (including the consent of Architect to said assignment), pursuant to which Borrower shall assign to Lender, subject to and in accordance with the provisions thereof, all of Borrower’s right, title and interest in, to and under the Architect’s Agreement and the Plans and Specifications. For purposes of this Agreement, all such assignments shall be referred to individually and collectively in the singular.

“Assignment of Engineering Contract” shall mean, for each Qualified Project financed by a Loan to be made hereunder, that certain Assignment of Engineering Contract, Plans and Specifications by Borrower for the benefit of Lender (including the consent of Engineer to said assignment), pursuant to which Borrower shall assign to Lender, subject to and in accordance with the provisions thereof, all of Borrower’s right, title and interest in, to and under the Engineering Contract and/or Plans and Specifications (as applicable). For purposes of this Agreement, all such assignments shall be referred to individually and collectively in the singular.

“Assignment of Permits” shall mean, for each Qualified Project financed by a Loan to be made hereunder, that certain Assignment of Agreements, Permits, Licenses and Approvals executed by Borrower. For purposes of this Agreement, all such assignments shall be referred to individually and collectively in the singular.

“Authorization Form” shall mean that certain Signature Authorization Form and Disbursement Instructions of even date herewith executed by Borrower.

“Available Commitment” shall be the lesser of (i) the Commitment Amount, as in effect from time to time, or (ii) the Borrowing Base, subject to the limitations set forth in Sections 2.1.1 and 2.2.1.

“Base Appraisal” shall mean, with respect to each Home financed by a Loan to be made hereunder, the lesser of (i) the value of such Home as determined by the Appraisal (as adjusted by Lender in its reasonable discretion) for the model plan type of said Home, which value shall be determined without lot premiums, options or upgrades (unless included by Lender in its sole discretion), or (ii) Borrower’s estimated sales price of such Home. For purposes of this Agreement, all such appraisals shall be referred to individually and collectively in the singular. Any and all FNMA appraisals shall establish the retail value of each model plan type to be financed in connection with each Qualified Project.

“Borrower’s Funds Account” shall mean that certain interest-bearing deposit account in the name of Borrower, listing Lender as secured party and pledgee of Borrower, which account shall be maintained as an account with Lender.

3

“Borrowing Availability” shall mean:

(a) An amount equal to the lesser of the Commitment Amount or Reduced Commitment Amount, as applicable, or the Borrowing Base as calculated each Calendar Month,

less

(b) The sum of the Loan Balance,

less

(c) Any reductions as provided in Section 2.1.3(d),

plus

(d) Any sums deposited into the Borrower’s Funds Account (including without limitation any Excess Sales Proceeds paid to Lender and not applied by Borrower to reduce the Loan Balance).

“Borrowing Base” shall be equal to the sum of:

(a) The respective Maximum Allowed Advances multiplied by the applicable Draw Percentages for all Entitled Land, Lots Under Development, Developed Lots, Spec Homes (including Model Homes) and Presold Homes for all Qualified Projects; and

(b) Any committed portion of the Letter of Credit Line under this Loan.

“Borrowing Base Certificate” means a certificate, in form and substance reasonably satisfactory to Lender, delivered to Lender by Borrower in accordance with Section 6.4.6 setting forth, among other things, a current and detailed computation of the Borrowing Base and Borrowing Availability with respect to Entitled Land, Lots Under Development, Developed Lots, Spec Homes and Presold Homes, and containing such other information as Lender may reasonably request. An initial form of the Borrowing Base Certificate is attached hereto as Exhibit “B”.

“Budget” shall mean each and every A&D Budget and/or Home Construction Budget approved by Lender for each and every Qualified Project to be financed by a Loan to be made hereunder.

“Bulk Finished Lot Value” shall mean, for each Qualified Project financed hereunder, the bulk sale value of the Lots included in said Project after completion of the A&D Improvements as determined by a qualified appraiser, which appraisal shall be satisfactory to Lender in all respects.

“Bulk Lot Sale” shall have the meaning given to such term in Section 2.1.6(a) below.

“Business Day” means each day of the year other than Saturdays, Sundays, Holidays, and days on which banking institutions are generally authorized or obligated by law or executive order to close in California.

“Business Hour” means each hour of each Business Day between 9:00 a.m. to 4:00 p.m. (California time).

“Calendar Month” shall mean the twelve (12) calendar months of the year. Any payment or obligation that is due or required to be performed within a specified number of Calendar Months shall become due on the day in the last of such specified number of Calendar Months that corresponds numerically to the date on which such payment or

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obligation was incurred or commenced, provided, however, that with respect to any obligation that is incurred or commences on the 29th, 30th, or 31st day of any Calendar Month and if the Calendar Month in which such payment or obligation would otherwise be due does not have a numerically corresponding date, such payment or obligation shall become due on the first day of the next succeeding Calendar Month.

“Calendar Quarter” shall mean a period of three (3) consecutive Calendar Months, commencing on the Closing Date and continuing through the Loan Term.

“Central Account” shall mean that certain interest-bearing deposit account in the name of Borrower, maintained as account number 3090015831 at Lender.

“Closing Date” shall mean (a) the date upon which the amendments to the Deeds of Trust for the Existing Projects are recorded in the Official Records of each applicable County (“Initial Closing Date”), and (b) the future date(s) upon which future Deeds of Trust for any Future Projects are recorded in the Official Records of each applicable County (each, a “Subsequent Closing Date”).

“Collateral” means all property, interests in property, and rights to property securing any or all Obligations from time to time.

“Commitment” means the agreement by Lender in Section 2.1.1 to make Advances pursuant to the terms and conditions herein.

“Commitment Amount” means (a) during the Initial Line Term, the sum of Fifty Million Dollars ($50,000,000.00), and (b) during the Reduction Period, beginning upon the last day of the first Calendar Quarter following the Initial Line Maturity Date, and on or prior to the last day of each Calendar Quarter thereafter during the Reduction Period, the Commitment Amount shall be reduced in the minimum amount of Twelve Million Five Hundred Thousand Dollars ($12,500,000.00) (each, “Reduced Commitment Amount”):

Date	Reduced Commitment Amount
Initial Line Maturity Date	$	50,000,000.00
First Calendar Quarter	$	37,500,000.00
Second Calendar Quarter	$	25,000,000.00
Third Calendar Quarter	$	12,500,000.00
Fourth Calendar Quarter	$	0.00

“Commitment Fee” means that certain facility fee (a) that is calculated, during the Initial Line Term, at the rate of one-half of one percent (0.50%) per annum on the full Commitment Amount, and (b) that is calculated, during the Reduction Period, at the rate of one-half of one percent (0.50%) per annum based on the then-applicable Reduced Commitment Amount, and all said fees shall be payable pursuant to Section 2.5.1 below. Said fees shall be paid in advance on a quarterly basis such that: (i) during the Initial Line term, each quarterly fee payment shall be based on a one-eighth of one percent (0.125%) of the full Commitment Amount, and (ii) during the Reduction Period, each quarterly fee payment shall be based on a one-eighth of one percent (0.125%) of the then-applicable Reduced Commitment Amount.

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“Construction Assignments” shall mean, for each Qualified Project to be entered into the Borrowing Base, the Assignment of Permits, Assignment of Engineering Contract, Assignment of Architect’s Agreement, and all other assignment and other related documents encumbering the Collateral, which assignments may be included within a single document to be executed by Borrower in connection with each Qualified Project to be financed hereunder.

“Contractor” shall mean the general contractor for each Qualified Project to be financed hereunder, which contractor shall be reviewed and approved by Lender in its discretion. For purposes of this Agreement, all such contractor shall be referred to individually and collectively in the singular. Borrower shall be permitted to act as an “owner/builder” for any Qualified Project and, as a result, Borrower shall not be required to enter into any contract, agreement or other document with a general contractor to perform general contracting services for said Project, unless and until (a) Lender shall have reviewed and approved of said general contractor and the terms of any such contract, agreement or other document with Borrower relating to said Project, and (b) Borrower shall have delivered to Lender a fully executed assignment in form and content acceptable to Lender in its sole discretion assigning to Lender all of Borrower’s rights, title and interest in said contract, agreement or other document, and said general contractor shall have consented in writing in form and content acceptable to Lender in its sole discretion to said assignment.

“Construction Contract” shall mean any agreement between the Contractor and Borrower for each Qualified Project to be financed by a Loan to be made hereunder. For purposes of this Agreement, all such agreements shall be referred to individually and collectively in the singular.

“County” shall mean each and every county in which a Qualified Project to be financed hereunder is located.

“Debt” means, as to any Person, without limitation, (i) all obligations of such Person which in accordance with GAAP would be shown on a balance sheet of such Person as a liability (including without limitation obligations for borrowed money and for the deferred purchase price of property or services and obligations evidenced by bonds, debentures, notes or similar instruments), (ii) all rental obligations under leases required to be capitalized under GAAP, (iii) the stated amount of all letters of credit issued for the account of such Person or upon which such Person would be obligated to reimburse the issuer thereof for draws, (iv) liabilities in respect of unfunded vested benefits under plans covered by ERISA, and (v) indebtedness of others secured by any lien upon property owned by such Person whether or not assumed.

“Dedication” means a transfer by Borrower, or the granting of easements, rights of way, and licenses by Borrower, to municipalities, utility providers, municipal districts, property owners, and property owners’ associations in connection with the development of the Project, for the purpose of providing streets, common areas, parks, water, waste water and sewage treatment facilities, hillside and other areas, and similar land and improvements.

“Deed of Trust” shall mean, for each Qualified Project entered into the Borrowing Base, a Construction Deed of Trust, Assignment of Leases and Rents and Security Agreement (Including Fixture Filing) executed by Borrower, as trustor, to Title Company, as trustee, and naming Lender as beneficiary, creating a first lien on the Property, the Improvements, and all other buildings, fixtures and improvements now or hereafter owned or acquired by Borrower and situated thereon, and all rights and easements appurtenant thereto. Each Deed of Trust shall secure indebtedness in the Commitment Amount. Upon the closing of the renewal of the Loan on the Initial Closing Date, a separate Deed of Trust shall encumber all

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of the Property in each of the Existing Projects under the Borrowing Base. Upon the entry of each Qualified Project into the Borrowing Base, a separate Deed of Trust shall encumber all of the Lots in the applicable Future Project. All Lots in a Qualified Project shall be subject to a Tentative Map or a Final Map, and Lender shall have no obligation to make any Advances of Hard Costs for the construction of any Homes in said Qualified Project, unless and until Lender receives evidence satisfactory to Lender in its discretion of the recording of the Final Map for said Qualified Project. If, with Lender’s prior approval, Entitled Land, Lots Under Development, Developed Lots, Spec Homes (including Model Homes) and Presold Homes for a Qualified Project are added into the Borrowing Base, the Deed of Trust for said Qualified Project shall be amended to secure such property in the form reasonably required by Lender, and Borrower shall pay all costs and expenses incurred by Lender in connection with encumbering all of said property with the applicable Deed of Trust, including without limitation the payment of title insurance and endorsement costs, closing and recording fees, legal fees and all other related charges. For purposes of this Agreement, all such deeds of trust and amendments thereto securing the Loan may be referred to individually and collectively in the singular as the “Deed of Trust.”

“Default Interest Rate” shall have the meaning given to such term in the Note.

“Developed Lots” means those certain Lots in a Qualified Project for which all A&D Improvements have been constructed and completed and said Lots are in condition for the construction of Homes thereon.

“Draw Percentage” shall mean (a) for the A&D Improvements, the percentage of completion for said improvements as certified by Borrower in its Borrowing Base Certificate, and (b) for all Home Improvements, the applicable percentage for the subject Improvements pursuant to the Home Construction Draw Schedule attached hereto as Exhibit “L”.

“Draw Request” means a completed, written request for an Advance from Borrower to Lender, which request shall be in form reasonably satisfactory to Lender, and shall be accompanied by such other documents and information as Lender may require or specify from time to time.

“EBITDA” means, with respect to any Person (or any asset of any Person) for a period, an amount equal to the earnings of such Person before the payment of interest expenses, taxes, depreciation expenses and amortization costs. The EBITDA of a Person shall be adjusted to reflect the Person’s allocable share of such amounts from any Person (or asset of any Person) the accounts of which are not consolidated with the financial statements of the first Person in accordance with GAAP, but only to the extent that such amounts could have been paid to such Person.

“Engineer” shall mean the engineer for each Qualified Project to be financed hereunder, which engineer shall be reviewed and approved by Lender in its discretion. For purposes of this Agreement, all such engineers shall be referred to individually and collectively in the singular.

“Engineering Contract” shall mean any agreement between the Engineer and Borrower for each Qualified Project to be financed by a Loan to be made hereunder. For purposes of this Agreement, all such agreements shall be referred to individually and collectively in the singular.

“Entitled Land” means those portions of the Land for which Borrower has satisfied the conditions set forth in Section 4.2 and with respect to which Borrower has not yet

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satisfied the conditions precedent for inclusion in the Borrowing Base as Lots Under Development.

“Environmental Indemnity” means, for each Qualified Project, that certain Environmental Indemnity executed by Borrower, which indemnity shall be in form and content acceptable to Lender in its discretion.

“ERISA” means the Employee Retirement Income Security Act of 1974 and the regulations and published interpretations thereunder, as in effect from time to time.

“Event of Default” shall mean all of the events described in Section 8.1.

“Excess Sales Proceeds” shall mean the difference, if any, between the Net Sales Proceeds received by Borrower in connection with the sale a Lot or Home and the Maximum Allowed Advance amount for the Lot or Home being sold.

“Existing Project” shall mean each of the thirteen (13) Qualified Projects for which Project Loans will be made hereunder as of the Initial Closing Date. The Existing Projects as of the Initial Closing Date are listed below:

Project Name	Lots	Models	Presold Units	Spec Units	Undesignated	Paid-Off
Sundance	0	0	6	2	0	130
Eastlake VR-9/VR-11	0	0	27	0	0	141
Waterfront	0	12	42	16	36	0
Harveston	162	0	0	0	162	0
Citrus Heights	72	0	0	0	72	0
Woodbury P-1	24	10	0	0	140	0
The Bluffs	0	0	2	0	0	68
Provance I	3	4	0	0	14	29
Provance II	0	0	30	4	1	13
Baton Rouge	91	0	0	0	2	0
Sonoran Foothills – P7	48	3	12	1	48	0
Sonoran Foothills – P8	62	4	10	0	62	0
Copper Canyon Ranch	166	3	17	2	0	0
Subtotal (Current Eligible Projects)	628	36	146	25	537	381

“Extension Conditions” shall mean (a) at the time the applicable notice of such extension is given to Lender and at the time of such extension, no Event of Default, or no

8

Unmatured Event of Default, shall have occurred and be continuing; and (b) there shall have been no Material Adverse Change in the financial condition of Borrower since the Initial Closing Date.

“Final Map” shall mean the final tract or plat map for the Property for each Qualified Project to be financed by a Project Loan to be made hereunder, which map shall be in form and content acceptable to Lender in its discretion.

“Financing Statement” shall mean, for each Qualified Project to be entered into the Borrowing Base to be made hereunder, a UCC-1 financing statement executed by Borrower, as debtor, in favor of Lender, as secured party, perfecting Lender’s security interest in the Collateral now owned or hereafter acquired by Borrower. The Financing Statement shall be in form and content satisfactory to Lender, and shall be filed in the Office of the Secretary of State of the State in which the subject Collateral is located (and in such other offices for recording or filing such statements in such jurisdictions as Lender shall require to perfect Lender’s security interest or reflect such interest in appropriate public records). For purposes of this Agreement, all such financing statements shall be referred to individually and collectively in the singular.

“First Payment Date” shall mean the first day of the first Calendar Month after the Closing Date or, in Lender’s sole discretion, the first day of the second Calendar Month after the Closing Date.

“Fixed Charge Coverage” shall mean EBITDA” (as defined herein) divided by Interest Incurred. Fixed Charge Coverage shall be shall be monitored quarterly by Lender upon receipt of the financial statements to be provided as provided in the Loan Agreement, based on the prior four (4) quarters.

“Force Majeure Event” shall mean acts of God or the elements, including fire, flood, windstorm, hailstorm, earthquake and lightning, acts of war, riot or civil insurrection, and strikes, labor disputes, delays in delivery of materials and disruption of shipping (to the extent such strikes, labor disputes, delays in delivery of materials and disruption of shipping affect not only Borrower but also similarly situated real estate owners and/or contractors in the vicinity of the Property, or are otherwise not the result of an intentional or grossly negligent act or failure to act by Borrower); provided, however, that inclement weather shall be considered a Force Majeure Event only to the extent it is significantly more severe than typical for the location and time of year in which such inclement weather occurred.

“Future Project” shall mean each Qualified Project for which a Project Loan will be made hereunder after the Initial Closing Date.

“GAAP” means generally accepted accounting principles consistently applied.

“Geographic Concentration Limitation” shall have the meaning given to such term in the Maximum Aggregate Loan Allocation(s).

“Governmental Authority” means any government, any court, and any agency, authority, body, bureau, department, or instrumentality of any government.

“Hard Costs” means, for each Qualified Project to be financed hereunder, the onsite cost of labor and materials directly related to the construction of the Improvements, including the A&D Improvements and each Home as set forth in the A&D Budget and Home Construction Budget, as applicable, including without limitation construction costs, which

9

costs shall be subject to Lender’s review and approval and shall specifically exclude costs to be funded from general budget categories for overhead, supervision, general and administrative, and marketing expenses, and shall also not include any costs and expenses related to upgrades, options or decorator items; provided, however, that with respect to any Model Home, Hard Costs may include costs and expenses related to upgrades, options or decorator items as may be approved by Lender.

“Home” or “Unit” shall mean, for each Qualified Project to be financed hereunder, a single family dwelling unit which shall be a Spec, Presold or Model Home to be constructed on the Property of any one (1) of the model, design and type generally described in the Plans and Specifications for the applicable Project, including any furniture, furnishings, fixtures and equipment to be installed therein as shown on said Plans and Specifications. A Home may include an attached unit, which shall include any completed Home that is designed pursuant to the Plans and Specifications to share at least one (1) common wall with another Home. Homes may be entered into the Borrowing Base upon confirmation of trenching by Lender.

“Home Construction Budget” shall mean, for each Qualified Project in which Homes are to be constructed that are to be financed hereunder, the detailed line-item cost breakdown and budget for the Presold, Spec and Model Homes approved by Lender, which budget shall be comprised of the Lot Release Price for the release of the Lot into the Loan for the construction of a Home thereon, and the Hard Costs and Soft Costs for the Home to be constructed on said Lot, and which budget shall be in conformity with the sources and uses of funds for the Presold, Spec and Model Homes as approved by Lender in its sole discretion. For purposes of this Agreement, all such budgets shall be referred to individually and collectively in the singular.

“Home Advance Maturity Date(s)” shall mean the term in which a Home may remain in the Borrowing Base for the purposes of calculating the Borrowing Availability:

(a) With respect to Presold or Spec Homes, twelve (12) Calendar Months after the initial entry of such Presold or Spec Home into the Borrowing Base;

(b) With respect to Model Homes, twenty-four (24) Calendar Months after the initial entry of such Model Home into the Borrowing Base (provided, however, that said maturity date may be extended for a six-month period if Borrower is in compliance with the Extension Conditions).

“Improvements” means, for each and every Qualified Project to be financed hereunder, the improvements to be made on the Land (or applicable portion thereof), which shall include all construction and development of the infrastructure and all other housing improvements made in preparation for the development and marketing of the Land (or applicable portion thereof).

“Initial Closing Date” shall mean the date on which the Deeds of Trust, or amendments thereto, for the Existing Projects are recorded in connection with the renewal and extension of this Loan.

“Initial Line Maturity Date” shall mean twenty-four (24) Calendar Months after the date of this Agreement (i.e., September 21, 2006).

“Initial Line Term” shall mean that certain twenty-four (24) Calendar Months commencing on the Initial Closing Date and ending on the Initial Line Maturity Date (i.e., September 21, 2006).

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“Intangible Assets” means all intangible assets of Borrower under GAAP, including without limitation copyrights, franchises, goodwill, licenses, loan origination fees, non-competition agreements, conveyance/organization/formation costs (to the extent required to be capitalized under GAAP), patents, service marks, service names, trademarks, trade names, write up in the book value of any asset in excess of the acquisition cost of the asset, any amount (however designated on the balance sheet) representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of Borrower, loans and advances to partners/employees/affiliates of Borrower, unamortized leasehold improvement expenses not recoverable at the end of the lease term, and unamortized Debt discount and deferred discount.

“Interest Incurred” shall mean, for any period, the sum of all interest incurred by a Person on a consolidated basis during such period, whether capitalized or expensed.

“Interest Rate” shall mean the rate of interest set forth in the Note.

“Land” or “Property” means that certain real property more particularly described in each Deed of Trust with respect to each Existing Project, and all other real property for each and every real property and all improvements located or to be constructed thereon located in each and every County for each Qualified Project to be financed by a Loan to be made hereunder. For purposes of this Agreement, all such properties shall be referred to individually and collectively in the singular.

“Letter of Credit” shall mean any letter of credit to be issued by Lender under the Letter of Credit Line.

“Letter of Credit Advance” shall mean each and every Advance of Loan funds to be made by Lender if there is any draw upon any Letter of Credit issued pursuant to this Agreement.

“Letter of Credit Fee” means that certain fee due and payable by Borrower on each Letter of Credit issued hereunder, which fee shall be calculated at the rate of one percent (1.00%) per annum on the face amount of the Letter of Credit, and said fee shall be payable as a condition to the issuance of each Letter of Credit and on each twelve-month anniversary of the issuance date of said Letter of Credit, if said Letter of Credit is to be extended beyond a twelve-month term.

“Letter of Credit Request” means each and every request by Borrower for the issuance of a Letter of Credit hereunder, which request shall be in the form attached hereto as Exhibit “C”.

“Letter of Credit Line” shall mean that certain line of credit to be provided under the Loan for the purposes set forth in Section 2.3 of this Agreement, which line of credit shall not exceed at any time the sum of Six Million Dollars ($6,000,000.00) (“LOC Total Commitment Amount”). The Letter of Credit Line shall be a revolving line of credit. Prior to the Maturity Date, the Letter of Credit Line may be drawn, repaid and drawn again through individual Advances in repetition, subject to the limitations herein, so long as:

(1) The sum of (a) the amounts outstanding on the Letter of Credit Line, and (b) the cumulative Letter of Credit Line amounts that are committed but not yet advanced on the Letter of Credit Line, never exceed the LOC Total Commitment Amount; and

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(2) The sum of (a) the amounts outstanding on the Loan, and (b) the cumulative Loan amounts that are committed but not yet advanced on the Loan, never exceed the Commitment Amount; and

(3) No Event of Default has occurred and is continuing.

Upon the Maturity Date, if the Loan is not renewed as provided herein, the Letter of Credit Line shall be repaid during the Reduction Period as set forth herein.

“LOC Maximum Commitment Amount” shall mean the amount committed under each Letter of Credit, which sum shall not exceed the sum equal to (a) Six Million Dollars ($6,000,000.00), less (b) any committed portion of the Letter of Credit Line that Borrower has requested and Lender has approved in its discretion be available for disbursement under the Loan.

“LOC Total Commitment Amount” shall mean the sum of all amounts committed under any Letters of Credit issued hereunder plus all Letter of Credit Advances in the aggregate, which sum shall not exceed Six Million Dollars ($6,000,000.00).

“Lien or Encumbrance” and “Liens and Encumbrances” mean, respectively, each and all of the following: (i) any lease or other right to use; (ii) any assignment as security, conditional sale, grant in trust, lien, mortgage, pledge, security interest, title retention arrangement, other encumbrance (voluntary or involuntary), stop notice, or other interest or right securing the payment of money or the performance of any other liability or obligation, whether voluntarily or involuntarily created and whether arising by agreement or under any law, ordinance, regulation, or rule (federal, state, or local); and (iii) any option, right of first refusal, or other right to purchase.

“Liquidity” shall mean the amount of any Person’s unencumbered cash, marketable securities, undrawn availability under lines of credit and unencumbered cash equivalents, as determined in accordance with GAAP.

“Loan Balance” means an amount, at any point in time, equal to (a) the sum of all outstanding Advances disbursed under the Loan, after giving effect to any borrowings and prepayments or repayments of Advances occurring prior thereto, plus (b) with respect to all outstanding Letters of Credit issued hereunder, the aggregate amount of all said Letters of Credit and all unreimbursed Letter of Credit Advances.

“Loan” means the revolving line of credit from Lender to Borrower described in this Agreement, which Loan shall include all the aggregate of all Project Loans made and all Letters of Credit issued hereunder.

“Loan Allocation” shall mean:

(a) With respect to each Lot to be constructed in a Qualified Project, the lesser of:

(1) the pro rata sum of the costs to be advanced by Lender as shown in the A&D Budget delivered to Lender with respect to such Lot; or

(2) the Maximum Allowed Advance for said Lot.

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(b) With respect to each Home to be constructed in a Qualified Project, the lesser of:

(1) the sum of the costs to be advanced by Lender as shown in the Home Construction Budget delivered to Lender with respect to such Home; or

(2) the Maximum Allowed Advance for said Home.

“Loan Documents” means this Agreement, the Note, the Deeds of Trust, the Environmental Indemnities and other Security Documents, and all other guaranties, agreements, documents, or instruments signed by Borrower and evidencing, guarantying, securing or containing agreements with respect to any and all Advances made hereunder, as such agreements, documents, and instruments may be amended, modified, extended, renewed, or supplemented from time to time.

“Loan Payment Date” means the first day of each Calendar Month after the Closing Date provided, however, that at Lender’s option, the First Payment Date may be the first day of the second calendar month after the Closing Date.

“Loan Term” means the period commencing with the Closing Date and ending on the applicable Maturity Date.

“Lot Advance Maturity Date(s)” shall mean the term in which a Lot may remain in the Borrowing Base for the purposes of calculating the Borrowing Availability:

(a) With respect to Developed Lots, twenty-four (24) Calendar Months after the initial entry of such Developed Lots into the Borrowing Base (less any time that has elapsed from the entry of said Lots into the Borrowing Base as either Lots Under Development and/or Entitled Land to the date of entry into the Borrowing Base as Developed Lots);

(b) With respect to Lots Under Development, twelve (12) Calendar Months after the initial entry of such Lots Under Development into the Borrowing Base (less any time that has elapsed from the entry of said Lots into the Borrowing Base as Entitled Land to the date of entry into the Borrowing Base as Lots Under Development) (provided, however, that said maturity date may be extended for a six-month period if over fifty percent (50%) of the total Lots Under Development under the subject Qualified Project have become Developed Lots prior to said maturity date and Borrower is in compliance with the Extension Conditions); or

(c) With respect to Entitled Land, nine (9) Calendar Months after the initial entry such Entitled Land into the Borrowing Base.

“Lot Concentration Limitation” shall have the meaning given to such term in the Maximum Aggregate Loan Allocation(s).

“Lots” means, with respect to each Qualified Project to be financed hereunder, one (1) or more than one (1) of the lots into which the subject Property is to be or has been divided, as set forth on the Final Map.

“Lots Under Development” means a portion of the Land for which Borrower has satisfied the conditions set forth in Section 4.3.

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“Material Adverse Change” means any change in the assets, business, financial condition, operations, or results of operations of Borrower or any Project or any other event or condition that in the reasonable opinion of Lender (i) is reasonably likely to affect in a material adverse respect the likelihood of performance by any Borrower of any of the obligations in the Loan Documents, (ii) is reasonably likely to affect in a material adverse respect the ability of any Borrower to perform any of the Obligations in any of the Loan Documents, (iii) is reasonably likely to affect in a material adverse respect the legality, validity, or binding nature of any of the Obligations in the Loan Documents or any lien, security interest, or other encumbrance securing any of the Obligations under the Loan Documents, or (iv) could affect the priority of any lien or encumbrance securing any of the Obligations in the Loan Documents.

“Maturity Date” means (a) the Initial Line Maturity Date — i.e., September 21, 2006, subject to the twelve-month extension of the maturity of the Loan during the Reduction Period as set forth in Section 2.1.3 below, or (b) such earlier date upon the acceleration of the repayment of the Loan as provided in the Loan Documents after the occurrence of the Event of Default.

“Maximum Allowed Advance” shall have the following meanings:

• Entitled Land: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) fifty percent (50%) of Total Project Costs, or (ii) fifty percent (50%) of the Appraised Value for said Land, subject to Lender’s approval.

• Lots Under Development: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) seventy percent (70%) of Total Project Costs, or (ii) seventy percent (70%) of the Bulk Finished Lot Value for said Lots, subject to Lender’s approval.

• Developed Lots: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) seventy percent (70%) of Total Project Costs, or (ii) seventy percent (70%) of the Bulk Finished Lot Value for said Lots, subject to Lender’s approval.

• Spec Homes: The sum of all Advances and Reserved Allocations committed but not disbursed for said Homes shall not exceed the lesser of (i) eighty-five percent (85%) of Total Project Costs, or (ii) seventy-five percent (75%) of the Base Appraisal for said Homes, subject to Lender’s approval.

• Presold Homes: The sum of all Advances and Reserved Allocations committed but not disbursed for said Homes shall not exceed the lesser of (i) ninety percent (90%) of Total Project Costs, or (ii) eighty percent (80%) of the Base Appraisal for said Homes, subject to Lender’s approval.

“Maximum Aggregate Loan Allocation(s)” shall mean each and every one of the following:

(a) With respect to all Qualified Projects included in the Borrowing Base (collectively or individually “Geographic Concentration Limitation”):

(1) The aggregate Loan Allocations for all Lots and/or Homes for Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) located in the State of Arizona shall not exceed the sum of Fifteen Million Dollars ($15,000,000.00); and/or

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(2) The aggregate Loan Allocations for all Lots and/or Homes for Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) located in the State of Nevada shall not exceed the sum of Fifteen Million Dollars ($15,000,000.00).

(b) With respect to all Lots to be included in the Borrowing Base, the aggregate Loan Allocations for all Entitled Land, Lots Under Development and Developed Lots for all Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Twenty Million Dollars ($20,000,000.00) (“Lot Concentration Limitation”).

(c) With respect to all Spec Homes to be included in the Borrowing Base (“Spec Home Concentration Limitation”):

(1) For all Qualified Projects financed hereunder, the aggregate Loan Allocations for all Spec Homes for all said Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Twelve Million Dollars ($12,000,000.00); and/or

(2) For each and every Qualified Project financed hereunder, the total number of Spec Homes shall not exceed (A) for the first phase of any Qualified Project, twenty-five (25), or (B) for all subsequent phases of any Qualified Project, the lesser of twenty-five (25) or four (4) months’ actual absorption for the subject Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for said Project.

“Model Home” shall mean, with respect to each Qualified Project to be financed hereunder, a Home constructed and furnished initially for inspection by prospective purchasers, which Model Home will not be sold until all of the other Homes of its respective plan type in said Project are sold, and which otherwise shall remain as collateral for the Loan until the Loan is paid in full. If permitted by Lender in its sole discretion for any Project, a Model Home may be sold and leased back to Borrower pursuant to a lease that is assigned to Lender and that is acceptable in form and content to Lender and, in such event, said Model Home shall remain as a model for said Project to be used for the marketing of the Project until all Homes in the Project of the same plan type as said Model Home have been sold.

“Net Sales Proceeds” means, for any sale of any portion of the Qualified Project, the gross sales price, less to the extent paid by or charged to Borrower: (a) customary tax prorations; (b) customary real estate brokerage commissions payable to any Person who is neither (i) an Affiliate of Borrower or employed by Borrower, nor (ii) engaged in on-site sales at said Project; and (c) reasonable and customary closing costs, including escrow fees, title insurance premiums, prorations, and recording costs as reflected on the settlement statement and reasonably approved by Lender.

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“Net Worth” shall mean the amount by which a Person’s Total Assets exceeds Total Liabilities less, to the extent included in Total Assets, the sum of:

(a) the total book value of all assets of a Person and its subsidiaries properly classified as intangible assets under GAAP, including such items as good will, the purchase price of acquired assets in excess of the fair market value thereof, trademarks, trade names, service marks, brand names, copyrights, patents and licenses, and rights with respect to the foregoing; plus

(b) all amounts representing any write-up in the book value of any assets of a Person and its subsidiaries resulting from a revaluation thereof subsequent to said Person’s balance sheet date.

“Non-Related Party” shall mean a person or entity that is not an Affiliate of Borrower, nor an officer of, or parent or subsidiary corporation of a shareholder of Borrower, or any person or entity otherwise controlled directly or indirectly by Borrower or Borrower’s shareholders, or a parent or subsidiary corporation or partnership of Borrower or its shareholders.

“Note” means that certain Third Amended and Restated Construction Loan Promissory Note (Construction Revolving Line of Credit) of even date herewith, executed by Borrower and payable to Lender, evidencing Borrower’s indebtedness hereunder, as amended, modified, extended, renewed or supplemented from time to time.

“Obligations” means the obligations of Borrower under the Loan Documents.

“Organizational Documents” shall include Borrower’s articles of incorporation and by-laws and any amendments thereto, and any certificates required to be filed by said corporation with any Governmental Authority.

“Permitted Exceptions” means (i) all items shown in Schedule B Part 1 of the Title Policy; (ii) Liens and Encumbrances granted to Lender to secure the Obligations; and (iii) other permitted exceptions pursuant to the Deed of Trust.

“Permitted Expenses” shall mean all expenses to be paid or reimbursed for the purposes set forth in Section 2.4.2 that are budgeted by Borrower in any and all Budgets for Project Loans and are budgeted in Borrower’s annual business plan submitted to Lender and that are approved by Lender in its sole discretion.

“Person” means a natural person, a partnership, a joint venture, an unincorporated association, a limited liability company, a corporation, a trust, any other legal entity, or any Governmental Authority.

“Plans and Specifications” means, with respect to any Qualified Project financed by a Loan to be made hereunder, the plans and specifications for the construction of the A&D Improvements and/or the Homes, as applicable, that have been approved by Lender pursuant to this Agreement.

“Pledge Agreement” means that certain collateral pledge and assignment dated as of September 21, 2000 by Borrower in favor of Lender pursuant to which Borrower has assigned to Lender all of the Purchase Contracts, Project Revenues and/or Net Sale Proceeds now or hereafter existing, as such assignment may be amended, modified, extended, renewed or supplemented from time to time.

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“Pledged Account” shall mean the Borrower’s Funds Account, which account and all funds deposited and held therein shall be pledged as security for the Loan as provided herein.

“Presold Home” shall mean a Home that is subject to:

(a) A duly executed Purchase Contract, escrow instructions or deposit receipt without contingencies (other than the sale of an existing residency contingency);

(b) A prequalification letter or mortgage commitment from an institutional mortgage lender or such other information or verification as Lender may require concerning the ability of the prospective buyer to obtain financing or otherwise acquire the Home; and

(c) A cash earnest money deposit or down payment of at least Five Thousand Dollars ($5,000.00) (which deposit requirement shall be increased to twenty percent (20%) of the purchase price for said Home if the prospective buyer failed to satisfy the requirement in subsection (b) above).

“Project” means the Land and the Improvements to be constructed for the development and marketing of a residential subdivision, each of which project shall be acquired, developed and constructed with the proceeds of a Loan to be made hereunder as approved by Lender. No Advances for any Project shall be approved and made unless and until a Tentative Map or Final Map has been recorded for the subject Property. In any event, no Advance shall be made for any Homes to be constructed in a Project unless and until a Final Map has been recorded for the subject Project. For purposes of this Agreement, all such projects shall be referred to individually and collectively in the singular. In the event a Qualified Project is entered into the Borrowing Base prior to the recordation of the Final Map for the applicable Project, Lender shall require, among other things, that an ALTA survey must be delivered to Lender for review and approval and/or Title Company shall agree in writing to issue the required Title Policy with all requested survey endorsements.

“Project Advance” means an advance of Loan proceeds by Lender to Borrower hereunder for the payment or reimbursement of any Permitted Expenses for Qualified Projects, which advance shall not be a Letter of Credit Advance.

“Project Loan” shall mean, for each Qualified Project to be included in the Borrowing Base, the aggregate of all Loan Allocations for all Lots and/or Homes to be included in the Borrowing Base for said Qualified Project. For purposes of this Agreement, all such loans shall be referred to individually and collectively in the singular.

“Project Loan Request” means each and every request by Borrower for the inclusion of a Qualified Project into the Borrowing Base, which request shall be in the form attached hereto as Exhibit “D”.

“Project Minimum Standards” means, with respect to each Qualified Project to be financed hereunder, the requirements of Lender that:

(a) The total number of Lots and/or Homes in each Qualified Project shall be less than two hundred (200); and

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(b) The total amount in the A&D Budget for each Qualified Project for land acquisition and lot development costs shall be less than $12,000,000.00.

“Project Revenues” means all lease or rent payments, profits, proceeds, revenues and receipts received by Borrower or on its behalf in connection with or arising out of the Qualified Projects.

“Property” or “Land” means that certain real property more particularly described in each Deed of Trust with respect to each Existing Project, and all other real property for each and every real property and all improvements located or to be constructed thereon located in each and every County for each Qualified Project to be financed by a Loan to be made hereunder. For purposes of this Agreement, all such properties shall be referred to individually and collectively in the singular.

“Purchase Contract” means:

(a) For the sale of any Lot or Lots, a bona fide written agreement between Borrower and a Non-Related Party (provided that an Affiliate of Borrower may be a purchaser) for sale in the ordinary course of Borrower’s business, accompanied by a cash earnest money deposit or down payment in an amount that is customary and is not subject to any contingencies (including without limitation “free look” or other similar contingencies related to the sale of other property of the purchaser, but excluding conditions precedent to the closing of any such sale to a Non-Related Party); and/or

(b) For the sale of any Home or Homes, a bona fide, arm’s-length written agreement entered into between Borrower and a Non-Related Party for the sale in the ordinary course of Borrower’s business of any Home for a sales price at least equal to the Maximum Allowed Advance. The Sales Agreement shall be conforming to any and all rules or regulations promulgated by any federal, state or local governmental entity with jurisdiction over the subject Project. A Sales Agreement shall be considered “without contingencies” if the buyer’s obligation to purchase is not contingent upon the sale of the buyer’s existing residence and provided there are no other contingencies to the buyer’s obligation to purchase the Home other than financing, title and inspection contingencies which are normally included in Sales Agreements for newly constructed residences in the Project.

“Qualified Project” means any Project that satisfies the following conditions:

(a) Lender has received a fully completed Project Loan Request, which certificate shall be executed by Borrower;

(b) Lender has received a fully executed Deed of Trust for the Property included in the Project, which Deed of Trust shall be recorded in the County in which said Property is located;

(c) Lender has received a fully executed Environmental Indemnity for the Property included in the Project, and has received fully executed Construction Assignments for the Project;

(d) Upon recordation of said Deed of Trust, Lender shall have received a Title Policy issued by the Title Company; and

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(e) Lender shall have received, reviewed and approved any and all Project information required by Lender hereunder.

“Raw Land” means (i) portions of the Land with respect to which all conditions for inclusion in the Borrowing Base as Entitled Land, Lots Under Development or Developed Lots have not been satisfied and (ii) portions of the Land which are not designated for development but are reserved as open space or as streets and common areas to be dedicated to homeowners’ associations and other Governmental Authorities.

“Reduced Commitment Amount” shall mean the mandatory reductions in the Commitment Amount during the Reduction Period, as set forth above in the definition of Commitment Amount.

“Reduction Period” shall mean, as set forth in Section 2.1.7 below, that twelve (12) month period during which all existing Qualified Projects entered into the Borrowing Base as of the Initial Line Maturity Date shall remain in the Borrowing Base and during which Lender’s obligation to include any new Qualified Projects into the Borrowing Base shall terminate.

“Release Note Payment Amount” shall mean the sum equal to the total Release Price paid to Lender less any Excess Sales Proceeds.

“Release Price” means, for all Lots and Homes to be sold and released and hereunder, the greater of (i) one hundred percent (100%) of the Net Sales Proceeds for said Lot or Home, or (ii) the Maximum Allowed Advance for said Lot or Home; provided however, the Release Price in connection with a Bulk Lot Sale shall be equal to the Maximum Allowed Advance for all Lots in said Bulk Lot Sale. In the event the Net Sales Proceeds exceeds the Maximum Allowed Advance for the Lot or Home to be released, the difference between the Net Sales Proceeds and the Maximum Allowed Advance amount (“Excess Sales Proceeds”) shall be deposited into the Borrower’s Funds Account for application as provided herein, with the remaining portion of the Release Price (“Release Note Payment Amount”) to be applied to reduce the outstanding principal balance of the Loan. Any and all Excess Sales Proceeds deposited in the Borrower’s Funds Account may be applied by Borrower to repay the outstanding principal balance of the Loan and/or to pay for Permitted Expenses as provided hereinbelow.

“Required Principal Payment” means (a) in connection with each Release Price paid to Lender in connection with the sale of a Lot or Home, the Release Note Payment Amount (and, if elected by Borrower, any Excess Sales Proceeds deposited into the Borrower’s Funds Account) to be applied to the outstanding Loan Balance, and (b) that certain quarterly principal payment to be made during the Reduction Period in order to reduce the outstanding balance of the Loan to an amount not greater than the then-applicable Reduced Commitment Amount.

“Requirements” means any and all obligations, other terms and conditions, requirements, and restrictions in effect now or in the future by which Borrower or any or all of the Project is bound or which are otherwise applicable to any or all of the Project, construction of any improvements thereon, or occupancy, ownership, or use of the Project (including, without limitation, such obligations, other terms and conditions, restrictions, and requirements imposed by: (i) any law, ordinance, regulation, or rule (federal, state, or local); (ii) any Approvals and Permits; (iii) any Permitted Exceptions; (iv) any condition, covenant, restriction, easement, right of way, or reservation applicable to the Land; (v) insurance policies; (vi) any other agreement, document, or instrument to which Borrower is a party or

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by which Borrower or any or all of the Project or the business or operations of Borrower is bound; or (vii) any judgment, order, or decree of any arbitrator, other private adjudicator, or Governmental Authority to which Borrower is party or by which Borrower or any of the Project is bound).

“Reserved Allocation” shall mean, for each Lot and Home included in the Borrowing Base, the difference at any time and from time to time between (i) the Loan Allocation for said Lot or Home less (ii) the principal amount with respect to such Lot and Home previously included in an Advance for the acquisition of and/or construction of Improvements on such Lot and Home.

“Sale Deposits” shall have the meaning given to such term in Section 2.1.6 below.

“Security Documents” means the Deeds of Trust, the Pledge Agreement, Account Pledge Agreement, the Construction Assignments, the Financing Statements, and such other assignments and security interests as may be required or granted pursuant to the terms of the Loan Documents.

“Spec Home” means any Home in a Qualified Project that is not a Presold Home, including without limitation a Model Home.

“Spec Home Concentration Limitation” shall have the meaning given to such term in the Maximum Aggregate Loan Allocation(s).

“Soft Costs” means, for each Qualified Project to be financed hereunder, the fees and costs that are not directly related to the onsite construction of the A&D Improvements or Homes for said Project, as applicable, which fees and costs shall include any Loan fees, plus any other costs, fees or expenses approved by Lender, including without limitation interest, inspection fees, escrow and title fees, processing and closing fees, wiring fees, legal fees, appraisals and all closing costs, insurance costs, and costs of direct project supervision, and also including without duplication costs to be funded from general budget categories for overhead, supervision, general and administrative, and marketing expenses, provided that the foregoing in the aggregate shall not exceed the amount of the Soft Costs set forth in the A&D Budget or Home Construction Budget, as applicable.

“Subsequent Closing Date” shall mean the date on which each Deed of Trust for a Future Project is recorded and a Qualified Project is entered into the Borrowing Base.

“Taking” means the taking of any or all of the Project, any interest therein, or any right thereto for public or quasi public use by the power of eminent domain, by condemnation (including, without limitation inverse condemnation), or any event in lieu thereof and any damage to the Project as the result of any taking of any other part of the Project or any property in the vicinity of the Project.

“Tangible Net Worth” shall mean a Person’s Net Worth less Intangible Assets.

“Tentative Map” shall mean the tentative tract map for the Property for each Qualified Project to be financed by a Loan to be made hereunder, which map shall be in form and content acceptable to Lender in its discretion and shall not be subject to any conditions that, in Lender’s reasonable judgment, cannot be reasonably satisfied by Borrower.

“Title Company” means Fidelity National Title Insurance Company.

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“Title Policy” means the title insurance policies to be provided by Borrower under Section 4.1.11.

“Total Assets” shall mean all assets of a Person determined in accordance with GAAP. All real estate assets held for development or sale shall be valued on an undepreciated cost basis. The assets of a Person on the financial statements of a Person shall be adjusted to reflect such Person’s allocable share of such asset, for the relevant period or as of the date of determination, taking into account (a) the relative proportion of each such item derived from assets directly owned by such Person, and (b) such Person’s respective ownership interest in its subsidiaries.

“Total Project Costs” shall mean:

(a) For all Land (including without limitation Entitled Land) to be acquired, the sum of all acquisition and other land costs;

(b) For all A&D Improvements to be financed hereunder, the sum of the land costs and the total Hard Costs and Soft Costs for the A&D Improvements pursuant to the applicable A&D Budgets; and

(c) For all Homes to be financed hereunder, the sum of the Hard Costs and Soft Costs for the Homes pursuant to the applicable Home Construction Budgets.

“Total Liabilities” shall be defined in accordance with GAAP and shall include all payable and accruals.

“Total Liabilities-to-Tangible Net Worth Ratio” means, with respect to each Person, the ratio of such Person’s (a) Total Liabilities to (b) Tangible Net Worth.

“Total Lot Inventory”: Borrower shall not own unsold lots under development and unsold developed lots (excluding lots under option agreements) in excess of an aggregate sum equal to two and one-half (2.5) times the number of lot sales and closings over the immediately preceding rolling four (4) Calendar Quarters) for all residential housing projects owned by Borrower.

“Unmatured Event of Default” means any condition or event that with notice, passage of time, or both would, if not cured within the time periods (if any) permitted pursuant to the Loan Documents, be an Event of Default.

1.2 General Provisions.

(a) Singular and Plural Terms. Any defined term used in the plural in any Loan Document shall refer to all members of the relevant class and any defined term used in the singular shall refer to any number of the members of the relevant class.

(b) Accounting Principles. Any accounting term used and not specifically defined in any Loan Document shall be construed in conformity with, and all financial data required to be submitted under any Loan Document shall be prepared in conformity with, generally accepted accounting principles applied on a consistent basis.

(c) Exhibits Incorporated. All exhibits to this Agreement, as now existing and as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference.

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(d) References. Any reference to any Loan Document or other document shall include such document both as originally executed and as it may from time to time be supplemented, modified or amended. References herein to Articles, Sections and Exhibits shall be construed as references to this Agreement unless a different document is named. References to subparagraphs shall be construed as references to the same section in which the reference appears unless a different section is named.

(e) Other Terms. The term “document” is used in its broadest sense and encompasses agreements, certificates, opinions, consents, instruments and other written material of every kind. The terms “including” and “include” mean “including (include) without limitation.” The term “or” is not exclusive. The requirement that any party “deliver” any item to another party shall be construed to require that the first party “deliver or cause to be delivered” such item to the second party. The term “any,” as a modifier to any noun, shall be construed to mean “any or all” preceding the same noun in the plural. The term “agreement” includes both written and oral agreements. The terms “law” and “laws,” unless otherwise modified, mean, collectively, all federal, state and local laws, rules, regulations, codes and administrative and judicial precedents. The terms “herein,” “hereunder” and other similar compounds of the word “here” refer to the entire document in which the term appears and not to any particular provision or section of the document. The use of the pronoun “its” shall be deemed to also refer to “his,” “hers,” “its,” or “theirs.” This Section 1.2 shall apply to all of the Loan Documents and the Indemnity.

(f) Headings. Section and section headings are included in the Loan Documents for convenience of reference only and are not part of the Loan Documents for any other purpose.

(g) Other Documents. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, this Agreement shall prevail.

(h) Intention. The provisions of this Article 1 shall not apply in any instance where a different meaning, construction or reference is clearly intended.

(i) Recitals. Borrower has applied to Lender for the Loan for the purpose of developing the Qualified Projects. Lender is willing to make such Loan to Borrower on the terms and subject to the conditions contained in this Agreement and the other Loan Documents.

2. BORROWING BASE.

2.1 Loan Facility.

2.1.1 Commitment.

(a) Amount of Commitment. Subject to the terms and conditions of this Agreement, Lender agrees to make Advances and/or issue Letters of Credit from time to time until the Maturity Date up to the maximum amount of the Borrowing Availability, provided that the aggregate amount of all Loan Allocations and Letters of Credit outstanding and committed at any time and from time to time, shall not exceed the least of (i) the Commitment Amount, or (ii) the Borrowing Availability at such time, or (iii) the Maximum Allowed Advances for all Homes and Lots to be entered into the Loan plus the LOC Total Commitment Amount.

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(b) Use of Loan Proceeds. Proceeds of Advances may be used only for the purpose paying and/or reimbursing Permitted Expenses as described in Section 2.4.2 below.

(c) Revolving Line of Credit. Advances shall be on a revolving basis. Advances repaid may be re-borrowed subject to the terms and the conditions herein. Although the outstanding principal of the Note may be zero from time to time, the Loan Documents shall remain in full force and effect until the Commitment terminates and all other Obligations are paid and performed in full.

(d) Suspension or Termination of Commitment. Upon the occurrence of an Unmatured Event of Default or an Event of Default and so long as such Unmatured Event of Default or Event of Default continues, Lender in its absolute and sole discretion, and without notice, may suspend the commitment to make Advances. In addition, upon the occurrence of an Event of Default, Lender in its absolute and sole discretion, and without notice, may terminate the commitment to make Advances. The obligation of Borrower to repay Advances shall be evidenced by the Note.

2.1.2 Purpose of the Loan.

(a) The purpose of this Agreement is to set forth the general terms and conditions for the entry of Qualified Projects into a borrowing base revolving line of credit loan in the total sum of Fifty Million Dollars ($50,000,000.00), which line of credit is being extended to provide funding for the acquisition, development and construction of current and future residential home projects by Borrower. This Agreement (i) shall set forth the basic approval requirements for said Projects, (ii) shall set forth the basic terms and conditions for the disbursement of Loan funds for said Projects, and (iii) establishes a revolving line of credit under which Advances may be made, repaid and made again, subject to the aggregate loan limits and time limits set forth herein.

(b) The Loan is being made for the purpose of (i) providing financing for Existing Projects, and (ii) providing financing for Future Projects, and (iii) providing a Letter of Credit facility for the issuance of Letters of Credit for future residential projects to be owned and developed by Borrower. Each new Qualified Project submitted for inclusion in the Loan shall be presented to Lender for approval in compliance with the requirements of Section 2.1.4 below. No new Qualified Project will be approved for inclusion in the Borrowing Base after the Initial Line Maturity Date.

(c) For each Qualified Project which is approved for financing hereunder, (i) a single Deed of Trust shall be executed to secure any and all such credit facilities, and (ii) any and all Project Loans shall be cross-defaulted and cross-collateralized.

2.1.3 Purpose of the Project Loans. Each Advance made for the Qualified Projects included within the Borrowing Base from time to time shall be for the purpose of paying for or reimbursing Borrower for certain costs and expenses incurred in connection with the acquisition of Land and the construction of A&D Improvements, Presold, Spec and/or Model Homes thereon and for other costs and expenses incidental to said Qualified Projects, as more particularly provided in this Agreement. This Loan shall constitute a revolving line of credit, and all Qualified Projects included in the Borrowing Base shall satisfy the Project Minimum Standards.

(a) Revolving Line of Credit. During the Loan Term, Advances for Qualified Projects may be drawn, repaid and drawn again through individual Advances in repetition, subject to the limitations herein, so long as (i) any Advance requested hereunder

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shall not exceed the Borrowing Availability as of the date said Advance is requested, and (ii) the aggregate Loan Allocations for the Lots and Homes included in the Qualified Projects shall, never exceed the Maximum Aggregate Loan Allocations, and so long as no Event of Default has occurred and is continuing.

(b) Continuation of Revolving Line after Initial Line Maturity Date. After the Initial Line Maturity Date, no new Project will be approved to be a Qualified Project for entry into the Borrowing Base, but Advances for all Qualified Projects included in the Borrowing Base as of the Initial Line Maturity Date may continue to be drawn to complete all Improvements remaining to be constructed as part of said Qualified Projects, subject to the limitations herein.

(c) Evidence of Loan Advances. Amounts outstanding under the Loan shall be evidenced by the Note and shall be secured by the Deed of Trust. Loan Advances for each Qualified Project shall be charged and funded under the Note. In the event of any inconsistency between the Note and this Agreement, the provisions of this Agreement shall prevail.

(d) Reduction of Borrowing Availability for Non-Compliance with Maximum Aggregate Loan Allocations. Notwithstanding any other provision of this Agreement to the contrary, in the event that the aggregate Loan Allocations for the Lots and Homes included in the Qualified Projects exceeds any Maximum Aggregate Loan Allocation, then the Borrowing Availability shall be reduced in the amount by which said Loan Allocations exceeds any Maximum Aggregate Loan Allocation.

2.1.4 Approval of Qualified Projects. Subject to the terms and conditions of this Agreement, Lender agrees to include Qualified Projects into the Borrowing Base, as said Projects are approved by Lender in its discretion during the Loan Term. Each Qualified Project shall be in compliance with the Project Minimum Standards. Lender shall have no obligation to approve of any Qualified Project unless and until:

(a) Tract Map(s). Borrower has provided Lender with an approved Tentative Map or recorded Final Map for said Project to be financed. Provided, however, that notwithstanding any provision of this Agreement to the contrary, Lender may agree to enter a Qualified Project into the Borrowing Base prior to the recordation of the Final Map, but Lender shall have no obligation to disburse any Loan funds for any Hard Costs for any Home Improvements to be constructed as part of said Qualified Project unless and until the Final Map for the Qualified Project is recorded with the Official Records of the County. In the event a Qualified Project Loan is entered into the Borrowing Base prior to the recordation of the Final Map for said Qualified Project, Lender shall require, among other things, that an ALTA survey must be delivered to Lender for review and approval and/or Title Company shall agree in writing to issue the required Title Policy with all requested survey endorsements.

(b) Project Loan Information. Borrower shall have submitted for Lender’s review and approval in its sole and absolute discretion:

(i) A fully-completed and executed Project Loan Request; and

(ii) To the extent said information is available for the A&D Improvements and/or Home Improvements to be constructed as part of the Qualified Project as of the date of entry into the Borrowing Base —

(A) Copies of the Plans and Specifications, Architect’s Agreement, Construction Contract, Engineering Contract, and all other agreements, entitlements, CC&Rs, preliminary title report, permits, licenses and approvals concerning said Project submitted for approval;

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(B) All cost breakdowns for the Improvements to be constructed as part of the Qualified Project as of the date of entry into the Borrowing Base;

(C) Project sources and uses of funds, Project economics and feasibility, market data and other similar information concerning said Qualified Project as reasonably requested by Lender;

(iii) Any and all of the applicable information concerning the Project set forth in Exhibit “D” and Exhibit “K” attached hereto; and

(iv) All other information reasonably requested by Lender. Each Project Loan Request submitted for approval by Borrower shall comply with all approval requirements set forth herein.

(c) Additional Project Requirements. Lender shall have no obligation to enter any Qualified Project into the Borrowing Base if (i) there is a continuing Unmatured Event of Default or Event of Default, and/or (ii) if the entry of said Qualified Project into the Borrowing Base would violate any of the Maximum Aggregate Loan Allocation limitations. In the event Borrower seeks approval of the entry of a Qualified Project into the Borrowing Base under terms and conditions different from those approval terms set forth herein, then Lender shall review and approve or disapprove of such Qualified Project pursuant to Lender’s underwriting guidelines in effect at the time of such application for approval.

2.1.5 Interest Payments. Interest on the unpaid outstanding principal amount of the Loan shall accrue at the Interest Rate(s) specified in the Note.

(a) Payment. Interest at the Interest Rate shall accrue on the outstanding and unpaid balance, if any, of the Advances made hereunder, commencing on the date of each Advance under the Loan, until repaid. Interest accruing under the Note shall be due and payable on each Loan Payment Date, commencing on the First Payment Date, until repayment in full, together with all other sums owed to Lender pursuant to any Loan Document.

(b) Rate After Default. Upon and after the occurrence of an Event of Default hereunder or under any of the Loan Documents, at the option of Lender, the outstanding principal balance of the Loan shall bear interest, payable on demand, at a rate per annum equal to the Default Interest Rate. The application of the Default Interest Rate shall not be interpreted or deemed to extend any cure period set forth in this Agreement or otherwise to limit any of Lender’s remedies under this Agreement or any of the other Loan Documents.

(c) Computation of Interest. Interest shall be calculated on a 360-day year for all Advances, but, in any case, shall be computed for the actual number of days in the period for which interest is charged, which period shall consist of 365 days on an annual basis. If any payment of interest under the Note would otherwise be due on a day which is not a Business Day, the payment instead shall be due on the next succeeding Business Day and such extension of time shall be included in computing the interest due in respect of said payment.

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(d) No Deductions. All payments of principal or interest under the Note shall be made without deduction of any present and future taxes, levies, deductions, charges or withholding, which amounts shall be paid by Borrower. Borrower will pay the amounts necessary such that the gross amount of the principal and interest received by Lender is not less than that required by the Note.

(e) Order of Application. Any payments received by Lender will be applied as set forth herein and in the Note.

(f) Interest Reserve; Other Amounts. Borrower hereby authorizes Lender to disburse the proceeds of the Loan to pay interest accrued on the Loan and other expenses set forth in the A&D Budget and the applicable Home Construction Budgets, notwithstanding that Borrower may not have requested a disbursement of such amount. The authorization hereby granted shall be irrevocable and at Lender’s discretion, and no further direction or authorization from Borrower shall be necessary for Lender to make such disbursements. Nothing contained herein shall be deemed to obligate Lender to make such disbursements to pay interest beyond the portions of any Project Loan specifically allocated to the payment of interest under an approved Budget.

(g) Full Recourse; Payments. The Loan shall be full recourse against Borrower. All amounts payable by Borrower on or with respect to the Loan, or pursuant to the terms of any other Loan Documents, shall be paid in lawful money of the United States of America to Lender at Central Note Department, P.O. Box 518, Lawndale, California 90260–0518, in same day funds, not later than 11:00 a.m. (Pacific time) on the date due.

2.1.6 Principal Payments.

(a) Bulk Sale of Lots. Borrower shall cause to be delivered through any sale escrow to Lender, and shall pledge as additional collateral for the Loan, any deposits (collectively “Sale Deposits”) to be received by Borrower in connection with Borrower’s bulk sale of any Lots (each, a “Bulk Lot Sale”) pursuant to a Purchase Contract for the bulk sale of said Lots. All Sale Deposits shall be deposited and held in the Borrower’s Funds Account and shall be applied by Lender for the payment of the Obligations as provided in this Agreement. In the event that any Bulk Lot Sale is terminated and any Sale Deposit previously paid to Lender is to be returned to a Non-Related Party pursuant to the terms of a Purchase Contract, then Borrower may include in its Draw Request funds to pay all or a portion of said Sale Deposit to said Non-Related Party, provided there is no Event of Default and sufficient Loan funds are available under the Borrowing Availability.

(b) Sale and Release of Lots and Homes. Immediately upon the sale and closing of Lots and Homes, Borrower shall pay to Lender any and all Release Prices payable under Section 3.2 below, which proceeds shall be applied by Lender as follows: (i) the Release Note Payment Amount (and, if elected by Borrower, any Excess Sales Proceeds obtained from said sale) shall be applied to repay sums due and owing under the Note; and (ii) the Excess Sales Proceeds shall be deposited into the Borrower’s Funds Account to be included in the Borrowing Availability and applied as set forth herein.

(c) Required Principal Payments During the Reduction Period. During the Reduction Period, commencing with the first Loan Payment Date occurring on or after the end of the first Calendar Quarter following the Initial Line Maturity Date and continuing at the end of each Calendar Quarter thereafter, Borrower shall make any Required Principal Payment necessary to reduce the outstanding Loan Balance to a sum not in excess of the then-applicable Reduced Commitment Amount.

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(d) Voluntary Loan Prepayment. Borrower shall have the right to prepay the Loan, in whole or in part, at any time, without premium or penalty, provided that Borrower must pay, together with any prepayment, all accrued but unpaid interest upon the principal so prepaid. Prior to the Initial Line Maturity Date, no prepayment of the Loan shall reduce the Commitment Amount, unless Borrower relinquishes in writing its right to obtain an Advance of all or any of the amount so prepaid; during the Reduction Period, principal payment(s) may be required as provided herein to reduce the Loan Balance to the applicable Reduced Commitment Amount.

(e) Payments of Principal and Interest to Balance the Loan. Principal and interest shall be payable in accordance with the terms of the Note; provided, however, that in addition to payments required pursuant to the terms of the Note, if for any reason at any time the outstanding principal amount of Advances under the Loan exceeds the Available Commitment, Borrower shall make a payment to Lender in an amount equal to such excess principal amount within the earlier of (a) one (1) Business Day after notice from Lender, (b) five (5) days after delivery of a Borrowing Base Certificate and/or other financial reports of Borrower reflecting that such a payment is due, and (c) five (5) days after Lender notifies Borrower (which notice may be oral, to be followed promptly by written notice setting forth the Lender’s calculations) of Lender’s determination of the Borrowing Base and Borrowing Availability pursuant to Section 2.2.3. Any funds paid hereunder shall be applied by Lender to the outstanding principal balance of the Loan.

2.1.7 Loan Term.

(a) Upon the Initial Line Maturity Date, Lender and Borrower shall initiate a twelve (12) month period (“Reduction Period”) to reduce the Commitment Amount under the terms and conditions set forth herein.

(b) During the Reduction Period, (i) no new Qualified Projects shall be entered into the Borrowing Base, and (ii) Advances under existing Project Loans shall continue to be made for the construction of Improvements for the subject Projects, subject to the limitations set forth herein.

2.1.8 Terms of Project Advances.

(a) Lots entered into the Borrowing Base shall be removed from the Borrowing Base on the applicable Lot Advance Maturity Date; provided, however, that the Lot Advance Maturity Date for Lots Under Development in a Project may be extended for a six-month period if over fifty percent (50%) of the total Lots Under Development under the subject Qualified Project have become Developed Lots prior to said maturity date and if Borrower has satisfied the Extension Conditions.

(b) Homes entered into the Borrowing Base shall be removed from the Borrowing Base on the applicable Home Advance Maturity Date; provided, however, that the Home Advance Maturity Date for Model Homes in a Project may be extended for a six-month period if Borrower has satisfied the Extension Conditions.

2.2 Available Commitment; Borrowing Base.

2.2.1 Available Commitment. The Available Commitment shall be determined in accordance with this Section 2.2 and shall be the lesser of (a) the applicable Commitment Amount or Reduced Commitment Amount, as in effect from time to time, or (b) the Borrowing Base.

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(i) The Available Commitment for all Qualified Projects shall be the difference between the amount set forth in 2.2.1 above less the amounts of all Letters of Credit issued under Section 2.3 below.

(ii) The Available Commitment for all Letters of Credit to be issued hereunder shall be no greater than the LOC Total Commitment Amount of Six Million Dollars ($6,000,000.00).

2.2.2 Amount of Borrowing Base and Borrowing Availability. Subject to the provisions of Section 2.2.3 below, the Borrowing Base and Borrowing Availability shall be determined by Lender based on each Borrowing Base Certificate delivered pursuant to Section 6.4.6.

2.2.3 Determination of Borrowing Availability.

(a) General Determination. The Borrowing Availability shall be determined by Lender based upon:

(i) Each Borrowing Base Certificate most recently submitted by Borrower from time to time (adjusted as determined by Lender from time to time to reflect portions of the Project sold, property released from the Deed of Trust, and other adjustments and limitations pursuant to this Agreement);

(ii) Lender’s inspections made pursuant to Sections 4.3.4 and 6.10 (as such inspections may result in any adjustment to reflect any variance between (A) the Borrowing Base Certificate and (B) the result of such inspections or other information available to Lender); and

(iii) Such other information as Lender may reasonably require in order to verify such amounts.

Each Borrowing Base Certificate shall accurately reflect the valuation of the Property included in the Borrowing Base as of the last day of the Calendar Month immediately preceding the Calendar Month in which such certificate is due, shall accurately recite the amounts of the Letters of Credit issued to date, and shall accurately calculate the Borrowing Availability as of the date of said certificate. Without limiting the foregoing, each Borrowing Base Certificate shall exclude the Loan Allocations for any and all Lots and Homes that have been released from the Deed of Trust, and each Borrowing Base Certificate shall reflect any reductions in the Loan Balance.

(b) Right to Exclude/Adjust. Lender, in its discretion, may exclude Lots or Homes from the Borrowing Base, adjust the Appraised Value of Lots or Homes, and/or adjust the applicable classification of property included in the Borrowing Base if:

(i) A portion of the Project is subject to unrepaired material damage or destruction;

(ii) Lender determines that a Purchase Contract with respect to Lots or Homes is in default or has been terminated or canceled or that the purchaser is not financially able to complete the purchase under the subject Purchase Contract;

(iii) Lender determines, based on the information provided by Borrower pursuant to Section 6.4, that reclassification of property included in the Borrowing Base is appropriate due to delays in development, changes in the Plans and Specifications,

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loss or change of zoning or other Approvals and Permits, Borrower’s failure to satisfy applicable conditions for inclusion in the designated classification, or the occurrence of a Material Adverse Change;

(iv) Lender determines that Spec Homes are to be removed from the Borrowing Base under Section 2.2.3(d) in order to remargin the Loan (provided, however, that Lender shall only be permitted to make such determination in the event that Borrower has failed to comply with the provisions of Section 2.2.3(d)(i) to remargin the Loan).

The exclusion of any Property from the Borrowing Base shall not require Lender to release such property from the Deed of Trust, and Lender shall be obligated to release Collateral only pursuant to the provisions of Section 3.2. Lender shall notify Borrower of any exclusion or adjustment in the Borrowing Base in writing with the Lender’s calculations.

(c) Specific Limitations. Lender has no commitment to Advance Loan funds for any Project that would violate:

(i) Any applicable Project Minimum Standards;

(ii) Any applicable Maximum Aggregate Loan Allocation(s), including without limitation (1) the Geographic Concentration Limitations for Projects in Arizona and Nevada, (2) the Lot Concentration Limitation to fund the acquisition and/or development of Entitled Land, Lots Under Development and/or Developed Lots, and/or (3) the Spec Home Concentration Limitation for Spec Homes constructed hereunder;

(iii) The Loan Allocations applicable to the Lots and Homes to be financed hereunder; and/or

(iv) The Borrowing Availability.

(d) Loan Remargining Due to Conversion of Homes.

(i) In the event any Home ceases to constitute a Presold Home for any reason, then such Home shall automatically become a Spec Home for purposes of the limitation upon the number of Spec Homes set forth herein and for purposes of calculating the Maximum Allowed Advance and/or the Home Maturity Date for such Home. After the conversion of any Presold Home to a Spec Home, (A) if the Spec Home limitations set forth in Section 4.5 below have been violated, then Lender shall have no obligation to make any Advances for any new Spec Homes to be included in the Borrowing Base and Borrower shall remove Spec Homes from the Borrowing Base so as to be in compliance with said Spec Home limitations, and (B) if the aggregate sum of the Advances and the Reserved Allocation for the Spec Homes in the Borrowing Base exceeds the Maximum Allowed Advances for said Spec Homes, then the Borrowing Availability shall be reduced by such excess amount or, if the Borrowing Availability has a negative balance, Borrower shall make any payment required under Section 2.4.5 below.

(ii) In the event a Spec Home or Model Home satisfies the requirements to become a Presold Home, then such Home shall automatically become a Presold Home for purposes of the limitation upon the number of Spec Homes set forth herein and for purposes of calculating the Maximum Allowed Advance and/or the Home Maturity Date for such Home.

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(e) Failure to Deliver Borrowing Base Certificate. If Borrower fails to deliver a Borrowing Base Certificate as and when required, then in addition to Lender’s other rights and remedies, Lender may determine the amount of the Borrowing Base based upon information available to Lender and such determination by Lender shall be final and conclusive, absent manifest error.

2.3 Letter of Credit Advances. Borrower shall be entitled to receive Letter of Credit Advances upon Borrower’s compliance with the terms, conditions and procedures set forth in this Section 2.3.

2.3.1 Issuance of Letter of Credit. Subject to the terms and conditions of this Agreement and the Letter of Credit Request, and subject to the policies, procedures, and requirements of Lender in effect from time to time for the issuance of any letter of credit (including without limitation payment of letter of credit fees), Lender agrees to issue on or before the Maturity Date a Letter of Credit upon request by and for the account of the Borrower, provided that Borrower has delivered to Lender:

(a) A completed and executed Letter of Credit Request, and

(b) Payment of the required Letter of Credit Fee;

and provided further that (i) the Letter of Credit shall not be required to be issued for a term of more than twelve (12) Calendar Months (but in no event later than the applicable Maturity Date), (ii) the Letter of Credit shall not be required to be issued for an amount in excess of the LOC Maximum Commitment Amount, (iii) the amount of the Letter of Credit, together with any and all existing Letters of Credit previously issued hereunder, shall not in the aggregate exceed the LOC Total Commitment Amount, and (iv) in any event, the date that is the last date for payment of a draft drawn or drawn and accepted under the Letter of Credit shall be before the applicable Maturity Date.

2.3.2 Issuance Procedure. To obtain a Letter of Credit, Borrower shall complete and execute a Letter of Credit Request and submit it to the letter of credit department of Lender. Upon receipt of a completed and executed Letter of Credit Request, Lender will process the application in accordance with the policies, procedures, and requirements of Lender then in effect (including without limitation the policies, procedures and requirements applicable to the form of the Letter of Credit). If the application meets the requirements of Lender and is within the policies of Lender then in effect, Lender will issue the requested Letter of Credit.

2.3.3 Purpose of Letter of Credit; General Letter of Credit Terms and Conditions.

2.3.3.1. The Letter of Credit shall be issued to provide a good faith deposit in connection with any Project, support for unfunded Project costs or any other purpose approved by Lender in connection with the acquisition and/or development and marketing of a Project. Upon occurrence of an Event of Default and so long such Event of Default continues, Lender, in its sole and absolute discretion and without notice, may refuse to renew or extend the commitment to issue the Letter of Credit, and shall exercise any and all remedies provided for in the Loan Documents.

2.3.3.2. The Letter of Credit shall be drawn under the conditions as set forth in the form of Letter of Credit attached hereto as Exhibit “E”.

2.3.4 Reimbursement of Lender for Payment of Drafts Drawn or Drawn and Accepted Under the Letter of Credit. The obligation of Borrower to reimburse Lender for

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payment by Lender of Letter of Credit Advances under the Letter of Credit shall be as provided in the Letter of Credit Request and in this Agreement. Lender will notify Borrower of payment by Lender of a Letter of Credit Advance under the Letter of Credit and of the respective Reimbursement Obligations and will give Borrower two (2) Business Days notice that the Reimbursement Obligations pursuant to the Letter of Credit Request shall be due on or before the applicable Maturity Date. Borrower shall also pay to Lender interest at the Interest Rate on the Reimbursement Obligations from and including the date Lender pays the Letter of Credit Advance at the Interest Rate until the Reimbursement Obligations and such interest are paid in full; provided, however, that if Borrower fails to pay the Reimbursement Obligations and accrued interest thereon within five (5) days after notification by Lender to Borrower of payment of the Letter of Credit Advance, interest thereafter will accrue at the Default Interest Rate. Such interest shall be computed on the basis of a 360-day year and accrue on a daily basis for the actual number of days elapsed. A Letter of Credit Advance shall be made to re-pay Lender for any funds disbursed in connection with a draft drawn under any Letter of Credit, at which time said advance shall be used to calculate the Borrowing Availability or, if said advance shall result in the Borrowing Availability having a negative balance, then Borrower shall make any payment required under Section 2.4.5 below.

2.3.5 Reimbursement Obligations. Borrower’s obligations under Section 2.3 and the Letter of Credit Request to reimburse Lender with respect to a drawing under a Letter of Credit (such obligations are collectively referred to as the “Reimbursement Obligations”) are absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim, or defense to payment which Borrower may have or have had against Lender or any beneficiary of the Letter of Credit, including any defense based upon the occurrence of any Event of Default, any draft, demand, certificate or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient, the failure of any payment by Lender to conform to the terms of said Letter of Credit (if, in Lender’s good faith opinion, such payment is determined to be appropriate) or any nonapplication or misapplication of the Letter of Credit or the proceeds of such payment, or the legality, validity, form, regularity or enforceability of the Letter of Credit; provided, however, that nothing herein will adversely affect the right of Borrower to commence a proceeding against Lender for any wrongful payment under the Letter of Credit made by Lender as the result of acts or omissions constituting gross negligence or willful misconduct on the part of Lender.

2.3.6 Nature of Reimbursement Obligations. Borrower assumes all risks of the acts, omissions, or misuse of any Letter of Credit by any Person to whom a Letter of Credit is issued. Lender (except to the extent of its own gross negligence or willful misconduct) will not be responsible for: (a) the form, validity, sufficiency, accuracy, genuineness or legal effect of the Letter of Credit or any document submitted by any party in connection with the issuance of any Letter of Credit, even if such document should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) the form, validity, sufficiency, accuracy, genuineness or legal effect of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (c) failure of any Person to comply fully with the conditions required in order to demand payment under the Letter of Credit; (d) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; or (e) any loss or delay in the transmission or otherwise of any document or draft required by or from any Person in order to make a disbursement under the Letter of Credit or the proceeds thereof. None of the foregoing will affect, impair or prevent the vesting of any of the rights or powers granted to Lender. In furtherance and extension and not in limitation or derogation of any of the foregoing, any act taken or omitted to be taken by Lender in good faith will be binding on Borrower and will not put Lender under any resulting liability to Borrower.

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2.4 Loan Advances; Project Monitoring.

2.4.1 Method for Advances. Advances in a sum not in excess at any time of the Borrowing Availability shall be made by Lender to the Central Account for the payment or reimbursement of Permitted Expenses at the written request within five (5) Business Hours following Lender’s receipt of a completed Draw Request from Borrower (which may be delivered by telecopy or facsimile) by the Person or Persons designated from time to time on Lender’s form of Authorization Form; provided, however, that Lender shall have acknowledged receipt of any changes in the Person or Persons designated by Borrower, and such Person or Persons shall have executed a new Authorization Form. Such Person or Persons are hereby authorized by Borrower to request Advances and to direct the transfer of the proceeds of Advances to the Central Account until written notice of the revocation of such authority is received from Borrower by Lender and Lender has had a reasonable time to act upon such notice. Lender shall have no duty to monitor for Borrower or any other Person or to report to Borrower or such other Person the use of proceeds of Advances.

2.4.2 Use of Advances. All Advances shall be used to pay or reimburse the Permitted Expenses incurred by Borrower in connection with the acquisition, development, marketing and operation of the Project and the other normal business activities of Borrower.

2.4.3 Draw Requests. Concurrently with a Draw Request for any Advance of Loan proceeds (other than Advances that, pursuant to this Agreement, may be made without a Draw Request), Borrower shall furnish to Lender a Draw Request together with such other forms and schedules of values as may from time to time be approved or required by Lender, duly signed and sworn to by Borrower, with all blanks appropriately filled in.

(a) Right of Inspection. Throughout the course of construction of any Improvements under each Qualified Project on at least a quarterly basis during the Loan Term, Lender shall have the right to employ, at Borrower’s sole cost and expense, an inspector or inspectors who shall review as agent for Lender all construction activities undertaken in regard to the Project. If required by Lender in its discretion, a certificate or indication from such inspector or inspectors that construction substantially complies with the Plans and Specifications shall be a further condition precedent to Lender’s approval of a Project, or any Lots or Homes included within a Project, for inclusion within the calculation of the Borrowing Base and the Borrowing Availability.

(b) Method of Advances. The proceeds of each Advance disbursed under this Agreement shall be evidenced by the Note and shall be secured by a Deed of Trust, and all such proceeds shall be disbursed into the Central Account.

2.4.4 Limitations on Borrower’s Rights to Advances. Borrower shall be entitled to disbursements of Loan proceeds only in accordance with the terms and conditions of this Agreement (unless waived or modified by Lender); and, in addition, Borrower certifies in connection with any Advances requested hereunder that Loan:

(a) The representations and warranties of Borrower contained in all of the Loan Documents shall be correct in all respects on and as of the date of the disbursement as though made on and as of that date, and no Event of Default shall have occurred and be continuing as of the date of the disbursement;

(b) The requested Loan proceeds shall be applied by Borrower only to defray costs actually incurred by Borrower in connection with the payment or reimbursement of Permitted Expenses; and

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(c) Notwithstanding any limitations on Advances set forth in this Agreement or otherwise, Borrower shall pay all costs and expenses arising in connection with each Qualified Project.

2.4.5 Excess Loan Balance Repayment. In the event the Borrowing Availability has a negative balance, there shall be due and payable from Borrower to Lender, and Borrower shall repay to Lender an amount equal to said negative balance within the earlier of (a) one (1) Business Day after notice from Lender, or (b) five (5) days after delivery of a Borrowing Base Certificate and/or other financial reports of Borrower reflecting that such a payment is due.

2.4.6 Appraisals and Evaluations. If reasonably required by Lender, or if required by law, Lender shall have the right to order Appraisals, appraisal reviews and/or evaluations of the Land and/or Improvements for any Qualified Project included in the Borrowing Base, from an appraiser selected by Lender, which Appraisal(s) shall comply with all federal and state standards for appraisals and otherwise shall be satisfactory to Lender in all respects. Notwithstanding the foregoing, Lender shall not order appraisals of any Project more than one (1) time per year unless (i) Lender believes that a Material Adverse Change has occurred with respect to the Project or any portion thereof, or (ii) Borrower requests in writing that Lender order an appraisal of the Project, or (iii) Lender is required to reappraise the Project in connection with regulatory requirements. Borrower agrees to pay the cost and expense for all appraisals, appraisal reviews and/or evaluations thereof ordered by Lender pursuant to this Section.

2.4.7 Borrower’s Accounts. Borrower has established and shall maintain during the term of this Loan the Borrower’s Funds Account in connection with the acquisition, development, marketing and operation of the Projects and the Central Account:

(a) Pledge Accounts. The “Pledged Account” shall include only the Borrower’s Funds Account, which Pledged Account and all funds deposited and held therein shall be pledged as security for the Loan as provided herein. Only Lender shall have the authority to sign documents and checks in connection with the transfer of funds into and out of the Borrower’s Funds Account. Borrower shall have authority to sign documents and checks in connection with the transfer of funds into and out of the Central Account for all of Borrower’s business purposes. Borrower irrevocably waives and relinquishes to transfer funds into or out of the Borrower’s Funds Account, and shall have no right to exercise dominion or control over the Borrower’s Funds Account or the proceeds thereof.

(b) Use of Borrower’s Funds and Central Accounts. Borrower shall pay or be reimbursed only Permitted Expenses with the funds deposited into the Borrower’s Funds Account. Advances shall be made directly to the Central Account or, at Lender’s sole discretion, may be made into the Borrower’s Funds Account and then transferred by Lender to the Central Account. Borrower shall deposit or cause to be deposited into the Borrower’s Funds Account each day all funds to be provided by Borrower to Lender during the Loan Term, to the extent such funds are not paid directly to Lender pursuant to this Agreement. Funds deposited and held in the Borrower’s Funds Account shall be applied by Lender to the payment of the Obligations as provided herein. In the event at any time during the Loan Term the outstanding principal Loan balance has been paid in full, and excess funds remain in the Borrower’s Funds Account, such excess funds shall be used by Lender to make any Advances hereunder. Notwithstanding the existence of any funds in the Borrower’s Funds Account or the availability or the non-availability of Loan funds under the Commitment, Borrower shall remain obligated to satisfy all Obligations.

(c) Central Account Provisions. Borrower shall establish and maintain the Central Account not only for Project-related purposes as described herein, but

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for Borrower’s general business purposes. Although Lender shall have no security interest in the Central Account or the funds deposited therein, Borrower warrants and represents that during the Loan Term, all Loan funds deposited into the Central Account shall be applied only for the payment or reimbursement of Permitted Expenses for Qualified Projects.

2.4.8 Project Cost Savings and Excess Costs. Each Draw Request submitted by Borrower shall be deemed a certification by Borrower of the following matters:

2.4.8.1 Excess Project Costs. In the event the actual cost (“Actual Line Item Cost”) of any matter covered by any given line item in any Budget exceeds the amount allocated to such line item in said Budget (“Approved Line Item Cost”), Borrower either has (a) paid or incurred the amount of the Actual Line Item Cost in excess of the Approved Line Item Cost (“Excess Cost”), or (b) the financial ability to pay such Excess Costs with its own funds, including without limitation the transfer of a portion of any Contingency line item amount provided for in the Budget and/or any “Cost Savings” (as defined in Section 2.4.8.3 below) to such line item in an amount equal to such Excess Cost.

2.4.8.2 Offsite Materials. In connection with any Project materials that are stored or housed at a location other than the Property for the applicable Project (“Offsite Materials”):

(a) Borrower has paid for the Offsite Materials or will cause payment to be made promptly upon receipt of the next Advance;

(b) if the Offsite Materials are stored at the facilities of the supplier of the Offsite Materials (“Offsite Supplier”), the Offsite Materials have been segregated from other materials in the Offsite Supplier’s storage facility and have been marked with the name of Borrower. If reasonably requested by Lender, Borrower shall provide Lender with a written statement from the Offsite Supplier, which statement shall include the Offsite Supplier’s acknowledgment of (i) the right of Lender to enter the Offsite Supplier’s storage facility at reasonable times for the purpose of inspecting or removing the Offsite Materials and (ii) Lender’s security interest in the Offsite Materials. If the Offsite Materials are stored in a place other than the facilities of the Offsite Supplier, if reasonably requested by Lender, Borrower shall provide Lender with a written statement from the bailee or other custodian acknowledging (i) the right of Lender to enter the site where the Offsite Materials are stored at reasonable times for the purpose of inspecting or removing the Offsite Materials and (ii) Lender’s security interest in the Offsite Materials;

(d) Borrower has obtained certificates of insurance showing the Offsite Materials to be insured as required by the Agreement and showing Lender as loss payee; and

(e) Borrower has paid all personal property taxes applicable to the Offsite Materials. Lender shall have the right to inspect and approve the Offsite Materials.

2.4.8.3 Cost Savings. For purposes of Section 2.4.8.1 above, “Cost Savings” shall mean any remaining undisbursed amounts shown in any Budget as allocated to any line item, or any funds allocated to said line item that exceed the amount of the subcontract for said line item either (a) upon completion of and disbursement for all matters covered by said line item in such Budget, or (b) upon the execution by Borrower and an approved subcontractor of a subcontract for the performance of work or furnishing of materials for said line item in an amount that is less than the Approved Line Item Cost for said item.

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2.5 Fees. As additional consideration for the Commitment, Borrower agrees to pay to Lender the following fees, which shall be earned by Lender on the date due under the Loan Documents and shall be non-refundable to Borrower:

2.5.1 Commitment Fee. During the Initial Line Term, a Commitment Fee equal to one-half of one percent (0.50%) per annum on the full Commitment Amount shall be payable, and during the Reduction Period, a Commitment Fee equal to one-half of one percent (0.50%) per annum on the then-applicable Reduced Commitment Amount shall be payable. On the date hereof, Borrower shall pay a portion of said fee in the sum of Fifty Thousand Dollars ($50,000.00), and the remainder of said annual fee shall be paid as follows: Said fees shall be paid in advance on a quarterly basis such that: (i) during the Initial Line term, each quarterly fee payment shall be based on a one-eighth of one percent (0.125%) of the full Commitment Amount, and (ii) during the Reduction Period, each quarterly fee payment shall be based on a one-eighth of one percent (0.125%) of the then-applicable Reduced Commitment Amount.

2.5.2 Letter of Credit Fee. A Letter of Credit Fee shall be due and payable by Borrower in connection with the issuance of each Letter of Credit hereunder, which fee shall be calculated at the rate of one percent (1.00%) per annum on the face amount of the Letter of Credit. The Letter of Credit Fee shall be payable as a condition to the issuance of each Letter of Credit and on each twelve-month anniversary of the issuance date of said Letter of Credit, if said Letter of Credit is to be extended beyond a twelve-month term.

2.5.3 Other Fees. Costs, expenses, and reasonable fees for Lender’s counsel as provided in the Loan Documents, payable on or before the date hereof, together with all title insurance premiums, appraisal costs, documentation fees, environmental study costs and other costs and expenses to which Lender is entitled to reimbursement pursuant to the Loan Documents.

3. THE COLLATERAL.

3.1 Security. Payment of the Note, all indebtedness and liabilities of Borrower to Lender, and performance of all Obligations, due or to become due, under this Agreement and the other Loan Documents, shall be secured by the following (collectively “Security Documents”):

(a) Deeds of Trust;

(b) Pledge Agreement;

(c) Account Pledge Agreement;

(d) Construction Assignments;

(e) Financing Statements; and

(f) Such other assignments and security interests as may be required or granted pursuant to the terms of the Loan Documents, including, without limitation, assignments of construction contracts, assignments of plans and specifications, assignments of permits, licenses and approvals, assignments of declarant’s rights under covenants, conditions and restrictions, assignments of purchase and sale agreements, and any assignments concerning any environmental indemnities in favor of Borrower.

3.2 Releases of Collateral. In addition to releases in connection with boundary line adjustments and the granting of easements and licenses as more particularly described in Section 6.3.3(c), Lender agrees to release portions of the Project from the lien of any Deed of Trust in

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connection with sales of portions of the Project secured by said Deed of Trust pursuant to a Purchase Contract for cash, upon the satisfaction of the following conditions prior to the release:

3.2.1 General Requirements for Releases. In connection with any release:

(a) Unless otherwise approved by Lender in its absolute and sole discretion, at the time of such release no Event of Default shall have occurred and be continuing.

(b) Such release shall be in connection with a sale of a Lot or Home in the Project (or in the case of a Dedication, a transfer or donation of a portion of the Project) to a Non-Related Party.

(c) Unless the portion of the Land to be released is an entire parcel with respect to which Lender has previously approved the parcel map or plat or is a lot or lots within a subdivision with respect to which Lender has previously approved a final map or plat, Borrower or Title Company shall have delivered to Lender (i) a legal description of the portion of the Land to be released, (ii) a map or plat of the portion of the Land to be released, and (iii) copies of all easements for ingress, egress or otherwise to be granted or retained in connection with such release.

(d) Unless the portion of the Land to be released is an entire parcel with respect to which Lender has previously approved the parcel map or plat or is a lot or lots within a subdivision with respect to which Lender has previously approved a final map or plat, prior to such release, (i) Lender shall have approved such release, which approval will not be unreasonably withheld, (ii) the remaining unreleased portion of the Land will, after giving effect to such release, have adequate access, in the reasonable opinion of Lender, and (iii) the value of the unreleased portion of the Land will, after giving effect to such release, not otherwise be materially impaired in the reasonable opinion of Lender.

(e) Borrower shall provide Lender with such endorsements to the Title Policy as Lender may reasonably request in connection with each release.

(f) Borrower shall pay all of Lender’s reasonable costs and expenses, including, without limitation, reasonable attorneys’ fees, arising in connection with each release.

(g) Each release shall be made by Lender by delivery of the release documents to a title company or other escrow agent satisfactory to Lender upon such conditions as shall assure Lender that all conditions precedent to such release have been satisfied and that the applicable transaction will be completed.

3.2.2 Sales of Lots or Homes Pursuant to a Purchase Contract. In connection with sales pursuant to a Purchase Contract for cash:

(a) Borrower shall satisfy each of the conditions set forth in Section 3.2.1.

(b) If requested by Lender, Borrower shall deliver to Lender a true and correct copy of any Purchase Contract, which shall (i) be substantially on Borrower’s standard forms as previously submitted to and approved by Lender or (ii) otherwise be in form and content reasonably satisfactory to Lender.

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(c) Borrower shall not have made any material changes in the Purchase Contract delivered to Lender pursuant to this Section 3.2.2, unless such changes have been approved by Lender, and the Non-Related Party under said Purchase Contract shall be acceptable to Lender in its sole discretion.

(d) The sale shall be made in the ordinary course of the development and marketing of the Project, and shall be accompanied by such rights of first refusal, development covenants, conditions and restrictions, deeds of trust, and other documents, consistent with Borrower’s past practices, as shall be necessary to assure that development of the Project occurs in accordance with Borrower’s development plans and existing Approvals and Permits.

(e) For any Bulk Lot Sale, Lender shall have received and approved in its reasonable discretion financial statements and other information reasonably required by Lender showing the Non-Related Party’s ability to complete the purchase under the Purchase Contract.

(f) Borrower shall have paid the applicable Release Price and all other fees and costs in connection with the release, which Release Price shall be applied as follows: (i) the Release Note Payment Amount (and, if elected by Borrower, any Excess Sales Proceeds obtained by Borrower in connection with said sale) shall be applied to repay sums due and owing under the Note; and (b) the Excess Sales Proceeds shall be deposited into the Borrower’s Funds Account to be included in the Borrowing Availability and applied as set forth herein.

3.2.3 Dedications. In connection with any Dedication:

(a) Borrower shall satisfy each of the conditions set forth in Section 3.2.1.

(b) At least ten (10) days prior to a release, Borrower shall have delivered to Lender all the terms, conditions and details of such release, including, without limitation, the purpose of such release, evidence of the conformity of such release to the overall development plan for the Project and all Approvals and Permits required in connection therewith, all of which shall be in form and content reasonably satisfactory to Lender.

4. CONDITIONS PRECEDENT

4.1 Conditions Precedent to Effectiveness of this Agreement and to the Effectiveness of the Commitment. This Agreement and the Commitment shall become effective only upon satisfaction by Borrower of the following conditions precedent on or before the date hereof at the sole cost and expense of Borrower:

4.1.1 Representations and Warranties Accurate. The representations and warranties by Borrower in the Loan Documents are correct on and as of the date of the recordation of the Deeds of Trust for the Existing Projects to be included in the Borrowing Base in all material respects.

4.1.2 Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing.

4.1.3 Documents. Lender shall have received the following agreements, documents, and instruments, each duly executed by the parties thereto:

(a) Loan Documents. The Loan Documents, which shall include all agreements documents, and instruments specified by Lender (including, without limitation that certain Environmental Indemnity in form and content acceptable to Lender in its discretion).

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(b) Corporation. Certified copies of (i) resolutions of Borrower’s board of directors authorizing Borrower to execute, deliver, and perform the Loan Documents and to grant to Lender the Liens and Encumbrances on the Collateral in the Loan Documents and certifying the names and signatures of the officer(s) of Borrower authorized to execute the Loan Documents and, in the case of Borrower, to request Advances on behalf of each Borrower, (ii) the certificate of incorporation and bylaws of Borrower and all amendments thereto, and (iii) a certificate of good standing as a corporation from the jurisdiction of formation or organization and for each jurisdiction in which the nature of Borrower’s business and operations require qualification as a foreign corporation.

(c) Insurance Policies. A certificate of insurance for all insurance required under the Loan Documents, and certificates of insurance with respect to professional liability coverage to the extent maintained by engineers, architects, and environmental contractors.

(d) Opinion Letter. A favorable opinion from a law firm representing Borrower covering such matters as Lender may require.

(e) Financial Statements. Borrower’s most recent financial statements reviewed by independent, certified public accountants acceptable to Lender, including without limitation a balance sheet, cash flow statement, reconciliation of net worth, and profit and loss statement for Borrower.

4.1.4 Plat and/or Survey. Borrower shall have delivered to Lender, and Lender shall have approved, all surveys, maps and plats in existence with respect to the Existing Projects and individual parcels thereof. Each such map, plat or survey must contain a legal description of the subject Existing Project (or applicable portion thereof), must describe and show all boundaries of and lot lines within said Existing Project (or applicable portion thereof) and all streets and other dedications and contain such other information and certifications as Lender may request.

4.1.5 Restrictive Covenants. Borrower shall have provided Lender with, and Lender shall have approved, all covenants, conditions, restrictions, easements and other rights that exist or are contemplated with respect to the Existing Projects.

4.1.6 Soils Test. Borrower shall have provided to Lender, and Lender shall have approved, a soils/hydrology test reports of the Existing Projects prepared by licensed engineers satisfactory to Lender showing the location of, and containing boring logs from, all borings, together with recommendations for the design of foundations.

4.1.7 Environmental Assessment. Borrower shall have delivered to Lender and Lender shall have approved a report of an environmental assessments of the Existing Projects, by environmental engineers acceptable to Lender containing such information, results, and certifications as Lender may require. If Lender determines, in its sole discretion, based on such reports or other information available to Lender that any further review should be obtained, Borrower shall also provide such follow up testing, reports, and other actions as may be required by Lender. The contents of the environmental assessment report and any follow up must be satisfactory to Lender. If such reports are addressed to Borrower, Borrower shall cause a reliance letter, in form and substance satisfactory to Lender, to be provided to Lender.

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4.1.8 Environmental Indemnity. Borrower shall have delivered to Lender, Lender’s form of Environmental Indemnity for each Existing Project, fully completed and duly executed by Borrower.

4.1.9 Preliminary Title Report. Borrower shall have provided Lender and Lender shall have approved, a preliminary title report for each Existing Project, prepared by the Title Company, together with a legible copy of each “Schedule B” item.

4.1.10 Flood Report. Borrower shall have provided to Lender evidence satisfactory to Lender as to whether (a) each Existing Project, or any portion thereof, is located in an area designated by the Department of Housing and Urban Development as having special flood or mudslide hazards, and (b) the community in which said Existing Project is located is participating in the National Flood Insurance Program.

4.1.11 Deed of Trust/Title Policy. For each Existing Project, Borrower shall have provided to Lender (a) the Deed of Trust, subject only to Permitted Exceptions, duly executed by Borrower, acknowledged, delivered and recorded; and (b) American Land Title Association loan policies of title insurance (1990 form with the creditors’ rights exception and arbitration provisions deleted and with a revolving credit endorsement and such other endorsements as Lender may require) for each Deed of Trust (collectively “Title Policy”). The Title Policy shall provide coverage (including without limitations mechanics’ lien coverage) satisfactory to Lender and insure the Deed of Trust as a first lien on the Project, subject only to Permitted Exceptions.

4.1.12 Completion of Filings and Recordings. For each Existing Project, Lender shall have received evidence of the completion of all recordings and filings to establish or maintain the perfection and priority of the Liens and Encumbrances on the Collateral granted in the Loan Documents and required by Lender to be in effect prior to the effectiveness of this Agreement and the Commitment.

4.1.13 Payment of Costs, Expenses, and Fees. For each Existing Project, all costs, expenses, and fees to be paid by Borrower under the Loan Documents on or before the effectiveness of this Agreement, the effectiveness of the Commitment, or the making of Advances shall have been paid in full (or shall be paid in full concurrently with the making of the initial Project Advance), including without limitation applicable fees set forth herein.

4.1.14 Appraisal. For each Existing Project, Lender shall have received and approved an Appraisal for the subject Land. Lender shall have no obligation to make any Advance against any parcels unless and until Lender shall have received and approved said Appraisals for said parcels against which Advances are requested.

4.1.15 Other Items or Actions by Borrower. Lender shall have received such other agreements, documents, and instruments, and Borrower shall have performed such other actions as Lender may reasonably require.

4.2 Conditions Precedent to Admission of Land as Entitled Land. Borrower may, from time to time, request Lender to include a portion of the Land as Entitled Land for purposes of the Borrowing Base. In connection with each such request, the following conditions precedent shall have been satisfied at the sole cost and expense of Borrower. Upon the satisfaction of such conditions precedent, as determined by Lender, such portions of the Land shall be included in the Borrowing Base as Entitled Land.

4.2.1 Request. Borrower shall have submitted to Lender a request in the form of Exhibit “F” to include those portions of the Land for which Lender has received Appraisals in the

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Borrowing Base as Entitled Land. Such request and all other documents and instruments described in this Section 4.2 shall be submitted with the Borrowing Base Certificate in which Borrower intends to include such portion of the Land in the Borrowing Base as Entitled Land. Each such request shall be deemed a renewal of all representations and warranties of Borrower set forth in the Loan Documents.

4.2.2 Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing on and as of the date that each portion of the Land is included as Entitled Land.

4.2.3 Map. Borrower shall have delivered to Lender and Lender shall have approved a Final Map or Tentative Map, as applicable, of the Entitled Land pursuant to the applicable subdivision map requirements. Each such map must contain a legal description of the Entitled Land, must describe and show all boundaries of and lot lines within such Entitled Land and all streets and other dedications, and must contain such other information and certifications as Lender may request

4.2.4 Zoning Approvals. Borrower shall have provided to Lender and Lender shall have approved evidence of appropriate vested zoning for the contemplated development of the Entitled Land.

4.2.5 Other. Borrower shall have provided such other documents and information reasonably requested by Lender.

4.3 Conditions Precedent to Admission of Land as Lots Under Development. Borrower may, from time to time, request Lender to include a portion of the Land as Lots Under Development (including without limitation, any custom lots) for purposes of the Borrowing Base. In connection with each such request, the following conditions precedent shall have been satisfied at the sole cost and expense of Borrower. Upon the satisfaction of such conditions precedent, as determined by Lender, such Land shall be included in the Borrowing Base as Lots Under Development.

4.3.1 Request. Borrower shall have submitted to Lender a request in the form of Exhibit “G” to include portion of the Land in the Borrowing Base as Lots Under Development. Such request and all other documents and instruments described in this Section 4.3 shall be submitted with the Borrowing Base Certificate in which Borrower intends to include such portion of the Land in the Borrowing Base as Lots Under Development. Each such request shall be deemed a renewal of all representations and warranties of Borrower set forth in the Loan Documents.

4.3.2 Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing on and as of the date that each portion of the Land is included as Lots Under Development.

4.3.3 Documents and Information. Borrower shall have provided to Lender, and Lender shall have approved, all documents and information required pursuant to Section 4.2 with respect to the applicable portion of the Land.

4.3.4 Inspection. Development of the applicable portion of the Land shall have commenced. Development will be deemed to have commenced when (i) construction of one or more of the following scopes of work has begun on the applicable portion of the Land — grading, paving, water, sewer or concrete, and (ii) Borrower has expended material amounts for Hard Costs with respect to such work.

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4.3.5 Map. Borrower shall have delivered to Lender and Lender shall have approved a Final Map or Tentative Map, as applicable, together with evidence reasonably satisfactory to Lender that any such Tentative Map has not expired and is not due to expire during the development of such portion of the Land. Each such map must contain a legal description of the Land, must describe and show all boundaries of and lot lines within such Land and all streets and other dedications, and must contain such other information and certifications as Lender may request.

4.3.6 Utilities. If requested by Lender, Borrower shall have delivered to Lender, evidence, which may be in the form of “will serve” letters from local utility companies or local authorities, that: (a) telephone service, electric power, storm sewer, sanitary sewer (if applicable) and water facilities will be available to the Lots Under Development; (b) such utilities will be adequate to serve the Lots Under Development; and (c) upon completion of the Improvements, no conditions will exist to affect Borrower’s right to connect into and have adequate use of such utilities except for the payment of a normal connection charges or tap charges and except for the payment of subsequent charges for such services to the utility supplier.

4.3.7 Lot Limitations. The total number of Lots Under Development and Developed Lots to be included in the Borrowing Base as of the date of any request made hereunder shall not be in excess of the Lot Concentration Limitation.

4.3.8 Other. Borrower shall have provided such other documents and information reasonably requested by Lender.

4.4 Conditions Precedent to Admission of Land as Developed Lots. Borrower may, from time to time, request Lender to include a portion of the Land as Developed Lots for purposes of the Borrowing Base. In connection with each such request, the following conditions precedent shall have been satisfied at the sole cost and expense of Borrower. Upon the satisfaction of such conditions precedent, as determined by Lender, such Land shall be included in the Borrowing Base as Developed Lots.

4.4.1 Request. Borrower shall have submitted to Lender a request in the form of Exhibit “H” that a portion of the Land be included in the Borrowing Base as Developed Lots. Such request and all other documents and instruments described in this Section 4.4 shall be submitted with the Borrowing Base Certificate in which Borrower intends to include such portion of the Land in the Borrowing Base as Developed Lots. Each such request shall be deemed a renewal of all representations and warranties of Borrower set forth in the Loan Documents.

4.4.2 Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing on and as of the date that each portion of the Land is included as Developed Lots.

4.4.3 Documents and Information. Borrower shall have provided to Lender, and Lender shall have approved, all documents and Information required pursuant to Sections 4.2 and 4.3, with respect to the applicable portion of the Land.

4.4.4 Lot Limitations. The total number of Lots Under Development and Developed Lots to be included in the Borrowing Base as of the date of any request made hereunder shall not be in excess of the Lot Concentration Limitation.

4.4.5 Other. Borrower shall have provided such other documents and information reasonably requested by Lender.

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4.5 Conditions Precedent to Admission of Land as Presold, Spec and/or Model Homes. Borrower may, from time to time, request Lender to include a portion of the Land as Presold, Spec and/or Model Homes for purposes of the Borrowing Base. In connection with each such request, the following conditions precedent shall have been satisfied at the sole cost and expense of Borrower. Upon the satisfaction of such conditions precedent, as determined by Lender, such Land shall be included in the Borrowing Base as Presold, Spec and/or Model Homes.

4.5.1 Request. Borrower shall have submitted to Lender a request in the form of Exhibit “I” that a portion of the Land be included in the Borrowing Base as Presold, Spec and/or Model Homes. Such request and all other documents and instruments described in this Section 4.5 shall be submitted with the Borrowing Base Certificate in which Borrower intends to include such portion of the Land in the Borrowing Base as Presold, Spec and/or Model Homes. Each such request shall be deemed a renewal of all representations and warranties of Borrower set forth in the Loan Documents.

4.5.2 Defaults. No Event of Default or Unmatured Event of Default shall have occurred and be continuing on and as of the date that each portion of the Land is included as Developed Lots.

4.5.3 Documents and Information. Borrower shall have provided to Lender, and Lender shall have approved, all documents and Information required pursuant to Sections 4.2, 4.3 and 4.4, with respect to the applicable portion of the Land.

4.5.4 Home Construction Information. Borrower shall not be entitled to include any portion of the Land in a Borrowing Base Certificate as Presold, Spec and/or Model Homes unless and until each of the following conditions precedent have been satisfied (or waived or modified by Lender in its discretion):

(a) Borrower shall have submitted to Lender, and Lender shall have approved, Plans and Specifications for each type of Home for each Project, which Plans and Specifications shall be (i) prepared by Architect and/or Engineer acceptable to Lender, and (ii) otherwise satisfactory to Lender;

(b) Homes may be entered into the Borrowing Base upon confirmation of trenching by Lender;

(c) At Borrower’s sole cost and expense, Lender shall have obtained Base Appraisals with respect to each type of Home, which Base Appraisals shall be (i) prepared by an appraiser acceptable to Lender, and (ii) otherwise satisfactory to Lender. Each Base Appraisal for each Home in a Project shall be updated or evaluated once annually at Lender’s discretion (or more frequently if required by regulatory guidelines), at the sole cost and expense of Borrower, and all FNMA appraisals or other appraisals for said Homes accepted by Lender that do not have a specific expiration date shall be updated once annually at Lender’s request; provided, however, that Lender may require that any such appraisal be updated more frequently than annually if (i) Lender believes that a material adverse change has occurred with respect to the Project or any portion thereof, or (ii) Borrower requests in writing that Lender order an appraisal of the Project, or (iii) Lender is required to reappraise the Project in connection with regulatory requirements. Based on such revised appraisals and/or evaluations and any other information provided to Lender, Lender shall be entitled to revise the Home Construction Budget and Maximum Allowed Advances applicable to any Home in said Project;

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(d) Borrower shall have submitted to Lender all other information requested by Lender to formulate a Home Construction Budget for each type of Home (which may include without limitation construction contracts and other verifications of costs), and Lender shall have formulated such Home Construction Budget;

(e) If requested by Lender, Borrower shall have submitted or made available to Lender evidence of (i) building permits for the construction of the Homes, (ii) all necessary permits, licenses and approvals for the construction of said Homes, including without limitation the requisite consumer disclosure reports and approvals required in connection with the sale of said Homes, and (iii) architectural control committee homeowners’ association and other approvals required under the CC&Rs;

(f) Prior to entering into any Purchase Contracts for the sale of any Homes, Borrower shall have delivered to Lender the requisite consumer disclosure reports and approvals prior to the sale of any Homes, in form and substance satisfactory to Lender;

(g) For all Presold Homes, Lender shall have received evidence in the form of Borrower’s most recent project reports from JD Edwards (or such other form as reasonably requested by Lender) of the following:

(i) A duly executed Purchase Contract, escrow instructions or deposit receipt without contingencies (other than the sale of an existing residency contingency);

(ii) A prequalification letter or mortgage commitment from an institutional mortgage lender or such other information or verification as Lender may require concerning the ability of the prospective buyer to obtain financing or otherwise acquire the Home; and

(iii) A cash earnest money deposit or down payment of at least Five Thousand Dollars ($5,000.00) (which deposit requirement shall be increased to twenty percent (20%) of the purchase price for said Home if the prospective buyer failed to satisfy the requirement in subsection (ii) above).

(h) For all Spec Homes (including any Model Homes), Borrower shall not be entitled to include in the Borrowing Base at any one time in violation of the Spec Home Concentration Limitation, which shall mean:

(i) For all Projects financed hereunder, the aggregate Loan Allocations for all Spec Homes for all Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Twelve Million Dollars ($12,000,000.00); and/or

(ii) For each and every Project financed hereunder, for more Spec Homes than the lesser of (A) twenty-five (25), (B) four (4) months’ appraised absorption for the Project, or (C) four (4) months’ actual absorption for the subject Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for said Project.

(i) For all Model Homes, the Lots to be used for the construction of any Model Homes, the Model Homes and any parking areas used for model complex parking shall remain as Collateral for the Loan and shall not be eligible for release from the applicable Deed of Trust until all production Homes of each Model Home’s respective plan type have

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been sold for each applicable Project; provided, however, that Lender in its sole discretion may permit Borrower to sell a Model Home, as long as (1) said Model Home is leased back to Borrower under terms and conditions acceptable to Lender, and (2) said lease of the Model Home is assigned or otherwise encumbered as collateral for the applicable Loan, and (3) said lease and said assignment or encumbrance shall be in full force and effect until all production Units of said Model Home’s respective plan type have been sold for the applicable Project.

4.5.5 Other. Borrower shall have provided such other documents and information reasonably requested by Lender.

4.6 Additional Conditions Precedent to All Advances. Lender shall be obligated to make an Advance only if Borrower shall have delivered to Lender a Draw Request for such Advance. Borrower may not submit more than one (1) Draw Request per Business Day. Lender shall not be required to make the requested Advance before five (5) Business Hours after receipt of the Draw Request. Notwithstanding the foregoing, Lender may make Advances, without further authorization or Draw Requests from Borrower, to pay interest prior to delinquency to the extent of the Available Commitment; provided, however, that from and after the occurrence and during the continuation of an Unmatured Event of Default or an Event of Default, such Advances to pay interest may be made in the sole and absolute discretion of Lender.

4.7 Waiver of Conditions Precedent. Borrower hereby authorizes Lender, and Lender reserves the right in its absolute and sole discretion, to verify any documents and information submitted to Lender in connection with this Agreement. Lender may elect, in its absolute and sole discretion, to waive any of the foregoing conditions precedent. Any such waiver shall be limited to the conditions) precedent therein and the requirements therein. Delay or failure by Lender to insist on satisfaction of any condition precedent shall not be a waiver of such condition precedent or any other condition precedent. The making of an Advance by Lender shall not be deemed a waiver by Lender of the occurrence of an Event of Default or an Unmatured Event of Default.

5. BORROWER’S REPRESENTATIONS AND WARRANTIES.

5.1 Closing Representations and Warranties. Borrower represents and warrants to Lender as of the date of this Agreement:

5.1.1 Corporate Existence and Authorization. Borrower is a corporation, validly existing under the laws of California and has the requisite power and authority to execute, deliver, and perform the Loan Documents. The execution, delivery, and performance by Borrower of the Loan Documents have been duly authorized by all requisite corporate action by or on behalf of Borrower and will not conflict with, or result in a violation of or a default under, the Organizational Documents of Borrower.

5.1.2 No Approvals, etc. No approval, authorization, bond, consent, certificate, franchise, license, permit, registration, qualification, or other action or grant by or filing with any Person is required in connection with the execution, delivery, or performance by Borrower of the Loan Documents.

5.1.3 No Conflicts. The execution, delivery, and performance by Borrower of the Loan Documents will not conflict with, or result in a violation of or a default under: (i) any applicable law, ordinance, regulation, or rule (federal, state, or local); (ii) any judgment, order, or decree of any arbitrator, other private adjudicator, or Governmental Authority to which Borrower is a party or by which Borrower or any of the assets or property of Borrower is bound; (iii) any of the Approvals and Permits; and/or (iv) any agreement, document, or instrument to which Borrower is a party or by which Borrower or any of the assets or property of Borrower is bound.

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5.1.4 Execution and Delivery and Binding Nature of Loan Documents. The Loan Documents have been duly executed and delivered by or on behalf of Borrower. The Loan Documents are legal, valid, and binding obligations of Borrower, enforceable in all material respects in accordance with their terms against Borrower, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization, or similar laws and by equitable principles of general application.

5.1.5 Legal Proceedings; Hearings, Inquiries, and Investigations. Except as previously disclosed to and approved by Lender, (i) no legal proceeding is pending or, to best knowledge of Borrower, threatened before any arbitrator, other private adjudicator, or Governmental Authority to which Borrower is a party or by which Borrower or any assets or property of Borrower may be bound or affected that if resolved adversely to Borrower could result in a Material Adverse Change, and (ii) no hearing, inquiry, or investigation relating to Borrower or any assets or property of Borrower is pending or, to the best knowledge of Borrower, threatened by any Governmental Authority that if resolved adversely to Borrower could result in a Material Adverse Change.

5.1.6 No Event of Default. No Event of Default or Unmatured Event of Default has occurred and is continuing.

5.1.7 Approvals and Permits; Assets and Property. Except as disclosed to Lender in writing prior to the date hereof, to the best knowledge of Borrower, (i) Borrower has all Approvals and Permits necessary for the development currently taking place at each Qualified Project and (ii) there are no facts or circumstances known to Borrower that would materially impair the ability of Borrower to obtain Approvals and Permits necessary for the future development of each Qualified Project or to otherwise continue the contemplated development of said Qualified Project. In the event that the foregoing representation and warranty shall cease to be true in all material respects with respect to a Qualified Project or portion thereof, such Qualified Project (or portion thereof, as the case may be) shall cease to be part of the Borrowing Base until such time as such representation and warranty shall become true in all material respects.

5.1.8 ERISA. Borrower is in compliance with ERISA. No Reportable Event or Prohibited Transaction (as defined in ERISA) or termination of any plan has occurred and no notice of termination has been filed with respect to any plan established or maintained by Borrower and subject to ERISA. Borrower has not incurred any material funding deficiency within the meaning of ERISA or any material liability to the Pension Benefit Guaranty Corporation in connection with any such plan established or maintained by Borrower.

5.1.9 Compliance with Law. Borrower has not received any notice of any material violations of any applicable laws, rules, or regulations of any Governmental Authority with respect to any Qualified Project or the development of said Qualified Project and Borrower is not aware of any facts or circumstances which would constitute or cause any such violation. If the foregoing representation and warranty shall cease to be true with respect to a Qualified Project (or portion thereof), such Qualified Project (or such portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until such time as such violation or facts or circumstances shall no longer exist.

5.1.10 Full Disclosure. All information in the loan application, financial statement, certificate, or other document and all information prepared and delivered by Borrower to Lender in obtaining the Commitment is correct and complete in all material respects, and there are no omissions therefrom that result in such information being incomplete, incorrect, or misleading in any material adverse respect as of the date thereof. To the best knowledge of Borrower, all information in any loan application, financial statement, certificate or other document prepared and delivered to Lender on behalf of Borrower by Persons other than Borrower or its Affiliates, and all

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other information prepared and delivered to Lender on behalf of Borrower or by Persons other than Borrower or its Affiliates in obtaining the Commitment is correct and complete in all material respects, and there are no omissions therefrom that result in any such information being incomplete, incorrect, or misleading in any material adverse respect as of the date thereof. There has been no Material Adverse Change as to Borrower or any Project since the date of such information. All financial statements heretofore delivered to Lender by Borrower were prepared in accordance with GAAP and accurately represent the financial conditions and results of operation of the subjects thereof as of the dates thereof and for the period covered thereby.

5.1.11 Use of Proceeds; Margin Stock. The proceeds of the Advances will be used by Borrower solely for the purposes specified in this Agreement. None of such proceeds will be used for the purpose of purchasing or carrying any “margin stock” as defined in Regulation U or G of the Board of Governors of the Federal Reserve System (12 C. F. R. Part 221 and 207), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a “purpose credit” within the meaning of such Regulation U or G. Borrower is not engaged in the business of extending credit for the purpose of purchasing, or carrying margin stock. Neither Borrower nor any Person acting on behalf of Borrower has taken or will take any action which might cause any Loan Documents to violate Regulation U or G or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934, or any rule or regulation thereunder, in each case as now in effect or as the same may hereafter be in effect. Borrower and Borrower’s subsidiaries own no “margin stock”.

5.1.12 Governmental Regulation. Borrower is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act (as any of the preceding have been amended), or any other law which regulates the incurring by Borrower of indebtedness, including but not limited to laws relating to common or contract carriers or the sale of electricity, gas, steam, water, or other public utility services.

5.1.13 Material Agreements; No Material Defaults. Borrower shall execute an assignment or assignments in favor of Lender of all of Borrower’s rights, title and interests in and to any and all material contracts, leases, permits, development agreements, covenants, restrictions, option agreements, purchase and sale agreements, instruments and other agreements requested by Lender for review relating to each of the Projects to be included as Qualified Projects under the Borrower Base (collectively “Material Agreements”) as required by Lender in its discretion. No event has occurred which, immediately or upon the expiration of applicable cure or grace periods, would constitute a default which in Lender’s reasonable opinion would have a Material Adverse Change in Borrower or any Project with respect to (i) the terms of any instrument evidencing or relating to any debt of Borrower, (ii) any such contract, lease, permit, development agreement, covenant, restriction, option agreement, purchase and sale agreement, instruments and other agreement, (iii) any statute, ordinance, law, judgment, order, writ, injunction, decree, or rule or regulation of any Governmental Authority or any determination or award of any arbitrator to which Borrower or any Project may be bound, or (iv) any other instrument, agreement or document by which Borrower, any Project or any of Borrower’s properties is bound. If the foregoing representation and warranty shall cease to be true with respect to a Qualified Project or a portion thereof, such Qualified Project (or such portion thereof, as the case may be) shall cease to be part of the Borrowing Base until such time as such representation and warranty is once again true.

5.1.14 Title to Property. Borrower has good, sufficient and legal title to all properties and assets reflected in its most recent balance sheet delivered to Lender, except for assets disposed of in the ordinary course of business since the date of such balance sheet. The Property is free and clear of Liens and Encumbrances, except for Permitted Exceptions. Borrower is the sole

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owner of, and has good and marketable title to, the fee interest in each Qualified Project and all other real property described in the Deed of Trust encumbering the property included in said Qualified Project, free from any Liens and Encumbrances, excepting only Permitted Exceptions. If the foregoing representation and warranty shall cease to be true in all material respects with respect to a Qualified Project or a portion thereof, such Qualified Project (or such portion thereof, as the case may be) shall cease to be part of the Borrowing Base until such time as such representation and warranty is once again true in all material respects.

5.1.15 Payment of Taxes. All tax returns and reports of Borrower required to be filed by Borrower have been timely filed, and all taxes, assessments, fees and other governmental charges upon Borrower and upon its properties, assets, income and franchises which are due and payable have been paid prior to delinquency. Borrower knows of no proposed tax assessment against Borrower or any Qualified Project that would be material to the condition (financial or otherwise) of Borrower or said Qualified Project, and Borrower has not contracted with any Governmental Authority in connection with any such taxes. If the foregoing representation and warranty shall cease to be true with respect to a Qualified Project or a portion thereof, such Qualified Project (or such portion thereof, as the case may be) shall cease to be part of the Borrowing Base until such time as such representation and warranty is once again true.

5.1.16 No Condemnation. No condemnation proceedings or moratorium is pending, or to the best of Borrower’s knowledge, threatened against any Qualified Project or any portion thereof which would impair the use, occupancy, or full operation of said Qualified Project in any manner whatsoever. If the foregoing representation and warranty shall cease to be true with respect to a Qualified Project or a portion thereof, such Qualified Project (or such portion thereof, as the case may be) shall cease to be part of the Borrowing Base until such time as such representation and warranty is once again true in all material respects.

5.1.17 Borrowing Base. The classification of each item of property included in the Borrowing Base is true and correct. No Borrowing Base value shall be attributed to Raw Land.

5.2 Representations and Warranties Upon Requests for Advances. Each Draw Request shall be a representation and warranty by Borrower to Lender that the representations and warranties in this Section 5 are correct and complete in all material respects as of the date the requested Advance except as otherwise disclosed by Borrower to Lender in writing prior to the date of such Draw Request.

5.3 Representations and Warranties Upon Delivery of Financial Statements, Documents, and Other Information. Each delivery by Borrower to Lender of financial statements, other documents, or information after the date of this Agreement (including, without limitation, documents and information delivered in obtaining an Advance) shall be a representation and warranty that such financial statements, other documents, and information are correct and complete (in accordance with GAAP) in all material respects, that there are no material omissions therefrom that result in such financial statements, other documents, or information being materially incomplete, incorrect, or misleading in any material respect as of the date thereof, and that such financial statements accurately present the financial condition and results of operations of Borrower as at the dates thereof in all material respects and for the periods covered thereby.

6. BORROWER AFFIRMATIVE COVENANTS. Until the Commitment terminates in full and the Obligations are paid and performed in full, Borrower agrees that, unless Lender otherwise agrees in writing in Lender’s absolute and sole discretion:

6.1 Corporate Existence. Borrower shall continue to be a corporation, validly existing under the laws of the State of California.

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6.2 Books and Records; Access By Lender. Borrower shall maintain a standard, modern system of accounting (including without limitation a single, complete, and accurate set of books and records of its assets, business, financial condition, operations, property, prospects, and results of operations) in accordance with GAAP. Borrower shall also maintain complete and accurate records regarding the acquisition, development and construction of the Project, including, without limitation, all construction contracts, architectural contracts, engineering contracts, field and inspection reports, applications for payment, estimates and analyses regarding construction costs, names and addresses of all contractors and subcontractors performing work or providing materials or supplies with respect to the development and construction of the Project, invoices and bills of sale for all costs and expenses incurred by contractors and subcontractors in connection with the development and construction of the Project, payment, performance and other surety bonds (if applicable), releases and waivers of lien for all such work performed and materials supplied, evidence of completion of all inspections required by any Governmental Authority, certificates of substantial completion, notices of completion, surveys, as-built plans, Approvals and Permits, Purchase Contracts, escrow instructions, records regarding all sales of all or portions of the Project, and all other documents and instruments relating to the acquisition, development, construction and/or sale of the Project or portions thereof. During business hours Borrower shall give representatives of Lender access to all assets, property, books, records, and documents of Borrower and will permit such representatives to inspect such assets and property and to audit, copy, examine, and make excerpts from such books, records, and documents. Upon request by Lender, Borrower shall also provide Lender with copies of the reports, documents, agreements, and other instruments described in this Section 6.2.

6.3 Special Covenants Relating to Collateral.

6.3.1 Defense of Title. Borrower shall defend the Collateral, the title and interest therein of Borrower represented and warranted in the Deed of Trust, and the legality, validity, binding nature, and enforceability of each Lien and Encumbrance contained in the Deed of Trust and the first priority of the Deed of Trust against all matters, including, without limitation: (a) any attachment, levy, or other seizure by legal process or otherwise of any or all Collateral; (b) except for Permitted Exceptions, any Lien or Encumbrance or claim thereof on any or all Collateral; (c) any attempt to foreclose, conduct a trustee’s sale, or otherwise realize upon any or all Collateral under any Lien or Encumbrance, regardless of whether a Permitted Exception and regardless of whether junior or senior to the Deed of Trust; and (d) any claim questioning the legality, validity, binding nature, enforceability, or priority of the Deed of Trust. Borrower shall notify Lender promptly in writing of any of the foregoing and will provide such information with respect thereto as Lender may from time to time request. During the period of time that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.2 Further Assurances. Borrower shall promptly execute, acknowledge, and deliver such additional agreements, documents, and instruments and do or cause to be done such other acts as Lender may reasonably request from time to time to better assure, preserve, protect, and perfect the interest of Lender in the Collateral and the rights and remedies of Lender under the Loan Documents. Without limiting the foregoing, to the extent that Lender determines from time to time that additional deeds of trust, amendments to deeds of trust, financing statements, subordinations, and other documents are required in order to perfect all Liens and Encumbrances in favor of Lender, and cause all Collateral encumbered by any of the deeds of trust to be subject only to

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Permitted Exceptions, Borrower shall execute and deliver such documents, instruments and other agreements as Lender may reasonably request.

6.3.3 Plats, Annexations and Approvals. For each Qualified Project to be included in the Borrowing Base:

(a) Each plat or map (whether tentative or final) with respect to any portion of any Qualified Project shall comply with all Requirements and shall be satisfactory in form and substance to Lender. Prior to evaluation by Lender of the plat or map for approval, Borrower shall deliver to Lender such certifications, maps, surveys, and other documents and information as Lender requires. Prior to the recordation of any plat or map by Borrower, Borrower shall deliver to Lender such title insurance endorsements insuring the continued priority of the Deed of Trust after recording of the plat or map as Lender may require. Borrower agrees to take such steps as Lender may require in (i) either re-recording the Deed of Trust or amending the Deed of Trust to reflect the new plat legal description, and (ii) obtaining an endorsement to the Title Policy to amend the legal description therein.

(b) Borrower shall obtain and, upon request, provide Lender with, evidence of: (i) appropriate zoning for the use and occupancy of each Qualified Project; (ii) all necessary Approvals and Permits of Governmental Authorities and other third parties necessary to permit the development and sale of each Qualified Project, including without limitation all applicable public reports, architectural committee approvals and other approvals required pursuant to any applicable restrictive covenants; (iii) all Approvals and Permits necessary to commence, carry out and complete construction; and (iv) evidence of payment of all fees and other required amounts for such Approvals and Permits.

(c) At Lender’s request, Borrower shall provide Lender with true and correct copies of all documents and instruments relating to proposed easements, boundary line adjustments, covenants, conditions and restrictions and other similar matters affecting title to each Qualified Project in connection with the development thereof, together with all surveys, plats, contracts, and other information requested by Lender in connection therewith. Such easements, boundary line adjustments, covenants, conditions and restrictions and other matters shall not be entered into by Borrower unless consented to in writing by Lender, which consent shall not be unreasonably withheld by Lender so long as they are entered into in the ordinary course of developing each Qualified Project. If such consent is granted by Lender, Lender will also enter into such subordinations and releases as may be appropriate in connection with such easements, boundary line adjustments, and covenants, conditions and restrictions, provided that such subordinations are in form reasonably satisfactory to Lender and, in connection with any such releases, Borrower has satisfied the conditions precedent set forth in Section 3.2.1 above.

In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.4 Utilities. Borrower shall provide or cause to be provided all telephone service, electric power, storm sewer, sanitary sewer and water facilities for each Qualified Project,

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and such utilities will be adequate to serve said Project. No condition will exist to affect Borrower’s right to connect into and have adequate use of such utilities, except for the payment of normal connection charges or tap charges and except for the payment of subsequent charges for such services to the utility supplier. In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.5 Plans and Specifications. Borrower shall be the sole owner of all Plans and Specifications for the Improvements for each Qualified Project or, to the extent that Borrower is not the sole owner of such Plans and Specifications, Borrower shall have the unconditional right to use such Plans and Specifications in connection with the construction of the Improvements for said Qualified Project. Lender will not be restricted in any way in use of such Plans and Specifications from and after an Event of Default in connection with the construction of the Improvements and the exercise of Lender’s other rights and remedies, and Borrower shall obtain all consents and authorizations necessary for the use of such Plans and Specifications to Lender. In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.6 Compliance with Permitted Exceptions. Borrower shall keep and maintain in full force and effect all restrictive covenants, development agreements, easements and other agreements with Governmental Authorities and other Persons that are necessary or desirable for the use, occupancy, and sale of each Qualified Project. Borrower shall not default in any material respect under any such covenants, development agreements, easements and other agreements and will diligently enforce its rights thereunder. In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.7 Project Development. For each Qualified Project:

(a) Borrower shall at all times maintain and operate the Project and use its best efforts to market each Qualified Project. Regardless of whether Advances are available, Borrower shall pay all costs and expenses arising in connection with the management, operation, development and sale of said Qualified Project. The Improvements for each Qualified Project shall be constructed and developed in substantial conformity with the Plans and Specifications therefor, and in strict conformity with all applicable laws, rules and regulations of all Governmental Authorities with jurisdiction over said Qualified Project

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and shall be contained wholly within the lot lines of the Land included within the Qualified Project and will not encroach on any other real estate, easements, building lines or setback requirements. Within fifteen (15) days after Borrower receives notice or knowledge thereof, Borrower shall proceed with diligence to correct any material departure from applicable plans and specifications and any departure from applicable laws, rules and regulations of any Governmental Authority with jurisdiction over said Qualified Project. The making of Advances shall not constitute a waiver of Lender’s right to require compliance with this covenant with respect to any such defect or departure from plans and specifications or applicable laws, rules and regulations.

(b) With respect to those portions of each Qualified Project which are to be open space” or otherwise constitute streets and other common areas to be dedicated and transferred to homeowners’ associations or other Governmental Authorities with jurisdiction over said Qualified Project, and are not otherwise included within the portions of the Land to be developed by Borrower, Borrower shall take such actions as may be necessary to cause such dedications to be made promptly and in accordance with applicable covenants, conditions and restrictions and laws, rules and regulations. Lender may, at its sole option, notify Borrower that such transfers and dedications are required by Lender, in which case Borrower shall cause such transfers and dedications to occur within thirty (30) days.

In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.8 Title Policy Endorsements. If required by Lender from time to time in connection with the approvals to be granted by Lender pursuant to the Loan Documents, Borrower shall provide such continuation endorsements, date down endorsements, survey endorsements and other endorsements to each Title Policy for each Qualified Project, in form and substance satisfactory to Lender, as Lender determines necessary to insure the priority of each said Deed of Trust as a valid first lien on the applicable Collateral, subject only to Permitted Exceptions. Borrower agrees to furnish to the Title Company such surveys and other documents and information as Lender or the Title Company may require for the Title Company to issue such endorsements. In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply., then said Project shall cease to be a Qualified Project hereunder.

6.3.9 Improvement Districts. For any Qualified Project, without obtaining the prior written consent of Lender, Borrower shall not consent to, or vote in favor of, the inclusion of all or any part of the Collateral in any improvement district, any “Mello Roos” district (for Qualified Projects in California), special assessment district or similar district. Borrower shall give immediate notice to Lender of any notification or advice that Borrower may receive from any municipality or

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other third party of any intent or proposal to include all or any part of the Collateral in an improvement, assessment or other district. Upon prior written notice to Borrower, Lender shall have the right to file a written objection to the inclusion of all or any part of the Collateral in an improvement, assessment or other district, either in its own name or in the name of Borrower, and to appear at, and participate in, any hearing with respect to the formation of any such district. In the event that Borrower is not able to comply with the covenants set forth herein for a Qualified Project or portion thereof for a period of thirty (30) days following written notice from Lender (provided that if Borrower cannot reasonably cure such non-compliance within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such non-compliance provided that Borrower shall have commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure), then said Qualified Project (or portion thereof, as the case may be) shall cease to be a part of the Borrowing Base until Borrower shall so comply.

6.3.10 Appraisals. Lender shall have the right to order Appraisals of each Qualified Project and all other Collateral from time to time in Lender’s discretion. Each Appraisal is subject to review and approval by Lender. With respect to each Appraisal that Lender orders, whether as a result of applicable laws, rules, and regulations of any Governmental Authority or as a result of Lender’s general policies and procedures applicable to loans secured by real estate or for any other reason, Borrower agrees upon demand by Lender to pay to Lender the cost and expense incurred by Lender for such Appraisals and a fee prescribed by Lender for review of each Appraisal by Lender.

6.4 Information and Statements. Borrower shall furnish or cause to be furnished to Lender in connection with each and every Loan made hereunder:

Reporting Party	Required Statement	To be Received by:
1. Borrower	Annual Financial Statement (audited by an independent certified public accountant and certified by the party submitting the statement)	Within 120 days of each fiscal year end
2. Borrower	Quarterly Financial Statement (certified by the party submitting the statement)	Within 60 days of the end of each quarterly period
3. Borrower	Annual 24-Month Cash Flow Projection	Within 90 days of the end of each fiscal year end
4. Borrower	Monthly Sales Report	Within 15 days of each Calendar Month end

6.4.1 Monthly Sales Reports. As soon as available and in any event within the time period set forth in the chart above, Borrower shall deliver to Lender a report of all Home and Lots sales and closings during the previous Calendar Month and on a cumulative basis since inception for each Project financed hereunder, which report shall be prepared and delivered by Borrower, shall be in form and substance satisfactory to Lender, shall be certified as true and correct on behalf of Borrower by the chief financial officer of Borrower and, upon request of Lender, shall be supported by settlement statements relating to each Lot or Home sale.

6.4.2 Quarterly Financial Statements. As soon as available and in any event within the time period set forth in the chart above, copies of the balance sheet of Borrower and 10-Q statement (as included in the consolidated financial statements of William Lyon Homes, a Delaware

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corporation) as of the end of such quarter (including full detail of all assets and Borrowing Base availability computations), statements of income and retained earnings and a statement of cash flow of Borrower for such month, prepared in accordance with GAAP, and signed and certified as true and correct on behalf of Borrower by the chief financial officer of Borrower.

6.4.3 Annual Financial Statements. As soon as available and in any event within the time period set forth in the chart above, annual consolidated, unqualified financial statements of Borrower (as included in the consolidated financial statements of William Lyon Homes, a Delaware corporation), including copies of the balance sheet of Borrower, 10-K statement as of the end of such fiscal year, internally-generated consolidating financial statements, and statements of income and retained earnings and a statement of cash flow of Borrower for such fiscal year, in each case setting forth in comparative form the figures for the preceding fiscal year of Borrower, all in reasonable detail and prepared in accordance with GAAP, audited by independent certified public accountants satisfactory to Lender and accompanied by an unqualified opinion of such auditors. Such audit shall also cover and include the information contained in the Borrowing Base Certificates delivered pursuant to Section 6.4.6. In the event that the annual financial statements provided to Lender hereunder are not accompanied by an unqualified opinion of such auditors, then Borrower shall provide such management letters as required by Lender in its discretion.

6.4.4 Annual 24-Month Projection. As soon as available and in any event within the time period set forth in the chart above, Borrower shall provide Lender with a projection for the next twenty-four (24) Calendar Months of cash flow and Project Revenues for Borrower and all Projects financed hereunder.

6.4.5 Compliance Certificates. Together with each of the financial statements required pursuant to Sections 6.4.1-6.4.4, a statement in form and substance satisfactory to Lender, certified by the chief financial officer of Borrower that Borrower is in compliance with all covenants, terms, and conditions applicable to Borrower under or pursuant to the Loan Documents and any other Debt owing by Borrower to any Person, and disclosing any noncompliance therewith and describing the status of Borrower’s actions to correct such noncompliance, if applicable.

6.4.6 Borrowing Base Certificate. By the fifteenth (15th) day of each Calendar Month, a current Borrowing Base Certificate reflecting the Property included the Borrowing Base as of the last day of the immediately preceding Calendar Month. In addition, by the twentieth (20th) day of the end of each Calendar Quarter, together with said certificate, a detailed computation of the financial covenant requirements set forth in Section 6.15 below.

6.4.7 Other Items and Information. Such other information concerning Borrower, the Project, and the assets, business, financial condition, operations, property, prospects, and results of operations of Borrower, as well as the financial statements and other information for prospective purchasers of any portion of the Land, as Lender reasonably requests from time to time. In this regard, promptly upon request of Lender, Borrower shall deliver to Lender counterparts and/or conditional assignments as security of any and all construction contracts, receipted invoices, bills of sale, statements, conveyances, and other agreements, documents, and instruments of any nature relating to the Project or under which Borrower claims title to any materials or supplies used or to be used in the Project. Also, in this regard, promptly upon request of Lender, Borrower shall deliver to Lender a complete list of all contractors, subcontractors, material suppliers, other vendors, artisans, and laborers performing work or services or providing materials or supplies for the Project.

6.5 Law; Judgments; Material Agreements; Approvals and Permits. Borrower shall comply with all laws, ordinances, regulations, and rules (federal, state, and local) and all judgments, orders, and decrees of any arbitrator, other private adjudicator, or Governmental Authority relating to Borrower, the Project, or the other assets, business, operations, or property of

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Borrower. Borrower shall comply with all material agreements, documents, and instruments to which Borrower is a party or by which Borrower, the Project, or any of the other assets or property of Borrower are bound or affected. Borrower shall not cancel or terminate any such agreements, documents or instruments if to do so could result in a Material Adverse Change. Borrower shall comply with all Requirements (including, without limitation, as applicable, requirements of the Federal Housing Administration and the Veterans Administration) and all conditions and requirements of all Approvals and Permits. Borrower shall obtain and maintain in effect from time to time all Approvals and Permits required for the development and marketing of the Project and the business activities and operations then being conducted by Borrower. Borrower shall immediately provide Lender with written notice and explanation of any litigation involving Borrower in which the amount in dispute exceeds One Million Dollars ($1,000,000.00). In the event of any dispute that, in the good faith opinion of Lender, could result in a Material Adverse Change or the fulfillment of any condition precedent or covenant herein, Lender may agree to make Advances for the account of Borrower without prejudice to Borrower’s rights, if any, to recover such funds from the party to whom paid. Such agreement or agreements may take any form that Lender in its reasonable discretion deems proper, including, without limitation, agreements to indemnify a title insurer against possible assertion of lien claims and agreements to pay disputed amounts to contractors in the event Borrower is unable or unwilling to pay the same. All sums paid or agreed to be paid pursuant to such agreement shall be for the account of Borrower and shall be charged as an Advance.

6.6 Taxes and Other Debt. Borrower shall pay and discharge (a) before delinquency all taxes, assessments, and governmental charges or levies imposed upon it, upon its income or profits, or upon any property belonging to it, (b) when due all lawful claims (including, without limitation, claims for labor, materials, and supplies), which, if unpaid, might become a Lien or Encumbrance upon any of its assets or property, and (c) all its other Debt, when due.

6.7 Assets and Property. Borrower shall maintain, keep, and preserve all of its assets and property (tangible and intangible) necessary or useful in the proper conduct of its business and operations in good working order and condition, ordinary wear and tear excepted. Borrower shall promptly obtain and maintain, from time to time at its own expense, all Approvals and Permits as may be required to enable it to comply with its obligations hereunder and under the other Loan Documents.

6.8 Insurance. Borrower shall obtain and maintain the following insurance and pay all premiums related thereto as and when they become due in connection with each and every Project financed hereunder:

6.8.1 Property. Insurance of all Collateral against damage or loss by fire, lightning, and other perils, on an all risks basis, such coverage to be in an amount not less than the full insurable value of such Collateral on a replacement cost basis. Such policy will be written on an all risks basis, with no coinsurance requirement, and will contain a provision granting the insured permission to complete and/or occupy the Project.

6.8.2 Liability. Commercial general liability insurance protecting Borrower and Lender against loss or losses from liability imposed by law or assumed in any agreement, document, or instrument and arising from bodily injury, death, or property damage with a limit of liability of not less than Two Million Dollars ($2,000,000.00) per occurrence and Ten Million Dollars ($10,000,000.00) general aggregate. Also, “umbrella” excess liability insurance in an amount not less than Ten Million Dollars ($10,000,000.00) or such greater amount as Lender may reasonably require. Such policies must be written on an occurrence basis so as to provide blanket contractual liability, broad form property damage coverage, and coverage for products and completed operations. If required by Lender, Borrower shall also obtain and maintain business motor vehicle liability insurance protecting Borrower and Lender against loss or losses from liability relating to motor

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vehicles owned, non-owned, or hired and used by Borrower or its agents and employees, with a limit of liability of not less than One Million Dollars ($1,000,000.00) (combined single limit for personal injury (including bodily injury and death) and property damage). Borrower acknowledges that Borrower has been advised by Lender of, and agrees that the requirements of this Section 6.8.2 are in compliance with, the following legal limitation regarding hazard insurance coverage for the Project pursuant to Civil Code Section 2955.5:

“No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.”

6.8.3 Flood. A policy or policies of flood insurance in the maximum amount of flood insurance available with respect to the Project under the Flood Disaster Protection Act of 1973, as amended. This requirement will be waived with respect to portions of the Project upon presentation of evidence satisfactory to Lender that no such portion of the Project in question is or will be located within an area identified by the U.S. Department of Housing and Urban Development as having special flood hazards.

6.8.4 Worker’s Compensation. Worker’s compensation insurance disability benefits insurance and such other forms of insurance as required by law covering loss resulting from injury, sickness, disability, or death of employees of Borrower.

6.8.5 Contractors. During the construction of the Improvements, any and all contractors and subcontractors will be required to carry liability insurance of the type and providing the minimum limits set forth below:

(a) Worker’s Compensation. Worker’s compensation insurance, disability benefits insurance and each other form of insurance which such contractor is required by law to provide, covering loss resulting from injury, sickness, disability or death of employees of the contractor who are located on or assigned to the construction of the Improvements.

(b) Liability. Comprehensive general liability insurance coverage for:

Property and Operations

Products and Completed Operations

Contractual Liability

Personal Injury Liability

Broad Form Property Damage (including completed operations)

Explosion Hazard

Collapse Hazard

Underground Property Damage Hazard

Such policy will have a limit of liability of not less than One Million Dollars ($1,000,000.00) (combined single limit for personal injury, including bodily injury or death, and property damage).

6.8.6 Additional Insurance. Such other policies of insurance as Lender may reasonably request in writing. All policies for required insurance will be in form and substance satisfactory to Lender in its absolute and sole discretion. All required insurance will be procured and maintained in financially sound and generally recognized responsible insurance companies selected by Borrower and approved by Lender. Deductibles under

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insurance policies required pursuant to this Section 6.8 will not exceed the amounts approved from time to time by Lender. Such companies must be authorized to write such insurance in the states in which the Collateral is located. Each company issuing the policies shall be rated “A” or better by A.M. Best Co., in Best’s Key Guide, or such other rating as may be acceptable to Lender. All property policies evidencing required insurance will name Lender, as first mortgagee and loss payee. All liability policies evidencing required insurance will name Lender as additional insured. The policies will not be cancelable as to the interests of Lender due to the acts of Borrower. The policies will provide for at least thirty (30) days prior written notice of the cancellation or modification thereof to be given to Lender. A certified copy of each insurance policy or, if acceptable to Lender in its absolute and sole discretion, certificates of insurance evidencing that such insurance is in full force and effect, will be delivered to Lender, together with proof of the payment of the premiums thereof. Prior to the expiration of each such policy, Borrower shall furnish Lender evidence that such policy has been renewed or replaced in the form of the original or a certified copy of the renewal or replacement policy or, if acceptable to Lender in its absolute and sole discretion, a certificate reciting that there is in full force and effect, with a term covering at least the next succeeding calendar year, insurance of the types and in the amounts required in this Section 6.8.

6.9 Commencement and Completion. Borrower shall cause construction of the Improvements to be prosecuted and completed in good faith, with due diligence, and without delay, subject to any Force Majeure Events; provided, however, that in all events all Improvements shall be constructed and completed prior to the applicable Lot Advance Maturity Date or applicable Home Advance Maturity Date for the subject Lot or Home for which said Improvements are being constructed. Upon demand by Lender, Borrower shall correct any defect in the Improvements or any material departure from any applicable Requirements or, to the extent not theretofore approved in writing by Lender, the applicable plans and specifications. Borrower understands and agrees that the inspection of the Improvements on behalf of Lender, the review by Lender or others acting on behalf of Lender of Draw Requests and related documents and information, the making of Advances by Lender, and any other actions by Lender will be for the sole benefit of Lender and will not be a waiver of the right to require compliance with this Section 6.9. In the event that construction of any Improvements for any Qualified Project is abandoned or halted prior to completion for any period of fifteen (15) consecutive days for any cause not a Force Majeure Event (or for any period up to, in the aggregate, ninety (90) consecutive days as a result of one or more Force Majeure Events) or otherwise beyond the reasonable control of Borrower, Contractor or any subcontractor, or not completed by the applicable maturity date, then said Qualified Project shall cease to be part of the Borrowing Base until a cure thereof shall have occurred.

6.10 Rights of Inspection; Agency.

6.10.1 Generally. Lender and its respective agents, employees, and representatives will have the right, at the sole cost and expense of Borrower, at any time and from time to time to enter upon the Collateral in order to inspect the Collateral and all aspects thereof, including, without limitation, in order to determine if Collateral is property classified for Borrowing Base purposes. All inspections by Lender are for the sole purpose of protecting the security of Lender and are not to be construed as a representation by Lender that there has been compliance with applicable plans and specifications, the applicable Requirements, or that the Project is free of defects in materials or workmanship. Borrower may make or cause to be made such other independent inspections as Borrower may desire for its own protection. Based on such inspections, Lender may adjust the Borrowing Base and other calculations pursuant to this Agreement.

6.10.2 Inspector(s). Without limiting the rights of Lender pursuant to Section 6.10, Lender may employ outside inspectors to perform some or all of the inspections described in Section 6.10 and may also elect to have Lender’s own employees perform some or all of such inspection duties and review the reports of outside inspectors.

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6.11 Verification of Costs. Lender will have the right at any time and from time to time to review and verify all Hard Costs and Soft Costs incurred by Borrower.

6.12 Use of Proceeds. Borrower shall use proceeds of Advances only for the purposes described herein.

6.13 Costs and Expenses of Borrower’s Performance of Covenants and Satisfaction of Conditions. Borrower shall perform all of its obligations and satisfy all conditions under the Loan Documents at its sole cost and expense.

6.14 Notification. Borrower shall promptly disclose to Lender the occurrence of: (a) any default by Borrower under or pursuant to the terms and conditions of any material Debt owed by Borrower to any Person, whether now existing or hereafter arising; (b) the occurrence of any event or other circumstance of which Borrower has knowledge and that with the giving of notice or the passage of time would constitute a default referred to in clause (a) above; (c) any Material Adverse Change; (d) any change in the Requirements of any Governmental Authority that would materially and adversely affect Borrower’s ability to develop the Project; (e) any action or proceeding which is instituted by or against Borrower or any Project in any Federal or state court or before any Governmental Authority, federal, state or local, foreign or domestic, or any such actions or proceedings are threatened against Borrower or any Project which, in any such case, if adversely determined, would cause a Material Adverse Change; and (f) the occurrence of any Event of Default or Unmatured Event of Default.

6.15 Financial Covenants. Financial covenants described in this Section 6.15, together with all other financial covenants and restrictions set forth in this Agreement shall be monitored quarterly by Lender upon receipt of the financial statements to be provided hereunder.

Covenant Party	Covenant Type	Covenant Requirement
Borrower	Total Lot Inventory (excluding lots under option agreements)	Borrower shall not own unsold lots under development and unsold developed lots in excess of an aggregate sum equal to two and one-half (2.5) times the number of lot sales and closings over the immediately preceding four (4) quarters for all residential housing projects owned by Borrower
Borrower and its subsidiaries	Maximum Total Liabilities-to-Tangible Net Worth Ratio (with the Total Liabilities to be exclusive of consolidated liabilities of variable interest entities)	Not in excess of 3.25:1.0
Borrower	Minimum Fixed Charge Coverage	Not less than 2.0:1.0
Borrower	Minimum Tangible Net Worth	Not less than the sum of $200,000,000.00 plus 50% of all annual net profits after June 30, 2004 plus 75% of additional future equity offerings
Borrower	Minimum Liquidity	Not less than $10,000,000.00

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6.15.1 No Other Debt. Except as approved by Lender, there shall be no third party Debt on the Property or in any Project, other than trade debt. Lender shall have the right, but not the obligation, to declare a default under the Loan if there are any material uncured monetary or non-monetary defaults on any and all trade debt obligations (including without limitation any other loans by Lender) of Borrower, which in Lender’s reasonable judgment will materially impair the ability of Borrower to perform under the terms of this Agreement, the Note or the Security Documents.

6.15.2 No Other Loan Defaults. Borrower shall not be in default under any “Other Loan.” For purposes of this Section 6.15.2, an “Other Loan” shall mean any loan by Lender, or any affiliate or subsidiary of Lender, that is made to Borrower or that is guaranteed by Borrower. It is the expressed intent of Borrower to cross-default this Loan with any Other Loan, such that (a) any Event of Default under this Loan shall constitute a default under each and every Other Loan, and (b) any default under each and every Other Loan shall constitute an Event of Default under this Loan.

6.16 Books and Records; Names; Place of Business and Chief Executive Office. Borrower shall give Lender thirty (30) days prior written notice of any change in the location of its books and records or its sole place of business or chief executive office.

6.17 Proceeds of Purchase Contracts.

6.17.1 After Event of Default or Unmatured Event of Default. From and after the occurrence and during the continuation of an Event of Default or Unmatured Event of Default, all payments of Net Sales Proceeds under Purchase Contracts shall be paid directly to Lender to be applied by Lender to the payment of the Obligations in such order as Lender may determine in its sole and absolute discretion. Absent the occurrence and continuation of an Event of Default or Unmatured Event of Default, such amounts required to be paid to Lender shall be applied (i) first to pay amounts due pursuant to Section 3.2.2, and (ii) then the balance shall be deposited with Lender.

6.17.2 Payments to Lender. If Borrower collects or receives any amounts payable to Lender pursuant to this Section 6.17, Borrower shall forthwith, upon receipt, transmit and deliver to Lender in the form received all cash, checks, drafts, chattel paper, and other instruments or writings for the payment of money (endorsed, where required, so that such items may be collected by Lender). Any such proceeds which may be so received by Borrower will not be commingled with any other of Borrower’s funds or property, but will be held separate and apart from Borrower’s own funds or property and upon express trust for Lender until delivery is made to Lender.

7. BORROWER NEGATIVE COVENANTS. Until the Commitment terminates in full and the Obligations are paid and performed in full, Borrower agrees that, unless Lender otherwise agrees in writing in Lender’s absolute and sole discretion:

7.1 Corporate Restrictions. Borrower will not issue any capital stock in Borrower or grant any option, right of first refusal, warrant, or other right to purchase any capital stock in Borrower. Borrower will not be dissolved or liquidated. Borrower will not amend, modify, restate, supplement, or terminate any of its Organizational Documents, Borrower will not consolidate or merge with any corporation, any other limited partnership, any limited liability company, or any other Person.

7.2 Name, Fiscal Year, Accounting Method, and Lines of Business. Borrower will not change its name, fiscal year, or method of accounting. Borrower will not directly engage in any business other than the lines of business in which Borrower is engaged on the date of this Agreement,

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discontinue any existing lines of business that are material to the business or operations of Borrower, or substantially alter its method of doing business.

7.3 Change in Ownership. Borrower will not suffer to occur or exist, whether occurring voluntarily or involuntarily, any change in, or Lien or Encumbrance with respect to, the legal or beneficial ownership of any capital stock in Borrower.

7.4 Loans. Borrower will not directly or indirectly in relation to any Qualified Projects (i) make any loan or advance to any other Person other than purchase money loans made in the ordinary course of business and advances made in the ordinary course of constructing the infrastructure for said Project to Persons engaged in such construction, purchase or otherwise acquire any capital stock or any securities of any other Person, any limited liability company interest or partnership interest in any other person, or any warrants or other options or rights to acquire any capital stock or securities of any other person or any limited liability company interest or partnership interest in any other Person, (ii) make any capital contribution to any other Person, (iii) otherwise invest in or acquire any interest in any other Person or establish any subsidiaries, (iv) guarantee or otherwise become obligated in respect of any indebtedness of any other Person, or (v) subordinate any claim against or obligation of any other Person to Borrower to any other indebtedness of such Person.

7.5 Liens and Encumbrances. Except for (i) Permitted Exceptions, (ii) Liens and Encumbrances securing this Loan, and (iii) involuntary Liens and Encumbrances being contested in good faith and through appropriate proceedings, and otherwise in accordance with the applicable conditions of the Loan Documents, Borrower shall not grant or suffer to exist any Lien or Encumbrance upon any Property.

7.6 Indebtedness. Borrower shall not assume, create, incur, or permit to exist any Debt for any Property, except (i) the Obligations, and (ii) trade obligations and normal accruals in the ordinary course of business not yet due and payable. Borrower shall not assume, create, incur, or permit to exist any contingent liabilities, including, without limitation, contingent reimbursement obligations under letters of credit other than the Letters of Credit; provided, however, that Borrower may incur and permit to exist contingent liabilities resulting from the issuance of payment and performance bonds related to construction of the Improvements.

7.7 Acquisition of Assets. Borrower shall not acquire by purchase, lease or otherwise all or substantially all the assets of any other person, if to do so would materially affect its business or operations.

8. EVENTS OF DEFAULT AND REMEDIES.

8.1 Events of Default. The occurrence of any one (1) or more of the following shall constitute an Event of Default under this Agreement:

8.1.1 Failure by Borrower to pay any monetary amount when due under any Loan Document and the expiration of ten (10) days after written notice of such failure by Lender to Borrower.

8.1.2 Failure by Borrower to perform obligation not involving the payment of money, or to comply with any other term or condition applicable to Borrower under any Loan Document, and the expiration of thirty (30) days after written notice of such failure by Lender to Borrower, provided that if Borrower cannot reasonably cure such failure within such thirty (30) day period, such thirty (30) day period shall be extended for a reasonable period not in excess of ninety (90) days from the date of Lender’s notice to cure such failure provided that Borrower shall have

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commenced such cure within such thirty (30) day period and shall diligently thereafter proceed to effect such cure.

8.1.3 Any representation or warranty by Borrower in any Loan Document is materially false, incorrect, or misleading as of the date made.

8.1.4 Borrower (i) is unable or admits in writing its inability to pay its monetary obligations as they become due, (ii) makes a general assignment for the benefit of creditors, or (iii) applies for, consents to or acquiesces in the appointment of a trustee, receiver or other custodian for itself or its property or any part thereof, or in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for Borrower, or the property of Borrower or any part thereof, and such appointment is not discharged within sixty (60) days.

8.1.5 Commencement of any case under the Bankruptcy Code, Title 11 of the United States Code or commencement of any other bankruptcy arrangement, reorganization, receivership, custodianship or similar proceeding under any federal, state or foreign law by or against Borrower, and such case in not discharged within sixty (60) days of filing.

8.1.6 Borrower fails to pay when due (after the expiration of any applicable notice and cure period) any monetary obligation (other than the Loan), whether such obligation be direct or contingent, to any person in excess of Five Hundred Thousand Dollars ($500,000.00), provided that Borrower may in good faith contest any such monetary obligation by appropriate administrative or judicial proceedings as long as (i) said contesting party has, in Lender’s judgment, a reasonable basis for such contest, (ii) said contesting party pays when due any portion of such monetary obligation that said party does not contest, (iii) said contesting party’s contest will not result in or pose any risk of the seizure, sale or imposition of a lien upon the Property or the Project or any portion thereof, or said contesting party has posted appropriate lien release bonds as permitted by applicable law in order to cause any such lien to be released from the Property or the Project, (iv) said contesting party delivers to Lender such bond or other security as Lender may require in connection with such contest, (v) said contesting party at all times prosecutes such contest with due diligence, and (vi) said contesting party pays, promptly following a determination of the amount of such monetary obligation due and owing by Borrower. In the event that said contesting party does not make, promptly following a determination of the amount of such monetary obligation due and owing by said contesting party, any payment required to be made pursuant to clause (vi) of the preceding sentence, an Event of Default shall have occurred and Lender may draw or realize upon any bond or other security delivered to Lender in connection with the contest by Borrower, in order to make such payments.

8.1.7 Any litigation or proceeding that, in Lender’s reasonable judgment if determined adversely to Borrower, would constitute a Material Adverse Change on Borrower or any Project, is commenced before any Governmental Authority against or affecting Borrower, or the property of Borrower or any part thereof, and such litigation or proceeding is not defended diligently and in good faith by Borrower or is not discharged within sixty (60) days of filing.

8.1.8 A final judgment or decree for monetary damages or a monetary fine or penalty (not subject to appeal or as to which the time for appeal has expired) is entered against Borrower by any Governmental Authority, which together with the aggregate amount of all other such judgments, decrees, fines and penalties against Borrower that remain unpaid or that have not been discharged or stayed, exceeds One Million Dollars ($1,000,000.00) or would otherwise in Lender’s reasonable judgment constitute a Material Adverse Change on Borrower or any Project, and such judgment, decree, fine or penalty is not paid, discharged or stayed within thirty (30) days after the entry thereof.

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8.1.9 Commencement of any action or proceeding which seeks as one of its remedies the dissolution of Borrower, and such action is not discharged within sixty (60) days of filing.

8.1.10 All or any part of the property of Borrower is attached, levied upon or otherwise seized by legal process, and such attachment, levy or seizure is not quashed, stayed or released within thirty (30) days of the date thereof.

8.1.11 The occurrence of any prohibited transfer under Section 2.9 of any Deed of Trust, unless prior to such transfer the holder of the Note has delivered to Borrower the written consent of such holder to such transfer.

8.1.12 The occurrence of any Event of Default, as such term is defined in any other Loan Document.

8.1.13 If Borrower, at any time, ceases to manage the Projects financed hereunder.

8.1.14 Any Governmental Authority with jurisdiction over the Property or any Project orders or requires that construction of any Improvements be stopped, in whole or in part, or any required approval, license or permit is withdrawn or suspended, and the order, requirement, withdrawal or suspension remains in effect for a period of thirty (30) days, then the Qualified Project or Property to which the order, requirement, withdrawal or suspension relates shall not be a part of the Borrowing Base until such order, requirement, withdrawal or suspension is no longer in effect.

8.1.15 Failure to deposit with Lender in cash or cash equivalents, as required herein, the amount necessary to put the Loan “in balance” (as required pursuant to Sections 2.1.6(c), 2.2.3(d), 2.3.4 and 2.4.5 above) within ten (10) days after Lender’s notice to Borrower that the Loan is not “in balance,” or any other failure to deposit the amount(s) necessary and required herein within ten (10) days after the date such amounts are required to be deposited.

8.2 Rights and Remedies of Lender.

8.2.1 Notwithstanding any provision to the contrary herein or any of the other Loan Documents, during the continuance of any Event of Default under this Agreement, or during the continuance of an Event of Default under any of the other Loan Documents: (i) Lender’s obligation to make further disbursements of the Loan shall abate; and (ii) if the Event of Default shall not be cured within the applicable notice and cure periods, then Lender shall, at its option, have the remedies provided in the Loan Document breached by Borrower, including, without limitation, the option to declare all outstanding indebtedness to be immediately due and payable without presentment, demand, protest or notice of any kind, and the following remedies: Lender’s obligation to make further disbursements to Borrower shall terminate; Lender may, at its option, apply any of Borrower’s funds in its possession to the outstanding indebtedness under the Note whether or not such indebtedness is then due; Lender may exercise all rights and remedies available to it under any or all of the Loan Documents; and Lender shall have the right to cause an independent contractor selected by Lender to enter into possession of the Property and to perform any and all work and labor necessary for the completion of the Project substantially in accordance with the Plans and Specifications and to perform Borrower’s obligations under this Agreement. All sums expended by Lender for such purposes shall be deemed to have been disbursed to and borrowed by Borrower and shall be secured by the Deed of Trust on the Property.

(a) Subject to the provisions of Sections 8.2.1(b) and 8.2.1(c) below, Lender and Borrower acknowledge and agree that in each instance in which a Project ceases to be a Qualified Project so as to be included in the Borrowing Base, either due to (i) the failure of or non-compliance with any representations and warranties under Sections 5.1.7,

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5.1.9, 5.1.13-5.1.16, or (ii) the failure of or non-compliance with any affirmative covenants under Sections 6.3.1, 6.3.3-6.3.9, 6.9 or (iii) the failure to cure a default under Section 8.1.14, then such removal of said Project from the Borrowing Base shall not in and of itself constitute an Event of Default under this Agreement.

(b) Notwithstanding any other provision of this Agreement to the contrary, if any adjustment in the Borrowing Base shall arise from a Project ceasing to be a Qualified Project for the purpose of inclusion in the Borrowing Base and Borrower shall fail or refuse to timely make any principal payment required as a result of said adjustment, then such failure and/or refusal to timely make said payment shall constitute an Event of Default under this Agreement.

(c) Notwithstanding any other provision of this Agreement to the contrary, any failure or non-compliance by Borrower with any representation, warranty, covenant (including without limitation the financial covenants set forth in Section 6.15 above), duty, obligation, promise or agreement set forth herein shall constitute an Event of Default under this Agreement unless such failure or non-compliance is (i) cured as provided herein, or (ii) expressly waived in writing by Lender, or (iii) subject to the express provisions of Section 8.2.1(a) above.

8.2.2 Borrower hereby constitutes and appoints Lender, or an independent contractor selected by Lender, as its true and lawful attorney-in-fact with full power of substitution, for the purposes of completion of each and every Project and performance of Borrower’s obligations under this Agreement in the name of Borrower, and hereby empowers said attorney-in-fact to do any or all of the following upon the occurrence of an Event of Default (it being understood and agreed that said power of attorney shall be deemed to be a power coupled with an interest which cannot be revoked until repayment of the Loan):

(a) To use any of the funds of Borrower, including any balance of the Loan, as applicable, and any funds which may be held by Lender for Borrower, for the purpose of effecting completion of the Improvements in the manner called for by the Plans and Specifications;

(b) To make such additions, changes and corrections in the Plans and Specifications as shall be necessary or desirable to complete the Improvements in substantially the manner contemplated by the Plans and Specifications;

(c) To employ any contractors, subcontractors, agents, architects and inspectors required for said purposes;

(d) To employ attorneys to defend against attempts to interfere with the exercise of power granted hereby;

(e) To pay, settle or compromise all existing bills and claims which are or may be liens against the Property, the Improvements or the Project or may be necessary or desirable for the completion of the Improvements or clearance of objections to or encumbrances on title;

(f) To execute all applications and certificates in the name of Borrower which may be required by any other construction contract;

(g) To prosecute and defend all actions or proceedings in connection with the Project, and to take such action, require such performance and do any and every other act as

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is deemed necessary with respect to the completion of the Improvements which Borrower might do on its own behalf; and

(h) To let new or additional contracts (to the extent not prohibited by existing contracts) to employ watchmen and erect security fences to protect the Project from injury, and to take such action and require such performance as Lender deems necessary under any of the bonds or insurance policies to be furnished hereunder, to make settlements and compromises with the sureties or insurers thereunder, and in connection therewith to execute instruments of release and satisfaction.

9. BANK’S OBLIGATIONS TO BORROWER ONLY AND DISCLAIMER BY BANK. No Person, other than Borrower and Lender, shall have any rights hereunder or be a third-party beneficiary hereof. Lender is not a joint venturer or a partner with Borrower. Prior to an Event of Default and thereafter until Lender elects in writing to assume specific obligations of Borrower, Lender shall not be obligated to any Person providing labor, materials, or other services for the Project and payment of funds from Advances directly to any such Persons shall not give or be a recognition of any third-party beneficiary status.

10. NO BROKERS. Except as disclosed by Borrower to Lender in writing prior to the date of this Agreement, Borrower and Lender represent and warrant to the other that it knows of no broker’s or finder’s fee due in respect of the transaction described in this Agreement and that it has not used the services of a broker or a finder in connection with this transaction.

11. PROVISIONS IN THE NOTE GOVERN THIS AGREEMENT. This Agreement is subject to certain terms and provisions in the Note, to which reference is made for a statement of such terms and provisions.

12. COUNTERPART EXECUTION. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Agreement to physically form one document.

13. MISCELLANEOUS.

13.1 Assignment

(a) Borrower shall not assign this Agreement or any interest it may have in the monies due hereunder, without the prior written consent of Lender, which consent may be granted or withheld in Lender’s sole and absolute discretion. Notwithstanding the foregoing, in the event of any such assignment, Lender may nevertheless at its option continue to make disbursements under this Agreement to Borrower or to those who succeed to Borrower’s title, and all sums shall be deemed to be disbursements under this Agreement, and not to be modifications hereof, and shall be secured by the Deed of Trust.

(b) Subject to the provisions of Section 13.18 below, Lender may at any time assign this Agreement, the Note, the Deed of Trust and other Loan Documents, and upon such assignment Lender shall have no further obligation or liability of any nature in connection herewith. Upon such assignment, the provisions of this Agreement shall continue to apply to the Loan and such assignee shall be substituted in the place and stead of Lender hereunder with all rights, obligations and remedies of Lender herein provided, including without limitation the right to so further assign this Agreement, the Note, the Deed of Trust and other Loan Documents.

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13.2 Notices. All notices, requests, demands and consents to be made hereunder to the parties hereto shall be in writing and shall be delivered by hand or sent by registered mail or certified mail, postage prepaid, return receipt requested, through the United States Postal Service to the addresses shown below or such other address which the parties may provide to one another in accordance herewith. Such notices, requests, demands and consents, if sent by mail, shall be deemed given two (2) Business Days after deposit in the United States mail, and if delivered by hand, shall be deemed given when delivered.

If to Borrower:	WILLIAM LYON HOMES, INC.
	4490 Von Karman Avenue (P.O. Box 7520)
	Newport Beach, California 92658-7520
	Attn: Richard Robinson and Michael Grubbs
With a copy to:	IRELL & MANELLA, LLP
	840 Newport Center Drive, Suite 400
	Newport Beach, California 92660-6324
	Attn: Roy Geiger, Esq.
If to Lender:	CALIFORNIA BANK & TRUST
	1900 Main Street, Suite 200
	Irvine, California 92614
	Attn: Erin Johnsen
And a copy to:	BRYAN CAVE LLP
	2020 Main Street, Suite 600
	Irvine, California 92614
	Attn: Ren R Hayhurst, Esq.

13.3 Authority to File Notices. Upon the occurrence of any Event of Default, Borrower irrevocably appoints Lender as its attorney-in-fact, with full power of substitution, to file or record, at the Borrower’s cost and expense and in Borrower’s name, any notices of completion, notices of cessation of labor, or any other notices that Lender considers necessary or desirable to protect its security.

13.4 Inconsistencies with the Loan Documents. In the event of any inconsistencies between the terms of this Agreement and any terms of any of the Loan Documents, the terms of this Agreement shall govern and prevail.

13.5 No Waiver. No disbursement of proceeds of the Loan shall constitute a waiver of any conditions to Lender’s obligation to make further disbursements nor, in the event Borrower is unable to satisfy any such conditions, shall any such waiver have the effect of precluding Lender from thereafter declaring such inability to constitute an Event of Default under this Agreement.

13.6 Lender Approval of Instruments and Parties. All proceedings taken in accordance with transactions provided for herein, and all surveys, appraisals and documents required or contemplated by this Agreement and the persons responsible for the execution and preparation thereof, shall be satisfactory to and subject to approval by Lender. Lender’s counsel shall be provided with copies of all documents which they may reasonably request in connection with the Agreement.

13.7 Lender Determination of Facts. Lender shall at all times be free to establish independently, to its satisfaction, the existence or nonexistence of any fact or facts, the existence or nonexistence of which is a condition of this Agreement.

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13.8 Incorporation of Preamble: Recitals and Exhibits. The preamble, recitals and exhibits hereto are hereby incorporated into this Agreement.

13.9 Third-Party Consultants. Lender may hire such third-party consultants as it deems necessary, the costs of which shall be paid by Borrower, to provide the following services: (a) review final Plans and Specifications and final construction cost breakdown and the construction schedule; (b) conduct compliance inspections with respect to the progress of construction of the Project and approve each element of a request for disbursement relating to construction costs, and (c) perform such other services as may, from time to time, be required by Lender. This obligation on the part of Borrower shall survive the closing of the Loan and the repayment thereof. Borrower hereby authorizes Lender, in its discretion, to pay such expenses, charges, costs and fees at any time by a disbursement of the Loan, and to the extent the applicable Loan Budget category is insufficient, such expenses, charges, costs and fees shall be paid by Borrower from its own funds.

13.10 Payment of Expenses. Borrower shall pay all taxes and assessments and all expenses, charges, costs and fees provided for in this Agreement or relating to the Loan or construction of the Improvements, including, without limitation, any fees incurred for recording or filing any of the Loan Documents, title insurance premiums and charges, tax service contract fees, fees of any consultants, Lender’s processing and closing fees, reasonable fees and expenses of Lender’s counsel, printing, photostatting and duplicating expenses, air freight charges, escrow fees, costs of surveys, premiums of hazard insurance policies and surety bonds and fees for any appraisal, appraisal review, market or feasibility study required by Lender. Borrower hereby authorizes Lender to disburse the proceeds of the Loan to pay such expenses, charges, costs and fees notwithstanding that Borrower may not have requested a disbursement of such amount, provided that Borrower acknowledges that Lender has no obligation to disburse amounts listed under “Borrower’s Equity” on the A&D Budget or the Home Construction Budget. Such disbursement shall be added to the outstanding principal balance of the Note. The authorization hereby granted shall be irrevocable, and no further direction or authorization from Borrower shall be necessary for Lender to make such disbursements. However, the provision of this Section 13.10 shall not prevent Borrower from paying such expense, charges, costs and fees from its own funds. All such expenses, charges, costs and fees shall be Borrower’s obligation regardless of whether or not Borrower has requested and met the conditions for a disbursement of the Loan. The obligations on the part of Borrower under this Section 13.10 shall survive the closing of the Loan and the repayment thereof.

13.11 Disclaimer by Lender. Lender shall not be liable to any contractor, subcontractor, supplier, laborer, architect, engineer or any other party for services performed or materials supplied in connection with the Project. Lender shall not be liable for any debts or claims accruing in favor of any such parties against Borrower or others or against the Property or the Project. Borrower is not and shall not be an agent of Lender for any purpose. Lender is not a joint venture partner with Borrower in any manner whatsoever. Prior to default by Borrower under this Agreement and the exercise of remedies granted herein, Lender shall not be deemed to be in privity of contract with any contractor or provider of services to the Project, nor shall any payment of funds directly to a contractor, subcontractor or provider of services be deemed to create any third party beneficiary status or recognition of same by Lender. Approvals granted by Lender for any matters covered under this Agreement shall be narrowly construed to cover only the parties and facts identified in any written approval or, if not in writing, such approvals shall be solely for the benefit of Borrower.

13.12 Indemnification. To the fullest extent permitted by law, Borrower agrees to protect, indemnify, defend and hold harmless Lender, and its directors, officers, agents and employees, from and against any and all liability, expense or damage of any kind or nature and from any suits, claims or demands, including reasonable legal fees and expenses on account of any matter or thing or action or failure to act by Lender, whether in suit or not, arising out of this Agreement or in connection herewith, other than such claims and liabilities as arise solely from the gross

65

negligence or intentional misconduct of Lender. Upon receiving knowledge of any suit, claim or demand asserted by a third party that Lender believes is covered by this indemnity, Lender shall give Borrower notice of the matter and an opportunity to defend it, at Borrower’s sole cost and expense, with legal counsel satisfactory to Lender. Lender may also require Borrower to so defend the matter. The obligations on the part of Borrower under this Section 13.12 shall survive the closing of the Loan and the repayment thereof.

13.13 Titles and Headings. The titles and headings of sections of this Agreement are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.

13.14 Brokers. Borrower and Lender represent to each other that neither of them knows of any brokerage commissions or finders’ fee due or claimed with respect to the transaction contemplated hereby. Borrower and Lender shall indemnify and hold harmless the other party from and against any and all loss, damage, liability and expense, including costs and reasonable attorneys’ fees, which such other party may incur or sustain by reason of or in connection with any misrepresentation by the indemnifying party with respect to the foregoing.

13.15 Change, Discharge, Termination or Waiver. No provision of this Agreement may be changed, discharged, terminated or waived except in writing signed by the party against whom enforcement of the chance, discharge, termination or waiver is sought. No failure on the part of Lender to exercise and no delay by Lender in exercising any right or remedy under the Loan Documents or under the law shall operate as a waiver thereof.

13.16 Choice of Law. This Agreement and the transaction contemplated hereunder shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws principles.

13.17 Disbursements in Excess of Loan Amount. In the event the total disbursements by Lender exceed the amount of the Loan, the total of all disbursements shall be secured by the Deed of Trust. All other sums expended by Lender pursuant to this Agreement or any other Loan Documents shall be deemed to have been paid to Borrower and shall be secured by, among other things, the Deed of Trust.

13.18 Participations. Lender may at any time sell, assign, grant participations in, or otherwise transfer to any other person, firm or corporation (each a “Participant”) all or part of the indebtedness of Borrower outstanding under this Agreement or the Note. Borrower hereby acknowledges and agrees that any such disposition will give rise to each Participant becoming a co-lender and an equitable owner of an undivided fractional interest in the Loan and the Loan Documents, with California Bank & Trust, a California banking corporation (“CB&T”), acting as the sole administrative agent for all said Participants as co-lenders; provided, however, that after any such disposition, as between Borrower and Lender under the Loan Documents, CB&T has the sole authority to bind the co-lenders under said Loan Documents, and Borrower shall have the right and the duty to continue to deal solely with CB&T concerning any part of the Loan in the same manner as if CB&T were the sole owner thereof and as if no sale of any participation interest had occurred. Subject to the foregoing, Borrower agrees and consents CB&T’s sale or transfer, whether now or later, of one (1) or more participation interests in the Loan to one (1) or more Participants, whether related or unrelated to Lender, with all references in the Loan Documents to Lender (together with all participants, successors and assigns) to include all said Participants as co-lenders hereunder. Lender may provide, without any limitation whatsoever, to any one (1) or more Participants, or potential Participant, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters as may be disclosed to said Participants or potential Participants.

66

Borrower additionally waives any and all notices of sale of participation interests, as well as all notice of any repurchase of a participation interest. Borrower also agrees that any Participant will be considered as the absolute owner of such participation interest in the Loan and will have all the rights granted under the intercreditor agreement and/or other agreements between Lender and Participant governing the sale of such participation interest. Subject to the foregoing, Borrower further waives all rights of offset or counterclaim (excluding any rights or counterclaims arising from the gross negligence or willful misconduct of or breach of this Agreement by CB&T) that it may have now or later against Lender or against any Participant and unconditionally agrees that either Lender or such Participant, as provided in said intercreditor agreement, may enforce Borrower’s obligations under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. In no event shall any sale, assignment or participation in the Loan result in any delay or change in the requirements for the disbursement of Loan funds to Borrower or alter any of Borrower’s or Lender’s obligations under the Loan.

13.19 Time Is of the Essence. Time is of the essence of this Agreement.

13.20 Attorneys’ Fees. Borrower shall promptly pay to Lender from Borrower’s own funds or from the proceeds of the Loan, upon demand, with interest thereon from the date of demand at the Default Interest Rate, reasonable attorneys’ fees, expert witness fees and all costs and other expenses paid or reasonably incurred by Lender in enforcing or exercising its rights or remedies created by, connected with or provided for in this Agreement or any of the other Loan Documents, and payment thereof shall be secured by the Deed of Trust. If at any time Borrower fails, refuses or neglects to do any of the things herein provided to be done by Borrower, Lender shall have the right, but not the obligation, to do the same but at the expense and for the account of Borrower. The amount of any moneys so expended or obligations so incurred by Lender, together with interest thereon at the Default Interest Rate, shall be repaid to Lender forthwith upon written demand therefor and payment thereof shall be secured by the Deed of Trust.

13.21 Signs. Throughout the term of the Loan, Lender shall have the right to erect one or more signs on the Project indicating its provision of financing for the Project, and Lender shall also have the right to publicize its financing of the Project as Lender may deem appropriate.

13.22 Subordination to Certain Easements, Dedications and Restrictions. Lender agrees to subordinate the lien and charge of the Deed of Trust to any easements for any public utility purposes, drainage purposes or roadway purposes, or to any roadway park or common area dedication, as specifically approved by Lender and as required by the applicable governmental authorities as a condition to its approval of the Final Map. In addition, Lender agrees to subordinate the lien and charge of the Deed of Trust to any CC&Rs which Borrower determines to be necessary or desirable in connection with the Project and which CC&Rs are approved by Lender. In addition, Lender shall cause the lien of the Deed of Trust to be partially reconveyed for any portion of the Property approved by Lender which is required to be dedicated for roadway, park and common area purposes. Lender agrees, without receipt of further consideration but at the sole cost and expense of Borrower, to execute and acknowledge any and all documents which are reasonably acceptable to Lender and which are reasonably necessary for the processing and recording of the Final Map or are reasonably necessary to effectuate the purposes of this Section 13.22.

13.23 Waiver of Right to Trial by Jury. BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG BORROWER AND LENDER ARISING OUT OF OR IN ANY RELATED TO THE LOAN OR THE LOAN DOCUMENTS. THIS PROVISION AND THE WAIVER SET FORTH HEREIN ARE

67

MATERIAL INDUCEMENTS TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN AND IN THE LOAN DOCUMENTS.

14. EXHIBITS. The following Exhibits are attached to this Agreement and incorporated herein by this reference:

Exhibits “A”	Reserved
Exhibit “B”	Form of Borrowing Base Certificate
Exhibit “C”	Letter of Credit Request Form
Exhibit “D”	Project Loan Request Form
Exhibit “E”	Form of Letter of Credit
Exhibit “F”	Form of Request for Admission of Entitled Land
Exhibit “G”	Form of Request for Admission of Lots Under Development
Exhibit “H”	Form of Request for Admission of Developed Lots
Exhibit “I”	Form of Request for Admission of Homes
Exhibit “J”	Reserved
Exhibit “K”	Required Project Information
Exhibit “L”	Home Construction Draw Schedule

15. ADDITIONAL ADVANCES. Borrower agrees that any and all amounts advanced by Lender to protect the Collateral or for any other purpose under the Loan Documents shall be considered Advances pursuant to this Agreement, and Borrower acknowledges that such advances may be made by Lender in its sole and absolute discretion and without any request or authorization of Borrower. Any such advances shall be immediately due and payable and shall bear interest at the Default Interest Rate until paid. Borrower acknowledges and agrees that such Advances may exceed the amount of Advances otherwise available, and Borrower nonetheless agrees to pay such Advances as provided herein and agrees that such Advances shall be secured by all Collateral.

[Signatures continued on the following page.]

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DATED as of the date first above stated.

LENDER:
CALIFORNIA BANK & TRUST, a California banking corporation
By:	/s/    ERIN JOHNSON
Name:	Erin Johnson
Title:	Vice President
BORROWER:
WILLIAM LYON HOMES, INC., a California corporation
By:	/s/    RICHARD S. ROBINSON
Name:	Richard Robinson
Title:	Senior Vice President
By:	/s/    MICHAEL D. GRUBBS
Name:	Michael D. Grubbs
Title:	Senior Vice President

69

EXHIBIT “A”

Reserved

EXHIBIT “A” – Page 1

EXHIBIT “B”

BORROWING CASE CERTIFICATE FORMAT

Submission Date:                     

Category:	Project Name/Date of Entry into Base	Appraised Value Multiplied by Advance Rate	Budgeted Project Costs Multiplied by Advance Rate	Maximum Allowed Advance (Lesser of Value or Cost Amount)	Amount Permitted in Borrowing Base (Draw Percentage Amount Multiplied by Maximum Allowed Advance)
I. Entitled Land to be Developed		50% X Value	50% X Costs
II. Lots Under Development		70% X Value	70% X Costs
III. Developed Lots		70% X Value	70% X Costs
X. Total Lot Inventory
I. Spec Homes		75% X Value	85% X Costs
II. Model Homes		75% X Value	80% X Costs
III. Presold Homes		80% X Value	90% X Costs
Y. Total Home Inventory
A. Total Borrowing Base (Items X + Y)
B. Less Outstanding Advances
C. Less Outstanding Letters of Credit
D. Less Adjustments under Section 2.1.3(d)
E. Plus Funds in Borrower’s Funds Account
BORROWING AVAILABILITY (deficiency) (A-B-C-D+E)

EXHIBIT “B” – Page 1

CERTIFICATION OF BORROWER

Borrower hereby certifies as follows with respect to the information contained in this Borrowing Base Certificate:

1. All Lot and Home inventory is located in Qualified Projects.

2. All Lot and Home inventory is owned by Borrower free of any liens or encumbrances, other than liens and encumbrances in favor of Lender as security for the Loan, or outstanding liens that have been bonded over, or outstanding liens that are subject to signed released delivered to Borrower.

3. Borrower has received lien waivers for all major scopes of construction work in process with respect to the subject Property.

4. As to any Lots Under Development, construction of the A&D Improvements has begun or is scheduled to begin within ninety (90) days of inclusion in the Borrowing Base as Lots Under Development.

5. As to any Developed Lots, construction of the A&D Improvements has been completed as of the date of inclusion in the Borrowing Base as Developed Lots.

6. As to any Homes, construction of the Home Improvements has begun or is scheduled to begin within ninety (90) days of inclusion in the Borrowing Base as Homes.

7. As to any Presold Homes, said Homes were in compliance with all requirements for a Presold Home as of the date of inclusion in the Borrowing Base as Presold Homes and remain in compliance as of the date hereof.

8. Attached hereto are the following request(s) for entry into the Borrowing Base of new ¨ Entitled Land, ¨ Lots Under Development, ¨ Developed Lots, ¨ Model Homes, ¨ Spec Homes and/or ¨ Presold Homes.

The undersigned hereby certifies to Lender that the foregoing information on this Borrowing Base Certificate as of the Calendar Month ending             , 200    , is true and correct and was provided from financial information prepared according to GAAP. All capitalized terms not defined herein shall have the meanings given to such terms in that certain Amended and Restated Revolving Line of Credit Loan Agreement dated as of September 21, 2004 (“Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”).

WILLIAM LYON HOMES, INC., a California

corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “B” – Page 2

EXHIBIT “C”

Letter of Credit Request Form

CALIFORNIA BANK & TRUST

1900 Main Street, Suite 200

Irvine, California 92614

Attn: Erin Johnsen

Ladies and Gentlemen:

Reference is hereby made to that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 21, 2004 (as may be amended from time to time, the “Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

Pursuant to Section 2.3 of the Loan Agreement, Borrower hereby certifies as follows:

1. Letter of Credit. The undersigned Borrowers hereby request a Letter of Credit to be issued under Section 2.3 of the Loan Agreement:

Principal Amount:	$
Beneficiary:	___________________________
Issuance Date:	___________________________

2. Use of Letter of Credit. Such Letter of Credit shall be used for the following purposes permitted by the Loan Agreement:

[Describe]

3. No Default. Borrower certifies that Borrower is and will be in compliance with all covenants under the Loan Agreement after giving effect to the issuance of the Letter of Credit requested hereby.

4. Representations True. Each of the representations and warranties made by or on behalf of any of Borrower contained in the Loan Agreement, in the other Loan Documents or in any document or instrument delivered pursuant to or in connection with the Loan Agreement was true and correct in all material respects as of the date as of which it was made and shall also be true and correct in all material respects at and as of the issuance date for the Letter of Credit requested hereby, with the same effect as if made at and as of such issuance date (except to the extent of changes resulting from transactions contemplated or permitted by the Loan Agreement and the other Loan Documents, changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, changes previously disclosed in writing to and approved by Lender in writing and except to the extent that such representations and warranties relate expressly to an earlier date) and no Event of Default or Unmatured Event of Default has occurred and is continuing.

5. Other Conditions. All other conditions to the issuance of the Letter of Credit requested hereby set forth in Section 2.3 of the Loan Agreement have been satisfied.

EXHIBIT “C” – Page 1

6. Issuance Date. Except to the extent, if any, specified by notice actually received by Lender prior to the issuance date specified above, the foregoing representations and warranties shall be deemed to have been made by Borrower on and as of such issuance date.

7. Definitions. Terms defined in the Loan Agreement are used herein with the meanings so defined.

IN WITNESS WHEREOF, we have hereunto set our hands and seals this              day of                     , 200    .

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “C” – Page 2

EXHIBIT “D”

Project Loan Request Form

CALIFORNIA BANK & TRUST

1900 Main Street, Suite 200

Irvine, California 92614

Attn: Erin Johnsen

Ladies and Gentlemen:

Reference is hereby made to that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 21, 2004 (as may be amended from time to time, the “Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

Pursuant to Section 2.1.4 of the Loan Agreement, Borrower hereby certifies as follows:

1. Loan. The undersigned Borrowers hereby request entry of a Qualified Project into the Borrowing Base under Section 2.1.4 of the Loan Agreement:

Name of Project:                                                      

Entry of Project into the Borrowing Base:                                         

Description of initial Lot Inventory as of date of entry into the Borrowing

Base:                                                                          

Description of initial Home Inventory as of date of entry into the Borrowing

Base:                                                                          

2. Due Diligence Completed: (Yes/No)

¨ Soils and Engineering Report

¨ Approved Phase I Report

¨ Approved Phase II Report (if required)

¨ Remediation completed by licensed environmental engineer

¨ Tentative Map ¨ or Final Map (recorded) ¨

¨ If Tentative Map, outstanding conditions to Final Map:                                                                                  .

¨ Title Insurance

¨ Owner’s Policy

¨ Title Policy in favor of Lender to be issued by Title Company

¨ No liens or encumbrances in violation of the Loan Agreement

¨ Plans and Specifications

EXHIBIT “D” – Page 1

¨ Compliance with Maximum Aggregate Loan Allocation limitations

3. Use of Proceeds. Such Project Loan shall be used for the following purposes permitted by the Loan Agreement:

[Attach A&D Budget and/or Home Construction Budget, as applicable]

4. Loan Documents. Borrower has executed and delivered to Lender the following Loan Documents for the Qualified Project:

¨ Deed of Trust;

¨ Financing Statement;

¨ Construction Assignments (as applicable);

¨ Assignment of Permits;

¨ Assignment of Architect’s Agreement (if applicable);

¨ Assignment of Construction Contract (if applicable);

¨ Assignment of Engineering Contract (if applicable);

¨ Environmental Indemnity.

5. No Default. The Borrower certifies that it is and will be in compliance with all covenants under the Loan Agreement after inclusion of the Qualified Project into the Borrowing Base as requested hereby. No condemnation proceedings are pending or, to Borrowers’ knowledge, threatened against any Project, and there have been no changes in title as reflected in the Title Policy since the date of the Title Policy, except as may have been previously disclosed in writing to and approved in writing by Lender.

6. Representations True. Each of the representations and warranties made by or on behalf of Borrower contained in the Loan Agreement, in the other Loan Documents or in any document or instrument delivered pursuant to or in connection with the Loan Agreement was true and correct in all material respects as of the date as of which it was made and shall also be true and correct in all material respects at and as of the initial entry date for the Qualified Project described herein, with the same effect as if made at and as of such date (except to the extent of changes resulting from transactions contemplated or permitted by the Loan Agreement and the other Loan Documents, changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, changes previously disclosed in writing to and approved in writing by Lender, except to the extent that such representations and warranties relate expressly to an earlier date) and no Event of Default or Unmatured Event of Default has occurred and is continuing.

7. Other Conditions. All other conditions to the entry of the Qualified Project into the Borrowing Base requested hereby set forth in Section 2.1.4 of the Loan Agreement have been satisfied, including without limitation that Borrower has provided any Project information set forth in Exhibit “K” to the Loan Agreement required by Lender prior to or concurrent with the submission of this request.

8. Definitions. Terms defined in the Loan Agreement are used herein with the meanings so defined.

EXHIBIT “D” – Page 2

IN WITNESS WHEREOF, we have hereunto set our hands and seals this              day of                     , 200    .

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “D” – Page 3

EXHIBIT “E”

Form of Letter of Credit

Please see attached.

EXHIBIT “E” – Page 1

EXHIBIT “F”

REQUEST FOR INCLUSION OF LAND

IN BORROWING BASE AS ENTITLED LAND

                                 ,             

CALIFORNIA BANK & TRUST

1900 Main Street, Suite 200

Irvine, California 92614

Attn: Erin Johnsen

Gentlemen:

Reference is hereby made to that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 21, 2004 (as may be amended from time to time, the “Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

Pursuant to Section 4.2 of the Loan Agreement, Borrower hereby requests that the portion of the Land more particularly described on Schedule “1” attached hereto be included in the Borrowing Base as Entitled Land. Borrower represents and warrants that Borrower has provided all information and documents and satisfied all conditions precedent with respect to the inclusion of such portion of the Land in the Borrowing Base as Entitled Land. Borrower further represents and warrants that (i) no Event of Default or Unmatured Event of Default has occurred and is continuing and (ii) except as otherwise disclosed to Lender in writing and approved in writing by Lender, all representations and warranties set forth in the Loan Documents are true and correct as of the date hereof.

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “F” – Page 1

EXHIBIT “G”

REQUEST FOR INCLUSION OF LAND

IN BORROWING BASE AS LOTS UNDER DEVELOPMENT

                                 ,             

CALIFORNIA BANK & TRUST

1900 Main Street, Suite 200

Irvine, California 92614

Attn: Erin Johnsen

Gentlemen:

Reference is hereby made to that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 21, 2004 (as may be amended from time to time, the “Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

Pursuant to Section 4.3 of the Loan Agreement, Borrower hereby requests that the portion of the Land more particularly described on Schedule “1” attached hereto be included in the Borrowing Base as Lots Under Development. Borrower represents and warrants that Borrower has provided all information and documents and satisfied all conditions precedent with respect to the inclusion of such portion of the Land in the Borrowing Base as Lots Under Development. Borrower further represents and warrants that (i) no Event of Default or Unmatured Event of Default has occurred and is continuing and (ii) except as otherwise disclosed to Lender in writing and approved in writing by Lender, all representations and warranties set forth in the Loan Documents are true and correct as of the date hereof.

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “G” – Page 1

EXHIBIT “H”

REQUEST FOR INCLUSION OF LAND

IN BORROWING BASE AS DEVELOPED LOTS

                                 ,             

CALIFORNIA BANK & TRUST

1900 Main Street, Suite 200

Irvine, California 92614

Attn: Erin Johnsen

Gentlemen:

Reference is hereby made to that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 21, 2004 (as may be amended from time to time, the “Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

Pursuant to Section 4.4 of the Loan Agreement, Borrower hereby requests that the portion of the Land more particularly described on Schedule “1” attached hereto be included in the Borrowing Base as Developed Lots. Borrower represents and warrants that Borrower has provided all information and documents and satisfied all conditions precedent with respect to the inclusion of such portion of the Land in the Borrowing Base as Developed Lots. Borrower further represents and warrants that (i) no Event of Default or Unmatured Event of Default has occurred and is continuing and (ii) except as otherwise disclosed to Lender in writing and approved in writing by Lender, all representations and warranties set forth in the Loan Documents are true and correct as of the date hereof.

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “H” – Page 1

EXHIBIT “I”

REQUEST FOR INCLUSION OF LAND

IN BORROWING BASE AS PRESOLD, SPEC OR MODEL HOMES

                                 ,             

CALIFORNIA BANK & TRUST

1900 Main Street, Suite 200

Irvine, California 92614

Attn: Erin Johnsen

Gentlemen:

Reference is hereby made to that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 21, 2004 (as may be amended from time to time, the “Loan Agreement”) by and between CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”) and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

Pursuant to Section 4.5 of the Loan Agreement, Borrower hereby requests that the portion of the Land more particularly described on Schedule “1” attached hereto be included in the Borrowing Base as [Presold] [Spec] [Model] Homes. Borrower represents and warrants that Borrower has provided all information and documents and satisfied all conditions precedent with respect to the inclusion of such portion of the Land in the Borrowing Base as [Presold] [Spec] [Model] Homes. Borrower further represents and warrants that (i) no Event of Default or Unmatured Event of Default has occurred and is continuing and (ii) except as otherwise disclosed to Lender in writing and approved in writing by Lender, all representations and warranties set forth in the Loan Documents are true and correct as of the date hereof.

WILLIAM LYON HOMES, INC., a California corporation

By:

Name:

Title:

By:

Name:

Title:

EXHIBIT “I” – Page 1

EXHIBIT “J”

Reserved

EXHIBIT “J” – Page 1

EXHIBIT “K”

Required Project Information

Borrower shall not be entitled to any Advances for any Qualified Project hereunder unless and until each of the following conditions precedent have been satisfied to the extent said information is available for the A&D Improvements and/or Home Improvements to be constructed as part of the Qualified Project:

(a) Final Plans. Borrower shall have submitted to Lender, and Lender shall have reviewed and approved, Plans and Specifications for the applicable Project, which Plans and Specifications shall (i) be prepared by Architect and/or Engineer, and (ii) be otherwise satisfactory to Lender.

(b) Appraisals. At Borrower’s sole cost and expense, Lender shall have obtained an Appraisal and/or Base Appraisals with respect to the Property and each type of Improvements for the applicable Project, which Appraisal and/or Base Appraisals shall be (i) prepared by an appraiser acceptable to Lender, and (ii) otherwise satisfactory to Lender.

(c) Independent Cost Analysis. If required by Lender, at Borrower’s sole cost and expense, Lender shall have obtained a report in form and content acceptable to Lender in its discretion from an independent cost engineer validating the cost adequacy of the applicable Project.

(d) Additional Assignments. Borrower shall have executed and delivered to Lender the Deed of Trust, Financing Statement and Construction Assignments securing the Collateral to be included in the subject Project, and Architect, Contractor and/or Engineer for the applicable Project shall have consented to such assignments.

(e) Environmental Reports. Borrower shall have submitted to Lender for each Project an environmental, toxics and/or soils report(s) satisfactory to Lender, including drainage, boring (if applicable) and compacting data, together with such hydrology and other engineering reports that Lender may reasonably require, all of which shall be by engineers acceptable to Lender and shall indicate that the condition of the Property is suitable for construction of the A&D Improvements and Homes thereon (without extraordinary land preparation) and for the operation and maintenance of the Project. Any recommendations in the approved soils, hydrology and other engineering reports must be complied with and incorporated into the Plans and Specifications. Each environmental assessment (Phase I assessment) of the Property and adjacent property shall be dated no earlier than one hundred eighty (180) days prior to the date hereof, and Borrower shall deliver to Lender any sampling and analysis (Phase II assessment) or special limited assessment that Lender may require after review of the Phase I assessment, together with any other environmental investigations and reports that Lender may reasonably require, all of which shall be by a Lender-approved environmental consulting firm, and none of which shall reveal any existing or potential environmental condition adversely affecting the use or value of the Property.

(f) Building Permits, Licenses, Etc. If required by Lender, Borrower shall have submitted to Lender evidence for the applicable Project of (i) building permits for the construction of the Homes (ii) all necessary permits, licenses and approvals (including without limitation any required consumer disclosure reports and approvals prior to the sale of any Homes) in connection with the sale of said Homes, and/or (iii) Architectural Control Committee and other approvals, if any, required under any CC&Rs affecting the Property.

(g) Truth-In-Lending Disclosures. Prior to entering into any Purchase Contract for the sale of any Unit for the applicable Project, Borrower shall have delivered to the purchaser all truth-in-lending and other required consumer disclosures, in compliance with law and in form and substance satisfactory to Lender.

EXHIBIT “K” – Page 1

(h) Approved Budgets. The final approved Budget for the applicable Project itemizing the Hard Costs and Soft Costs, including direct and indirect costs, certified to be correct to the best knowledge and belief of Borrower for each type of Improvement to be constructed as part of the Project. Said Budget shall be subject to formal review and approval by Lender at Lender’s sole discretion, and if Lender determines that the Loan funds allocated for Hard Costs are inadequate to pay for all Hard Costs, then Lender may require Borrower to deposit cash into an account pledged as additional collateral for the Loan the amount of the shortfall. In no event shall the costs of the Project as set forth in any A&D Budget or any Home Construction Budget violate the applicable Maximum Allowed Advance(s).

(i) Miscellaneous Conditions. The following additional conditions must be satisfied prior to the Closing Date for each Loan made hereunder:

(1) Financial Statements. Financial statements for Borrower in conformity with the requirements of the Loan Agreement covering the two-year period immediately preceding the Closing Date and showing a financial condition satisfactory to Lender in its sole discretion;

(2) Survey. If required by Lender, particularly if a Qualified Project is to be entered into the Borrowing Base prior to the recording of a Final Map for said Qualified Project, a current survey of the Property by a licensed surveyor acceptable to Lender describing the boundaries of said property and showing all means of ingress and egress, rights-of-way, easements (each of which shall be identified by docket and page or recording number where recorded) and all other customary and relevant information pursuant to ALTA standards and any Title Company requirements. All surveys shall be certified to Lender and the Title Company issuing the Title Policy required by the Loan Agreement;

(3) Title Insurance. The Title Insurance Policy, with such endorsements as Lender may require, issued by the Title Company satisfactory to Lender in the amount of the Loan (with direct access reinsurance in amounts and by companies and in form acceptable to Lender as Lender may require) insuring the lien of the Deed of Trust to be a first and prior lien upon the Property, as security for all Advances pursuant to the terms of this Agreement, subject only to such exceptions as Lender may expressly approve in writing, and insuring against any lien claims that could arise out of the construction of the Homes on the Property. During the course of construction of the Homes, Borrower shall provide Lender with such title insurance endorsements as Lender may require, including CLTA Form 122 Endorsements (or equivalent endorsements acceptable to Lender) for each disbursement, and any other endorsements Lender may require to insure that the Homes shall have been constructed within the boundaries of the Property and in accordance with all applicable laws, covenants, restrictions and/or CC&Rs. Upon completion of the Homes, Borrower shall deliver to Lender such further endorsements to the title insurance policy as Lender may require;

(4) Zoning. Evidence that the Property is properly zoned for the construction of the A&D Improvements and/or Homes to be constructed as part of the applicable Project;

(5) Construction Materials. Copies of all agreements between Borrower and any architects, engineers, consultants, managers or supervisors, and, if required by Lender, copies of construction subcontracts related to the construction, maintenance, repair, leasing, management and operation of the Project, together with written agreements by such persons or entities that they will perform for Lender the services contracted to Borrower, notwithstanding the occurrence of any Event of Default and any trustee’s sale or foreclosure of the Deed of Trust (provided that such persons or entities continue to receive payments under their respective contracts), and the consent of such

EXHIBIT “K” – Page 2

persons or entities to the collateral assignment by Borrower to Lender of their respective contracts;

(6) CC&Rs. Copies of any CC&Rs and related documents pertaining to the Property and the Project;

(7) Taxes. Evidence that all taxes and assessments levied against or affecting the Property have been paid current, together with a tax service contract for the Project in form and content acceptable to Lender in its sole discretion;

(8) Organizational Documents. Copies of Borrower’s Organizational Documents, together with proper authorizations and certificates and such other documents as Lender may require, relating to the existence and good standing of such Persons and the authority of any officer, partner or member, as applicable, executing documents on behalf of such Persons;

(9) Equity. Evidence satisfactory to Lender that Borrower has equity in the Project in an amount sufficient to satisfy the applicable Maximum Allowed Advances for the Project;

(10) Other Insurance. In addition to evidence of all insurance coverages as set forth in Section 6.8 of the Loan Agreement, evidence of such other insurance as Lender may reasonably require herein, including without limitation (i) earthquake insurance, (ii) insurance covering vandalism and malicious mischief, and sprinkler leakage, and (iii) errors and omissions insurance for the contractors, architects, engineers, environmental engineers and the provider of the soils report with limits of liability in amounts reasonably acceptable to Lender;

(11) Flood. Evidence whether the Property, or any part thereof, lies within a “special flood hazard area” as designated on maps prepared by the U.S. Department of Housing and Urban Development pursuant to the Flood Disaster Protection Act of 1973, as amended, and, if so designated, a National Flood Insurance Association standard flood insurance policy, plus insurance from a private insurance carrier if required by Lender, for the duration of the Loan in the amount of the full insurable value of the completed Improvements, naming Lender as an additional loss payee;

(12) Utilities. Evidence that all utilities and services to the Property and Improvements, including without limitation water, sewer, gas, electric and telephone, are available, or will be available as required, and will be provided in amounts that are sufficient to service the Improvements for their intended use;

(13) Ingress/Egress. Evidence that there exists adequate legal ingress and egress to the Project;

(14) Job Schedule. A job progress schedule showing the planned timing, progress of construction and completion date for the Improvements of the Project;

(15) Off-Site Improvements. Evidence that each type of off-site improvement for the Property that has been completed shall have been certified and/or accepted by any municipality, utility, county or other governmental entity whose certification or acceptance thereof is required;

(16) List of Contractors. If required by Lender, a list of all subcontractors, suppliers and materialmen employed or retained, or to be employed or retained, in connection with the construction of the Improvements. Such list shall show the

EXHIBIT “K” – Page 3

name, address and telephone number of each such person, a general statement of the nature of the work to be done, the labor and materials to be supplied, the names of materialmen (if known) and the approximate dollar value of such labor or work with respect to the labor and materials to be supplied;

(17) Legal Opinion. If required by Lender, a legal opinion in form and content acceptable to Lender addressing such issues as required by Lender; and

(18) Other Information. Such other information and documents that Lender may reasonably require.

EXHIBIT “K” – Page 4

EXHIBIT “L”

Home Construction Draw Schedule

Stage of Completion	Description
Stage 1	Permits and Fees
Stage 2 — 5%	Layout trench Underground plumbing Electrical stubs
Stage 3 — 10%	Foundation complete Garage slab poured
Stage 4 — 15%	Lumber & trusses on site First floor framing
Stage 5 — 15%	Rough plumbing HVAC electrical
Stage 6 — 20%	Framing complete Installed lath or siding Drywall stocked Roof loaded
Stage 7 — 15%	Insulation Drywall complete Taped & texture Stucco brown complete Finish carpentry Cabinets Painting
Stage 8 — 15%	HVAC Roofing Finish trades complete
Stage 9 — 5%	Flooring complete City final

EXHIBIT “L” – Page 1

EX-10.2

Exhibit 10.2

AMENDED AND RESTATED

LOAN AGREEMENT

Dated as of September 17, 2004

Between

WILLIAM LYON HOMES, INC.,

a California corporation

the “Borrower”

and

RFC CONSTRUCTION FUNDING CORP.,

a Delaware corporation

“Lender”

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

TABLE OF CONTENTS

ARTICLE I DEFINITIONS	2
Section 1.1. Certain Defined Terms	2
Section 1.2. Other Definitional Provisions	21
ARTICLE II THE LOAN	21
Section 2.1. Agreement to Lend and Borrow; Evidence of Indebtedness and Maturity	21
Section 2.2. Disbursements of the Loan	22
Section 2.3. Use of Disbursements	22
Section 2.4. Commitment Fees	22
Section 2.5. Increase in Commitment Fee as a Result of Increase in the Loan Amount; No Reduction in Commitment Fee Regardless of Reductions in the Loan Amount	23
Section 2.6. Repayment of Principal	24
Section 2.7. Interest	25
Section 2.8. Prepayment of the Loan	25
Section 2.9. Security	25
Section 2.10. Payments	26
Section 2.11. Extension	26
Section 2.12. Applications of Payments; Late Charges	26
Section 2.13. Interest Rate Limitation	27
Section 2.14. Revolving Nature of Loan	27
Section 2.15. Voluntary Permanent Reduction in the Loan Amount	28
ARTICLE III APPROVAL OF PROJECTS AND DISBURSEMENTS	28
Section 3.1. Project Approval and Project Commitments	28
Section 3.2. The ABF Program	29
Section 3.3. Processes and Conditions Relating to Disbursements	34
ARTICLE IV REPRESENTATIONS AND WARRANTIES	37
Section 4.1. Consideration	37
Section 4.2. Organization	37
Section 4.3. Authorization	38
Section 4.4. Governmental Consents	38
Section 4.5. Validity	38
Section 4.6. Financial Position	38
Section 4.7. Governmental Regulations	38

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Section 4.8. Employee Benefit Plans	39
Section 4.9. Securities Activities	39
Section 4.10. No Material Adverse Change	39
Section 4.11. Payment of Taxes	39
Section 4.12. Litigation	39
Section 4.13. Environmental Matters	39
Section 4.14. No Burdensome Restrictions	40
Section 4.15. Full Disclosure	40
Section 4.16. Adequate Consideration	40
ARTICLE V COVENANTS OF BORROWER	40
Section 5.1. Consideration	40
Section 5.2. Affirmative Covenants	41
Section 5.3. Negative Covenants	44
Section 5.4. Financial Covenants	45
Section 5.5. Insurance	46
Section 5.6. Prohibited Transfers	47
ARTICLE VI THE PROJECTS	47
Section 6.1. Consideration	47
Section 6.2. Title to the Projects	48
Section 6.3. No Prior Liens or Claims	48
Section 6.4. Access to the Projects	48
Section 6.5. Compliance with Project Requirements and Laws and Regulations	48
Section 6.6. Covenants, Zoning, Codes, Permits and Consents	49
Section 6.7. Utilities	49
Section 6.8. Map, Permits. Licenses and Approvals	49
Section 6.9. Approval of Plans and Specifications and Approval of Budgets	49
Section 6.10. Adequacy of Acquisition and Development Amount	50
Section 6.11. Construction Start and Completion	50
Section 6.12. Personal Property Incorporation	51
Section 6.13. Contractors and Contracts	51
Section 6.14. Evidence of Ownership of Materials	51
Section 6.15. Changes to Plans and Specifications and Budgets	51
Section 6.16. Lender Inspections, Appraisal and Information	54
Section 6.17. Correction of Defects	54

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Section 6.18. Protection Against Lien Claims	54
Section 6.19. Conveyance, Lease or Encumbrance	55
Section 6.20. Security Instruments	56
Section 6.21. Further Assurances; Cooperation	56
Section 6.22. Negative Covenants	56
Section 6.23. Signs	56
Section 6.24. Letters of Credit	56
ARTICLE VII SALES OF LOTS AND UNITS AND RELEASES FROM DEED OF TRUST	61
Section 7.1. Sales Agreements	61
Section 7.2. Sales and Closings	61
Section 7.3. Sales Operations and Seller’s Obligations	62
Section 7.4. Model Units	62
Section 7.5. Releases from Lien of Deed of Trust	62
ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES	64
Section 8.1. Events of Default	64
Section 8.2. Remedies	68
Section 8.3. Authorization to Apply Assets to Payment of Loan	73
ARTICLE IX MISCELLANEOUS	74
Section 9.1. Successors and Assigns; No Assignment by Borrower	74
Section 9.2. Notices	74
Section 9.3. Changes, Waivers, Discharge and Modifications in Writing	75
Section 9.4. No Waiver; Remedies Cumulative	75
Section 9.5. Costs, Expenses and Taxes	76
Section 9.6. Disclaimer by Lender; No Joint Venture	76
Section 9.7. Indemnification	77
Section 9.8. Consultants	78
Section 9.9. Governing Law	78
Section 9.10. Titles and Headings	78
Section 9.11. Counterparts	78
Section 9.12. Lender’s Right With Respect to the Loan	78
Section 9.13. Confidentiality	78
Section 9.14. Time is of the Essence	78
Section 9.15. No Third Parties Benefitted	79
Section 9.16. Severability	79
Section 9.17. Jurisdiction	79

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Section 9.18. Waiver of Jury Trial	79
Section 9.19. Interpretation	80
Section 9.20. Entire Agreement	80
Section 9.21. Amended and Restated Loan Agreement	80

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

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AMENDED AND RESTATED

LOAN AGREEMENT

THIS AMENDED AND RESTATED LOAN AGREEMENT (this “Loan Agreement”) is made as of September 17, 2004, by and between WILLIAM LYON HOMES, INC., a California corporation (the “Borrower”) and RFC CONSTRUCTION FUNDING CORP., a Delaware corporation, its successors and assigns (the “Lender”).

R E C I T A L S:

A. Borrower and Lender have previously entered into a Loan Agreement dated as of September 25, 2000, as amended by a First Amendment to Loan Agreement dated as of July 31, 2001, by a Second Amendment to Loan Agreement and to Other Loan Documents dated as of March 28, 2002, by a Third Amendment to Loan Agreement and to Other Loan Documents dated as of January 10, 2003, by a Fourth Amendment to Loan Agreement and to Other Loan Documents dated as of January 23, 2003 and by a Fifth Amendment to Loan Agreement and to Other Loan Documents dated as of April 14, 2004 (collectively, the “Original Loan Agreement”), pursuant to which Lender has made a revolving loan to Borrower (the “Loan”) to finance various acquisition, development and construction projects which Borrower has undertaken and anticipates undertaking.

B. The Borrower has requested that the terms of the Loan and the Original Loan Agreement be amended to, among other things, extend the Maturity Date and the Approval Period Termination Date and to allow for Land acquisition and the construction of Development Work to be funded under the ABF Program.

C. The Loan is presently, and will continue to be, secured by a lien on certain of the real property owned by Borrower, including the real property which is currently being improved, or will in the future be improved, by the Borrower with the proceeds of the Loan.

D. Lender is willing to make the amendments requested by the Borrower to the terms of the Loan and the Original Loan Agreement upon and subject to the terms and conditions set forth in this Loan Agreement.

E. Prior to the date of this Loan Agreement, the terms of the Original Loan Agreement shall govern the Loan; on and after the date of this Loan Agreement the terms of this Loan Agreement shall govern the Loan.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

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AGREEMENT:

NOW, THEREFORE, in consideration of the covenants and conditions herein contained, the parties agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1. Certain Defined Terms. As used herein (including any Exhibits attached hereto), the following terms shall have the meanings set forth below (unless expressly stated to the contrary):

“ABF Program” shall mean the asset-based financing program available to the Borrower as further described in Section 3.2 herein.

“Acquisition and Development Amount” shall mean, with respect to a Project as to which the Lender has agreed that advances of the Loan outside of the ABF Program shall be made for Qualified Acquisition and Development Expenditures, the maximum amount of the Loan outside of the ABF Program which may be disbursed for Qualified Acquisition and Development Expenditures which relate to the acquisition of the Land and the Development Work of such Project, subject to availability under the terms of this Loan Agreement.

“Acquisition and Development Interest Reserve” shall mean, with respect to a Project as to which the Lender has agreed that advances of the Loan outside of the ABF Program shall be made for Qualified Acquisition and Development Expenditures, the amount within the Budget which has been designated as available to pay the interest on the Acquisition and Development Amount for such Project; provided, however, that in the event the cumulative sales of the Homes within the Project on or after the date which is six (6) months from the date Homes in the Project are first offered for sale is thirty-three percent (33%) or more below the projected cumulative sales as determined based on the absorption rate set forth in the applicable Project Commitment, then at Lender’s option Borrower will be required to pay interest from its own funds on the Acquisition and Development Amount for such Project.

“Acquisition and Development Maturity Date” shall mean, with respect to a Project as to which the Lender has agreed that advances of the Loan outside of the ABF Program shall be made for Qualified Acquisition and Development Expenditures, the date which is set forth in the Project Commitment for such Project as the date on which all proceeds of the Loan advanced for the acquisition of the Land and the Development Work for such Project must be repaid.

“Acquisition and Development Soft Costs and Other Costs” shall mean, with respect to a Project as to which the Lender has agreed that advances of the Loan outside of the ABF Program shall be made for Qualified Acquisition and Development Expenditures, and subject to the limitations set forth in the Project Commitment for such Project, the Borrower’s overhead, general and administrative expenses, governmental fees, legal fees and expenses, title insurance costs and other “soft” costs and all other costs incurred in the acquisition of the

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

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Land and the Development Work of such Project, to the extent included in the Budget for such Project.

“Additional Loan Fee” shall mean, with respect to a High Advance Rate Project, the additional fee the Borrower will be required to pay to Lender as a condition precedent to the Lender’s release of its lien on any Lot or Unit located in the Project, which amount shall equal the following:

(a) in the event the Lender has advanced proceeds of the Loan to finance the acquisition of the Land and the Development Work and the Borrower finances the construction of a Home on a Lot from a source other than the Lender or sells a Lot to another builder, an amount equal to five percent (5%) of the Value of such Lot; and

(b) in the event the Lender has advanced proceeds of the Loan to finance the Homes, regardless of the completion status of the Unit, an amount equal to one and one-half percent (1.50%) of the Gross Selling Price of such Unit.

“Additional Units” shall mean Units which (a) were not previously encumbered by the lien of the Deed of Trust, (b) are located within a Project for which the Lender has issued a Project Commitment to include such Units in the ABF Program, (c) the Borrower desires, and Lender approves, be made a part of the Borrowing Base Collateral under the ABF Program, and (d) have become encumbered by the first-priority lien of the Deed of Trust.

“Advance Rate” shall mean, with respect to a Project and disbursements of the Loan for the Project, the percentages set forth in the Project Commitment.

“Affiliate” shall mean a Person that, directly or indirectly, controls, is controlled by, or is under common control with, a referenced Person.

“Applicable ABF Home Advance Rate” shall have the meaning given in Section 3.2(c)(2).

“Applicable ABF Lot Advance Rate” shall have the meaning given in Section 3.2(c)(2).

“Applicable Acquisition and Development Principal Repayment Percentage” shall mean, with respect to a Project as to which the Lender has agreed that advances of the Loan outside of the ABF Program shall be made for Qualified Acquisition and Development Expenditures, one hundred fifteen percent (115%); provided, however, if the applicable Project Commitment for a Project specifies that the “Applicable Acquisition and Development Principal Repayment Percentage” for such Project is one hundred percent

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(100%), then the “Applicable Acquisition and Development Principal Repayment Percentage” for such Project shall be one hundred percent (100%).

“Appraisal Report” shall mean, with respect to a Project, a real estate appraisal report which (i) has been prepared by an Appraiser, (ii) at the time it is submitted to the Lender is not more than three (3) months old, or was updated by letter not more than three (3) months prior to the date of submission to the Lender, (iii) states that it is prepared in accordance with the applicable standards of the American Institute of Real Estate Appraisers for such reports, (iv) provides an appraisal of the Value of the Project or portion thereof required to be appraised thereunder, and (v) employs a customary methodology and provides limiting conditions satisfactory to the Lender.

“Appraiser” shall mean, with respect to a Project, a Person who is qualified to appraise property similar in size and scope to the Project which such Person is acceptable to the Lender in its sole and absolute discretion.

“Approval Period” shall mean the period during which new projects will be considered for approval for funding from proceeds of the Loan, which period shall commence on the date of this Loan Agreement and shall end on the Approval Period Termination Date.

“Approval Period Termination Date” shall mean September 24, 2006, as such date may be extended pursuant to the terms of Section 2.11.

“Approved Cash Flow Statement” shall mean, with respect to a Project, the cash flow statement for such Project, prepared by Borrower and approved by Lender, which shall, among other things, establish the estimated outstanding advances of the Loan for such Project on a month-by-month basis, as such cash flow statement may be amended from time to time with the prior written consent of Lender.

“Assignment” shall mean, with respect to all of the Projects, that certain Amended and Restated Assignment of Construction Agreements and Development Items dated as of the date of this Loan Agreement and executed by the Borrower in favor of Lender, as the same may be amended, restated or otherwise modified from time to time.

“Borrower” shall mean William Lyon Homes, Inc., a California corporation.

“Borrowing Base Allowable Disbursement Amount” shall mean, on any date of determination, as determined by Lender, the amount of the Loan available to be disbursed with respect to the Borrowing Base Collateral, which amount shall be the lesser of (a) the Loan Amount minus the sum of (i) the outstanding principal balance of advances under the Loan made for the acquisition of Land and Development Work outside of the ABF Program

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for Projects, plus (ii) the sum of the Borrowing Base Outstanding Amount and the Letter of Credit Amount, or (b) the Borrowing Base Value minus the sum of the Borrowing Base Outstanding Amount and the Letter of Credit Amount.

“Borrowing Base Collateral” shall mean the Units and all personal property and fixtures located thereon or associated therewith which are included in the ABF Program.

“Borrowing Base Home Amount” shall have the meaning given in Section 3.2(c)(2).

“Borrowing Base Lot Amount” shall have the meaning given in Section 3.2(c)(2).

“Borrowing Base Outstanding Amount” shall mean, on any date of determination, as determined by Lender, the principal amount of the Loan outstanding in connection with the ABF Program.

“Borrowing Base Value” shall mean, on any date of determination, the value assigned to the Borrowing Base Collateral by the Lender on such date pursuant to and in accordance with the terms of Section 3.2.

“Budget” shall mean, with respect to a Project, the itemized budget for such Project submitted to and approved by the Lender, as such budget may be amended in accordance with the provisions of this Loan Agreement.

“Business Day” shall mean a day other than Saturday, Sunday or a day on which national banks are legally closed for business in the States of California, Illinois and Minnesota.

“Change” shall mean, with respect to a Project, any material extra work not contemplated by the Plans and Specifications, the installation of materially additional or different materials from those set forth in the Plans and Specifications, or any other material change in the Plans and Specifications.

“Commitment Fee” shall mean the fee the Borrower is required to pay to the Lender during the period from the date of this Loan Agreement through the Maturity Date, which fee shall be an amount equal to one-half of one percent (.50%) per annum of One Hundred Fifty Million Dollars ($150,000,000), to be paid in quarterly installments as provided in Section 2.4; provided, however, to the extent that the maximum amount of the Loan Amount is reduced by the Borrower to less than One Hundred Fifty Million Dollars ($150,000,000) in accordance with the provisions of Section 2.15, the Commitment Fee shall be payable on such reduced maximum amount of the Loan Amount from and after the date on which such reduction under Section 2.15 becomes effective.

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“Construction Agreements” shall mean, with respect to a Project, all agreements (including, without limitation, construction contracts) entered into between the Borrower and any contractor, architect, engineer, supplier or other Person with respect to the development or construction of the Project, as such agreements may be amended or otherwise modified from time to time in accordance with this Loan Agreement.

“Construction Progress Schedule” shall mean, with respect to a Project, the schedule for the Development Work and the Homes submitted to the Lender, as such schedule may be adjusted in accordance with the provisions of this Loan Agreement.

“Conventional Project” shall mean a Project as to which (i) the proceeds of the Loan may be used to acquire Land, construct Development Work and/or construct Homes, (ii) the applicable Advance Rates are established for a “Conventional Project” as described in the applicable Project Commitment and (iii) no Additional Loan Fee is due.

“Debt” shall mean, for any Person, without duplication, the sum of all (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, (iv) obligations as lessee under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, (v) obligations of such Person to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities or property, (vi) obligations of such Person to reimburse any bank or other Person in respect of amounts actually paid under a letter of credit or similar instrument, (vii) indebtedness or obligations of others secured by a lien on any asset of such Person, whether or not such indebtedness or obligations are assumed by such Person (to the extent of the value of the asset), (viii) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above, and (ix) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA.

“Deed of Trust” shall mean collectively, each deed of trust, security agreement and fixture filing (or mortgage, as applicable) with assignment of rents, proceeds and agreements, covering any one or more of the Projects, executed or to be executed by the Borrower, as trustor, for the benefit of the Lender, as the same may be amended or otherwise modified from time to time.

“Development Work” shall mean, with respect to a Project, the work of development to be performed on or with respect to the Land (including, without limitation, the installation of utilities, roads and all related on-site and off-site improvements) in connection with the development of the Land for the subsequent construction thereon of Homes, all of which

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work and construction shall be completed by or on behalf of the Borrower in accordance with the Development Work Plans and Specifications, but shall not include the Homes.

“Development Work Plans and Specifications” shall mean, with respect to a Project, the final set of architectural, structural, mechanical, electrical, grading, sewer, water, street and utility plans and specifications for the Development Work to be included within such Project, including all supplements, amendments and modifications thereto signed by the architect, all in form and substance reasonably satisfactory to the Lender and the Inspector.

“Draw Request Certification” shall mean, with respect to a requested disbursement of the Loan, a certification of Borrower delivered to the Lender in the form of Exhibit E.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and rulings issued thereunder.

“Environmental Indemnity” shall mean, with respect to all of the Projects, that certain Amended and Restated Hazardous Substances Remediation and Indemnification Agreement dated as of the date of this Loan Agreement and executed by the Borrower in favor of the Lender, as the same may be amended, restated or otherwise modified from time to time.

“Event of Default” shall mean the occurrence of any of the events listed in Section 8.1.

“Excluded Unit” shall mean any Unit which includes a Home (whether under construction or completed) that has been part of the Borrowing Base Collateral for more than fifteen (15) months from the commencement of construction of such Home in the case of a Sold Unit or a Spec Unit or for more than thirty (30) months from the commencement of construction of such Home in the case of a Model Unit.

“Finished Lot” shall mean a Lot as to which all of the Development Work has been completed and construction of the Home thereon can be commenced.

“Force Majeure Event” shall mean, with respect to a Project, fire, flood, labor dispute, weather, governmental action or other cause beyond the reasonable control of Borrower that shall delay the Development Work or the completion of the Homes.

“GAAP” shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession prevalent in the United States of America.

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“GMAC” means General Motors Acceptance Corporation, a Delaware corporation.

“Gross Selling Price” means, with respect to any Unit, the base sales price for such Unit plus any lot premium, plus any options, extras and/or upgrades ordered from the Borrower, whether financed or collected at the close of the escrow, less any builder concessions given by the Borrower.

“Guarantor” shall mean William Lyon Homes, a Delaware corporation, which is the parent corporation of the Borrower.

“Guaranty” shall mean that certain Amended and Restated Guaranty dated as of the date of this Loan Agreement and executed by the Guarantor in favor of the Lender, as such Guaranty may be amended, restated or otherwise modified from time to time.

“Hazardous Materials” shall mean the following:

(a) any oil, flammable substances, explosives, radioactive materials, hazardous wastes or substances, toxic wastes or substances or any other materials or pollutants, exposure to which is prohibited, limited or regulated by any governmental authority pursuant to any Hazardous Materials Law;

(b) asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million, exposure to which is prohibited, limited or regulated by any governmental authority pursuant to any Hazardous Materials Law;

(c) any chemical, material or substance defined as or included in the definition of “hazardous substances”, “hazardous wastes”, “hazardous materials”, “extremely hazardous waste”, “restricted hazardous waste”, or “toxic substances” or words of similar import under any Hazardous Material Laws; and

(d) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority pursuant to any Hazardous Materials Law.

“Hazardous Materials Claims” shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Materials Laws, together with all claims made or threatened by any third party relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials.

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“Hazardous Materials Laws” shall mean any federal, state or local laws, ordinances and the regulations, policies or publications promulgated pursuant thereto relating to (i) the environment, (ii) health and safety, (iii) any Hazardous Materials (including, without limitation, the use, handling, transportation, production, disposal, discharge or storage thereof), (iv) industrial hygiene or (v) environmental conditions on, under or about property, including, without limitation, soil and groundwater conditions; including, but not limited to, the following, as now or hereafter amended: the Clean Air Act, 42 U.S.C. Sec. 9401, et seq.; the Clean Water Act, 33 U.S.C. Sec. 7401, et. seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Sec. 9601, et. seq., as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Sec. 11001, et. seq.; the Federal Water Pollution Control Act, 33 U.S.C. Sec. 1251, et. seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sec. 1801, et. seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Sec. 6901, et. seq.; the Safe Drinking Water Act, 42 U.S.C. Secs. 300f to 300j; the Solid Waste Disposal Act, 42 U.S.C. Sec. 3251, et. seq.; the Toxic Substances Control Act, 15 U.S.C. Sec. 2601, et seq.; Sections 25115, 25117, 25122.7, 25140, 25249.8, 25281, 25316, 25501, and 25316 of the California Health and Safety Code; Article 9 or Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20; Nevada Revised Statutes Chapter 459; Nevada Revised Statutes Chapter 444; Nevada Revised Statutes Chapter 445; Nevada Revised Statutes Chapter 590; Nevada Revised Statutes Sections 618.850, inclusive; Nevada Revised Statutes Section 477.045, as now or hereafter amended; the Uniform Fire Code, as adopted by and now or hereafter in effect in the State of Nevada.

“High Advance Rate Project” shall mean a Project as to which (i) the proceeds of the Loan may be used to acquire Land, construct Development Work and/or construct Homes, (ii) the applicable Advance Rates are established for a “High Advance Rate Project” as described in the applicable Project Commitment.

“Home Staged Draw Schedule” shall mean, with respect to a Project, the various Stages of construction of the Homes, which such Stages, and the components of the Homes which fit within each such Stage, shall be specified in the Project Commitment.

“Homes” shall mean, with respect to a Project, the single family residences, condominium homes and/or attached townhouses that will be constructed by the Borrower in accordance with the Home Plans and Specifications using certain of the proceeds of the Loan, which structures the Borrower shall construct on the Lots and offer for sale to individuals and families.

“Home Percentage Completed” shall have the meaning given in Section 3.2(c)(2).

“Home Plans and Specifications” shall mean, with respect to a Project, the final set of architectural, structural, mechanical and electrical plans and specifications for the Homes to

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be included within such Project, including all supplements, amendments and modifications thereto signed by the architect, all in form and substance reasonably satisfactory to the Lender and the Inspector.

“Indemnified Party” shall mean the Lender and any Affiliate of Lender and any successors or assigns of Lender or any such Affiliate and each of their officers, directors, employees, agents, attorneys, consultants, advisors and Affiliates.

“Independent Project Commitment Amount” shall mean, at any date of determination, the aggregate amount of outstanding loan commitments issued by the Lender and/or Residential Funding Corporation to the Borrower or its Affiliates with respect to projects which are not cross-collateralized with the Projects and which are evidenced by promissory notes other than the Note. For purposes of this Agreement, the “Independent Project Commitment Amount” shall (i) automatically increase by the amount of any new loan commitment issued by the Lender or Residential Funding Corporation to the Borrower or its Affiliates with respect to a project which is not cross-collateralized with the Projects and which is evidenced by a promissory note other than the Note, with such automatic increase to become effective on the date of issuance of such new loan commitment, and (ii) reduce by the amount of any reduction in the Independent Project Commitment Amount, with such reduction to become effective only upon delivery by the Lender or Residential Funding Corporation to the Borrower or its applicable Affiliate of a written notice which serves to reduce a specific loan commitment by the amount specified in such written notice.

“Inspector” shall mean, with respect to a Project, the inspector(s) or engineer(s) engaged by the Lender, at the expense of the Borrower, to provide to Lender consultation services in connection with the Project.

“Interest Due Date” shall mean the fifteenth (15th) calendar day of each month in which the Lender has sent a statement of interest due pursuant to the terms of Section 2.7(b).

“Land” shall mean, with respect to a Project, that certain real property which is suitable for and substantially entitled for the construction of Homes thereon and related on and off-site improvements and upon which the Borrower will perform the Development Work (if applicable) and construct the Homes, as such real property is legally described in the Deed of Trust.

“Land Banking” shall mean the practice of acquiring unimproved real property and not commencing the initial phase of development of such real property within six (6) months after the date of acquisition.

“Land Speculation” shall mean the practice of acquiring either (i) unimproved real property and reselling such real property without adding value by development of such real

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property, or (ii) real property for which a tentative tract map or the equivalent of a tentative tract map has not been obtained or which is not substantially entitled for the development of a residential project.

“Laws and Regulations” shall mean, with respect to a Project, (i) all laws, regulations, orders, codes, ordinances, rules, statutes and policies of all local, regional, county, state and federal governmental authorities having jurisdiction over such Project and (ii) all restrictive covenants and other title encumbrances, permits and approvals, leases and other rental agreements which in any case related to the development, occupancy, ownership, management, use, and/or operation of such Project.

“Lender” shall mean RFC Construction Funding Corp., a Delaware corporation, its successors and assigns.

“Lender’s Release Price” shall mean, with respect to any Lot and/or Unit which the Borrower requests the Lender to release from the lien of a Deed of Trust, the amount required to be paid to the Lender prior to such release, which amount shall equal the sum of (i) if the Lot or Unit is in a High Advance Rate Project, the Additional Loan Fee for such Lot or Unit plus (ii) the amount specified in Section 2.6(a) for such Lot or Unit, plus (iii) any past due interest or fees owed to the Lender pursuant to the terms of the Loan Documents.

“Letter of Credit” shall mean any letter of credit issued by GMAC pursuant to Section 6.24 of this Loan Agreement or pursuant to Section 6.24 of the Original Loan Agreement.

“Letter of Credit Amount” shall mean the sum of (a) the aggregate amount available for drawing under all of the outstanding Letters of Credit and (b) the aggregate amount of all outstanding Obligations of Reimbursement with respect to Letters of Credit which have been drawn upon.

“Loan” shall mean the revolving loan described in this Loan Agreement in a principal amount not to exceed the Loan Amount.

“Loan Agreement” shall mean this Amended and Restated Loan Agreement, as this loan agreement may be amended, restated or otherwise modified from time to time in accordance with the terms hereof.

“Loan Amount” Shall mean, at any date of determination, an amount equal to (a) One Hundred Fifty Million Dollars ($150,000,000), minus (b) the outstanding principal amount of the loans under the Independent Project Commitment Amount, subject to reduction pursuant to Section 2.15.

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“Loan Documents” shall mean, as to the Loan, all documents, instruments, agreements, assignments and certificates relating thereto, including, without limitation, any and all loan or credit agreements, promissory notes, deeds of trust, mortgages, security agreements, assignments of rents, assignments of leases, assignments of contracts, environmental indemnities, guaranties, contractor’s consent agreements, lender’s title insurance policies, opinions of counsel, evidences of authorization or incumbency, escrow instructions, architect’s consent agreements, and UCC-1 financing statements in connection with Lender making the Loan to Borrower, as the same may be amended or otherwise modified from time to time in accordance with this Loan Agreement. The Loan Documents shall include, but not be limited to, the following:

(a) this Loan Agreement;

(b) the Note;

(c) the Guaranty;

(d) the Environmental Indemnity;

(e) the Assignment;

(f) the Title Policy; and

(g) the Project Documents.

“Loan Parties” shall mean the Borrower and the Guarantor.

“Lot Percentage Completed” shall have the meaning given in Section 3.2(c)(2).

“Lot Staged Draw Schedule” shall mean, with respect to a Project, the various stages of construction of the Development Work, which such Stages, and the completion of the Development Work which fit within each such Stage, shall be specified in the Project Commitment.

“Lots” shall mean, with respect to a Project, the tracts of real property within the Land that have been or will be developed for the subsequent construction thereon of Homes.

“Map” shall mean a final subdivision or parcel map for a Project consistent with the Plans and Specifications for such Project and the Laws and Regulations applicable to such Project, which “Map” shall be acceptable to the Lender in the Lender’s sole discretion.

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“Material Adverse Change” shall mean any material and adverse change in, or a change which has a material adverse effect upon, any of:

(a) the business, properties, operations or condition (financial or otherwise) of any Loan Party since either or both of (i) the financial condition reflected in the December 31, 2003 audited financial statements of the Loan Parties, or (ii) the date of the most recent financial statements delivered to the Lender in connection with the Loan; or

(b) the legal or financial ability of either of any Loan Party to perform its obligations under the Loan Documents to which it is a party and to avoid any Potential Default or Event of Default; or

(c) the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document.

“Maturity Date” shall mean the first to occur of (i) September 24, 2008 (as such date may be extended in writing by Lender and Borrower from time to time), or (ii) the date on which the Loan is required to be repaid pursuant to Section 8.2.

“Model Unit” shall mean, with respect to a Project, any Unit which is not subject to a Sales Agreement and which the Borrower has designated as a model home to be used in marketing the Project, the number of which such model homes shall be limited as set forth in the Project Commitment.

“Net Income” of the Guarantor and its Subsidiaries (including the Borrower) means, with respect to a calendar year, the after-tax net income of the Guarantor and its Subsidiaries (including the Borrower) on a consolidated basis for such calendar year determined in accordance with GAAP, before any extraordinary losses.

“Net Sales Proceeds” shall mean the proceeds from the sale of a Lot and/or Unit deducting a reasonable real estate commission and closing costs, which real estate commission and closing costs shall not exceed five percent (5%) of the gross sales price for such Lot and/or Unit.

“Note” shall mean that certain Revolving Promissory Note dated as of the date of this Loan Agreement and executed by Borrower, as maker, and made payable to the order of Lender, as holder, in the principal amount of One Hundred Fifty Million Dollars ($150,000,000) and maturing on the Maturity Date, to evidence the Loan, as such Revolving Promissory Note may be amended, extended, renewed, replaced or otherwise modified from time to time, which Note has been issued in replacement of and substitution for, but not in payment of, that certain Revolving Promissory Note dated as of January 10, 2003, and executed by Borrower, as maker, and made payable to the order of the Lender, as holder, in the principal amount of One Hundred Fifty Million Dollars ($150,000,000).

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“Obligation of Reimbursement” has the meaning specified in Section 6.24(e) of the Loan Agreement.

“Original Loan Agreement” has the meaning specified in the Recitals.

“Permitted Exceptions” shall mean, with respect to a Project, (i) real estate taxes and assessments not yet due and payable and possible supplemental assessments for improvements constructed on the Land, (ii) exceptions to title which are approved in writing by the Lender, and (iii) the exceptions set forth in the Title Policy or in any Title Policy Endorsement accepted by Lender.

“Person” shall mean an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.

“Plans and Specifications” shall mean, with respect to a Project, the Development Work Plans and Specifications for such Project and the Home Plans and Specifications for such Project, collectively.

“Potential Default” shall mean the existence of any event, which with the giving of notice, the passage of time, or both, would constitute an Event of Default hereunder or an event of default (however described) under any other of the Loan Documents.

“Prepayment Price” shall mean an amount equal to (i) the principal amount of the Loan to be prepaid, as requested by the Borrower, with no premium thereon, plus (ii) all accrued interest to the date of prepayment on the principal amount prepaid, together with other fees and expenses due and owing to Lender pursuant to the terms of the Loan Documents.

“Prime Rate” shall mean the rate that is indicated in the Telerate as the prime lending rate announced from time to time by Bank One, National Association, a national banking association, as in effect from time to time, it being understood that the Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. In the event that such rate is no longer shown in the Telerate, Borrower and Lender shall reasonably agree on a substitute source for determining the prime lending rate of Bank One, National Association.

“Project” shall mean any acquisition, development and/or construction project of the Borrower as to which the Lender has issued a Project Commitment and made proceeds of the Loan available for disbursement, which such project shall include the Land, the Development Work and/or the Homes to be completed on the Land.

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“Project Commitment” shall mean, with respect to a Project, the commitment issued by the Lender to the Borrower for the Project, wherein the Lender agrees, subject to the terms and conditions of this Loan Agreement and such “Project Commitment”, to make proceeds of the Loan available for the Project, and, if applicable, to arrange for the issuance of a Letter of Credit for the Project. The Project Commitments shall be substantially in the form of Exhibit D.

“Project Documents” shall mean, with respect to a Project, all documents, instruments, agreements, assignments and certificates relating thereto, including, without limitation, any and all loan or credit agreements, promissory notes, deeds of trust, mortgages, security agreements, assignments of rents, assignments of leases, assignments of contracts, environmental indemnities, guaranties, contractor’s consent agreements, lender’s title insurance policies, opinions of counsel, evidences of authorization or incumbency, escrow instructions, architect’s consent agreements, and UCC-1 financing statements in connection with Lender making proceeds of the Loan available to the Borrower for the Project, as the same may be amended or otherwise modified from time to time in accordance with this Loan Agreement. The Project Documents shall include, but not be limited to, the following:

(a) the Project Commitment;

(b) the Deed of Trust or a modification to the Deed of Trust;

(c) the UCC Financing Statement;

(d) the Title Policy Endorsement;

(e) the Plans and Specifications; and

(f) the Letter of Credit (if any).

The Project Documents shall include those forms of documents, instruments, agreements, assignments and certificates for the States of California, Arizona and Nevada which the Lender has approved in connection with the execution and delivery of the Original Loan Agreement, as evidenced by a written certificate of the Lender. The forms of the Project Documents may be supplemented or amended from time to time to add or amend form Project Documents approved by Lender and Borrower.

“Project Maturity Date” shall mean, with respect to a Project as to which the Lender has agreed that advances of the Loan under the ABF Program shall be made for Land acquisition and the construction of Development Work, the date which is set forth in the Project Commitment for such Project as the “Project Maturity Date”, which shall be the date

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from and after which all Lots and Units related to such Project will be excluded from the Borrowing Base Value for purposes of the ABF Program.

“Project Requirements” shall mean, for any project proposed to be included as a Project pursuant to the terms of this Loan Agreement, the requirements listed in Exhibit B.

“Project Security Instruments” shall mean, with respect to a Project, all pledge agreements, guaranties, deeds of trust, mortgages, security agreements, assignments and other agreements or instruments previously executed or to be executed by Borrower granting in favor of Lender a lien or encumbrance on or a security interest in any property or right or interest of Borrower as security for the Loan, as the same may be amended or otherwise modified from time to time in accordance with this Loan Agreement, including but not limited to the following:

(a) the Deed of Trust; and

(b) the UCC Financing Statement.

“Project Underwriting Documents” shall mean, for any project proposed to be included as a Project pursuant to the terms of this Loan Agreement, the documents listed in Exhibit C and any other documents relating to the proposed project which Lender reasonably requests, all in form and substance reasonably satisfactory to the Lender and, as to items A2, A6, B1, B3 and B6, in form and substance reasonably satisfactory to the Inspector.

“Qualified Acquisition and Development Expenditures” shall mean, with respect to a Project for which the acquisition of the Land and the construction of the Development Work is to be funded outside of the ABF Program, the costs related to the acquisition of the Land and the Development Work for such Project for which proceeds of the Loan may be disbursed up to the applicable Acquisition and Development Amount as contemplated by the Project Commitment for such Project, which such costs shall be limited to the following:

(a) the cost of acquiring the Land or the Lots;

(b) the cost of materials and labor for Development Work in place for the Project, but excluding any costs for materials delivered to the Land which have not yet been put in place or materials as to which the Borrower does not have title;

(c) the Acquisition and Development Acquisition Soft Costs and Other Costs; and

(d) the Acquisition and Development Interest Reserve.

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The particular amounts which may be disbursed for each of the categories set forth in paragraphs (a) through (d) above shall be set forth in the Budget for the applicable Project. Amounts in the Budget related to the acquisition of the Land and the Development Work for a Project which are not listed in any of the categories set forth in paragraphs (a) through (d) above shall not be Qualified Acquisition and Development Expenditures.

“RFC CF Asset Based Funding System” shall mean the Lender’s software system on which Lender and Borrower maintain information regarding the Units in the Borrowing Base Collateral, Borrowing Base Value, Borrowing Base Outstanding Amount, Borrowing Base Allowable Disbursement Amount and related information relating to the ABF Program.

“Release” shall mean any presence, use, generating, storing, spilling, leaking, pumping, pouring, emitting, treating, emptying, discharging, injecting, escaping, leaching, dumping or disposing of Hazardous Materials into the environment, or about, on, from, under, within or affecting any Project, or transported to or from any Project, including continuing migration of Hazardous Materials into or through soil, surface water or groundwater, during Borrower’s ownership of such Project, in violation of the Hazardous Materials Laws.

“Rolling Option Project” shall mean a Project as to which (i) the proceeds of the Loan may be used to acquire Finished Lots and construct Homes, and (ii) the Advance Rates are established for a “Rolling Option Project” as described in the applicable Project Commitment.

“Sales Agreement” shall mean a written agreement for the sale of a Lot or a Unit between the Borrower and a person who is not an Affiliate of the Borrower and who has been pre-qualified for the financing necessary to purchase such Lot or Unit, which agreement shall (i) be binding upon such purchaser, (ii) require such purchaser to deposit with the Borrower an “at risk” deposit (which such deposit may be returned to the purchaser, and shall not be “at risk”, in the event the contingencies specified in the agreement are not satisfied), (iii) contain no contingencies to the obligation of such purchaser to purchase such Lot or Unit, other than contingencies related to financing and the sale of another residence; provided that in the event any contingency is not removed within sixty (60) days of the date of the agreement, such agreement shall no longer be considered a “Sales Agreement” for purposes of this Loan Agreement, and (iv) conform to all applicable laws, regulations, codes and ordinances, including those requiring disclosures to prospective and actual buyers.

“Sold Unit” shall mean any Unit which is subject to a Sales Agreement.

“Spec Units” shall mean Units, other than Model Units, which are not subject to a Sales Agreement.

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“Special Collateral Account” has the meaning specified in Section 6.24(i) of this Loan Agreement.

“Stage” shall mean, with respect to a Project, the various stages of construction of the Development Work or the Homes, as applicable.

“Subsidiary” of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries.

“Tangible Net Worth” means the difference between (a) the tangible assets of the Guarantor and its Subsidiaries (including the Borrower) on a consolidated basis as determined in accordance with GAAP, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is permitted, and (b) the Total Liabilities of the Guarantor and its Subsidiaries (including the Borrower) on a consolidated basis as determined in accordance with GAAP; provided, however, in no event shall there be included as tangible assets, patents, trademarks, tradenames, copyrights, licenses, goodwill, receivables from Affiliates, prepaid expenses, deposits, deferred loan costs or other deferred charges, or treasury stock or any securities or indebtedness of the Guarantor or its Subsidiaries (including the Borrower), or any other securities unless such securities are readily marketable on a public exchange in the United States of America.

“Title Company” shall mean Fidelity National Title Insurance Company or any other title insurance company approved in writing by the Lender.

“Title Policy” shall mean that certain policy or policies of title insurance accepted by the Lender for all of the Projects, which policy or policies of title insurance shall (i) be an ALTA loan form (1970 form, revised 10-17-84, or the equivalent thereof) title insurance policy, (ii) be issued in the amount of the original principal amount of the Note, (iii) be issued by the Title Company, (iv) insure the Lender that the applicable Deed of Trust is an enforceable first lien against marketable fee simple title to all of the Projects, subject only to Permitted Exceptions, (v) provide mechanics’ lien coverage, and (vi) have appended thereto a comprehensive endorsement, a usury endorsement, a revolving loan credit and variable rate endorsement, an environmental lien endorsement and such other endorsements as are generally required by lenders in the area in which the Projects are located, and otherwise in form and substance reasonably satisfactory to Lender.

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“Title Policy Endorsement” shall mean an endorsement to the Title Policy, in form and content acceptable to the Lender, to be delivered to the Lender pursuant to the terms of this Loan Agreement.

“Total Liabilities” shall mean the aggregate amount of all liabilities of the Guarantor and its Subsidiaries (including the Borrower) reported on a consolidated basis as computed in accordance with GAAP.

“Transfer” shall mean the occurrence of any of the following:

(a) any sale, conveyance, assignment, transfer, alienation, mortgage, conveyance, of security title, encumbrance or other disposition of any Project, of any kind, or any other transaction the result of which is, directly or indirectly, to divest Borrower of any portion of its title to or interest in any Project, voluntarily or involuntarily;

(b) any merger, consolidation or dissolution involving Borrower or the sale or transfer of a significant portion of the assets of Borrower;

(c) any merger, consolidation or dissolution involving Guarantor or any sale, conveyance, assignment, transfer, alienation, encumbrance or other disposition by Guarantor of any of its stock in Borrower or any other transaction or event the result of which is directly or indirectly to cause Guarantor to own less than one hundred percent (100%) of the outstanding stock if Borrower.

(d) any conveyance, assignment, transfer or other disposition (at one time or over a period of time) of any of the stock of Guarantor owned at any time by William Lyon (“General Lyon”) or William H. Lyon (“Mr. Lyon”) (collectively, General Lyon and Mr. Lyon are herein called the “Lyons”) or any issuance of additional stock in Guarantor or any other event the result of which is to dilute, decrease or eliminate the Lyons’ ownership interest in Guarantor, unless, after giving effect to any such conveyance, assignment, transfer, other disposition, issuance or other event, the Lyons and/or a Qualified Transferee (defined below) (i) retain control of Guarantor, (ii) continue to own at least forty percent (40%) of the outstanding stock of Guarantor at all times subsequent to such conveyance, assignment, transfer, other disposition, issuance or other event on a continuous and full time basis with the power and responsibility to manage the material day to day operations of Guarantor, Borrower and their Subsidiaries, and (iii) any three (3) of Wade Cable, Thomas J. Mitchell, Douglas F. Bauer, Richard S. Robinson or Michael D. Grubbs continue to be employed by Guarantor and Borrower at all times subsequent to the transfer on a continuous and full time basis with power and responsibility to manage the material day to day operations of Guarantor, Borrower and their Subsidiaries. For purposes of

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this subsection (d), a “Qualified Transferee” is a transferee which must be (1) the executor of the estate of General Lyon, (2) a member of the immediate family of General Lyon, or (3) the trustee of a trust established and continuously maintained for the sole benefit of the immediate family of General Lyon.

“UCC Financing Statement” shall mean, with respect to a Project, a UCC financing statement naming Borrower, as debtor, in favor of Lender, as secured party, in connection with Lender making proceeds of the Loan available to the Borrower for such Project, as such UCC financing statement may be amended or otherwise modified from time to time.

“Unit” shall mean a Lot and the Home constructed on such Lot.

“Value” shall mean the value which an Appraiser (or if no Appraisal Report is required by Lender, Lender) assigns to the Project or any part thereof as to which a value is being determined, as set forth in an Appraisal Report (if an Appraisal Report is required by Lender) and based upon the following:

(a) with respect to High Advance Rate Projects, and for purposes of determining the Additional Loan Fee payable in the event the Lender has advanced proceeds of the Loan to finance the acquisition of the Land and the Development Work, and the Borrower finances the construction of a Home from a source other than the Lender or sells a Lot to another builder, the value of such Lot shall be determined based on the “as if complete” value of such Lot after completion of all Development Work;

(b) the value of the Land or any part thereof which is part of a Project shall be determined based on the retail value of the Land after completion of all Development Work;

(c) the value of any Sold Unit, whether or not the Home has been commenced or completed, shall be determined based upon the sales price set forth in the Sales Agreement; and

(d) the value of any Model Unit or Spec Unit, whether or not the Home has been commenced or completed, shall be determined based upon the “as-completed” “full retail” value of the base model of the applicable Unit set forth in an Appraisal, exclusive of options, extras, upgrades and lot/location premiums except to the extent set forth in the applicable Project Commitment.

“WIP Report” shall mean a Work in Progress Report related to the Borrower’s Units included in the ABF Program, which report shall be generated by the Lender from the RFC CF Asset Based Funding System.

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Section 1.2. Other Definitional Provisions.

(a) Accounting terms not defined herein shall have the respective meanings given to them under GAAP. To the extent that the definitions of accounting terms herein are inconsistent with the meanings of such terms under GAAP, the definitions contained herein shall control.

(b) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Loan Agreement shall refer to this Loan Agreement as a whole and not to any particular provision of this Loan Agreement.

(c) In this Loan Agreement in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”.

ARTICLE II

THE LOAN

Section 2.1. Agreement to Lend and Borrow; Evidence of Indebtedness and Maturity.

(a) Lender agrees, on the terms and conditions hereinafter set forth, to make the Loan to Borrower for the purpose of providing financing for Projects; provided, however, that (i) the sum of the outstanding principal balances of advances under the Loan made for the acquisition of Land and the construction of Development Work outside of the ABF Program, the Borrowing Base Outstanding Amount and the Letter of Credit Amount shall not exceed at any time the Loan Amount, (ii) the advances of the Loan made with respect to the acquisition of Land and the construction of Development Work outside of the ABF Program for any given Project shall not exceed at any time the Acquisition and Development Amount specified in the applicable Project Commitment for such Project, (iii) the Borrowing Base Outstanding Amount shall not exceed at any time the Borrowing Base Value, and (iv) the obligation of the Lender to make the Loan is conditioned upon, among other things, the Lender’s receipt of the documents set forth in Exhibit A attached hereto. Borrower and Lender acknowledge that although the sum of the Acquisition and Development Amounts outside of the ABF Program, the Borrowing Base Outstanding Amount and the Letter of Credit Amount at any given date of determination may exceed the Loan Amount, Lender shall have no obligation to make any advance of Loan proceeds which would cause the sum of the outstanding principal balance of the Loan and the Letter of Credit Amount to exceed the Loan Amount. The Borrower shall repay the Loan pursuant to Section 2.6, may prepay the Loan pursuant to Section 2.8 and may reborrow proceeds of the Loan pursuant to this Section 2.1(a).

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(b) Concurrent with the execution and delivery of this Loan Agreement, the Borrower shall execute and deliver to the Lender the Note, evidencing the indebtedness incurred by the Borrower pursuant to the terms of this Loan Agreement.

(c) The outstanding principal balance of the Loan, together with accrued and unpaid interest thereon and all other amounts payable by Borrower under the terms of the Loan Documents, shall be due and payable on the Maturity Date.

Section 2.2. Disbursements of the Loan. The Lender shall make disbursements of the Loan in accordance with and subject to the terms of Article III hereof.

Section 2.3. Use of Disbursements. Borrower shall ensure the use of disbursements of the Loan only for purposes permitted by this Loan Agreement.

Section 2.4. Commitment Fees.

(a) During the period from the date of this Loan Agreement until the Approval Period Termination Date, the Commitment Fee shall be an annual fee determined in advance for the applicable annual period. The Borrower shall pay to Lender the annual Commitment Fee for each annual period in which the Commitment Fee is required to be paid; provided, however, that the Lender agrees that the Borrower may pay such annual Commitment Fee in advance in equal quarterly installments; provided further, however, that the fact that the Commitment Fee may be paid in quarterly installments does not alter the character of the Commitment Fee as an annual fee, payable for the applicable annual period. During the period from the date of this Loan Agreement through the Approval Period Termination Date, on January 1, April 1, July 1 and October 1 of each year, the Borrower shall pay the quarterly installment of the Commitment Fee due with respect to the applicable annual period.

(b) On and after the Approval Period Termination Date, the Commitment Fee shall be a semi-annual fee determined in advance for the applicable semi-annual period. The Borrower shall pay to Lender the semi-annual Commitment Fee for each semi-annual period in which the Commitment Fee is required to be paid; provided, however, that the Lender agrees that the Borrower may pay such semi-annual Commitment Fee in advance in equal quarterly installments; provided further, however, that the fact that the Commitment Fee may be paid in quarterly installments does not alter the character of the Commitment Fee as a semi-annual fee, payable for the applicable semi-annual period. On and after the Approval Period Termination Date, the Commitment Fee shall be paid as follows:

(1) The initial quarterly installment of the Commitment Fee shall be paid on the Approval Period Termination Date.

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(2) On January 1, April 1, July 1 and October 1 of each year commencing with the first such date after the Approval Period Termination Date, the Borrower shall pay the quarterly installment of the Commitment Fee due with respect to the applicable semi-annual fee.

(c) If Borrower fails to pay any Commitment Fee as required under this Section 2.4 in a timely manner, Borrower hereby authorizes Lender to disburse to itself proceeds of the Loan to pay such Commitment Fee. Lender in its sole discretion (but without any obligation to do so) may make such disbursements notwithstanding the existence of an Event of Default or Potential Default. Such disbursements shall be added to the outstanding principal balance of the Loan. The authorization hereby granted is irrevocable, and no further direction or authorization from Borrower is necessary for Lender to make such disbursements. If Lender disburses to itself Loan proceeds to pay itself a Commitment Fee without first having received a request from Borrower to make such a disbursement, then Lender shall send to Borrower a statement that shows the amount of Loan proceeds disbursed to pay such Commitment Fee and an explanation of Lender’s calculation of the amount thereof.

Section 2.5. Increase in Commitment Fee as a Result of Increase in the Loan Amount; No Reduction in Commitment Fee Regardless of Reductions in the Loan Amount. The Borrower acknowledges that prior to the Approval Period Termination Date the Commitment Fee required to be paid to the Lender pursuant to the provisions of Section 2.4 shall be due and owing to the Lender in advance for each annual period, regardless of whether the Loan remains outstanding for the entire annual period, and regardless of whether the Loan Amount decreases during such annual period, and in the event either the Borrower repays or is required to repay the Loan prior to the end of such annual period, or the Loan Amount decreases prior to the end of such annual period, the Borrower shall not be entitled to any refund of the Commitment Fee previously paid. The Borrower further acknowledges that on and after the Approval Period Termination Date the Commitment Fee required to be paid to the Lender pursuant to the provisions of Section 2.4 shall be due and owing to the Lender in advance for each semi-annual period, regardless of whether the Loan remains outstanding for the entire semi-annual period, and regardless of whether the Loan Amount decreases during such semi-annual period, and in the event either the Borrower repays or is required to repay the Loan prior to the end of such semi-annual period, or the Loan Amount decreases prior to the end of such semi-annual period, the Borrower shall not be entitled to any refund of the Commitment Fee previously paid. Upon termination of this Loan Agreement, no additional Commitment Fee shall thereafter be due to the Lender.

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Section 2.6. Repayment of Principal. Principal of the Loan shall be due and payable as follows:

(a) Upon the sale of a Lot or Unit, the Borrower shall repay the principal amount of the Loan in an amount equal to the greater of (i) one hundred percent (100%) of the Net Sales Proceeds arising from the sale of such Lot or Unit (after payment of the Additional Loan Fee related to such Lot or Unit, if applicable) or (ii) the sum of (A) the Applicable Acquisition and Development Principal Repayment Percentage of the total amount of the Loan outside of the ABF Program budgeted for the acquisition of such Lot plus the Development Work related to such Lot (including Acquisition and Development Soft Costs and Other Costs related to the acquisition of the Land and the Development Work), plus (B) one hundred percent (100%) of the Borrowing Base Value of such Lot or Unit. Each principal payment received by Lender shall be applied first to repay the Applicable Acquisition and Development Principal Repayment Percentage of the total amount of the Loan outside of the ABF Program budgeted for the acquisition of such Lot plus the Development Work related to such Lot (including Acquisition Soft Costs and Other Costs related to the acquisition of the Land and the Development Work), with the remainder of such principal payment being applied to the Borrowing Base Outstanding Amount. The principal payments described above shall continue to be made until such time as the total amount of the Loan related to such Project outside of the ABF Program has been paid in full and the Borrowing Base Outstanding Amount has been paid in full. Thereafter, the principal payments described above shall continue to be made and shall be applied to the outstanding principal balance of the Loan related to other Projects outside of the ABF Program as specified by the Borrower and agreed to by the Lender.

(b) If the amount of the Loan disbursed for the acquisition of the Land and the Development Work outside of the ABF Program for a Project has not been repaid on or before the Acquisition and Development Maturity Date for such Project, the Borrower shall on such date repay the entire principal amount of the Loan disbursed for the acquisition of the Land and the Development Work outside of the ABF Program for such Project.

(c) In the event that the Borrowing Base Outstanding Amount shall at any time exceed the Borrowing Base Value, the Borrower shall immediately make a principal repayment of the Borrowing Base Outstanding Amount in an amount sufficient to eliminate any such excess.

(d) In the event that the sum of the outstanding principal balances of advances under the Loan made for the acquisition of Land and Development Work outside of the ABF Program for Projects, the Borrowing Base Outstanding Amount

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and the Letter of Credit Amount shall at any time exceed the Loan Amount, the Borrower shall immediately pay to the Lender a principal repayment of the Borrowing Base Outstanding Amount in an amount sufficient to eliminate any such excess.

(e) On any date that the Lender makes any payment with respect to a Letter of Credit, the Borrower shall pay to the Lender an amount equal to the amount so paid by the Lender with respect to the Letter of Credit.

(f) On the Maturity Date, the Borrower shall repay the entire remaining principal amount of the Loan.

Section 2.7. Interest.

(a) The Loan shall bear interest on the unpaid principal thereof at the per annum rate of the Prime Rate plus one-fourth of one percent (.25%). Throughout the term of the Loan, interest shall be calculated on the basis of a 360-day year consisting of twelve (12) thirty (30) day months.

(b) On or before the fifth (5th) Business Day of each month, the Lender shall send to Borrower a statement setting forth the amount of interest due for the previous month. Borrower shall pay the interest due for the previous month on or before the Interest Due Date, except if the Borrower has elected, with respect to any Project, to include in the Budget for such Project an Acquisition and Development Interest Reserve, then the Borrower may direct the Lender to make a disbursement of the Loan to pay the interest due on the Loan with respect to such Project until such time as such Acquisition and Development Interest Reserve is fully disbursed, upon and subject to the terms and conditions contained herein.

Section 2.8. Prepayment of the Loan. Borrower shall have the right to prepay the Loan at any time, in full or in part at a price equal to the Prepayment Price. Any partial prepayment of the Loan shall be accompanied by a statement wherein the Borrower specifies (i) whether such prepayment is to be applied to the Borrowing Base Outstanding Amount or to a given Project as to which the Land acquisition and the construction of Development Work has been funded outside of the ABF Program, and (ii) if the prepayment is to be applied to a Project as to which the Land acquisition and the construction of Development Work has been funded outside of the ABF Program, the particular Lots and/or Units, to which such prepayment is to be applied.

Section 2.9. Security. Payment of the Loan by Borrower and performance of Borrower’s other obligations under the Loan Documents shall be secured by the collateral described in the Project Security Instruments, which Borrower warrants shall create a valid and first-lien position with respect to the Projects subject to Permitted Exceptions.

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Section 2.10. Payments. All payments of principal and interest on the Loan shall be made to the Lender by federal funds wire transfer as instructed by the Lender in immediately available funds not later than 1:00 p.m. (Minneapolis time) on the dates such payments are to be made. Any payment received after 1:00 p.m. (Minneapolis time) shall be deemed received by the Lender on the next Business Day. All computations of interest and fees under the Loan Documents shall be made by Lender on the basis of a year of 360 days, comprised of twelve (12) thirty (30) day months. If any payment of interest or principal to be made by Borrower shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest with respect to such payment.

Section 2.11. Extension. Borrower may, not earlier than ninety (90) days and not later than forty five (45) days prior to the then effective Approval Period Termination Date (as it may be extended from time to time pursuant to this Section 2.11), request in writing that the Approval Period and the Maturity Date each be extended for twelve (12) months, or an increment thereof. Lender may, in its sole and absolute discretion, consent or not consent to such request by giving written notice thereof to Borrower not less than thirty (30) days prior to the then effective Approval Period Termination Date. If Lender fails to give such notice Lender shall be deemed not to have consented to such extension. If the Lender consents to such request, the Approval Period Termination Date and the Maturity Date shall each be extended twelve (12) months, or an increment thereof, from the then effective Approval Period Termination Date and Maturity Date, respectively.

Section 2.12. Applications of Payments; Late Charges.

(a) Payments received by Lender pursuant to the terms hereof shall be applied in the following manner:

(1) first, to the payment of all expenses, charges, costs and fees incurred by or payable to Lender and for which Borrower is obligated pursuant to the terms of the Loan Documents;

(2) second, to the payment of all interest accrued to the date of such payment, except that the payments made pursuant to Section 2.6(a) through (f) shall be applied to the payment of principal in accordance with subparagraph (3) below and not to the payment of interest; and

(3) third, to the payment of principal.

Notwithstanding anything to the contrary contained in this Loan Agreement, after the occurrence and during the continuation of an Event of Default, all amounts received

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by Lender from any party shall be applied in such order as Lender, in its sole discretion, may elect.

(b) If any installment of interest and/or the payment of principal is not received by Lender within five (5) Business Days after the due date thereof, then in addition to the remedies conferred upon Lender pursuant to Section 8.2 hereof and the other Loan Documents, the Lender may elect to assess a late charge of four percent (4%) of the amount of the installment due and unpaid, which such late charge will be added to the delinquent amount to compensate Lender for the expense of handling the delinquency. Borrower and Lender agree that such late charge represents a good faith and fair and reasonable estimate of the probable cost to Lender of such delinquency. Borrower acknowledges that during the time that any such amount shall be in default, Lender will incur losses which are impracticable, costly and inconvenient to ascertain and that such late charge represents a reasonable sum considering all of the circumstances existing on the date of the execution of this Loan Agreement and represents a reasonable estimate of the losses Lender will incur by reason of late payment. Borrower further agrees that proof of actual losses would be costly, inconvenient, impracticable and extremely difficult to fix. Acceptance of such late charge shall not constitute a waiver of the default with respect to the overdue installment, and shall not prevent Lender from exercising any of the other rights and remedies available hereunder.

Section 2.13. Interest Rate Limitation. The provisions of this Loan Agreement and the other Loan Documents are hereby expressly limited so that in no contingency or event whatever shall the amount paid or agreed to be paid to Lender for the use, forbearance or detention of the sums evidenced by this Loan Agreement exceed the maximum amount permissible under applicable law. If from any circumstance whatever the performance or fulfillment of any provision of this Loan Agreement or of any other Loan Document should involve or purport to require any payment in excess of the limit prescribed by law, then the obligation to be performed or fulfilled is hereby reduced to the limit of such validity, and if, from any circumstance whatever, Lender should ever receive as interest an amount which would exceed the highest lawful rate under applicable law, then the amount which would be excessive interest shall be applied as an optional reduction of principal in accordance with the terms of Section 2.8 of this Loan Agreement (or, at Lender’s option, be paid over to Borrower), and shall not be counted as interest.

Section 2.14. Revolving Nature of Loan. The Loan is a revolving loan, and until the Approval Period Termination Date, any amounts which are repaid may, subject to the terms of the Loan Documents limiting the amounts which may be drawn for any Project and the terms restricting disbursements of proceeds of the Loan, be redrawn for another Project; provided, however, that amounts of the Loan which are disbursed with respect to acquisition

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of Land and Development Work outside of the ABF Program cannot be disbursed again with respect to that Project unless otherwise expressly provided in the Project Commitment with respect to such Project.

Section 2.15. Voluntary Permanent Reduction in the Loan Amount. From and after the Approval Period Termination Date, Borrower may from time to time, upon written notice given by Borrower to Lender not less than thirty (30) days prior to the end of the then-current semi-annual period for the Commitment Fee, elect to permanently reduce the Loan Amount; provided, however, that (i) the Loan Amount, after giving effect to any such permanent reduction, shall not be less than an amount which the Lender reasonably determines will be necessary to complete the Development Work and all of the Homes in all of the Projects, and (ii) the amount of any such permanent reduction shall be Five Million Dollars ($5,000,000) or a greater amount in One Million Dollars ($1,000,000) increments. Provided that the Borrower provides the required written notice to Lender within the thirty (30) day period specified above, the applicable reduction in the Loan Amount under this Section 2.15 shall become effective on the first day of the next semi-annual period for the Commitment Fee.

ARTICLE III

APPROVAL OF PROJECTS AND DISBURSEMENTS

Section 3.1. Project Approval and Project Commitments.

(a) During the Approval Period, the Borrower may submit to Lender projects proposed to be included as Projects, all pursuant to and in accordance with the terms of this Loan Agreement, and upon approval as a Project, disbursements of the Loan may be made in accordance with the provisions of this Loan Agreement.

(b) In order to include a proposed project as a Project, Borrower shall submit to Lender a complete description of the proposed project, including the Project Underwriting Documents, and evidence that the proposed project complies with the Project Requirements.

(c) Upon its receipt of the Project Underwriting Documents and evidence that the proposed project complies with the Project Requirements, Lender shall have thirty (30) days to review and, in its sole and absolute discretion and acting in good faith, approve or disapprove the proposed project as a Project which may be financed from proceeds of the Loan. In the event a proposed project complies with the Project Requirements and the Lender disapproves the proposed project, the Lender shall disclose in writing to the Borrower the reasons for the Lender’s disapproval. Upon any such approval, Lender shall issue a Project Commitment with respect thereto and such proposed project shall become a Project for purposes of this Loan Agreement. The Project Commitment for each Project will specify, among other things, whether

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the acquisition of Land and the Development Work for such Project is to be funded by advances of the Loan under the ABF Program or outside of the ABF Program, and if the acquisition of Land and the construction of Development Work is to be funded by advances of the Loan outside of the ABF Program, the Project Commitment will specify the Acquisition and Development Amount for such Project, which amount once disbursed and repaid cannot be disbursed again with respect to such Project unless otherwise expressly provided in the Project Commitment with respect to such Project.

Section 3.2. The ABF Program. The construction of Homes in a Project and, if specified in the applicable Project Commitment, the acquisition of Land and the construction of Development Work for such Project, shall be funded through the ABF Program, in accordance with the conditions and procedures set forth below:

(a) Pledging of Borrowing Base Collateral.

(1) On the date of execution and delivery of this Loan Agreement, the Borrowing Base Collateral shall consist of those Units, if any, encumbered by the lien of the Deed of Trust as of the date of this Loan Agreement. The Borrower may pledge Additional Units as part of the Borrowing Base Collateral, subject to the terms of this Section 3.2.

(2) No Additional Unit may become part of the Borrowing Base Collateral unless it is within a Project for which the Lender has issued a Project Commitment to include such Project in the ABF Program.

(3) In order to pledge an Additional Unit as part of the Borrowing Base Collateral, the Borrower shall be required to meet the following conditions precedent with respect to such pledge:

(i) the Additional Unit must be located in a Project for which the Lender has issued a Project Commitment to include such Project in the ABF Program and shall not have been previously included as part of the Borrowing Base Collateral;

(ii) the Borrower shall notify Lender of Borrower’s request to include such Additional Unit by making the appropriate entries in the RFC CF Asset Based Funding System;

(iii) if the Lender does not already have a Deed of Trust, UCC Financing Statement and Title Policy acceptable to the Lender covering such Additional Unit, the Borrower shall deliver to the Lender a Deed

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of Trust (or if requested by Lender, a deed of trust modification agreement), a UCC Financing Statement and a Title Policy (or if requested by Lender, a Title Policy Endorsement) relating to such Additional Unit, each of which shall be in form and substance acceptable to Lender in Lender’s sole discretion;

(iv) if requested by the Lender, the Borrower shall deliver to the Lender recording and closing affidavits and certificates, closing statements, documents establishing that all taxes, charges, filing registration and recording fees, excises and levies imposed by reason of Lender taking a Deed of Trust on the Additional Unit have been paid, and all other documents and instruments customarily delivered in connection with deed of trust transactions in the jurisdiction in which such Additional Unit is located, each of which shall be in form and substance acceptable to Lender in Lender’s sole discretion; and

(v) if requested by the Lender, the Borrower shall deliver to Lender a favorable opinion of counsel with respect to the Deed of Trust (or, if requested by Lender, the deed of trust modification agreement) and each other Loan Document delivered with respect to the pledge of such Additional Units in form and substance satisfactory to Lender.

(b) WIP Reports.

(1) From time to time at the discretion of the Lender, Lender shall generate an updated WIP Report related to the Borrower’s Units included in the Borrowing Base Collateral. The Lender shall utilize the WIP Report in determining the Borrowing Base Lot Amount, the Borrowing Base Home Amount, the Borrowing Base Value, the Borrowing Base Outstanding Amount, the Borrowing Base Allowable Disbursement Amount and other information related to the Units included in the ABF Program.

(2) The Borrower shall promptly from time to time update information in the RFC CF Asset Based Funding System to reflect the inclusion of Additional Units, changes in Stages of construction of Development Work on Lots under the ABF Program, changes in Stages of construction of Homes, etc. All information updated by Borrower in the RFC CF Asset Based Funding System must be approved by Lender and may be adjusted or modified by Lender in its sole discretion. Lender, in its sole discretion, may update the RFC CF Asset Based Funding System to reflect such changes in the Homes and other matters as Lender determines, including, without limitation, changes to reflect sales of Units.

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(3) The Lender may, on any date it determines, deliver a copy of the most recently generated WIP Report to the Inspector. The Inspector shall take such actions as the Lender and Inspector deem necessary to verify the status of the Borrowing Base Collateral as set forth in such WIP Report, including random inspections of the Projects to confirm the accuracy of the WIP Report. The Borrower shall take any and all actions requested by the Lender or Inspector to enable the Inspector to make such verifications, including but not limited to taking such actions as are necessary to allow the Inspector access to the Projects. The Borrower shall pay the costs and expenses of such inspections, provided, however, that so long as a Potential Default or an Event of Default does not exist, the Borrower shall be required to pay for (i) not more than one (1) such inspection each month of the Development Work related to each Project with respect to which the Land acquisition and Development Work is being funded under the ABF Program, and (ii) not more than one (1) such inspection during each calendar quarter of each of the Homes in each of the Projects during each calendar quarter (the Lender anticipates that the Inspector will inspect approximately one-third (1/3) of all Homes in the ABF Program each month).

(c) Determination of Borrowing Base Value.

(1) The Lender shall determine the Borrowing Base Value, taking into account all Units then comprising the Borrowing Base Collateral (except the Excluded Units and except any Lots or Units excluded as a result of the occurrence of the applicable Project Maturity Date with respect to such Lots or Units), the status of construction, increases in the value of the Borrowing Base Collateral as reflected in the most recently generated WIP Report, decreases in the value of the Borrowing Base Collateral as a result of the release of Borrowing Base Collateral as a result of sales or otherwise, and adjustments to the value of the Borrowing Base Collateral based upon the reports the Lender receives from the Inspector and/or the Appraiser. For purposes of determining the Borrowing Base Value, the Borrower agrees that no value shall be assigned to any Excluded Units or to any Lots or Units which the Lender has excluded as a result of the occurrence of the applicable Project Maturity Date with respect to such Lots or Units. In addition, the Lender, in its sole discretion, may elect to exclude Lots or Units related to a Project in connection with the calculation of the Borrowing Base Value if the Lender determines that a Change in the Budget applicable to such Project has occurred as specified in Section 6.15(a) or Section 6.15(b) and the Borrower has not submitted to the Lender a revised Budget for such Project which has been approved by the Lender in its sole discretion.

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(2) For purposes of calculating the Borrowing Base Value, the following definitions shall be employed:

“Borrowing Base Lot Amount” shall mean, with respect to any Unit for which the land acquisition and Development Work is to be funded under the ABF Program, the amount which shall be allocated to such Lot included in the ABF Program for purposes of determining the Borrowing Base Value, which amount shall be equal to that amount which is determined by multiplying the Applicable ABF Lot Advance Rate times the Value of such Lot as a Finished Lot. The Borrowing Base Lot Amount shall be determined for each Lot and shall be set forth in the applicable Project Commitments.

“Borrowing Base Home Amount” shall mean the amount which shall be allocated to each Home included in the ABF Program for purposes of determining the Borrowing Base Value, which amount shall be equal that amount which is determined by multiplying the Applicable ABF Home Advance Rate times the Value of the Unit, and subtracting therefrom either the total amount of the Loan disbursed for the land acquisition and budgeted for the Development Work related to such Unit (if the land acquisition and Development Work for such Unit are funded outside of the ABF Program) or the applicable Borrowing Base Lot Amount for such Unit (if the land acquisition and Development Work for such Unit are funded under the ABF Program). The Borrowing Base Home Amounts shall be determined for each design type of Home and shall be set forth in the applicable Project Commitments.

“Applicable ABF Home Advance Rate” shall mean (i) with respect to a Unit in a Conventional Project, 80% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit, (ii) with respect to a Unit in a High Advance Rate Project, 85% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit, and (iii) with respect to a Unit in a Rolling Option Project, 80% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit.

“Applicable ABF Lot Advance Rate” shall mean, with respect to any Unit for which the land acquisition and Development Work is to be funded under the ABF Program, (i) with respect to a Lot in a Conventional Project, the lesser of 70% of the Value of such Lot as a Finished Lot or 85% of the cost of such Lot as a Finished Lot, (ii) with respect to a Lot in a High Advance Rate Project, 90% of the Value of

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such Lot as a Finished Lot, and (iii) with respect to a Finished Lot in a Rolling Option Project, 75% of the cost of such Finished Lot.

“Home Percentage Completed” shall mean, with respect to a Home, the percentage of the construction of the Home which has been completed, which such percentage shall be based upon the percentages in the Home Staged Draw Schedule and shall be set forth in the most recent WIP Report.

“Lot Percentage Completed” shall mean, with respect to any Unit for which land acquisition and Development Work is to be funded under the ABF Program, the percentage of the construction of the Development Work which has been completed, which such percentage shall be based upon the percentages in the Lot Staged Draw Schedule and shall be set forth in the most recent WIP Report.

(3) With respect to a Unit included in the ABF Program, on any date of determination, the Borrowing Base Value for such Unit shall be the sum of (i) the amount which is equal to the Borrowing Base Lot Amount for such Unit multiplied by the Lot Percentage Completed for such Unit, plus (ii) the amount which is equal to the Borrowing Base Home Amount for such Unit multiplied by the Home Percentage Completed for such Unit; provided, however, that (A) Excluded Units shall be excluded in determining the Borrowing Base Value, although such Excluded Units shall remain as part of the collateral for the Loan until any such Excluded Unit is released from the lien of the Deed of Trust in accordance with the terms of the Loan Documents and (B) any Units as to which the applicable Project Maturity Date has occurred shall be excluded in determining the Borrowing Base Value, although such Units shall remain as part of the collateral for the Loan until any such Lot or Unit is released from the lien of the Deed of Trust in accordance with the terms of the Loan Documents.

(4) The Borrowing Base Value for Units included in the ABF Program shall be adjusted by the Lender in its sole discretion (i) to reflect Units which have been removed as Borrowing Base Collateral, (ii) to reflect Units which have become Excluded Units or Units which are excluded as a result of the occurrence of the applicable Project Maturity Date with respect to such Units, (iii) to reflect additional construction of Development Work, as set forth in the most recently generated WIP Report, (iv) to reflect additional construction of the Homes, as set forth in the most recently generated WIP Report, (v) to reflect the addition of Additional Units as part of the Borrowing Base Collateral as approved by the Lender, and (vi) to reflect any change in

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Value based upon reports the Lender receives from the Inspector and/or the Appraiser or otherwise.

(d) Determination of Borrowing Base Allowable Disbursement Amount. The Lender shall determine the Borrowing Base Allowable Disbursement Amount, taking into account changes in the Borrowing Base Value as determined pursuant to Section 3.2(c) above and the Borrowing Base Outstanding Amount on any day of determination. The Borrowing Base Allowable Disbursement Amount is available for disbursement by the Lender to the Borrower subject to the terms and conditions for disbursement set forth in this Loan Agreement.

Section 3.3. Processes and Conditions Relating to Disbursements.

(a) All requests for disbursements of proceeds of the Loan shall comply with the terms of this Section 3.3 and any additional limitations set forth in this Loan Agreement and the Project Commitments. Disbursements related to the acquisition of Land and Development Work outside of the ABF Program with respect Projects shall be available two (2) times per month, subject to the provisions of Section 3.3(d) below. Disbursements related to the acquisition of Land, the construction of Development Work or the construction of Homes under the ABF Program shall be available daily subject to the provisions of Section 3.3(e) below.

(b) Each disbursement request shall be evidenced by a Draw Request Certification and, if such disbursement request includes costs for Development Work to be funded by advances of the Loan outside of the ABF Program, shall be accompanied by the following:

(1) with respect to requested disbursements for costs of Development Work, a written summary prepared by the Borrower, in detail acceptable to the Lender, of the billings of each subcontractor or vendor with respect to such Development Work for which a disbursement is being requested, and, upon request of Lender, copies of such billings of each such subcontractor or vendor;

(2) with respect to requested disbursements for costs of Development Work, a written certification from the Inspector to Lender, in a form satisfactory to Lender, that (i) the portion of the Development Work for which payment is being sought has been completed and (ii) all Development Work done for which payment is being sought shall have been completed with sound new materials and fixtures, or refurbished materials and fixtures that meet the requirements of the Plans and Specifications, and in a good and workmanlike manner;

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(3) with respect to requested disbursements for costs of Development Work, at Borrower’s expense, a “mechanics lien” endorsement to the Title Policy insuring that there are no liens imposed by law for services, labor or materials appearing in the public records, and insuring the full amount of the disbursement, provided that any such endorsement may show mechanics’ liens resulting from the Development Work if and only if the issuer of the Title Policy shall issue an endorsement which insures Lender against any loss by reason of such mechanics’ liens and Borrower shall have complied in all respects with the requirements of Section 6.18; and

(4) such other documents specified in the Project Commitment.

The foregoing submissions shall reflect the cost of all Development Work for which payment is to be made, and the Draw Request Certification shall specify the portion of such costs which will be paid out of the requested disbursement of Loan proceeds outside of the ABF Program, and, if any portion of such costs are to be paid by the Borrower, the portion of such costs to be paid by the Borrower.

(c) Each disbursement request related to the acquisition of Land, the construction of Development Work or the construction of Homes under the ABF Program shall specify a requested disbursement which is equal to or less than the Borrowing Base Allowable Disbursement Amount. In addition, if requested by the Lender, the Borrower shall provide the items described in Section 3.3(b) above with respect to the Development Work with respect to any Lots included in the Borrowing Base Collateral under the ABF Program.

(d) Provided that no Event of Default or Potential Default exists, and subject to the terms and conditions set forth herein, the Lender will use its reasonable best efforts to disburse to the Borrower the amount requested relating to the acquisition of Land and Development Work to be funded outside of the ABF Program within five (5) Business Days after receipt of a Draw Request Certification meeting the requirements of this Loan Agreement, provided that in the event the Lender is unable to make the disbursement within such time period, the Lender will disburse the proceeds of the Loan as soon thereafter as possible. All disbursements shall be delivered to Borrower by federal funds wire transfer as instructed by Borrower.

(e) Provided that no Event of Default or Potential Event of Default exists, and subject to the terms and conditions set forth herein, so long as the Lender receives a Draw Request Certification meeting the requirements of this Loan Agreement on or before 1:00 p.m. (Minneapolis time) on any Business Day, the Lender will use its reasonable best efforts to disburse to the Borrower the amount requested in such Draw Request Certification relating to the acquisition of Land, the construction of

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Development Work and construction of Homes under the ABF Program on the next Business Day following such Business Day on which the Lender received such Draw Request Certification, provided that in the event the Lender is unable to make the disbursement within such time period, the Lender will disburse the proceeds of the Loan as soon thereafter as possible. All disbursements shall be delivered to Borrower by federal funds wire transfer as instructed by Borrower.

(f) The obligation of Lender to make a disbursement requested by the Borrower of proceeds of the Loan or to attempt to arrange for issuance of a Letter of Credit for the account of the Borrower is subject to fulfillment of all of the following conditions precedent:

(1) No Event of Default or Potential Default has occurred and is continuing, or would result from such disbursement or from the application of the proceeds therefrom or as a result of the issuance of such Letter of Credit.

(2) Lender shall not be obligated to make any disbursement of the Loan related to a Project if such Project does not satisfy the project requirements set forth in the Project Commitment for such Project.

(3) Lender shall not be obligated to make any distribution of the Loan related to the acquisition of Land or Development Work to be funded outside of the ABF Program for a Project if the proceeds of the Loan which remain available for disbursement for such acquisition of Land and Development Work will not be sufficient to complete such acquisition of Land and the Development Work related to such Project; provided, however, that the Lender shall be obligated to make a disbursement notwithstanding such a deficiency in the event that (i) the Budget for the acquisition of the Land and the Development Work of such Project and the amount of the Loan available for such acquisition of the Land and such Development Work have been increased by an amount at least equal to such deficiency in accordance with the terms of Section 6.15(d), or (ii) the Borrower provides to the Lender evidence that it has paid from its own funds, in addition to any Borrower funds which the Budget for such Project requires, an amount at least equal to the amount of such deficiency.

(4) Lender shall not be obligated to make any disbursement of the Loan related to the acquisition of Land or the Development Work to be funded outside of the ABF Program for a Project to the extent that the related disbursement relates to costs which are not Qualified Acquisition and Development Expenditures for such Project.

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(5) Lender shall not be obligated to disburse any Loan proceeds to the extent that any liens (other than liens for real property taxes that are not yet delinquent) have been filed against the collateral, except as permitted by Section 6.18;

(6) Lender shall not be obligated to disburse any Loan proceeds unless all statements made in the applicable Draw Request Certification are true and correct on and as of the date of the requested disbursement, before and after giving effect thereto and to the application of the proceeds therefrom; and

(7) Lender shall not be obligated to disburse any Loan proceeds unless the representations and warranties of Borrower contained in the Loan Documents are true and correct in all material respects on and as of the date of the requested disbursement, before and after giving effect thereto and to the application of the proceeds therefrom, as though made on and as of such date.

(g) Lender shall not be obligated to make any disbursement of the Loan under the ABF Program unless the Lender shall have received from the Title Company, within ninety (90) days prior to such requested disbursement, a “date-down endorsement” with respect to the Title Policy relating to each Project for which Units are included in the Borrowing Base Collateral.

(h) Notwithstanding the failure of any condition precedent to Lender’s obligation to make any disbursement or to arrange for issuance of any Letter of Credit hereunder, Lender may make such disbursement or arrange for issuance of such Letter of Credit if Lender, in its sole discretion, determines the making or issuance of the same to be advisable. The making of any disbursement or the issuance of any Letter of Credit, either before or after the satisfaction of all conditions precedent with respect to Lender’s obligation to make the same, shall not be deemed to constitute an approval or acceptance by Lender of the Development Work or the Homes theretofore completed or a waiver of such condition with respect to a subsequent disbursement or a subsequent Letter of Credit.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

Section 4.1. Consideration. As an inducement to Lender to execute this Loan Agreement, make the Loan and disburse the proceeds of the Loan, Borrower represents and warrants to Lender the truth and accuracy of the matters set forth in this Article IV.

Section 4.2. Organization. Each of the Loan Parties is duly organized, validly existing and in good standing as a corporation under the laws of its state of incorporation, is

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duly qualified to do business and is in good standing in every jurisdiction where its business or properties require such qualification and has all requisite power and authority to own and operate its properties and to carry on its business as now conducted or proposed to be conducted.

Section 4.3. Authorization. The execution, delivery and performance by each of the Loan Parties of the Loan Documents to which it is a party have been duly authorized by all necessary action and do not and will not (i) contravene the Articles of Incorporation or charter documents of the Loan Parties; (ii) contravene any law, rule or regulation or any order, writ, judgment, injunction or decree or any contractual restriction binding on or affecting the Loan Parties; (iii) require any approval or consent of any partner, shareholder or any other Person other than approvals or consents which have been previously obtained and disclosed in writing to Lender; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which either of the Loan Parties is a party or by which either of the Loan Parties or its properties may be bound or affected; or (v) result in, or require the creation or imposition of, any lien of any nature (other than the liens contemplated hereby) upon or with respect to any of the properties now owned or hereafter acquired by either of the Loan Parties; and neither of the Loan Parties is in default in any material respect under any such law, rule, regulation, order, writ, judgment, injunction, decree or contractual restriction or any such indenture, agreement, lease or instrument.

Section 4.4. Governmental Consents. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by either of the Loan Parties of the Loan Documents to which it is a party or any other document executed pursuant thereto or in connection therewith.

Section 4.5. Validity. The Loan Documents have been duly executed and delivered by and constitute the legal, valid and binding obligations of the Loan Parties, enforceable in accordance with their respective terms.

Section 4.6. Financial Position. As of the dates prepared, the financial statements and all financial data heretofore delivered to Lender in connection with the Loan and/or relating to the Loan Parties are true, correct and complete in all material respects and were prepared in accordance with GAAP consistently applied. Such financial statements fairly present the financial position of the Persons who are the subject thereof as of the dates thereof.

Section 4.7. Governmental Regulations. Neither of the Loan Parties is subject to regulation under the Investment Company Act of 1940, the Federal Power Act, the Public Utility Holding Company Act of 1935, the Interstate Commerce Act, as the same may be

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amended from time to time, or any federal or state statute or regulation limiting its ability to incur Debt.

Section 4.8. Employee Benefit Plans. Neither of the Loan Parties maintains any pension, retirement, profit sharing or similar employee benefit plan that is subject to ERISA other than a plan pursuant to which such entity’s contribution requirement is made concurrently with the employees’ contributions.

Section 4.9. Securities Activities. Neither of the Loan Parties is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System in effect from time to time) and not more than twenty-five percent (25%) of the value of the assets of either of the Loan Parties consists of such margin stock.

Section 4.10. No Material Adverse Change. No Material Adverse Change has occurred since December 31, 2003.

Section 4.11. Payment of Taxes. All tax returns and reports required to be filed by each of the Loan Parties have been timely filed, or proper extensions for filing have been obtained, and all taxes, assessments, fees and other governmental charges upon each of the Loan Parties and its properties, assets, income and franchises which are due and payable have been paid when due and payable, or proper extensions for payment have been obtained, except to the extent that such taxes, assessments, fees and other governmental charges or the failure to pay the same would not be material to the respective business, properties, assets, operations, condition (financial or otherwise) or business prospects of such Loan Party. Neither of the Loan Parties has any knowledge of any proposed tax assessment against either of the Loan Parties that could be material to its business, properties, assets, operations, condition (financial or otherwise) or business prospects.

Section 4.12. Litigation. There is no pending or, to the knowledge of the Loan Parties, threatened action, suit, proceeding or arbitration against or affecting either of the Loan Parties before any court, governmental agency or arbitrator, which may result in a Material Adverse Change.

Section 4.13. Environmental Matters. The operations of each of the Loan Parties comply in all respects with all Hazardous Materials Laws except such noncompliance which would not (if enforced in accordance with applicable law) reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. As of the date of this Loan Agreement, (i) neither of the Loan Parties nor the present properties or operations of the Loan Parties is subject to any outstanding written order from or settlement or consent agreement with any governmental authority or other Person, nor is any of the foregoing

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subject to any judicial or docketed administrative proceeding respecting any Hazardous Materials Law, Hazardous Materials Claim or Hazardous Material, and (ii) there are no other conditions or circumstances known to either of the Loan Parties which may give rise to any Hazardous Materials Claim arising from the operations of either of the Loan Parties.

Section 4.14. No Burdensome Restrictions. Neither of the Loan Parties is a party to or bound by any contract or agreement, or subject to any charter or corporate restriction or any requirement of law, which would reasonably be expected to result in a Material Adverse Change.

Section 4.15. Full Disclosure. None of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of either of the Loan Parties in connection with the Loan Documents contains any untrue statement of a material fact, or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading; provided, however, that it is recognized by Lender that projections and forecasts provided and to be provided by Loan Parties, while reflecting the Loan Parties’ good faith projections or forecasts based upon methods and data the Loan Parties believe to be reasonable and accurate, are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results.

Section 4.16. Adequate Consideration. The Borrower represents and warrants to Lender that prior to the Loan Parties entering into the Loan Documents to which it is a party, each of the Loan Parties has reviewed the benefits to be provided to it as a result of the Lender making the Loan and has concluded that such benefits are reasonably equivalent in value to the collateral to be pledged to secure the Loan and the obligations assumed and to be assumed by the Loan Parties pursuant to the Loan Documents.

ARTICLE V

COVENANTS OF BORROWER

Section 5.1. Consideration. As an inducement to Lender to execute this Loan Agreement, make the Loan and make each disbursement of the Loan, Borrower hereby covenants as set forth in this Article V.

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Section 5.2. Affirmative Covenants. Unless Lender shall otherwise consent in writing, so long as any amount payable hereunder or under any other Loan Document shall remain unpaid or Lender shall have any commitment to disburse the Loan hereunder, Borrower shall, and Borrower shall cause each other Loan Party to:

(a) Reporting Requirements. Furnish or cause to be furnished to Lender the following notices and reports:

(1) Weekly, Monthly and Quarterly Reports. The following reports:

(A) On or before the fifth (5th) day after the end of each week, a weekly sales report for all of the Borrower’s construction and development projects, including, without limitation, the Projects; and

(B) Upon Lender’s written request, from time to time, a status report relating to the Projects which sets forth the progress of construction and actual costs of acquisition and development for each Project as compared with the Budget for such Project;

(2) Quarterly Financial Reports. As soon as possible and in any event within forty five (45) days after the end of each fiscal quarter of the Guarantor (other than the last quarter of any fiscal year), the following: (i) unaudited financial statements of the Guarantor and its Subsidiaries (including the Borrower) on a fully consolidated basis (and with respect to the Borrower, on a consolidating basis), which financial statements shall include (A) a balance sheet as at the end of such fiscal quarter and (B) statements of income and cash flow for the period from the beginning of the then current fiscal year to the end of such fiscal quarter and setting forth in comparative form figures for the corresponding period of the preceding fiscal year, all in reasonable detail and in accordance with GAAP consistently applied and certified by the President, Senior Vice President or Senior Vice President and Chief Financial Officer of the Guarantor to fairly present the financial condition of the Guarantor and its Subsidiaries (including the Borrower) on a fully consolidated basis (and with respect to the Borrower, on a consolidating basis) as at the end of such fiscal quarter and the results of the operations of the Guarantor and its Subsidiaries (including the Borrower) on a fully consolidated basis (and with respect to the Borrower, on a consolidating basis) for the period ending on such date; (ii) a summary report of accounts payable aging, and (iii) a written statement certifying that the Loan Parties are in compliance with the terms of the Loan Documents, or if the Loan Parties are not in compliance, specifying the details of the non-compliance and the action being taking to correct such non-compliance;

(3) Annual Financial Statements. As soon as possible and in any event within one hundred twenty (120) days after the end of each fiscal year of the Guarantor, audited financial statements of the Guarantor and its Subsidiaries (including the Borrower) on a fully consolidated basis (and with

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respect to the Borrower, on a consolidating basis), which financial statements shall include a balance sheet as at the end of such fiscal year, statements of income, shareholders’ equity and cash flow for such fiscal year, and setting forth in each case in comparative form figures for the preceding fiscal year, all in reasonable detail and in accordance with GAAP consistently applied accompanied by an unqualified opinion issued by an independent certified public accountant acceptable to Lender;

(4) Notice of Labor Controversy. As soon as possible and in any event within five (5) Business Days after Borrower has knowledge of its occurrence, written notice of any labor controversy resulting in a material strike, work stoppage, shutdown or other material labor disruption against or involving Borrower or any Project;

(5) Notice of Material Adverse Change. Promptly upon its occurrence, written notice and a description of any matter which has resulted, or will result, in a Material Adverse Change;

(6) Notice of Defaults or Potential Defaults. As soon as possible and in any event within five (5) Business Days after Borrower has knowledge of the occurrence of any Potential Default (however described) or Event of Default hereunder or an event of default (however described) under any other of the Loan Documents, written notice and a description of such Potential Default, Event of Default or event of default and the action which Borrower proposes to take with respect thereto;

(7) Notices of Default Regarding Other Development Projects. As soon as possible and in any event within five (5) Business Days after Borrower has knowledge of the occurrence of (i) any event of default under any loan or other financing facility, including seller financing, made for a development or construction project comparable to a Project and involving either of the Loan Parties, which event of default is likely to result in a Material Adverse Change, or (ii) any event of default under any other loan or credit agreement relating to other debt incurred by either of the Loan Parties, which event of default is likely to result in a Material Adverse Change, written notice and a description of such event of default under subparagraph (i) or (ii) above and the cure period and the action which Borrower proposes to take with respect thereto;

(8) Notice of Litigation. As soon as possible and in any event within five (5) Business Days after institution thereof, (i) written notice and a description of any adverse litigation, action or proceeding relating to any Project or (ii) written notice and a description of any other adverse litigation,

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action or proceeding commenced against either of the Loan Parties which would, if adversely determined against such Loan Party, result in a Material Adverse Change;

(9) Notices Regarding Hazardous Materials. Promptly upon its occurrence, written notice and a description of the Release of any Hazardous Material, or any liability with respect thereto, on, under or in connection with a Project and the action which Borrower proposes to take with respect thereto;

(10) Notices Regarding Projects. Promptly and in any event within five (5) Business Days after receipt by Borrower, copies of all (i) notices of violation relating to and adversely affecting any Project that Borrower receives from any governmental agency or authority, (ii) notices of default that Borrower receives under the Construction Agreements or any other agreement relating to and adversely affecting any Project, and (iii) notices of default that Borrower receives under any agreement relating to the borrowing of money by Borrower for any Project from any Person; and

(11) Other Information. Such other information respecting the business, properties, assets, operations and condition, financial or otherwise, of the Loan Parties and the Projects, including, without limitation, copies of Project construction and sales reports and information to verify the calculation and accuracy of the Gross Selling Price for Units, all as Lender may from time to time reasonably request.

(b) Compliance with Laws, Etc. Comply in all material respects, with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which is likely to result in a Material Adverse Change.

(c) Payment of Taxes and Claims. Pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or profits before any penalty accrues thereon, and all other claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a lien upon any of its properties or assets. Notwithstanding the foregoing, either of the Loan Parties may, at its expense, contest the validity or application of any such taxes, assessments, other governmental charges and other claims by appropriate legal proceedings promptly initiated and diligently conducted in good faith, provided that, with respect to mechanic’s liens for any Project, Borrower complies with the terms and requirements of Section 6.18 of this Loan Agreement.

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(d) Maintenance of Properties; Books and Records. Maintain or cause to be maintained:

(1) in good repair, working order and condition all properties and assets material to the continued conduct of the business of either of the Loan Parties, and from time to time make or cause to be made all necessary repairs, renewals and replacements thereof; and

(2) proper books, records and accounts in which full, true and correct entries in accordance with GAAP consistently applied are made of all financial transactions and matters involving its assets and business.

(e) Maintenance of Existence. Maintain and preserve its existence and all rights, privileges, qualifications, permits, licenses, franchises and other rights material to its business.

(f) Further Assurances. Execute and deliver at any time and from time to time any and all instruments, agreements and documents, and shall take such other action as Lender reasonably requires to maintain, perfect or insure Lender’s security provided for under the Loan Documents, including, without limitation, the execution of amendments to the Loan Documents.

(g) Management. At all times, maintain professional and qualified management and staff, as determined in the reasonable discretion of the Borrower, to manage, operate and maintain the Projects.

Section 5.3. Negative Covenants. So long as any amount payable hereunder or any other Loan Document still remains unpaid or Lender shall have any commitment to disburse the Loan hereunder, Borrower shall not, unless Lender shall otherwise consent in writing:

(a) Liens. Subject to the rights of the Borrower pursuant to this Loan Agreement, create, assume or suffer to exist any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon the collateral for the Loan assigned to Lender by Borrower pursuant to the Project Security Instruments, excluding, however, liens for taxes and assessments which are not yet delinquent.

(b) Sales, Etc. of Assets; Ownership of Collateral. Make any material transfer, pledge or hypothecation of (i) any assets of the Borrower (in a single transaction or a series of related transactions) other than to secure real estate loans to other lenders in the normal course of business or other transfers in the ordinary course of business, or (ii) any of the collateral for the Loan assigned to Lender pursuant to

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the Project Security Instruments; provided, however, that the foregoing restriction shall not apply to any sale of a Lot or a Sold Unit in the ordinary course of the business of the Borrower; provided further, however, that in no event shall the Borrower be allowed to grant subordinate liens or security interests on the Projects.

(c) Change in Nature of Business. Make any change in the nature of its business as carried on at the date hereof.

(d) Land Banking or Land Speculation. Permit the use of Loan proceeds for Land Banking or Land Speculation.

(e) Use of Proceeds. Use any part of the proceeds of the Loan to (i) purchase or carry any margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), (ii) repay or otherwise refinance indebtedness of Borrower or others incurred to purchase or carry any margin stock, (iii) extend credit for the purpose of purchasing or carrying any margin stock, or (iv) acquire any security in any transaction that is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended, and regulations promulgated thereunder.

Section 5.4. Financial Covenants. Borrower shall cause the Guarantor to comply with each of the following financial covenants:

(a) Tangible Net Worth. The Guarantor and its Subsidiaries (including the Borrower) shall maintain at all times a Tangible Net Worth equal to or in excess of the amount set forth below opposite the applicable period set forth below:

Applicable Period	Minimum Tangible Net Worth Amount
As of June 30, 2004	$200,000,000
September 30, 2004 and each calendar quarter thereafter	The Required Tangible Net Worth Amount

As used in this Section 5.4, the “Required Tangible Net Worth Amount” for any given calendar quarter shall be an amount equal to the sum of the minimum Tangible Net Worth required under this Section 5.4 as of the immediately preceding calendar quarter plus fifty percent (50%) of the Net Income realized by the Guarantor and its Subsidiaries (including the Borrower) during the then-ended calendar quarter (with any net loss counting as zero in such calculation).

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(b) Ratio of Total Liabilities to Tangible Net Worth. The Guarantor and its Subsidiaries (including the Borrower) will maintain at all times the ratio of its Total Liabilities (exclusive of consolidated liabilities of variable interest entities) to Tangible Net Worth of not more than 3.50 to 1.00.”

Section 5.5. Insurance. Borrower shall maintain or cause its contractors to maintain the insurance required by the terms of this Loan Agreement and shall deposit with Lender original, duplicate original or certified copies of insurance certificates issued by insurance companies with current Best’s Key Ratings of not less than A/IX and written in form and content acceptable to Lender, providing the following minimum insurance coverages:

(a) For each Project, all-risk course of construction insurance (non-reporting form) in the minimum amount of the proposed construction cost for such Project on a replacement cost basis against loss or damage by hazards customarily included within “extended coverage” policies, and any other risks or hazards which in Lender’s reasonable judgment should be insured against, with a Lender’s Loss Payable Endorsement naming Lender as a mortgagee together with a full replacement cost endorsement (without provisions for co-insurance).

(b) “Comprehensive General Liability” insurance in the minimum “general aggregate” amount of Two Million Dollars ($2,000,000), in the minimum “occurrence” limit of One Million Dollars ($1,000,000) and in the minimum “umbrella” amount of Ten Million Dollars ($10,000,000), all against claims for “personal injury” liability, including bodily injury, death or damage to the project liability, including completed operations and contractual liability and also including owners’ and contractors’ protective coverage naming Lender as an additional insured.

(c) Workers’ compensation insurance as prescribed by the laws of each state in which the Borrower is required to maintain such insurance, and employers’ liability with limits as prescribed by law.

(d) For each Project, flood insurance in the maximum amount of the proposed land acquisition, development work and home construction cost for such Project or the maximum coverage available, whichever is less, designating Lender as payee, or evidence satisfactory to Lender that the Project is not located within an area designated as within the 100 year flood plain under the National Flood Insurance Program.

(e) Insurance with respect to its properties, assets and business against loss or damage of the kinds customarily insured against by Persons of established reputation engaged in the same or similar business and similarly situated, of such

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types and in such amounts as are customarily carried under similar circumstances by such other Persons, all in accordance with reasonably prudent industry standards.

Each policy of insurance required under this Section 5.5 shall contain the “standard non-contributory mortgagee clause” and the “standard lenders’ loss payable clause,” or their equivalents, in favor of Lender and/or its assignees, and shall provide that it shall not be modified or canceled without thirty (30) days’ prior written notice to Lender. Borrower shall also furnish Lender with receipts for the payment of premiums on such policies or other evidence of such payment reasonably satisfactory to Lender. In the event Borrower does not deposit with Lender a new policy of insurance with evidence of payment of premiums thereon at least thirty (30) days prior to the expiration of any expiring policy, then Lender may, but shall not be obligated to, procure such insurance, and Borrower shall pay the premiums thereon to Lender promptly upon demand. If the Borrower has a blanket insurance policy in force providing coverage for several properties of the Borrower, the Lender will accept a certificate of such insurance together with a copy of such blanket insurance policy and a Lender’s Loss Payable Endorsement naming Lender as a mortgagee, provided that the certificate identifies all of the Projects and sets forth the coverage and amounts of insurance and such coverage and amounts of insurance comply with each of the requirements set forth in this Section 5.5. Lender shall not, by the fact of approving, disapproving, accepting, preventing, obtaining or failing to obtain any such insurance, incur any liability for the form or legal sufficiency of insurance contracts, solvency of insurers or payment of losses, and Borrower hereby expressly assumes full responsibility therefor and all liability related thereto, if any.

Section 5.6. Prohibited Transfers. Borrower shall not, and shall not cause, allow or permit a Transfer without the prior written consent of Lender, which consent may be withheld or conditioned in Lender’s absolute discretion. To the extent any Transfer consented to by Lender involves any of the Projects of Borrower or any of Borrower’s obligations under the Loan Documents, any permitted transferee shall, as a condition of the effectiveness of any consent by Lender hereunder, assume all of Borrower’s obligations under the Loan Documents and agree to be bound thereby. Such assumption shall not, however, release Borrower from any liability under the Loan Documents. Consent to any Transfer by Lender shall not be deemed a waiver of Lender’s right to require such consent to any further or future Transfers. The foregoing provisions shall not apply to sales of the Lots and Homes to home buyers in the ordinary course of Borrower’s business.

ARTICLE VI

THE PROJECTS

Section 6.1. Consideration. As an inducement to Lender to execute this Loan Agreement and to make each disbursement of the Loan, Borrower represents and warrants to

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the truth and accuracy of the matters regarding each Project set forth in this Article VI and hereby covenants regarding each Project as set forth in this Article VI. With respect to a future Project, Borrower represents and covenants to the truth and accuracy of the matters regarding such Project set forth in this Article VI and covenants regarding such Project as set forth in this Article VI from and after the point in time when Lender issues a Project Commitment to Borrower with respect to such Project.

Section 6.2. Title to the Projects. Borrower is, or will be upon acquisition of the Land related to each Project and the construction of the Development Work and Homes related to each Project, the sole legal and beneficial owner of such Land, Development Work and Homes, free and clear of all claims, liens and encumbrances other than Permitted Exceptions. All of the personal property which forms a part of such Development Work and Homes is or will be vested solely in Borrower, free and clear of all claims, liens and encumbrances, and the security interest of Lender in such personal property is a first lien thereon.

Section 6.3. No Prior Liens or Claims. Except as otherwise may have been approved in writing by Lender and as to which Lender shall have received such endorsements (including mechanics lien coverage) to the Title Policy as Lender may require to assure the priority of the Deed of Trust as a valid first lien on each Project, Borrower represents that, prior to recordation of the Deed of Trust, neither it, nor anyone acting on Borrower’s behalf has (i) commenced construction of the Development Work or the Homes, or any grading or site clearance related thereto, (ii) purchased, contracted for or otherwise brought upon the Land related to any such Project any materials, specially fabricated or otherwise, to be incorporated into the Development Work or the Homes related to any such Project, or (iii) entered into any contract or arrangement, the performance of which by any other party thereto could give rise to a lien or claim on any such Project or any portion thereof.

Section 6.4. Access to the Projects. All roads, streets, traffic turn lanes, and access ways necessary for the full utilization of each Project for its intended purpose have either been completed or the necessary rights of way have either been acquired or conditionally approved for acquisition by the appropriate governmental authority or have been dedicated to or conditionally approved for dedication for public use and by the appropriate governmental authority, and all necessary steps have been taken by Borrower and the appropriate governmental authority to assure the complete construction and installation thereof by the time needed for construction and/or occupancy and operation of each such Project.

Section 6.5. Compliance with Project Requirements and Laws and Regulations. Each Project, the proposed and actual use thereof, the Development Work and the Homes related thereto, when completed, will comply with the Project Requirements and with the Laws and Regulations, and there is no action or proceeding pending or, to the knowledge of Borrower (after due inquiry), threatened before any court, quasi-judicial body or administrative agency

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at the time of any disbursement by Lender relating to the validity of the Loan or the proposed or actual use of any Project.

Section 6.6. Covenants, Zoning, Codes, Permits and Consents. Borrower is familiar with and has complied with, or will comply with, all of the Laws and Regulations to be complied with in connection with the construction of the Development Work and the Homes related to each Project. Except as set forth in the Project Commitment applicable to each Project, all permits, licenses, consents, approvals or authorizations by, or registrations, declarations, withholding of objections or filings with any governmental body necessary in connection with the valid execution, delivery and performance of the Loan Documents, and any and all other documents executed in connection with any of the foregoing, necessary for the subdivision of the Land related to each such Project, necessary for the construction of the Development Work and the Homes related to each such Project, and necessary for the marketing and sale of the Homes related to each such Project, have been obtained or will be obtained on a timely basis and are or will be valid, adequate and in full force and effect. Construction of the Development Work and the Homes related to each such Project and the intended use thereof will in all respects conform to and comply with all Laws and Regulations, including without limitation all applicable zoning, subdivision, environmental protection, use and building codes, laws, regulations and ordinances.

Section 6.7. Utilities. All utility services and facilities necessary for the construction, sale and occupancy of each Project and the operation thereof for its intended purpose are either available at the boundaries of the Land related to each such Project, or, if not, all necessary steps have been taken by Borrower and the local authority or public utility company which provides such services to assure the complete installation and availability thereof when needed for construction, sale, occupancy and operation of each such Project.

Section 6.8. Map, Permits. Licenses and Approvals. Borrower has obtained, or will in a timely manner obtain, a Map for each Project. Borrower shall properly comply with and keep in effect each Map and all permits, licenses and approvals which are required to be obtained from governmental bodies in order to construct, occupy, operate, market and sell each such Project. Borrower shall promptly deliver copies of each Map and all such permits, licenses and approvals to Lender.

Section 6.9. Approval of Plans and Specifications and Approval of Budgets.

(a) The Development Work Plans and Specifications for each Project are a true, complete and accurate reflection of the Development Work that Borrower will construct with respect to such Project. The Home Plans and Specifications for each Project are a true, complete and accurate reflection of the Homes that the Borrower will construct with respect to such Project. The Plans and Specifications for each Project are satisfactory to Borrower and have been reviewed and approved by

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Borrower and the general contractor for such Project (if different from the Borrower), and have also been approved, or will be approved in a timely manner, as required by all governmental bodies or agencies having jurisdiction (including, without limitation, any local design review boards) and by the beneficiary of any restrictive covenant affecting such Project. There are no structural defects in the Development Work or the Homes as shown in the Plans and Specifications for any Project, and no violation of any of the Laws and Regulations exists with respect to the Plans and Specifications for any Project.

(b) After diligent investigation of all relevant conditions and due consultation with such parties as Borrower deems appropriate, Borrower represents that the Budget for each Project identifies on a line item basis all costs to be incurred in connection with the Development Work and the Homes for such Project and all costs for which proceeds of the Loan are to be disbursed. The Budget for each Project reflects Borrower’s best, true, accurate and complete estimate of the costs shown therein and of the costs estimated to be necessary to construct the Development Work and the Homes for such Project in accordance with the Plans and Specifications for such Project.

Section 6.10. Adequacy of Acquisition and Development Amount. With respect to each Project as to which Qualified Acquisition and Development Expenditures will be funded outside of the ABF Program, the aggregate amount of the Acquisition and Development Amount is sufficient to pay all costs of the acquisition of the Land and all costs of the Development Work for such Project in accordance with the Development Work Plans and Specifications and all remaining costs related thereto, except as has been specifically disclosed to and approved in writing by Lender.

Section 6.11. Construction Start and Completion. Borrower shall commence construction of the Development Work and the Homes for each Project no later than the date set forth in the Project Commitment and shall thereafter diligently proceed with construction and completion of the Development Work and the Homes in a good and workmanlike manner in accordance with the Plans and Specifications for such Project and the Construction Progress Schedule for such Project; provided however that in the event construction of a Project is subject to delays caused by any Force Majeure Event, the Borrower shall provide to the Lender written notice of such delay, and if such delay will not exceed one hundred twenty (120) days in the aggregate or is otherwise reasonable in length, the Borrower shall not be deemed in default of its obligations assumed pursuant to this Loan Agreement solely by reason of such delay. The Borrower shall cause the Development Work and the Homes for each Project at all times to materially conform to the Laws and Regulations and shall accomplish completion of the Development Work and the Homes of such Project in accordance with the Construction Progress Schedule for such Project. Borrower shall

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cooperate at all times with Lender in bringing about the timely completion of each element of the Development Work and the Homes for each Project, and Borrower shall resolve all disputes arising during the work of construction in a manner which shall allow work to proceed expeditiously.

Section 6.12. Personal Property Incorporation. All personal property for which Lender advances Loan proceeds for a Project is to be stored on the Land for such Project and in Lender’s judgment must be reasonably secure from damage and theft and fully insured at all times.

Section 6.13. Contractors and Contracts. Upon demand by Lender, the Borrower shall furnish to Lender, from time to time, correct lists of all contractors and subcontractors employed in connection with the Development Work and the Homes for each Project. Each such list shall show the name, address and telephone number of each such contractor or subcontractor, a general statement of the nature of the work to be done, the labor and materials to be supplied, the names of materialmen, if known, and the approximate dollar value of such labor, work and materials with respect to each. Upon an Event of Default, Lender shall have the right, and at any time the Inspector shall have the right (in both cases without either the obligation or the duty), to contact directly each contractor, subcontractor and materialman to verify the facts disclosed by said list or for any other purpose.

Section 6.14. Evidence of Ownership of Materials. If requested by Lender, Borrower shall promptly deliver to Lender any bills of sale, statements, receipts, contracts or agreements under which Borrower claims title to any materials, fixtures or articles incorporated into the Development Work and the Homes of any Project.

Section 6.15. Changes to Plans and Specifications and Budgets.

(a) The following Changes, whether made by change order or otherwise, to any of (i) the Budget for a Project or the schedule of the costs of the Homes for a Project, (ii) the Plans and Specifications for a Project and/or (iii) working drawings relating to the Development Work or Homes of a Project, shall require the prior written approval of the Lender:

(1) any Change which, together with all prior increases, will result in an increase to the total Budget for the Development Work of a Project of five percent (5%) or more, it being understood that the foregoing shall not apply to increases to particular line items of such Budget unless such increase to the line item will result in an increase to such total Budget for the Development Work of five percent (5%) or more; and

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(2) any Change which, together with all prior decreases, will result in a decrease to the total Budget for the Development Work of a Project of five percent (5%) or more, it being understood that the foregoing shall not apply to decreases to particular line items of such Budget unless such decrease to the line item will result in a decrease to such total Budget for the Development Work of five percent (5%) or more; provided, however, that the Borrower shall not offset against each other increases and decreases in such total Budget for the Development Work, it being the intent that an increase or a decrease in such total Budget for the Development Work which meets either the threshold set forth in subparagraph (a)(1) or the threshold set forth in this subparagraph (a)(2) shall require the prior approval of the Lender.

(b) As a condition to its approval of any Change described in subparagraph (a), Lender may require verification that such Change:

(1) is a Change as to which the Borrower has complied with the terms of subparagraph (d) of this Section 6.15;

(2) will not adversely affect the value of Lender’s security;

(3) is not a material change in structure, design, exterior appearance, square footage, or function;

(4) would not cause an increase in any line item or category of such Budget in excess of the contingencies (if any) specifically contained in such Budget for that line item or category; and

(5) would be consistent with the Laws and Regulations.

Lender is under no duty to review or inform Borrower of the quality or suitability of the Plans and Specifications for any Project, any contract or subcontract or any changes thereto. Without limitation of the foregoing, Borrower shall obtain Lender’s prior written approval of any alteration in the Plans and Specifications for any Project which might adversely affect the value of Lender’s security or which, regardless of cost, is a material change in structure, design, function or exterior appearance.

(c) Borrower agrees to provide Lender with copies of all change orders, together with all additional documents that Lender may require in order to evaluate a request for approval of a Change of a type described in subparagraph (a) above. These documents may include the following: (i) a written description of the Change and related working drawings and (ii) a written estimate of the cost of the Change and

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the time necessary to complete it. Lender may take a reasonable time to evaluate any requests for approval of a Change, and may require that all other approvals required from other parties be obtained before it reviews any requested Change; provided however that to the extent the Lender’s consent is required by a governmental entity prior to such governmental entity giving its consent, Lender shall not require that all other approvals required from other parties be obtained before it reviews any requested Change. Lender may approve or disapprove Changes in the exercise of its reasonable judgment. Borrower acknowledges that delays may result, and agrees that so long as any delays caused by Lender are not unreasonable in duration, they shall not affect Borrower’s obligation to complete each element of the Development Work and the Homes of a Project in accordance with the Construction Progress Schedule for such Project.

(d) In the event that either:

(1) the proceeds of the Loan which are available for disbursement for the Development Work outside of the ABF Program for a Project will not be sufficient to complete such Development Work for such Project as scheduled; or

(2) the costs of the Development Work for such Project have increased over the amount set forth in the Budget for such Development Work by an amount in excess of the amount set forth in subparagraphs (a)(1) or (a)(2),

then the Borrower shall submit to the Lender a revised budget for such Project, and if the Qualified Acquisition and Development Expenditures for such Project are to be funded outside of the ABF Program, the Borrower shall also submit to the Lender (i) a request that the Lender approve an increase in the Acquisition and Development Amount for such Project, which request the Lender may approve or disapprove in its absolute and sole discretion, or (ii) evidence that the Borrower has sufficient funds to pay the increased costs, in which event the Lender shall not be obligated to disburse additional amounts of the Loan pursuant to the provisions of Section 3.1 until such time as the Borrower provides to the Lender evidence that it has paid from its own funds, in addition to any Borrower funds which the Budget for such Project requires, an amount at least equal to the increase; provided however that in the event Borrower provides to Lender the required evidence, as set forth in the preceding provision, Lender shall make additional disbursements of proceeds of the Loan, subject to the terms and conditions of the Loan Documents. Any such revised Budget for such Project submitted to the Lender shall be accompanied by a written report from the Inspector stating that the Inspector has reviewed and approved such revised Budget.

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(e) In addition to obtaining the prior written approval of the Lender in connection with any Change described in this Section 6.15, the Borrower shall also obtain, to the extent that such approvals may be required, (i) the approvals of the appropriate governmental authorities to any Change and (ii) from the appropriate persons or entities approvals of any alterations in the Map for such Project, the Plans and Specifications for such Project or any work, materials or contracts for such Project that are required by any of the Laws and Regulations or under the terms of the Project Commitment for such Project or the other Loan Documents.

Section 6.16. Lender Inspections, Appraisal and Information. During normal business hours, the Borrower shall arrange for the Lender, the Inspector or any other authorized representative of Lender, at the reasonable expense of Borrower, to visit, inspect or appraise each Project, the materials to be used thereon or therein, contracts, records, plans, specifications and shop drawings relating thereto, whether kept at Borrower’s offices or at the construction site for such Project or elsewhere, and the books, records, accounts and other financial and accounting records of Borrower wherever kept, and to make copies and take extracts thereof and therefrom as often as may be requested at Borrower’s cost and expense. Borrower will cooperate with Lender to enable the Lender, the Inspector or such other authorized representatives of the Lender to conduct such visits, inspections and appraisals. The costs of the Inspector and the other authorized representatives of the Lender, and of such inspections and appraisals shall be borne by Borrower and shall be paid within thirty (30) days of Borrower’s receipt of any invoice with respect thereto.

Section 6.17. Correction of Defects. If Lender in its reasonable judgment determines that any Development Work, Homes or materials related to a Project fail to conform to the Map for such Project, any Laws and Regulations applicable to such Project, the Plans and Specifications for such Project or sound building practices, or that they otherwise depart from any of the requirements of this Loan Agreement, Lender may require the work to be stopped and withhold disbursements until the matter is corrected. If this occurs, Borrower shall promptly correct the work to Lender’s reasonable satisfaction, and pending completion of such corrective work shall not allow any other work which is dependent upon or directly related to the work requiring correction to proceed. No such action by Lender shall affect Borrower’s obligation to complete each element of the Development Work and the Homes for such Project within the times required by this Loan Agreement. The advance of any Loan proceeds shall not constitute a waiver of Lender’s right to require compliance with this covenant.

Section 6.18. Protection Against Lien Claims.

(a) Borrower shall pay and discharge, or cause to be paid and discharged, promptly and fully all claims for labor done and materials and services furnished in connection with the Development Work and the Homes for each Project, and take or

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cause to be taken all reasonable steps to forestall the assertion of claims of lien against each such Project or any part thereof. Upon the request of the Lender, Borrower shall obtain a lien waiver with respect to each payment by or to the Borrower and each of the various subcontractors and materialmen (and the major subcontractors and submaterialmen under them) for each Project, and Lender, at any time, at its option, may require that Borrower make any payments for which disbursements are made hereunder by joint check made payable to the Borrower and the subcontractor or sub-subcontractor for whose account such payment is to be made, as joint payees.

(b) Nothing herein contained shall require Borrower to pay any claims for labor, materials, or services which Borrower in good faith disputes and which Borrower, at its own expense, currently and diligently contests, provided that, for each such case where a claim of lien in excess of Five Thousand Dollars ($5,000) has been filed, within thirty (30) days after the Borrower’s actual receipt of notice of filing of any such claim of lien, the Borrower shall take one of the following actions with respect to such claim of lien: (1) record or cause to be recorded in the office of the recorder of the applicable county where such Project is located a surety bond sufficient to release said claim of lien, or (2) make or cause to be made a deposit of cash in the amount of 150% of the claim of lien with Lender; or (3) deliver or cause to be delivered to Lender a specific endorsement to the Title Policy which insures Lender against any loss by reason of such claim of lien, or (4) deliver or cause to be delivered to Lender such other assurance as may be acceptable to Lender; provided, however, that in the event the aggregate amount of claims filed with respect to a Project exceeds Twenty-Five Thousand Dollars ($25,000), Borrower shall be required to take one of the actions specified in (1) through (4) with respect to all subsequent claims for such Project, regardless of amount.

Section 6.19. Conveyance, Lease or Encumbrance. Borrower shall not sell, agree to sell, convey, transfer, dispose of or further encumber any Project or any portion thereof or interest therein (other than the sale of Lots and Units on and subject to the terms of this Loan Agreement), or enter into a lease covering all or any portion thereof or interest therein, either voluntarily, involuntarily or otherwise, or enter into an agreement to do so, without the prior written consent of Lender being first had and obtained. All easements, declarations, covenants, conditions, restrictions and dedications affecting any Project shall be submitted to Lender for its approval, accompanied by a drawing or survey showing the precise location thereof, and such approval shall be obtained prior to the execution or granting of any thereof by Borrower. Borrower shall not execute any lease of any portion of any Project without the prior written consent of Lender. Borrower shall promptly notify Lender of any event of default or cancellation under any lease now or hereafter in effect.

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Section 6.20. Security Instruments. From time to time, upon the request of Lender, Borrower shall execute and deliver to Lender a security instrument or instruments naming Lender as secured party covering all contracts of any kind entered into in connection with the Development Work or the Homes for each Project and all other property of any kind whatsoever owned by the Borrower and used, or to be used, in the use and enjoyment of each Project and concerning which Lender may have any doubt as to its being subject to the lien of the Project Security Instruments.

Section 6.21. Further Assurances; Cooperation. Borrower will at any time and from time to time upon request of Lender take or cause to be taken any action, execute, acknowledge, deliver or record any further documents, opinions, mortgages, security agreements, financing statements or other instruments or obtain such additional insurance as Lender in its discretion deems necessary or appropriate to carry out the purposes of this Loan Agreement and to preserve, protect and perfect the security interest intended to be created and preserved in each Project and the Development Work and the Homes of each Project.

Section 6.22. Negative Covenants. So long as any amount payable under any Loan Document still remains unpaid or Lender shall have any commitment to disburse the Loan hereunder, Borrower shall not, unless Lender shall otherwise consent in writing (i) create, assume or suffer to exist any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon the collateral for the Loan assigned to Lender by Borrower pursuant to the Project Security Instruments, or (ii) sell, lease, transfer or otherwise dispose of any of the collateral for the Loan assigned to Lender by Borrower except in the ordinary course of business.

Section 6.23. Signs. Upon the request of Lender, Borrower shall erect and place on or in the vicinity of each Project a sign or signs indicating that Lender has provided construction financing for such Project. Said sign(s) shall remain the property of Lender and shall be required to be removed only after the Development Work and the Homes for such Project have been completed.

Section 6.24. Letters of Credit.

(a) Subject to the terms and conditions set forth in this Section 6.24 and elsewhere in this Loan Agreement, the Lender agrees to use its best efforts to arrange for the issuance by GMAC of Letters of Credit requested by the Borrower, in substantially the form of Exhibit F to this Loan Agreement, subject to the following conditions: (i) the Lender, in its sole discretion, shall have approved the issuance of any such requested Letter of Credit, and such Letter of Credit is to be issued for the exclusive purpose of providing security to a seller in lieu of a cash deposit with respect to a proposed purchase of land by the Borrower or by an affiliate of the Borrower from such seller or for such other purpose as the Lender shall have

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approved in its sole discretion, (ii) the Letter of Credit Amount shall not exceed Fifteen Million Dollars ($15,000,000) at any time, (iii) the Lender shall not arrange for the issuance of any such requested Letter of Credit if, after giving effect to the issuance of such Letter of Credit, the outstanding principal balance of the Loan and the Letter of Credit Amount would exceed the Loan Amount, (iv) the Lender shall not arrange for the issuance of any such requested Letter of Credit if, after giving effect to the issuance of such Letter of Credit, the Letter of Credit Amount would exceed fifty percent (50%) of the outstanding principal balance of the Loan, (v) the Lender shall not arrange for the issuance of any such requested Letter of Credit which would have an expiry date which is more than one (1) year from the date of issuance of such Letter of Credit or which is later than the Approval Period Termination Date, and (vi) the Lender shall not attempt to arrange for the issuance of any such requested Letter of Credit if GMAC is unable or unwilling to issue such requested Letter of Credit.

(b) Whenever the Borrower desires to obtain issuance of a Letter of Credit, the Borrower shall request the same by written notice to the Lender, which notice shall specify the requested amount of such Letter of Credit, the requested beneficiary of such Letter of Credit and the purpose of such requested Letter of Credit, together with all relevant information related to the requested Letter of Credit, including, without limitation, a copy of the related land purchase agreement, and such other information related to such requested Letter of Credit as the Lender shall request. If requested by the Lender, the Borrower shall execute such letter of credit applications, agreements and other documentation as the Lender may require on the forms provided by the Lender. Upon the Lender’s approval of a requested Letter of Credit and upon satisfaction of all other conditions to issuance of such Letter of Credit set forth in this Loan Agreement, the Lender shall request that GMAC issue and deliver the requested Letter of Credit; provided, however, in no event shall the Lender have any liability to the Borrower or to any other Person in the event GMAC does not issue or deliver the Letter of Credit as requested. In the event that GMAC advises the Lender that GMAC will not issue a requested Letter of Credit, the Lender shall promptly notify the Borrower of GMAC’s determination not to issue the requested Letter of Credit.

(c) The Borrower hereby agrees to pay to the Lender, for each Letter of Credit, a fee equal to the sum of (i) one and one-fourth of one percent (1.25%) per annum of the face amount of such Letter of Credit for the period commencing on the date of issuance of such Letter of Credit and ending on the expiry day of such Letter of Credit, and (ii) the fees, if any, required by GMAC for issuing such Letter of Credit. In the event that GMAC advises the Lender that GMAC will charge a fee for issuing any requested Letter of Credit, the Lender shall promptly notify the Borrower of the amount of such fee prior to issuance of such requested Letter of Credit. The foregoing letter of credit fees shall be payable in advance to the Lender prior to

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issuance of such Letter of Credit. In addition to the foregoing fees, the Borrower shall pay to the Lender, on written demand by the Lender, all administrative fees charged by the Lender or GMAC in connection with the honoring of drafts under such Letter of Credit and all other activity with respect to such Letter of Credit.

(d) The Borrower and the Lender acknowledge and agree as follows:

(1) The Lender is not obligated to provide, obtain or procure any Letter of Credit;

(2) The Lender’s sole obligation to the Borrower with respect to the Letters of Credit are as set forth in this Loan Agreement and the other Loan Documents;

(3) The Lender has an absolute right to decline approval for any requested Letter of Credit if (i) any Event of Default or Potential Default has occurred and is continuing, or (ii) the Lender decides, in its sole discretion for any reason, not to approve the requested Letter of Credit.

(e) The Borrower hereby irrevocably agrees to reimburse the Lender with respect to all amounts drawn on any Letter of Credit plus any and all reasonable charges and expenses incurred relative to any such drawing on any such Letter of Credit (all such amounts with respect to any such Letter of Credit are hereinafter referred to, collectively, as the “Obligation of Reimbursement” with respect to such Letter of Credit). Subject to all of the terms and conditions set forth in this Agreement, in the event the Borrowing Base Allowable Disbursement Amount (excluding any reduction thereto attributable to the Obligation of Reimbursement related to any given Letter of Credit) is sufficient to permit the Borrower to request a disbursement of the Loan under the ABF Program for the purposes of repaying the Obligation of Reimbursement with respect to such Letter of Credit, then the Borrower may request a disbursement under the ABF Program for the purpose of repaying the Obligation of Reimbursement with respect to such Letter of Credit. In addition, in the event that the Obligation of Reimbursement with respect to such Letter of Credit has not been fully repaid within five (5) Business Days following any drawing under such of Letter of Credit, the Lender, without any request from or notice to the Borrower, is hereby irrevocably authorized to (but has no obligation to) make a disbursement of the Loan in an amount equal to the amount paid by the Lender or any Affiliate of the Lender to GMAC to reimburse GMAC for any amount paid by GMAC in connection with a draw on any Letter of Credit plus any and all reasonable charges and expenses incurred relative to any such drawing, regardless of whether the Borrowing Base Allowable Disbursement Amount (excluding any reduction thereto attributable to the Obligation of Reimbursement related to such Letter of Credit) is sufficient to permit

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the Borrower to request a disbursement of the Loan under the ABF Program. The Borrower’s failure to fully repay any Obligation or Reimbursement with respect to a Letter of Credit within five (5) Business Days following any drawing under such Letter of Credit shall constitute an Event of Default under this Agreement.

(f) Any unpaid Obligation of Reimbursement with respect to a Letter of Credit shall bear interest at the interest rate then in effect under the Note and shall be calculated on the basis of a 360 day year, comprised of twelve (12) thirty (30) day months. Interest due with respect to an unpaid Obligation of Reimbursement shall be due and payable from time to time on demand of the Lender.

(g) The obligations of the Borrower to the Lender with respect to repayment of any Obligation of Reimbursement with respect to any Letter of Credit, or any disbursement of the Loan under this Section 6.24 with respect thereto, shall be absolute, unconditional and irrevocable to the extent permitted by law, and shall be performed strictly in accordance with the terms of this Loan Agreement, irrespective of any of the following circumstances:

(1) any lack of validity or enforceability of any Loan Document, any Letter of Credit, any of the documents relating to any Letter of Credit, or any other agreement or instrument underlying any Loan Documents or any Letter of Credit, or any failure to comply strictly with the terms of any Loan Document, any Letter of Credit or any other agreement or instrument;

(2) any amendment or waiver of, or consent to departure from, any Letter of Credit, any document relating thereto or any Loan Document;

(3) the existence of any claim, setoff, defense or other right which the Lender, any Affiliate of Lender or the Borrower may have at any time against any other party or any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such party or beneficiary or any such transferee may be acting), the issuer of any Letter of Credit or any other person or entity, whether in connection with a Letter of Credit, any document relating thereto, any Loan Document, any agreement or transaction underlying a Letter of Credit or any unrelated transactions;

(4) any statement, certificate, draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever;

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(5) payment by the issuer of a Letter of Credit under such Letter of Credit against presentation of a draft or certificate which does not comply with the terms of the Letter of Credit; or

(6) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.

(h) Without limiting in any way any Obligation of Reimbursement with respect to a Letter of Credit or any disbursement of the Loan under this Section 6.24 which is owing by the Borrower to the Lender, the Borrower reserves any claim which the Borrower may have against the Lender to the extent of any direct damages (as opposed to consequential or exemplary damages) suffered by the Borrower as a result of the gross negligence or willful misconduct of the Lender or GMAC in connection with the honoring or other administration of such Letter of Credit. Nothing in this Section 6.24(h) shall be construed as a reservation by the Borrower of a claim against GMAC to the extent of any damages suffered by the Borrower as a result of the gross negligence or willful misconduct of the Lender or GMAC in connection with the honoring or other administration of any Letter of Credit.

(i) If at any time the Letter of Credit Amount shall exceed fifty percent (50%) of the outstanding principal balance of the Loan, upon request of the Lender, the Borrower shall immediately deliver to Lender for deposit by the Lender in a collateral account pledged to the Lender (the “Special Collateral Account”) an amount equal to the amount by which the Letter of Credit Amount exceeds fifty percent (50%) of the outstanding principal balance of the Loan. In addition, at any time that an Event of Default exists, upon written demand of the Lender, the Borrowers shall immediately deliver to Lender for deposit by Lender in the Special Collateral Account an amount equal to the Letter of Credit Amount. The Borrower hereby grants the Lender a security interest in the Special Collateral Account and in all amounts now or hereafter in the Special Collateral Account to secure payment of all obligations now or hereafter owing by the Borrower to the Lender. The Borrower agrees to execute such agreements and other documentation as the Lender shall reasonably request from time to time to evidence such security interest. All interest or other earnings on amounts in the Special Collateral Account shall be credited to the Special Collateral Account. Following the occurrence of an Event of Default, amounts in the Special Collateral Account may be applied by the Lender at any time or from time to time to the obligations now or hereafter owing by the Borrower to the Lender in such order of application as the Lender shall determine in its sole discretion. The Borrower shall have no right to withdraw or otherwise obtain any funds from the Special Collateral Account. In the event that the Letter of Credit Amount shall cease to exceed fifty percent (50%) of the outstanding principal balance of the Loan or to the extent that

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the amount of funds in the Special Collateral Account exceeds the amount by which the Letter of Credit Amount exceeds fifty percent (50%) of the outstanding principal balance of the Loan, so long as no Potential Default or Event of Default exists, upon written request received by the Lender from the Borrower, the Lender shall release such excess amount from the Special Collateral Account to the Borrower.

(j) The Borrower recognizes and acknowledges that all real and personal property given as security for the Loan also secures the Borrower’s obligations to the Lender with respect to the Letters of Credit.

ARTICLE VII

SALES OF LOTS AND UNITS

AND RELEASES FROM DEED OF TRUST

Section 7.1. Sales Agreements. Each Lot and Unit shall be sold under a Sales Agreement. Each Sales Agreement must require full payment in cash to Borrower at closing. No Lot or Unit may be leased, sold or conveyed under any lease, conditional sales contract or other arrangement where Borrower retains a deferred portion of the purchase price or any residual or contingent interest in the Lot or Unit, including any purchase money security interest, without the express prior written consent of Lender in each instance. The Borrower shall, upon the Lender’s request, provide to Lender copies of the Sales Agreements.

Section 7.2. Sales and Closings. Borrower may enter into sales in the ordinary course of business with bona fide third party buyers without Lender’s prior written consent if:

(a) A Sales Agreement is executed with the buyer which conforms to the requirements of this Loan Agreement; and

(b) Borrower, acting in good faith following exercise of due diligence, has determined that the buyer is financially capable of performing all of its obligations under the Sales Agreement.

Lender in the exercise of its reasonable discretion may consider any sale to be unsatisfactory if the sale fails to meet any of the requirements of this Loan Agreement. If this happens, or if any Event of Default (as hereinafter defined) has occurred and is continuing, Lender may make written demand on Borrower to submit future Sales Agreements for Lender’s approval prior to execution, together in each instance with accompanying financial statements and other information that Borrower may have pertaining to the prospective buyer. Borrower shall comply immediately with any such demand by Lender.

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Section 7.3. Sales Operations and Seller’s Obligations. Borrower shall at all times maintain adequate marketing capability for the sale of the Lots and Units, and shall perform all obligations required to be performed by it under each Sales Agreement.

Section 7.4. Model Units.

(a) The Borrower shall (i) construct and if necessary, modify, Homes in such a manner as to accommodate their use as Model Units within each Project, and (ii) maintain a sales office at or near each Project, as the Borrower determines, to provide for adequate sales and marketing of each such Project. The Borrower shall insure that sufficient adjacent parking for customers exists within the vicinity of the sales office. The Model Units within each Project shall be used solely as a model display (including landscaping and walkways), as a sales office and for parking, all in connection with the marketing and sale of Homes within such Project. Borrower shall maintain the interiors and exteriors of the Model Units within such Project in good condition, repair and order, except for ordinary wear and tear. Regardless of any other provision of this Loan Agreement, Lender shall not be required to release the Model Units within any Project or any of them from the lien of the Deed of Trust unless Borrower has provided, and Lender has accepted, a substituted Model Unit within such Project which Lender in its reasonable judgment considers to be comparable to the Model Unit to be released and suitable for the purposes and uses described above. Notwithstanding the foregoing, with the prior written consent of Lender, which consent shall not be unreasonably withheld by Lender, the Borrower may convert Model Units within a Project to Units held for sale at such time as the Borrower determines that it is appropriate to do so given the sales activity for such Project. Borrower shall maintain insurance coverage regarding the Model Units as Lender shall reasonably require.

(b) Borrower may sell a Model Unit to a Person approved by Lender in its reasonable discretion, subject to the requirements that (i) the Borrower leases the Model Unit back from such Person pursuant to a lease agreement, the form and terms of which are approved by the Lender in its reasonable discretion and (ii) upon the request of the Lender, Borrower executes such documents as Lender requires to assign to Lender the Borrower’s interest in such lease.

Section 7.5. Releases from Lien of Deed of Trust.

(a) Borrower may from time to time request that Lender release one or more Lots and/or Units from the lien of the Deed of Trust and the other Project Security Instruments encumbering such Lots and/or Units. So long as no Event of Default exists, Lender agrees that it will execute a partial release that releases Lender’s lien on such Lot and/or Unit pursuant to the Deed of Trust and the

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documents executed pursuant thereto, provided that the following conditions precedent shall have been satisfied:

(1) Lender shall have received a written notice requesting the partial release no fewer than five (5) Business Days prior to the date on which the partial release is to be effective, which notice shall specify (i) the Project, (ii) the specific Lots and/or Units to be released, (iii) if such release is being requested in connection with a sale of the Lots and/or Units, the Person to whom such Lots and/or Units are being sold, which Person shall not be an Affiliate of the Borrower, and (iv) the Lender’s Release Price(s) therefor;

(2) Lender shall have received evidence satisfactory to Lender that (i) the closing of the sale and/or release of such Lots and/or Units shall be conducted through an escrow with the Title Company, and (ii) the Title Company shall have been instructed, which instructions shall have been acknowledged and agreed to by the Title Company and which cannot be changed or supplemented without Lender’s written concurrence, not to record Lender’s partial release until the Title Company receives in respect of such release an amount equal to Lender’s Release Price for such Lots and/or Units and is irrevocably committed to disburse such amount to Lender;

(3) Lender shall have received executed originals of instruments, agreements and other documents, in form and substance satisfactory to Lender, which Lender determines are necessary or appropriate, to evidence and/or effectuate the partial release and to modify the Loan Documents as a result thereof;

(4) Lender shall have received evidence satisfactory to Lender that the Borrower has satisfied all conditions precedent in the Loan Documents relating to the release of the Lots and/or Units.

If the Title Company that is selected by Borrower to insure title to the Lots and/or Units sold by the Borrower elects to have Borrower and Lender enter into a master release agreement that provides for, among other things, the release of the Lots and/or Units once all of the Lots and/or Units in a phase of a Project or in an entire Project are sold instead of being released one at a time, then Lender agrees to enter into such a master release agreement in form and substance satisfactory to Lender.

In connection with each release of a Lot and/or Unit, provided all conditions to such release have been met, Lender agrees to provide to the Title Company an estoppel letter, in form and substance satisfactory to Lender, specifying the Lender’s Release Price.

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(b) In addition to the releases provided for in subparagraph (a), so long as no Event of Default exists, Lender agrees that, without requiring payment of any release price, it shall release from the lien of the Deed of Trust and the other Project Security Instruments those portions of a Project necessary for utility easements, dedicated public roads, common elements (including any parts of such Project to be transferred to a homeowners’ association or the like), parks, greenbelts, recreation areas, schools, medical facilities and other similar purposes, provided (i) the Borrower complies with the requirements of subparagraphs (1), (3) and (4) of subparagraph (a) above (except that the requirement of written notice specifying the Lender’s Release Price(s) and payment of the Lender’s Release Price(s) shall not be applicable), (ii) the Lender is furnished with a survey, or another document reasonably satisfactory to the Lender, depicting and describing the real property to be released and (iii) such release is consistent in all material respects with the site plan or other depiction of such Project provided to the Lender as part of the Project Underwriting Documents.

ARTICLE VIII

EVENTS OF DEFAULT AND REMEDIES

Section 8.1. Events of Default. The occurrence and continuance of any of the following events shall constitute an “Event of Default” hereunder:

(a) Borrower shall fail to pay any installment of principal on the Loan when due, whether at stated maturity, as a result of a mandatory prepayment requirement, upon acceleration, upon demand for payment under Section 8.2(c) or otherwise, or pay when due any interest, fees or other amounts payable hereunder or under the other Loan Documents;

(b) any representation or warranty made by the Borrower herein or by any Loan Party in any other Loan Document shall at any time be incorrect in any material respect; or

(c) Borrower shall fail to perform or observe any term, covenant or agreement contained in this Loan Agreement or any Loan Party shall fail to perform or observe any term, covenant or agreement contained in any other Loan Document, and such failure shall remain unremedied for thirty (30) days after notice thereof from Lender to Borrower or such other Loan Party, as applicable; provided that in the event Borrower or such other Loan Party, as applicable, commences and is diligently pursuing to completion action to cure the failure, such thirty (30) day period may be extended for such period of time as is necessary to cure the failure, but in no event longer then one hundred twenty (120) days from the date of the Lender’s notice; provided further however, that in the event (i) Lender reasonably determines that the

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failure to immediately declare an Event of Default could materially and adversely harm the rights of the Lender hereunder or under any other Loan Document, or the rights of the Lender with respect to the collateral pledged to secure the Loan, or (ii) Lender reasonably determines that the failure to perform or observe the terms of this Loan Agreement or any other Loan Document cannot be remedied with the passage of one hundred twenty (120) days, then Lender may declare an immediate Event of Default in its notice given pursuant to this Section 8.1(c); or

(d) the Borrower or any other Loan Party shall assert the invalidity or unenforceability of any Loan Document or any Loan Document shall be adjudicated to be invalid or unenforceable in any material respect; or

(e) the Borrower or any other Loan Party shall fail to pay any Debt, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; any other default under any agreement or instrument relating to any such Debt, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure to pay, default or event results in the acceleration, or permits the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or is required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; provided however that none of the foregoing events or inactions shall constitute an Event of Default unless such event or inaction could result in a Material Adverse Change; or

(f) the Borrower or any other Loan Party shall generally not pay its Debts as such Debts become due, or shall admit in writing its inability to pay its Debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any other Loan Party seeking to adjudicate such party as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of such party’s Debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for such party or for any substantial part of such party’s property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of thirty (30) days (whether or not consecutive), or any of the actions sought in such proceeding (including, without, limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or

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the Borrower or any other Loan Party shall take any action to authorize any of the actions set forth above; or

(g) any event of default (however described) under any other Loan Document shall occur and not be cured within the applicable grace period; or

(h) any Project Security Instrument, for any reason, ceases to create a valid and perfected first priority lien on or in the Land or other collateral relating thereto as described in the Loan Documents, or the Borrower or any other Loan Party shall so state in writing; or

(i) the dissolution or winding up of the Borrower or any other Loan Party; or

(j) any judgment or order for the payment of money in excess of Two Hundred Thousand Dollars ($200,000), singularly or in the aggregate, shall be rendered against the Borrower or any other Loan Party, and either (i) there shall be a period of forty-five (45) days or more during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect, or (ii) enforcement proceedings shall have been commenced by any creditor upon such judgment or order and there shall be a period of forty-five (45) days or more during which a stay of such enforcement proceedings shall not be in effect; or

(k) a Material Adverse Change shall occur; or

(l) the Borrower shall fail to comply with, or shall fail to cause the Guarantor to comply with, any of the covenants set forth in Section 5.2, Section 5.3, Section 5.4, Section 5.5 or Section 5.6; or

(m) Borrower fails to meet or comply with any of the projections or other provisions of the Construction Progress Schedule for any Project (which failure Lender reasonably believe may result in impairment of the value of its security for the Loan or in the ability of the Borrower to repay the Loan in full by the Maturity Date), and does not cure that failure within thirty (30) days after written notice from Lender; provided that such cure period shall not be applicable (i.e., there shall be no cure period) if Lender has reasonably determined that such failure is not susceptible to cure within thirty (30) days; or

(n) the assignment by the Borrower of the rents or the income of any Project, or any part thereof or of any other revenues or sales proceeds relating to any Project (other than to Lender); or

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(o) there shall occur substantial deviations in the Development Work or the Homes of any Project from the Plans and Specifications for such Project without the prior approval of Lender, or the existence of materially adverse defective workmanship or materials incorporated into the Development Work or the Homes for any Project which deviations or defects are not corrected within thirty (30) days after written notice thereof to Borrower, such deviations and defects to be conclusively determined by Lender after consultation with the Inspector; or

(p) cessation of the Development Work of any Project prior to completion of the Homes of such Project for a continuous period of (i) one hundred twenty (120) days or more if such cessation is by a Force Majeure Event, or (ii) sixty (60) days or more if such cessation is not caused by a Force Majeure Event; or

(q) the Development Work or the Homes of any Project are not, in Lender’s reasonable judgment, being carried out in accordance with the Construction Progress Schedule for such Project (subject to delays not to exceed sixty (60) days or to delays not to exceed one hundred twenty (120) days in the aggregate which are caused by Force Majeure Events of which Lender has been properly notified in accordance with the provisions of Section 6.11); or

(r) a court of competent jurisdiction enters an order enjoining construction of the Development Work or the Homes of any Project, or such a court or an authorized governmental agency orders that sales of the Lots and/or Units of any Project be suspended or halted, or any required approval, license or permit is withdrawn or suspended, and the order, withdrawal or suspension remains in effect for a period of thirty (30) days; or

(s) there occurs any attachment, levy, execution or other judicial seizure of any portion of any Project, any other material collateral provided by Borrower under any of the Loan Documents, or any substantial portion of the other assets of Borrower, which is not released, expunged, discharged or dismissed prior to the earlier of (i) thirty (30) days after such attachment, levy, execution or seizure, or (ii) the sale of the assets affected thereby; or

(t) any surety obligated for any Development Work or Homes of any Project is called upon to perform its obligations and/or any person demands funds pursuant to any “set-aside” letter or “cash in lieu of bond agreement” issued by Lender with respect to such Project; or

(u) the average sales price for the ten (10) most recently sold Units in any Project is less than eighty-five percent (85%) of the lesser of (i) the average of the appraised values of such Units as determined based upon an Appraisal Report

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identifying the appraised values of base home designs for such Project (or if no Appraisal Report is required by Lender with respect to a Project, based upon the values of such Units as determined based upon the values of such home designs for such Project as set forth in the Project Commitment for such Project) or (ii) the average of the base prices for such Units based upon the Approved Cash Flow Statement for such Project; or

(v) the Borrower’s pre-tax net income is negative in each of two (2) consecutive fiscal quarters or for any four (4) consecutive fiscal quarters on a cumulative basis and the ratio of the Total Liabilities of the Guarantor and its Subsidiaries (excluding the Borrower) (exclusive of consolidated liabilities of variable interest entities) to the Tangible Net Worth of the Guarantor and its Subsidiaries (including the Borrower) is more than 3.50 to 1.00; or

(w) any two (2) or more of Wade Cable, Thomas J. Mitchell, Douglas F. Bauer, Richard S. Robinson or Michael D. Grubbs shall cease to be employed by the Guarantor or the Borrower on a continuous and full time basis with power and responsibility to manage the material day to day operations of the Guarantor, the Borrower and their Subsidiaries; or

(x) an event of default (however described) shall occur under any loan agreement or related loan document (other than under this Loan Agreement or under the Loan Documents) between the Borrower and the Lender, Residential Funding Corporation or any successor or assign thereof; or

(y) the failure of the Borrower to pay in full any Obligation of Reimbursement owing by the Borrower to the Lender with respect to a Letter of Credit within five (5) Business Days following any drawing under such Letter of Credit.

Borrower acknowledges and agrees that all material non-monetary defaults are conclusively deemed to be and are defaults which impair the security of the Deed of Trust, and that Lender shall be entitled to exercise any appropriate remedy, including without limitation, foreclosure of the Deed of Trust upon the occurrence of any such material non-monetary default.

Section 8.2. Remedies. Upon the occurrence of any Event of Default, the following provisions shall apply:

(a) if such event is an Event of Default specified in Section 8.1(f), Lender’s commitment to fund the Loan shall terminate and the indebtedness evidenced by the

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Note shall and any other amounts payable under this Loan Agreement and the other Loan Documents shall immediately and automatically become due and payable;

(b) if such event is an Event of Default specified in Section 8.1(v) or Section 8.1(w), the Lender’s remedies shall be limited to, by notice to the Borrower, termination of its commitment to consider proposed projects for approval as Projects;

(c) if such event is an Event of Default under Section 8.1(b), Section 8.1(c), Section 8.1(g), Section 8.1(m), Section 8.1(o), Section 8.1(p), Section 8.1(q), Section 8.1(r) or Section 8.1(u) and such event relates solely to a single Project, the Lender’s remedies shall be limited to the following remedies: (i) Lender may withhold one or more requested disbursements of proceeds of the Loan related to such Project (or to such portion of such Project as Lender shall determine in its sole discretion), whether such requested disbursement relates to the Acquisition and Development Amount for such Project or is requested under the ABF Program, (ii) by notice to the Borrower, Lender may unilaterally eliminate all Units of such Project (or such portion of the Units of such Project as Lender shall determine in its sole discretion) for purposes of determining the Borrowing Base Value (although such Units will remain as collateral for the Loan until released from the lien of the Deed of Trust in accordance with the terms of the Loan Documents), (iii) by notice to the Borrower, Lender may suspend or terminate its commitment to make any further advance of proceeds of the Loan related to the acquisition of Land for such Project, Development Work for such Project or the construction of Homes of such Project (or related to the acquisition of such portion of Land for such Project, such portion of the Development Work for such Project or such portion of the construction of Homes for such Project as Lender shall determine in its sole discretion), and (iv) by notice to Borrower, Lender may declare that portion of the outstanding principal balance of the Loan related to the acquisition of Land and Development Work for such Project (or related to the acquisition of such portion of Land and Development Work for such Project as Lender shall determine in its sole discretion), and all interest thereon, to be due and payable, whereby such portion of the outstanding principal balance of the Loan related to the acquisition of the Land and the Development Work for such Project (or related to the acquisition of such portion of Land and Development Work for such Project as Lender shall determine in its sole discretion) shall become forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; and

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(d) upon the occurrence of any Event of Default, other than an Event of Default expressly covered by Section 8.2(b) or Section 8.2(c), Lender may, at its option:

(1) by notice to Borrower, terminate its commitment to fund the Loan and declare the Loan, all interest thereon, and all other amounts payable under this Loan Agreement and the other Loan Documents to be due and payable, whereupon the Loan, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; and/or

(2) exercise any and all rights and remedies available to Lender under the Loan Documents or at law or in equity, including, without limitation, the right to foreclose or otherwise realize upon all or any part of the collateral securing Borrower’s obligations and to proceed against Borrower and/or any other Person liable with respect to the obligations under the Loan Documents; and/or

(3) immediately terminate any further advances of Loan funds hereunder, and from time to time apply all or any portion of the undisbursed Loan funds to payment of accrued interest under the Note and/or upon any other obligations of Borrower hereunder or under the Loan Documents. Lender may also withhold any one or more disbursements after a Potential Default occurs, unless Borrower cures or corrects the event or condition to the reasonable satisfaction of Lender prior to the occurrence of an Event of Default; and/or

(4) record a notice of default under the Deed of Trust and under the mortgages or deeds of trust, as applicable, which secure the indebtedness evidenced by the Note; and/or

(5) make any disbursements after the happening of any one or more Events of Default, without thereby waiving its right to demand payment of the Loan and all other sums owing to Lender with respect to the Loan Documents or any other rights or remedies described herein, and without liability to make any other or further disbursements, notwithstanding Lender’s previous exercise of any such rights and remedies; and/or

(6) enter upon any or all Projects and with or without legal process take possession of such Project or Projects, remove Borrower and all employees, contractors and agents of Borrower therefrom, and complete or attempt to complete construction of the Development Work and/or the Homes related thereto in accordance with the Plans and Specifications therefor, with such changes, additions or corrections therein as Lender may from time to time and in its judgment deem appropriate, and market, sell or lease such Project or

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Projects, at the risk and expense of Borrower. Lender shall have the right at any time to discontinue any work commenced by it in respect to such Development Work and/or the Homes or to change the course of action undertaken by it and not be bound by any limitations or requirements of time whether set forth herein or otherwise. Lender shall have the right and power (but shall not be obligated) to assume any construction contract made by or on behalf of Borrower in any way relating to such Homes and to take over and use all or any part of the labor, materials, supplies and equipment contracted for, by or on behalf of Borrower whether or not previously incorporated into such Development Work and/or the Homes, in the discretion of Lender. Lender may also modify or terminate any contractual arrangements, subject to its right at any time to discontinue any work without liability. If Lender chooses to complete such Development Work and/or the Homes, Lender shall not assume any liability to Borrower or any other person for completing them, or for the manner or quality of their construction, and Borrower expressly waives any such liability. In connection with any work of construction undertaken by Lender pursuant to the provisions of this subsection (6), Lender may do any of the following:

(i) engage builders, contractors, subcontractors, architects, engineers, suppliers, inspectors, consultants and others for the purpose of furnishing labor, materials, equipment and other services in connection with the work of construction, for the protection or clearance of title to such Project or Projects, or for the protection of Lender’s interests with respect thereto;

(ii) pay, settle or compromise all bills or claims which may become liens against such Project or Projects or which have been or may be incurred in any manner in connection with completing construction of such Development Work and/or the Homes or for the protection or clearance of title to such Project or Projects, or for the protection of Lender’s interests with respect thereto;

(iii) prosecute and defend all actions and proceedings in connection with such Project or Projects;

(iv) execute, acknowledge and deliver all other instruments and documents in the name of Borrower that are necessary or desirable, to exercise Borrower’s rights under contracts concerning such Project or Projects; and

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(v) take such other action, including the employment of security personnel to protect such Development Work and such Homes, or refrain from taking action under this Loan Agreement as Lender may in its discretion determine from time to time.

Borrower shall be liable to Lender for sums paid or incurred for completing construction of such Development Work and such Homes whether the same shall be paid or incurred pursuant to the provisions of this Section or otherwise, and all payments made or liabilities incurred by Lender hereunder of any kind whatsoever shall be paid by Borrower to Lender upon demand with interest at the rate set forth in the Note, and all of the foregoing shall be deemed and shall constitute disbursements under this Loan Agreement and be secured by the Project Security Documents. For the purpose of carrying out the provisions and exercising the rights, powers and privileges granted by this subsection (6), Borrower hereby unconditionally and irrevocably constitutes and appoints Lender its true and lawful attorney-in-fact to enter into such contracts, perform such acts and incur such liabilities as are referred to in said Section in the name and on behalf of Borrower. This power of attorney is coupled with an interest; and/or

(7) where substantial deviations from the Plans and Specifications for any Project appear which have not been approved as set forth herein, or where defective or unworkmanlike labor or materials are being used in the construction of the Development Work and/or the Homes of any Project, or upon receipt of knowledge of encroachments to which there has been no consent, or if Lender determines that the Development Work and/or the Homes of any Project are not being constructed in accordance with any governmental requirements or any covenants, conditions, restrictions, agreements or other matters, whether or not of record, affecting the condition of title to any Project, Lender shall have the right to immediately order stoppage of the construction and demand that such conditions be corrected. After issuance of such an order in writing, no further work shall be done on that portion of the Development Work and/or the Homes of such Project where there is a substantial deviation from the Plans and Specifications for such Project which has not been approved as set forth herein, where there is defective or unworkmanlike labor or materials, or which does not comply with governmental requirements or matters affecting title to such Project, without the prior written consent of Lender, which consent shall not be unreasonably withheld, unless and until said condition has been fully corrected; and/or

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(8) foreclose on any security for the Loan without waiving its rights to proceed against any other security or other entities or individuals directly or indirectly responsible for repayment of the Loan, or waive any and all security for the Loan as Lender may in its discretion so determine, and pursue any such other remedy or remedies as Lender may so determine to be in its best interest; and/or

(9) if Lender spends its funds in exercising or enforcing any of its rights or remedies under the Loan Documents, the amount of funds spent shall be payable to Lender upon demand, together with interest at the rate applicable to the principal balance of the Note, from the date such funds were spent until repaid. Such amounts shall be deemed secured by the Deed of Trust and other applicable Project Security Documents.

Whether or not Lender elects to employ any or all of the remedies available to it in connection with an Event of Default, Lender shall not be liable for (i) the construction of or failure to construct, complete or protect the Development Work and/or the Homes of any Project, (ii) the payment of any expense incurred in connection with the exercise of any remedy available to Lender or the construction or completion of the Development Work and/or the Homes of any Project, or (iii) the performance or non-performance of any other obligation of Borrower or any other Loan Party.

All remedies of Lender provided for herein and in any other Loan Document are cumulative and shall be in addition to all other rights and remedies provided by law or in equity. The exercise of any right or remedy by Lender hereunder or under any other Loan Document shall not in any way constitute a cure or waiver of any Event of Default or any Potential Default hereunder or under any other Loan Document or invalidate any act done pursuant to any notice of default, or prejudice Lender in the exercise of any of its rights hereunder or under any other Loan Documents. If Lender exercises any of the rights or remedies provided in this Article VIII, that exercise shall not make Lender, or cause Lender to be deemed to be, a partner or joint venturer of Borrower. No disbursement of Loan funds by Lender shall cure any Event of Default or Potential Default, unless Lender agrees otherwise in writing in each instance.

Section 8.3. Authorization to Apply Assets to Payment of Loan. The Borrower hereby authorizes the Lender, following the occurrence of an Event of Default, without notice or demand, to apply any property, balances, credits, accounts or moneys of the Borrower, the Guarantor or any Affiliate of the Borrower or the Guarantor then in the possession of Lender, or standing to the credit of the Borrower, the Guarantor or any Affiliate of the Borrower or the Guarantor, to the payment of the Loan.

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ARTICLE IX

MISCELLANEOUS

Section 9.1. Successors and Assigns; No Assignment by Borrower. The provisions of this Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that Borrower may not assign or transfer any of its rights or obligations under this Loan Agreement or any of the other Loan Documents without the prior written consent of Lender.

Section 9.2. Notices. All notices, requests and demands to be made hereunder to the parties hereto shall be in writing (at the addresses set forth below) and shall be given by any of the following means:

(a) personal delivery;

(b) reputable overnight courier service;

(c) electronic communication, whether by telex, telegram or telecopying (if confirmed in writing sent by registered or certified, first class mail, return receipt requested); or

(d) registered or certified, first class mail, return receipt requested.

Any notice, demand or request sent pursuant to the terms of this Loan Agreement shall be deemed received (i) if sent pursuant subsection (a), upon such personal delivery, (ii) if sent pursuant to subsection (b), on the next Business Day following delivery to the courier service, (iii) if sent pursuant to subsection (c), upon dispatch if such dispatch occurs between the hours of 9:00 a.m. and 5:00 p.m. (recipient’s time zone) on a Business Day, and if such dispatch occurs other than during such hours, on the next Business Day following dispatch and (iv) if sent pursuant to subsection (d), three (3) days following deposit in the mail.

The addresses for notices are as follows:

To Lender:	RFC Construction Funding Corp.
	8400 Normandale Lake Boulevard, Suite 250
	Minneapolis, Minnesota 55437
	Attention:	Managing Director
		Business Capital Group
	Telephone No.: (952) 857-6968
	Telecopier No.: (952) 857-6943

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With a copy to:	RFC Construction Funding Corp.
	8400 Normandale Lake Boulevard, Suite 250
	Minneapolis, Minnesota 55437
	Attention:	Chief Counsel
		Business Capital Group
	Telephone No.: (952) 857-6911
	Telecopier No.: (952) 857-6949
To Borrower:	William Lyon Homes, Inc.
	4490 Von Karman Avenue
	Newport Beach, California 92660
	Attention:	Michael D. Grubbs, Senior Vice President and Chief Financial Officer
		Richard S. Robinson, Senior Vice President
	Telephone No.: (949) 476-5475
	Telecopier No.: (949) 252-2575
With a copy to:	Irell & Manella LLP
	840 Newport Center Drive
	Suite 500
	Newport Beach, California 92660-6324
	Attention:	Roy S. Geiger
	Telephone No.: (949) 760-5299
	Telecopier No.: (949) 760-5200

Such addresses may be changed by notice to the other parties given in the same manner as provided above.

Notwithstanding the foregoing, all requests for disbursements of the Loan pursuant to Article II above shall be deemed received only upon actual receipt, and such requests for disbursement shall be given only to the Lender’s primary addressee.

Section 9.3. Changes, Waivers, Discharge and Modifications in Writing. No provision of this Loan Agreement or any of the other Loan Documents may be changed, waived, discharged or modified except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or modification is sought.

Section 9.4. No Waiver; Remedies Cumulative. No disbursement of proceeds of the Loan shall constitute a waiver of any conditions to Lender’s obligation to make further disbursements nor, in the event Borrower is unable to satisfy any such conditions, shall any

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such waiver have the effect of precluding Lender from thereafter declaring such inability to constitute an Event of Default (however described) under this Loan Agreement or any other Loan Document. No failure or delay on the part of Lender in the exercise of any power, right or privilege hereunder or under this Loan Agreement or any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any Event of Default (however described) or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof, or of any other right, power or privilege. Except as specifically provided herein, all rights and remedies existing under this Loan Agreement or any other Loan Document are cumulative to and not exclusive of any rights or remedies otherwise available.

Section 9.5. Costs, Expenses and Taxes. Borrower agrees to pay the costs, and all expenses incurred by Lender in connection with the preparation, execution, delivery, administration, modification and amendment of this Loan Agreement, the other Loan Documents and any other documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for Lender with respect thereto and with respect to advising Lender as to its rights and responsibilities under this Loan Agreement and the other Loan Documents. Borrower further agrees to pay all costs and expenses of Lender (including, without limitation, reasonable counsel fees and expenses, court costs and all other litigation expenses, including, but not limited to, reasonable expert witness fees, document copying expenses, exhibit preparation, courier expenses, postage expenses and communication expenses) in connection with the enforcement of this Loan Agreement, the other Loan Documents and any other documents delivered hereunder, including, without limitation, costs and expenses incurred in connection with any bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceeding, or any refinancing or restructuring in the nature of a “workout” of the Loan Documents and any other documents delivered by Borrower related thereto. In addition, Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Loan Agreement, the other Loan Documents and the other documents to be delivered hereunder, and agrees to hold Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. Payment from the Borrower of amounts due pursuant to this Section 9.5 shall be due ten (10) days after it has received from the Lender written notice of the nature of the item for which payment is required and the amount due, other than amounts due pursuant to the last sentence of the previous paragraph which amounts shall be due on demand.

Section 9.6. Disclaimer by Lender; No Joint Venture. Borrower acknowledges, understands and agrees as follows:

(a) The relationship between Borrower and Lender is, and shall at all times remain, solely that of borrower and lender, and Lender neither undertakes nor assumes

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any responsibility for or duty to Borrower to select, review, inspect, supervise, pass judgment upon or inform Borrower of the quality, adequacy or suitability of any matter or thing submitted to Lender for its approval.

(b) Lender owes no duty of care to protect Borrower or any other Person against negligent, faulty, inadequate or defective building or construction.

(c) Borrower is not and shall not be an agent of Lender for any purpose. Lender is not a joint venture partner with Borrower in any manner whatsoever. Approvals granted by Lender for any matters covered under this Loan Agreement shall be narrowly construed to cover only the parties and facts identified in any such approval.

Section 9.7. Indemnification. Borrower agrees to protect, indemnify, defend and hold harmless each Indemnified Party from and against any and all claims, damages, losses, liabilities, obligations, penalties, actions, judgments, suits, costs, disbursements and expenses (including, without limitation, reasonable fees and expenses of counsel and consultants and allocated costs of internal counsel) that may be incurred by or asserted against any Indemnified Party, in each case arising out of or in connection with or related to any of the following:

(a) the Loan, this Loan Agreement or any other Loan Document,

(b) the use of funds advanced under the Loan Documents, or

(c) the failure of Borrower or any other party (other than Lender) to comply fully with any and all laws applicable to it,

whether or not an Indemnified Party is a party thereto and whether or not the transactions contemplated hereby are consummated, except to the extent such claims, damages, losses, liabilities, obligations, penalties, actions, judgments, suits, costs, obligations, penalties, disbursements and expenses are found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Indemnified Party. Notwithstanding the foregoing, nothing in this Section 9.7 shall be construed as an indemnification by Borrower of any claims, damages, losses, liabilities, obligations, penalties, actions, judgments, suits, costs, disbursements and expenses related to Hazardous Materials or Hazardous Materials Laws, which indemnification obligation is separately and exclusively set forth in the Environmental Indemnity. Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 9.7 shall survive the termination of this Loan Agreement and the other Loan Documents and the payment in full of the Loan.

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Section 9.8. Consultants. Borrower shall pay any and all valid claims of any consultants, advisors, brokers or agents whom it has retained or with whom it has initiated contact with respect to the Loan who claims a right to any fees in connection with the Loan, and shall indemnify, defend and hold Lender harmless from such claims, whether or not they are valid.

Section 9.9. Governing Law. This Loan Agreement shall be governed by and construed in accordance with the laws of the State of California.

Section 9.10. Titles and Headings. The titles and headings of sections of this Loan Agreement are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Loan Agreement.

Section 9.11. Counterparts. This Loan Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement with the same effect as if all parties had signed the same signature page.

Section 9.12. Lender’s Right With Respect to the Loan. Notwithstanding any provision to the contrary contained in this Loan Agreement or any other Loan Document, the Lender may at any time sell, assign, grant or transfer to any Person all or a portion of its interest in or rights with respect to the Loan and in all or part of the obligations of the Borrower and any other obligated party under the Loan Documents.

Section 9.13. Confidentiality. Borrower and Lender shall mutually agree on the contents of any press release, public announcement or other public disclosure regarding this Loan Agreement and the transactions contemplated hereunder to be made following the mutual execution and delivery of this Loan Agreement; provided that Lender may disclose the terms hereof and give copies of the Loan Documents to assignees and participants and to prospective assignees and participants. If either party fails to respond to the other party in writing with either an approval or a disapproval within five (5) Business Days of a party’s receipt of the other party’s request for consent or approval as expressly contemplated pursuant to this Section 9.13, which request shall have been sent to the other party’s notice addressees in the manner set forth in Section 9.2, then such consent or approval shall be deemed to have been given, provided that such five (5) Business Day period shall not commence to run unless and until the other party shall have received all information, materials, documents and other matters required to be submitted to it hereunder with respect to such consent or approval and all other information, materials, documents and other matters reasonably essential to its decision process.

Section 9.14. Time is of the Essence. Time is of the essence of this Loan Agreement.

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Section 9.15. No Third Parties Benefitted. This Loan Agreement is made and entered into for the sole protection and legal benefit of Borrower, Lender, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with this Loan Agreement or any of the other Loan Documents. Lender shall not have any obligation to any Person not a party to this Loan Agreement or the other Loan Documents.

Section 9.16. Severability. The illegality or unenforceability of any provision of this Loan Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Loan Agreement or any instrument or agreement required hereunder.

Section 9.17. Jurisdiction. Any legal action or proceeding with respect to this Loan Agreement or any of the other Loan Documents may be brought in the courts of the State of California or of the United States for the District of California, and by execution and delivery of this Loan Agreement, each of Borrower and Lender consents, for itself and in respect of its property, to the jurisdiction of those courts. Each of Borrower and Lender irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect to this Loan Agreement or any document related hereto. Borrower and Lender each waive any personal service of any summons, complaint or other process, which may be made by any other means permitted by California law. Nothing in this Section 9.17 shall affect the right of Lender to serve legal process in any other manner permitted by law or limit the right of Lender to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction.

Section 9.18. Waiver of Jury Trial. BORROWER AND LENDER WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS LOAN AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. BORROWER AND LENDER AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER

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SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS.

Section 9.19. Interpretation. This Loan Agreement and the other Loan Documents shall not be construed against Lender merely because of Lender’s involvement in the preparation of such documents and agreements.

Section 9.20. Entire Agreement. This Loan Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among Borrower and Lender and supersedes all prior or contemporaneous agreements and understandings of such persons, verbal or written, relating to the subject matter hereof and thereof except for any prior arrangements made with respect to the payment by Borrower of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of Lender.

Section 9.21. Amended and Restated Loan Agreement. This Loan Agreement constitutes an amendment to, and a complete restatement of, the Original Loan Agreement.

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IN WITNESS WHEREOF, Lender and Borrower have caused this Loan Agreement to be duly executed and delivered as of the date first above written.

BORROWER:
WILLIAM LYON HOMES, INC. a California corporation
By:	/s/    RICHARD S. ROBINSON
Printed Name:	Richard S. Robinson
Title:	Sr. Vice President
And
By:	/s/    MICHAEL D. GRUBBS
Printed Name:	Michael D. Grubbs
Title:	Sr. Vice President
LENDER:
RFC CONSTRUCTION FUNDING CORP., a Delaware corporation
By:	/s/    PETER FISCHER
Printed Name:	Peter Fischer
Title:	Assistant Vice President

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EXHIBIT A TO LOAN AGREEMENT

CONDITIONS TO OBLIGATION OF LENDER TO MAKE LOAN

The obligation of the Lender to make the Loan is conditioned upon the Lender having received, in form and substance satisfactory to Lender, each of the following:

1. Executed originals of this Loan Agreement, the Note, the Assignment, the Environmental Indemnity and the Guaranty.

2. A Certificate of the Secretary of the Borrower certifying that the Articles of Incorporation and By-Laws previously delivered by the Borrower to the Lender have not been amended or otherwise changed and remain in full force and effect, together with a current Certificate of Good Standing for the Borrower.

3. A Certificate of the Secretary of the Guarantor certifying that the Articles of Incorporation and By-Laws previously delivered by the Guarantor to the Lender have not been modified or otherwise changed and remain in full force and effect, together with a current Certificate of Good Standing for the Guarantor.

4. Copies of the resolutions adopted by the Borrower authorizing certain officers of the Borrower to execute and deliver this Loan Agreement and the other Loan Documents to which the Borrower is a party.

5. Copies of the resolutions adopted by the Guarantor authorizing certain officers of the Guarantor to execute and deliver the Guaranty and any other Loan Documents to which the Guarantor is a party.

6. Payment of all costs and expenses incurred by Lender, including, without limitation, the fees and costs of its legal counsel, in connection with the preparation, execution and delivery of this Loan Agreement, the Note, the Assignment, the Environmental Indemnity and the Guaranty.

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EXHIBIT B TO LOAN AGREEMENT

PROJECT REQUIREMENTS

GENERAL	A proposed project may utilize proceeds of the Loan for any of the following: (i) acquisition of the Land, Development Work and Homes, (ii) acquisition of the Land and Development Work, (iii) acquisition of Finished Lots and Homes or (iv) Homes. A proposed project may be one of several projects anticipated to be developed by the Borrower in a single contiguous development.
ENTITLEMENTS	All proposed projects must be suitable for and substantially entitled for the commencement of the Development Work and/or the Homes, as applicable, including the relative on and off-site improvements. Unless otherwise agreed to by the Lender, the Land must be fully entitled, and the Borrower must be able to commence development of the Project, as contemplated by the Project Underwriting Documents, upon payment of fees to the governing municipality.
GEOGRAPHIC REGION	Projects must be located in the State of California, the State of Arizona or the State of Nevada.
COMMENCEMENT OF WORK	The Development Work or the Homes, as applicable, for a Project must commence within six (6) months of the date of the Project Commitment for such Project.
ACQUISITION AND DEVELOPMENT AMOUNT	With respect to a Project as to which the Qualified Acquisition and Development Expenditures will be funded outside of the ABF Program, the Acquisition and Development Amount for the acquisition of the Land and the Development Work related to such Project shall be set forth in the Project Commitment for such Project.
EQUITY	The equity requirement from the Borrower will be specified in the applicable Project Commitment.

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ACQUISITION AND DEVELOPMENT MATURITY DATE	All Projects. With respect to a Project as to which the Qualified Acquisition and Development Expenditures will be funded outside of the ABF Program, all outstanding borrowings of the Loan related to the acquisition of the Land and the Development Work for such Project shall be due and payable on the Acquisition and Development Maturity Date for such Project. The Acquisition and Development Maturity Date of a Project shall not exceed the earlier of (i) the date which is specified in the Project Commitment as the Acquisition and Development Maturity Date, or (ii) the Maturity Date.
PRICE POINT	The maximum sales price for any Unit in a Project shall not exceed $850,000 in California or $500,000 in Nevada or Arizona.
PROJECT SIZE LIMITATIONS	The size of each Project as to which the Qualified Acquisition and Development Expenditures will be funded outside of the ABF Program shall be limited to the number of Units which can be absorbed prior to the Acquisition and Development Maturity Date, subject to the requirement that the size of a Project may not exceed 150 Units.
START LIMITATIONS	Construction of Homes within a Project will be limited to the following: 1. an unlimited number of Sold Units; 2. a number of Model Units not to exceed five (5) Model Units per Project; and 3. a number of Spec Units equaling up to three (3) months of unit absorption (based upon the Appraisal required to be delivered as part of the Project Underwriting Documents), except on the 1st phase of the Project, a number of Spec Units not to exceed twenty-five (25) Spec Units;

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ADVANCE RATES FOR THE ACQUISITION OF LAND AND THE DEVELOPMENT WORK RELATED TO A PROJECT The Advance Rates for the acquisition of Land and the Development Work related to a Project as to which the Qualified Acquisitions and Development Expenditures will be funded outside of the ABF Program shall be as follows: Conventional Project: Proceeds of the Loan may be advanced to fund the following: (1) the lesser of 70% of the cost of the Land or 70% of the Value of the Land; plus (2) 100% of the costs of the Development Work, provided however that the Acquisition and Development Amount shall not exceed the lesser of 70% of the Value of the Land or 85% of the cost of Finished Lots. High Advance Rate Project: Proceeds of the Loan may be advanced to fund the following: (1) 85% of the acquisition price of the Land; plus (2) 100% of the costs of the Development Work, provided however that the Acquisition and Development Amount shall not exceed ninety percent (90%) of the Value of the Land.

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BORROWING BASE VALUE FOR UNITS INCLUDED IN THE ABF PROGRAM The Borrowing Base Value for a Unit included in the ABF Program shall be determined in accordance with the applicable provisions of the Loan Agreement, including the following definitions: “Applicable ABF Home Advance Rate” shall mean (i) with respect to a Unit in a Conventional Project, 80% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit, (ii) with respect to a Unit in a High Advance Rate Project, 85% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit, and (iii) with respect to a Unit in a Rolling Option Project, 80% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit. “Applicable ABF Lot Advance Rate” shall mean, with respect to any Unit for which the land acquisition and Development Work is to be funded under the ABF Program, (i) with respect to a Lot in a Conventional Project, the lesser of 70% of the Value of such Lot as a Finished Lot or 85% of the cost of such Lot as a Finished Lot, (ii) with respect to a Lot in a High Advance Rate Project, 90% of the Value of such Lot as a Finished Lot, and (iii) with respect to a Finished Lot in a Rolling Option Project, 75% of the cost of such Finished Lot. “Borrowing Base Lot Amount” shall mean, with respect to any Unit for which the land acquisition and Development Work is to be funded under the ABF Program, the amount which shall be allocated to such Lot included in the ABF Program for purposes of determining the Borrowing Base Value, which amount shall be equal to that amount which is determined by multiplying the Applicable ABF Lot Advance Rate times the Value of such Lot as a Finished Lot. The Borrowing Base Lot Amount shall be determined for each Lot and shall be set forth in the applicable Project Commitments. “Borrowing Base Home Amount” shall mean the amount which shall be allocated to each Home included in the ABF Program for purposes of determining the Borrowing Base Value, which amount shall be equal that amount which is determined by multiplying the Applicable ABF Home Advance Rate times the Value of the Unit, and subtracting therefrom either the total amount of the Loan disbursed for the land acquisition and budgeted for the Development Work related to such Unit (if the land acquisition and Development Work for such Unit are funded outside of the ABF Program) or the applicable Borrowing Base Lot Amount for such Unit (if the land acquisition and Development Work for such Unit are funded under the ABF Program). The Borrowing Base Home Amounts shall be determined for each design type of Home and shall be set forth in the applicable Project Commitments.

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“Home Percentage Completed” shall mean, with respect to a Home, the percentage of the construction of the Home which has been completed, which such percentage shall be based upon the percentages in the Home Staged Draw Schedule and shall be set forth in the most recent WIP Report.

“Lot Percentage Completed” shall mean, with respect to any Unit for which land acquisition and Development Work is to be funded under the ABF Program, the percentage of the construction of the Development Work which has been completed, which such percentage shall be based upon the percentages in the Lot Staged Draw Schedule and shall be set forth in the most recent WIP Report.

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EXHIBIT C TO LOAN AGREEMENT

PROJECT UNDERWRITING DOCUMENTS

A. GENERAL PROJECT INFORMATION:

1. Summary description of proposed project.

2. Designation of proposed project as a Conventional Project, a High Advance Rate Project or a Rolling Option Project.

3. Purchase contract for property.

4. Cash flow analysis, which shall include the proposed Budget (including breakdown between Land acquisition costs, costs of Development Work and costs of Homes) and Construction Progress Schedule for the proposed project.

5. Market report supporting absorption rates and information on home product.

6. Appraisal Report setting forth (i) a Value for the proposed project equal to or greater than that required by the Project Requirements and (ii) a value for each model type within the proposed project.

7. The map or plat relating to such project.

8. Preliminary title report, including copies of all documents relating to exceptions.

B. CONSTRUCTION INFORMATION AND DOCUMENTS:

1. Site plan.

2. Evidence of site plan approval and proper zoning.

3. Plans and Specifications for each Home design.

4. ALTA survey, if required by Lender.

5. Phase I environmental report.

6. Soils report.

7. Letters regarding utility availability.

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8. Evidence of the Borrower’s ability to satisfy the conditions of the site plan approval.

C. PROJECT LEGAL DOCUMENTS

1. Proposed or recorded CC&R’s.

2. If a condominium, a copy of the homeowner’s association articles of incorporation, by-laws and budget.

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EXHIBIT D TO LOAN AGREEMENT

FORM OF PROJECT COMMITMENT

FIELD(Commitment Date)

William Lyon Homes, Inc.

4490 Von Karman Avenue

Newport Beach, California 92660

Attention:	Michael D. Grubbs, Senior Vice President and Chief Financial Officer
	Richard S. Robinson, Senior Vice President

RFC CONSTRUCTION FUNDING CORP., a Delaware corporation, its successors and assigns (the “Lender”) is pleased to confirm that the Lender agrees to advance, in accordance with and pursuant to the Loan Agreement referenced below, proceeds of the loan which the Lender made to WILLIAM LYON HOMES, INC., a California corporation (the “Borrower”) with respect to the Project specified below, substantially upon the terms outlined below. Capitalized terms used herein shall have the meanings assigned those terms in the Amended and Restated Loan Agreement dated as of September 17, 2004, as amended, between the Borrower and the Lender.

GENERAL
PROJECT	Project Name
PROJECT LOCATION	Project Location
TERMS OF THE LOAN APPLICABLE TO THIS PROJECT
FUNDING OF LAND ACQUISITION AND DEVELOPMENT WORK	The land acquisition and construction of development work will be funded [under the ABF Program] or [outside of the ABF Program]
KEYBOARD (Include only if land acquisition and development work is funded outside of the ABF Program) ACQUISITION AND DEVELOPMENT AMOUNT	The Acquisition and Development Amount, which is the amount of the Loan reserved to finance and/or refinance the acquisition and development of the Finished Lots in the Project, is $Acquisition and Development Amount.
EQUITY	Amount[$] and Timing

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TYPE OF PROJECT	High Advance Rate, Conventional or Rolling Option
KEYBOARD (Include Only For High Advance Rate Projects)ADDITIONAL LOAN FEE	The Additional Loan Fee the Borrower will be required to pay to Lender as a condition precedent to the Lender’s release of its lien on any Lot or Unit located in the Project is equal to the following: (a) in the event the Lender has advanced proceeds of the Loan to finance the acquisition of the Land and the Development Work and the Borrower finances the construction of a Home on a Lot from a source other than the Lender or sells a Lot to another builder, an amount equal to five percent (5%) of the Value of such Lot; and (b) in the event the Lender has advanced proceeds of the Loan to finance the Homes, regardless of the completion status of the Unit, an amount equal to one and one-half percent (1.50%) of the Gross Selling Price of such Unit.
INTEREST RATE	The Loan shall bear interest from the date of disbursement on the unpaid principal at the per annum rate of the Prime Rate plus one-fourth of one percent (.25%).
KEYBOARD (Include only if land acquisition and development work is funded outside of the ABF Program) (Select Type of Project) ADVANCE RATE FOR LAND ACQUISITION AND DEVELOPMENT WORK — High Advance Rate Project	Proceeds of the Loan up to the Acquisition and Development Amount may be advanced to fund the following: (1) to acquire the Land, 85% of the acquisition price of the Land; plus (2) to fund Development Work, 100% of the costs of the Development Work, provided however that the Acquisition and Development Amount shall not exceed ninety percent (90%) of the Value of the Land.

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ADVANCE RATE FOR LAND ACQUISITION AND DEVELOPMENT WORK — Conventional Project	Proceeds of the Loan up to the Acquisition and Development Amount may be advanced to fund the following: (1) to acquire the Land, the lesser of 70% of the cost of the Land or 70% of the Value of the Land; plus (2) to fund Development Work, 100% of the costs of the Development Work, provided however that the Acquisition and Development Amount shall not exceed the lesser of seventy percent (70%) of the Value of the Land or 85% of the cost of Finished Lots.
VALUE OF LAND	KEYBOARD (Insert Values) Value of Land The value of the Land shall be $Value of Land, which value was determined based on the retail value of the Land after completion of all Development Work. KEYBOARD (High Advance Rate Projects Only) Value of Finished Lots: For purposes of determining the Additional Loan Fee payable in the event the Lender has advanced proceeds of the Loan to finance the acquisition of the Land and the Development Work, and the Borrower finances the construction of a Home from a source other than the Lender or sells a Lot to another builder, the value of the Lots shall be determined based on the “as if complete” value of the Lots after completion of all Development Work.
APPLICABLE ACQUISITION AND DEVELOPMENT PRINCIPAL REPAYMENT PERCENTAGE (Include only if land acquisition and development work is funded outside of ABF Program)	The Applicable Acquisition and Development Principal Repayment Percentage for the Project is APPLICABLE PERCENTAGE (            %).

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

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ABF PROGRAM

Proceeds of the Loan may be advanced to fund [the acquisition of the Land, the construction of Development Work and] the construction of Homes in the Project under the ABF Program pursuant to the terms of the Loan Agreement.

BORROWING BASE VALUE UNDER THE ABF PROGRAM

The Borrowing Base Value of a Unit included in the ABF Program shall be in accordance with the applicable provisions of the Loan Agreement, including the following definitions: “Applicable ABF Home Advance Rate” shall mean (i) with respect to a Unit in a Conventional Project, 80% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit, (ii) with respect to a Unit in a High Advance Rate Project, 85% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit, and (iii) with respect to a Unit in a Rolling Option Project, 80% of the Value of such Unit if such Unit is a Model Unit, a Spec Unit or a Sold Unit. “Applicable ABF Lot Advance Rate” shall mean, with respect to any Unit for which the land acquisition and Development Work is to be funded under the ABF Program, (i) with respect to a Lot in a Conventional Project, the lesser of 70% of the Value of such Lot as a Finished Lot or 85% of the cost of such Lot as a Finished Lot, (ii) with respect to a Lot in a High Advance Rate Project, 90% of the Value of such Lot as a Finished Lot, and (iii) with respect to a Finished Lot in a Rolling Option Project, 75% of the cost of such Finished Lot.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

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“Borrowing Base Home Amount” shall mean the amount which shall be allocated to each Home included in the ABF Program for purposes of determining the Borrowing Base Value, which amount shall be equal that amount which is determined by multiplying the Applicable ABF Home Advance Rate times the Value of the Unit, and subtracting therefrom either the total amount of the Loan disbursed for the land acquisition and budgeted for the Development Work related to such Unit (if the land acquisition and Development Work for such Unit are funded outside of the ABF Program) or the applicable Borrowing Base Lot Amount for such Unit (if the land acquisition and Development Work for such Unit are funded under the ABF Program). The Borrowing Base Home Amounts shall be determined for each design type of Home and shall be set forth in the applicable Project Commitments.

“Borrowing Base Lot Amount” shall mean, with respect to any Unit for which the land acquisition and Development Work is to be funded under the ABF Program, the amount which shall be allocated to such Lot included in the ABF Program for purposes of determining the Borrowing Base Value, which amount shall be equal to that amount which is determined by multiplying the Applicable ABF Lot Advance Rate times the Value of such Lot as a Finished Lot. The Borrowing Base Lot Amount shall be determined for each Lot and shall be set forth in the applicable Project Commitments.

“Home Percentage Completed” shall mean, with respect to a Home, the percentage of the construction of the Home which has been completed, which such percentage shall be based upon the percentages in the Home Staged Draw Schedule and shall be set forth in the most recent WIP Report.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-5

	“Lot Percentage Completed” shall mean, with respect to any Unit for which land acquisition and Development Work is to be funded under the ABF Program, the percentage of the construction of the Development Work which has been completed, which such percentage shall be based upon the percentages in the Lot Staged Draw Schedule and shall be set forth in the most recent WIP Report.
VALUE OF UNITS	Sold Units: The value of any Sold Unit, whether or not the Home has been commenced or completed, shall be determined based upon the sales price set forth in the Sales Agreement. Model Units and Spec Units: The values of the Model Units and Spec Units, whether or not the Home has been commenced or completed, shall be determined, based upon the “as-completed” “full retail” value of the base value of the applicable Unit, exclusive of options, extras, upgrades and lot/location premiums, which shall be as follows:
	Base Model	Value
	[Model #Model 1]	$Value 1
	[Model #Model 2]	$Value 2
	[Model #Model 3]	$Value 3
ADDITIONAL LIMITATIONS ON DISBURSEMENTS	FIRST: KEYBOARD(Specify) SECOND: KEYBOARD(Specify) ADDITIONAL: KEYBOARD(Specify)
MATURITY DATE	The Maturity Date is the first to occur of (i) September 24, 2008, which is the date four (4) years from the date of the Loan Agreement (as such date may be extended in writing by Lender and Borrower from time to time), or (ii) the date on which the Loan is required to be repaid pursuant to Section 8.2 of the Loan Agreement.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-6

ACQUISITION AND DEVELOPMENT MATURITY DATE (Include only if the land acquisition and development work is to be funded outside of the ABF Program)	The first to occur of (i) KEYBOARD(Acquisition and Development Maturity Date), which is the date KEYBOARD(# months) months from the date of the Project Documents for such Project (as such date may be extended in writing by the Lender and the Borrower from time to time), or (ii) the Maturity Date.
[EXCLUDED UNIT/EXCLUDED LOT CONCEPT] [DISCUSS]	[Discuss]
KEYBOARD(Delete if not applicable) LETTER OF CREDIT	KEYBOARD(Specify information)
PROJECT INFORMATION
DESCRIPTION OF PROJECT	ACQUISITION OF LAND: Acquisition of land for a Unit No [wds/#] lot residential subdivision located Location Within State in the State of Project State.
	DEVELOPMENT WORK: The work of development to be performed on or with respect to the Land (including, without limitation, the installation of utilities, roads and all related on-site and off-site improvements) in connection with the development of the Land for the subsequent construction thereon of Homes, all of which work and construction shall be completed by or on behalf of the Borrower in accordance with the Plans and Specifications, but shall not include the Homes.
	HOMES: The Homes which are to be constructed on or with respect to the Land by or on behalf of the Borrower in accordance with the Plans and Specifications, which improvements shall include Unit No. [wds/#] single-family detached homes / attached townhomes / detached townhomes / condominiums in a subdivision commonly known as Project Name located in Project County County, State of Project State, but shall not include the Development Work.
BUDGET FOR LAND ACQUISITION AND DEVELOPMENT WORK	The Budget for the land acquisition and Development Work is attached hereto as Schedule 1.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-7

BUDGET AND STAGES FOR HOMES	Schedule 2 attached hereto sets forth the Budget for the Homes, including a Staged Draw Schedule of the Stages relating to the construction of the Homes.
STAGES FOR DEVELOPMENT WORK (Include only if land acquisition and development work is to be funded under the ABF Program)	Schedule 3 attached hereto sets forth the Lot Staged Draw Schedule and the Stages relating to the construction of the Development Work.
PRICE POINT	The maximum sales price for any Unit in the Project shall not exceed $Price Point.
PERMITTED MODEL UNITS	Proceeds of the Loan may be disbursed for no more than Model Home Number Model Units.
ABSORPTION RATE	The projected absorption rate for the Project is Absorption Number Units per month.
PERMITTED SPEC UNITS	Proceeds of the Loan may be disbursed for a number of Spec Units equaling three (3) months of absorption, currently Spec Number Spec Units, except on the 1st phase of the Project, a number of Spec Units not to exceed twenty-five (25) Spec Units.
INSPECTOR	Inspector, or such other inspector(s) or engineer(s) engaged by the Lender, at the expense of the Borrower, to provide to Lender consultation services in connection with the Project.
CONSTRUCTION PROGRESS SCHEDULE	Construction of the Project will commence no later than ninety (90) days from the date of this Project Commitment and will continue in accordance with the Construction Progress Schedule provided to Lender.
PROJECT DOCUMENTS
PROJECT DOCUMENTS	Project Commitment Deed of Trust UCC Financing Statements (one for filing with Project State Secretary of State and one for filing with Project County County Title Policy or Title Policy Endorsement Plans and Specifications

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-8

OTHER REQUIRED DOCUMENTS Prior to closing this transaction, Borrower shall deliver to Lender the following: KEYBOARD(Specify)

This Project Commitment is conditioned upon the absence of (i) any Material Adverse Change since the date of the most recent financial statements delivered to Lender, (ii) any material adverse change in the financial condition or projected operations of the Project since the date of the most recent information delivered to the Lender with respect to the Project, (iii) any material action, suit or proceeding (including, without limitation, any inquiry or investigation) pending or threatened with respect to Borrower, the Guarantor or the Project that could have a material adverse affect on the Borrower, the Guarantor or the Project and (iv) the occurrence of any Event of Default or Potential Default prior to the execution and delivery of the Project Documents.

The Project Documents shall be prepared by counsel to the Lender and shall be satisfactory to the Lender. Borrower shall be obligated to pay all costs and expenses incurred to satisfy all conditions precedent, whether or not any funds of the Loan are advanced with respect to the Project. The Lender shall not be responsible or liable for consequential damages which may be alleged as a result of the issuance of this Project Commitment.

Borrower agrees to indemnify and hold harmless Lender from liabilities (including costs of settlement) arising out of or resulting from the transactions contemplated by this Project Commitment, and to reimburse the Lender for reasonable legal or other expenses incurred in connection with the defense or preparation of the defense of any such liability.

The provisions of the immediately preceding two paragraphs shall survive any termination of this Project Commitment.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-9

This Project Commitment shall terminate unless (a) this Project Commitment is accepted by you on or before Date, and (b) definitive Project Documents, satisfactory in form and substance to the Lender, have been entered into on or before Document Date or such later date as is mutually agreeable to the Lender and the Borrower.

Sincerely,

RFC CONSTRUCTION FUNDING CORPORATION

By:

Printed Name:

Title:

TERMS ACCEPTED:

WILLIAM LYON HOMES, INC., a California corporation

By:

Printed Name:

Title:

And

By:

Printed Name:

Title:

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-10

SCHEDULE 1

Acquisition and Development Budget

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-11

SCHEDULE 2

Budget for Homes and Home Staged Draw Schedule

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-12

SCHEDULE 3

Lot Staged Draw Schedule

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

D-13

EXHIBIT E TO LOAN AGREEMENT

FORM OF DRAW REQUEST CERTIFICATION

DRAW REQUEST NUMBER             

[DATE]

LENDER:	RFC CONSTRUCTION FUNDING CORP.
BORROWER:	WILLIAM LYON HOMES, INC., a California corporation

Reference is made to that certain Amended and Restated Loan Agreement dated as of September 17, 2004, between Lender and Borrower (as amended, restated or otherwise modified from time to time, the “Loan Agreement”). Capitalized terms used herein without definition shall have the meanings set forth in the Loan Agreement, unless the context shall require otherwise.

With respect to the Acquisition and Development Amounts of the Projects, Borrower requests Lender to disburse to the Borrower proceeds of the Loan in the amounts and for the purposes stated in the attached Schedule 1.

With respect to the ABF Program, Borrower requests Lender to disburse to the Borrower proceeds of the Loan in the amount of $                    , which is equal to or less than the Borrowing Base Allowable Disbursement Amount.

In connection with such requested disbursements, Borrower hereby represents, warrants and certifies to Lender as follows:

(a) No Event of Default or Potential Default presently exists under the Loan Agreement or any other Loan Document.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

E-1

(b) All of the representations and warranties of Borrower under the Loan Agreement and the other Loan Documents are hereby remade and restated.

(c) With respect to the Loan:

(1) the Borrower has satisfied all conditions precedent to the funding of the proceeds of the Loan as set forth in the Loan Agreement and the other Loan Documents;

(2) the Loan Documents are in full force and effect;

(3) the Loan is secured by a first priority lien on the Projects and the other collateral described in the Loan Documents;

(4) with respect to each Project, the sum of all amounts expended in respect of the acquisition of Land and Development Work related to such Project does not exceed the amounts in the specified Budget, or if such amounts do exceed the amounts specified in the Budget, attached hereto is a listing of the amounts over budget and an explanation of such budget overrun(s); and

(5) all contractors, subcontractors, vendors, materialmen and other Persons entitled to payment with respect to each Project have been paid or will be paid, subject to retainage, with the proceeds of the requested disbursement.

(d) All insurance required to be maintained by Borrower remains in full force and effect, of the types, in the amounts and issued by insurers as previously approved by Lender.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

E-2

(e) All of the information contained in the most recent WIP Report generated by Lender is true, complete and accurate, and such WIP Report does not contain any untrue statement of a material fact, or omit any material fact required to be stated therein or necessary to make the statement made therein, in light of circumstances under which they are made, not misleading.

BORROWER:

WILLIAM LYON HOMES, INC.,

a California corporation

By:

Printed Name:

Title:

And

By:

Printed Name:

Title:

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

E-3

EXHIBIT F TO LOAN AGREEMENT

FORM OF

IRREVOCABLE LETTER OF CREDIT

                    , 200    

Addressee

Address

Attn:                                                                                       

RE:	Irrevocable Letter of Credit
	Amount:	$    ,      ,      .
	Term:	, 200
	Applicant:	RFC Construction Funding Corp. (for William Lyon Homes, Inc., a California corporation -                     )
	Beneficiary:	______________________________________
		Address

Dear Sir or Madam:

For the account of RFC Construction Funding Corp. (for William Lyon Homes, Inc., a California corporation -                                                              ) we hereby open in your favor our Irrevocable Letter of Credit (“Credit”) for an amount not exceeding a total of                                                               and 00/100 U.S. dollars (U.S. $        ,            ,            .         ), effective immediately and expiring at the offices of General Motors Acceptance Corporation (“GMAC”) on                      , 200  .

Funds under this Credit are available to you against your sight draft(s) drawn on us, bearing the clause “Drawn under General Motors Acceptance Corporation                          , 200   Irrevocable Letter of Credit for the account of RFC Construction Funding Corp. (for William Lyon Homes, Inc., a California corporation -                                                              ) completed by you in substantially the form attached as Exhibit 1, for all or any part of this Credit.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

E-4

All drafts drawn in compliance with the terms of this Credit shall be duly honored if presented together with document(s) as specified and the original of this Credit if received on or before the expiration date at:

200 Renaissance Center

Detroit, MI 48265

Attention: Managing Director and Chief Financial Officer

GMAC Mortgage Group, Inc.

Drafts presented at our office at the address set forth above no later than 10:00 a.m. shall be honored on the date of presentation, by payment, in accordance with your payment instructions that accompany each such draft. Payment under this Credit shall be made by wire transfer of immediately available funds to your account as specified in the draft.

If any amounts are available under this Credit following honor of a draft drawn under this Credit, we will endorse the amount of such draft drawn under this Credit on the reverse of this Credit and we will return this Credit to you following such honor.

This Credit sets forth in full the terms of our understanding. Such undertaking shall not in any way be modified, amended or amplified by reference to any document or instrument referred to herein or in which this Credit is referred to or to which this Credit relates and any such reference shall not be deemed to incorporate herein by reference any document or instrument.

This Credit, including the right to draw under this Credit, is not transferable.

All bank charges and commissions incurred in this transaction are for the applicant’s account.

We hereby agree with drawers, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of this Credit that such drafts will be duly honored upon presentation to the drawee. The obligation of GMAC under this Credit is the individual obligation of GMAC, and is not contingent upon reimbursement with respect thereto.

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

F-5

This Credit shall be governed by and subject to the Uniform Customs and Practice for Documentary Credits (1993 version), International Chamber of Commerce Publication No. 500 (“UCP”) and to the extent not inconsistent with the UCP, laws of the State of New York, and, in the event of conflict the laws of the State of New York will control. If this Credit expires during an interruption of business as described in Article 17 of said I.C.C. publication, we agree to effect payment if this Credit is drawn against within 30 days after the resumption of business.

GENERAL MOTORS ACCEPTANCE CORPORATION

By:

Name:

Title:

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

F-6

Exhibit 1

SIGHT DRAFT

General Motors Acceptance Corporation

200 Renaissance Center

Detroit, MI 48265

Attention: Managing Director and Chief Financial Officer

GMAC Mortgage Group, Inc.

                    , 200  

Pay on demand to the undersigned the sum of U.S. $                    . This draft is drawn under General Motors Acceptance Corporation                          , 200   Irrevocable Letter of Credit for the account of RFC Construction Funding Corp. (for William Lyon Homes, Inc., a California corporation -                                                              ).

The undersigned hereby certifies that the amount specified above is due and owing to the undersigned pursuant to the terms of that certain                                                               Agreement dated as of                                 ,             , between the undersigned and William Lyon Homes, Inc., a California corporation.

The amount specified above should be paid to the undersigned by your wire transfer of the amount specified above to the following account of the undersigned:

_________________________________________

_________________________________________

_________________________________________

_________________________________________

By:

Name:

Title:

Amended and Restated Loan Agreement – William Lyon Homes, Inc.

F-7