1 1 THE COURT OF COMMON PLEAS LANCASTER COUNTY, PENNSYLVANIA 2 CIVIL _____________________________________ 3 PENN SQUARE GENERAL CORPORATION, : THE GENERAL PARTNERS OF PENN SQUARE : 4 PARTNERS, a Pennsylvania Limited : Partnership, and THE REDEVELOPMENT : 5 AUTHORITY OF THE CITY OF LANCASTER, : Plaintiffs : 6 : vs : 7 : COUNTY OF LANCASTER, : 8 BOARD OF County commissioners OR : THE COUNTY OF LANCASTER, : 9 MOLLY HENDERSON, Commissioner, and, : RICHARD SHELLENBERGER, Commissioner, : 10 Defendants : _____________________________________ No. CI-06-05555 11 LANCASTER COUNTY CONVENTION CENTER : AUTHORITY, : 12 Plaintiff, : : 13 vs : : 14 COUNTY OF LANCASTER, : BOARD OF COUNTY OF COMMISSIONERS OF : 15 THE COUNTY OF LANCASTER, and : MOLLY HENDERSON, Commissioner and : 16 RICHARD SHELLENBERGER, Commissioner, : Defendants : 17 _____________________________________ 18 19 PERMANENT INJUNCTION VOLUME I 20 21 Before: HON. JOSEPH C. MADENSPACHER, JUDGE 22 Date : Thursday, September 28, 2006 23 Place : Courtroom No. 2 50 North Duke Street 24 Lancaster, Pennsylvania 25 2 1 APPEARANCES: 2 JOHN C. FENNINGHAM, ESQUIRE GREGORY S. BERKE, ESQUIRE 3 FENNINGHAM, STEVENS & DEMPSTER, LLP Five Neshaminy Interplex, Suite 315 4 Trevose, PA 19053 For - Lancaster County Convention Center Auth 5 ANDREW W. STEPHENSON, ESQUIRE 6 HOLLAND & KNIGHT, LLP 2099 Pennsylvania Avenue, NW 7 Suite 100 Washington, DC 20036 8 For - Lancaster County Convention Center Authority 9 DAVID H. PITTINSKY, ESQUIRE JOHN C. GRUGAN, ESQUIRE 10 BALLARD SPAHR ANDREWS & INGERSOLL, LLP 1735 Market Street, 51st Fl. 11 Philadelphia, PA 19103 For - Penn Square General Corporation 12 HOWARD L. KELIN, ESQUIRE 13 KEGEL KELIN ALMY & GRIMM, LLP 24 North Lime Street 14 Lancaster, PA 17602 For - County of Lancaster 15 16 17 18 19 20 21 22 23 24 25 3 1 P R O C E E D I N G S 9:00 a.m. 2 THE COURT: All right. We're all gathered for 3 round 2; is that correct? 4 Is everybody ready to proceed? 5 MR. FENNINGHAM: Your Honor, I'm prepared to 6 make a brief opening statement. 7 THE COURT: Yes, you may. 8 MR. FENNINGHAM: Thank you, Your Honor. 9 Good morning, Your Honor. John Fenningham for 10 the Lancaster County Convention Center Authority. 11 With me today is my colleague Andrew Stephenson 12 of the firm of Holland & Knight and my associate Greg 13 Berke of my firm. 14 We are here on behalf of the petitioner, 15 complainant, the Authority, along with co-petitioner PSP 16 and RACL in these consolidated cases filed against the 17 county and the defendant commissioners. 18 The petitioners seek the entry of a permanent 19 injunction order following the July 12, the July 14th 20 hearings which resulted in the entry of your order dated 21 July 24, the preliminary injunction order, Your Honor. 22 Counsel have stipulated that all evidence 23 presented at the July 12 and July 14 hearings would be 24 incorporated into this permanent injunction record. 25 THE COURT: Correct, Mr. Kelin? 4 1 MR. KELIN: Yes, Your Honor. 2 THE COURT: Mr. Pittinsky? 3 MR. PITTINSKY: Yes, Your Honor. 4 MR. FENNINGHAM: The petitioners will present 5 direct testimony of three witnesses, Your Honor. 6 The first witness to be called will be Douglas 7 Rauch and he'll be responsive to Your Honor's indication 8 in your July 24 order that you wish to hear further 9 development or testimony regarding the defendant's 10 contention that there is some variation between 11 Ordinance 73 of 2003 passed by the Board of 12 Commissioners and the provisions of the trust indenture 13 that is one of the documents associated with the 2003 14 financing for the Authority's project. 15 In particular, the focus will be upon Section 7 16 (B) of the ordinance and Section 2.05 (B) (2) of the 17 trust indenture. 18 Petitioners will -- believe they will show that 19 there is no variation, there's no issue whatsoever that, 20 in fact, what the trust indenture required was greater 21 than what the ordinance provision indicated; and that 22 will -- we anticipate that will be through Mr. Rauch's 23 testimony. 24 The second witness will be Mark Fitzgerald, the 25 executive vice-president and COO of Penn Square General 5 1 Corp, who testified in July and he will be presented by 2 Mr. Pittinsky. 3 The third witness, Your Honor, will be Thomas 4 Beckett, the financial advisor for the Authority, and he 5 will describe his efforts in conjunction with the 6 remarketing of the bond, the 2003 Citizens Bank bond, 7 and proceeding with permanent financing of the 8 construction of the convention center. 9 Your Honor, in addition, the counsel have 10 agreed to present to you the deposition transcript of 11 former county commissioner Paul Thibault, and we have 12 indicated by highlighting what excerpts each side would 13 like you to focus upon, if you would. 14 At issue, as Your Honor focused the parties, is 15 the validity and enforceability of the guaranty 16 agreement entered into by the county in -- on December 17 15, 2003, and, of course, the conversion of your 18 preliminary injunction order into a permanent injunction 19 directed at Resolutions 36 and 37, adopted by the two 20 defendant commissioners in May of this year. 21 All other issues, Your Honor, the parties have 22 stipulated would be deferred; that is, issues arising 23 under the two consolidated complaints. 24 It is our position going forward, Your Honor, 25 today that greater injury will result from refusing to 6 1 make the preliminary injunction permanent. So we seek 2 to preserve through a permanent injunction, Your Honor, 3 the benefit of the bargain that arises under that 4 guaranty agreement entered into almost three years ago. 5 And we have relied upon the idea and the 6 express terms of that guaranty agreement being 7 irrevocable, absolute and unconditional as part of the 8 need to go forward with remarketing of the bond, and to 9 proceed to not only obtain the permanent financing for 10 construction, but to commence construction of the 11 convention center. 12 Thank you, Your Honor. 13 THE COURT: Okay. Mr. Pittinsky? 14 MR. PITTINSKY: Your Honor, I simply join in 15 the -- Mr. Fenningham's eloquent remarks. 16 THE COURT: Thank you. 17 MR. Kelin? 18 MR. KELIN: Thank you, Your Honor. 19 I'm here on behalf of the defendants. If I 20 may, I'd like to reserve my opening until I present my 21 witnesses. 22 THE COURT: You may do so. 23 All right. Whenever you're ready. 24 MR. FENNINGHAM: Your Honor, I call Douglas 25 Rauch. 7 1 MR. SPEICHER: And, Your Honor, if the Court 2 please, I'm attorney John Speicher from Reading. I'm a 3 shareholder with the law firm of Leisawitz, Heller, 4 Abramowitch and Phillips. 5 Mr. Rauch is a member of our firm and I'd like 6 to enter my appearance with your permission on behalf of 7 Mr. Rauch. 8 THE COURT: Why, does Mr. Rauch need an 9 attorney? 10 MR. SPEICHER: Well, we never know if he does, 11 but I might just in case there would be something that 12 would come up with that we would not be anticipating 13 that could be of issue, we feel it is prudent for us to 14 have counsel for him. 15 MR. FENNINGHAM: We have no objection, Your 16 Honor. 17 THE COURT: Mr. Kelin, any objection? 18 MR. KELIN: Well, Your Honor, I'm not familiar 19 with witnesses being represented by counsel. I'm not 20 sure there's authority for that. 21 I don't have any particular objection. I just 22 don't know that it's authorized. I have never heard of 23 such a thing. 24 THE COURT: If I ask -- well, I'll allow it at 25 this particular point and, hopefully, we don't even have 8 1 to deal with the issue. 2 MR. SPEICHER: I hope that will not be 3 necessary. 4 THE COURT: All right. 5 DOUGLAS RAUCH, Called as a witness, being duly sworn or affirmed, was 6 examined and testified as follows: 7 THE COURT: We'll make a place for you back 8 here. 9 MR. SPEICHER: I'll just sit -- I can just sit 10 right behind the counsel for Lancaster County, that 11 would be fine. 12 THE COURT: Okay. 13 DIRECT EXAMINATION 14 BY MR. FENNINGHAM: 15 Q. State your name. 16 A. Douglas Rauch. 17 Q. Mr. Rauch, you're admitted to the bar of the 18 Commonwealth of Pennsylvania as an attorney? 19 A. Yes. 20 Q. When were you admitted? 21 A. 1989. 22 Q. And how long have you been in private practice? 23 A. About 17 years. 24 Q. Which firm are you presently employed with? 25 A. Leisawitz, Heller, Abramowitch, Phillips. 9 1 Q. How long have you been employed by that firm? 2 A. Since '96; 10 years. 3 Q. What is the focus of your practice of law? 4 A. Transactional work, but I do specialize in 5 municipal finance and municipal work. 6 Q. Have -- could you describe your -- the scope of 7 your experience with regard to municipal finance law? 8 A. I have served as bond counsel, underwriter's 9 counsel, special tax counsel, disclosure counsel, and 10 hundreds of finance -- mainly municipal finance 11 transactions 12 Q. And you've done so over the past 10 years? 13 A. Yes. 14 Q. Did your firm -- your present firm serve as 15 special counsel to the County of Lancaster in 2003? 16 A. Yes. 17 Q. Was that special counsel role related to 18 municipal financing? 19 A. That's correct. 20 Q. And was that in connection with the guaranty 21 agreement and related documents concerning financing of 22 the Lancaster County Convention Center Authority? 23 A. Yes. 24 Q. If -- you have two binders before you, one is 25 rather -- one is larger than the other. If you would 10 1 open the larger binder and turn to tab 10. Let me know 2 when you're prepared. 3 A. Go ahead. 4 Q. That document has been admitted into evidence 5 as County Exhibit 10. It is identified as the DCED 6 certificate of approval of Ordinance 73. 7 Do you recognize that as such? 8 A. Yes. 9 Q. And if you would look at the very first printed 10 line at the top of the first page of that exhibit, it 11 appears to be a code entry identifying the document; is 12 that correct? 13 A. Yes. 14 Q. And there is initials DPR toward the right side 15 of that first line entry. Does -- is that a description 16 of yourself? 17 A. Yeah, Douglas Paul Rauch. 18 Q. Does that indicate that you drafted the 19 application form submitted to DCED? 20 A. That's right. 21 Q. And appended to that -- and as part of that 22 Exhibit 10 is a certificate, as well as a copy of County 23 of Lancaster Ordinance Number 73 enacted October 29, 24 2003; is that correct? 25 A. Yes. 11 1 Q. Did you draft Ordinance 73? 2 A. Yes. 3 Q. And you did so in your capacity as special 4 counsel to the county? 5 A. That's right. 6 Q. If you would turn to -- strike that. 7 As part of this -- as demonstrated by Exhibit 8 10, was the Ordinance 73 -- strike that. 9 If you would turn to the smaller binder, and 10 open up to tab 39. 11 MR. FENNINGHAM: Your Honor -- 12 THE COURT: The smaller binder? 13 MR. FENNINGHAM: We're proceeding into new 14 exhibits. You don't have this binder just yet. 15 Your Honor, if we may, I'd -- these are going 16 to be exhibits both sides -- we may have objections, but 17 we're dealing with the documents that were addressed at 18 the depositions. 19 THE COURT: Okay. 20 BY MR. FENNINGHAM: 21 Q. So, again, in the smaller binder, tab 39, would 22 you identify that document, Mr. Rauch? 23 A. It's a cover letter to the Department of 24 Community and Economic Development. 25 Q. And does it describe within the contents of 12 1 your letter documents submitted to DCED? 2 A. Yes. These are the required documents. It was 3 attached as a package that's sent to DCED; actually, two 4 sets of these documents were sent, because as you know, 5 the -- the Department has to approve the incurrence of 6 debt of any municipality and the guaranty constitutes 7 that. 8 Q. And that is pursuant to citing the second line 9 of your November 3, 2003, letter, it -- it is pursuant 10 to the local government unit debt act; is that right? 11 A. That's the governing statute of Pennsylvania. 12 That's right. 13 Q. And this letter is addressed to the office of 14 chief counsel -- 15 A. Right. 16 Q. -- of the DCED? 17 A. Right. 18 Q. Now, as a result -- turning back to tab 10 and 19 the first page of Exhibit 10, the top part of that page, 20 could you describe what that is, and if it has any 21 relation to your letter of November 3, 2003? 22 A. Yeah. That literally is the certificate of 23 approval. It doesn't -- the copy doesn't do it 24 justice. It's actually a sticker. 25 They used to send you a form with a nice seal 13 1 on it, but I think as a way to cut costs, they decided 2 to do it by sticker. 3 If you read it, it says certificate of approval 4 and the amount and the approval number. 5 Q. And that -- and that is, based on your opinion 6 and based upon the law, that is the approval of the DCED 7 for the county to enter into the guaranty agreement? 8 A. That's correct. 9 Q. Did you or your firm draft the guaranty 10 agreement that was entered into in December of 2003 by 11 the county? 12 A. Yes. 13 Q. And do you recall whether -- or who drafted the 14 trust indenture or was there a trust indenture 15 associated with the bond financing in 2003? 16 A. There was an indenture. 17 Q. And who drafted that, if you know? 18 A. Peter Edelman. 19 Q. And he is with the firm of Stevens & Lee? 20 A. Yeah, they were the bond counsel for the deal. 21 Q. If you page down within tab 10 of County 22 Exhibit 10, and turn to the fourth page, which at the 23 bottom you'll see Section 7, and if you turn to -- after 24 reviewing Section 7, if you turn to the next page, five, 25 and focus upon subparagraph B of Section 7 of Ordinance 14 1 73. Do you see that? 2 A. Yeah. Yes, I do. 3 Q. And you prepared the language that required the 4 Authority as issuer of the 2003 bond to certify items to 5 the trustee that are identified in subparagraphs 1 -- or 6 I and II; is that correct? 7 A. Yes. 8 Q. Would you describe for the Court what you meant 9 in terms of the language that the Authority would 10 certify something to the trustee? 11 A. A certificate is just a -- a document that sets 12 forth certain items, you know, that you're certifying 13 to. It's a written document signed. 14 Q. And those items that are addressed in Section 7 15 (B) would -- would be certified to allow the Authority 16 to release the proceeds of the bonds on deposit in the 17 construction fund. 18 Am I referring to Section 7 (B) correctly? 19 A. As it worked out, yeah, that's -- that's -- 20 that would have been the thought and -- you present the 21 certification to in this case the trustee, and they 22 would meet their obligation. 23 Q. There was testimony by Mr. Edelman on July 12 24 that is incorporated into this record that related to 25 subsequent amendment of that provision, Section 7 (B) of 15 1 the Ordinance 73. 2 If you would turn to tab 11. 3 MR. KELIN: Objection. I think that's -- 4 Amendment 7 (A) not 7 (B). 5 MR. FENNINGHAM: 7 (A). Excuse me. Thank 6 you. 7 BY MR. FENNINGHAM: 8 Q. Is Ordinance 74 before you behind tab 11? 9 A. Yes. 10 Q. Did you draft Ordinance 74? 11 A. Yes. 12 Q. And is it correct, that as Mr. Kelin noted for 13 me, that Section 2 of Ordinance 74 amends Section 7 (A) 14 of Ordinance 73? 15 A. Yes, it does. 16 Q. Now, in the small binder would you turn to tab 17 41? 18 Strike that. Would you turn to tab 40? 19 Would you describe the document behind tab 40 20 in the binder of the county exhibits? 21 A. Behind tab 40? 22 Q. 40, yes. 23 A. There's nothing behind my tab 40. 24 THE COURT: There should be an e-mail, it looks 25 like. 16 1 THE WITNESS: Yeah, it's just an e-mail in this 2 one. 3 MR. FENNINGHAM: Yeah, that's what I'm asking 4 you to refer to. 5 THE WITNESS: Oh. 6 BY MR. FENNINGHAM: 7 Q. I'm just asking you to describe that. 8 A. I thought you meant behind the e-mail. I'm 9 sorry. 10 Q. No. That's okay. 11 A. It's an e-mail from Mr. Edelman to the working 12 group. 13 Q. Is this a document that you provided to 14 Mr. Kelin from your work files in connection with the 15 2003 bond -- special bond counsel effort? 16 A. Yes. 17 Q. And, in fact, you received this from 18 Mr. Edelman on or about November 26th, 2003? 19 A. Yes. 20 Q. If you would turn to the next tab, 41, there is 21 another e-mail dated the same date, but later in the 22 afternoon, November 26th, 2003, from Mr. Edelman to a 23 number of people, including yourself; is that correct? 24 A. Yes. 25 Q. And was this document also produced to 17 1 Mr. Kelin from your work file in connection with your 2 role as special counsel in 2003? 3 A. Yes. 4 Q. Attached to the first page, being the e-mail, 5 are certain documents. Would you describe those, 6 please? 7 A. Well, actually, the -- the -- the e-mail 8 explains it. It's copies of the sections of the 9 indentures -- of the indenture which had been amended, 10 and we sent it electronically and it electronically 11 details what's been added to the -- to the document. 12 Q. Now, backing up a bit, Mr. Edelman transmitted 13 to you pages of the trust indenture? 14 A. That's right. 15 Q. And they indicated -- they indicate changes to 16 the original draft of the trust indenture? 17 A. Yes. 18 Q. And how did it come about that Mr. Edelman had 19 made changes to those particular sections of the trust 20 indenture? 21 A. The first draft did not address the 22 requirements under the ordinance in any manner. So, of 23 course, I contacted them to -- to make those changes. 24 Q. And you and he discussed the -- what you wanted 25 to be added to the trust indenture to comply with 18 1 Ordinance 73? Is that your testimony? 2 MR. KELIN: Objection, leading. 3 THE COURT: Sustained. Don't lead him. 4 BY MR. FENNINGHAM: 5 Q. How did it come about that Mr. Edelman provided 6 to you a copy of Section 2.05 (B) that contained some 7 additional language? 8 A. As I told you, I don't remember specifics, but 9 I know -- I know that I -- I called him and told him 10 that the -- the Section of the adult -- excuse me -- the 11 Section of the indenture that's in here now was not 12 addressed previously. The ordinance requirements were 13 not there. 14 Q. And if you look at the second page of the 15 documents on tab 41, you'll see certain provisions of -- 16 of subparagraph B with lines through them. 17 Do you see that? 18 A. That -- yes, I do. 19 Q. Could you describe what those lines are? 20 A. Well, actually, as I testified in the 21 deposition, I think we pretty much understood it looks 22 like the Section, it has cross-outs in it, but I think 23 that is actually just a computer error, because this 24 is -- this is the material that was added in response to 25 my request. 19 1 And I think Mr. Kelin pointed out, it tracks 2 what's in the indenture now. 3 Q. So the strike-out, if I could use that 4 expression, provisions within this page 22 are -- are -- 5 are lines that were actually added to the executed trust 6 indenture? 7 A. Yes. 8 THE COURT: Were there problems with the 9 underlining? 10 THE WITNESS: Yeah, I think -- I think that's 11 what happens -- I'm not a technology whiz. I'm not 12 going to try to explain that. 13 THE COURT: I guess that is what it was. 14 BY MR. FENNINGHAM: 15 Q. And if you turn -- following the Judge's 16 comment, if you turn to the last two pages of this 17 exhibit, 41, do you see additional -- what are those 18 pages? Would you describe those, please? 19 A. The last two pages? Yeah. 20 Q. If you look at the bottom. 21 A. 5.04 of the indenture. 22 Q. And do those pages contain strike-outs and 23 underscoring? 24 A. Yeah. 25 Q. And are they also of the same nature that 20 1 Mr. Edelman forwarded to you revisions to the original 2 trust indenture draft? 3 A. Yes. 4 Q. And were those changes in discussion with you 5 and Mr. Edelman? 6 A. I don't recall. 7 Q. Did he forward -- do you know whether these 8 changes were made part of the executed trust indenture? 9 A. Without looking at it, I couldn't tell you if 10 it was word for word. It looks familiar. 11 Q. If you would -- if you would turn to tab 12, 12 the larger binder. 13 A. Yeah. 14 Q. And if you would flip to -- that is the trust 15 indenture, is it not? 16 A. It is, yes. 17 Q. And if you would turn to page 50 of the trust 18 indenture. Is that Section 5.04? 19 A. That is. 20 Q. And if you look at paragraph B on page 50, is 21 that referring to as a subheading, payment of debt 22 service requirements? 23 A. Yeah. Yes, it is. 24 Q. Were you satisfied or what was your reaction to 25 the submittal by Mr. Edelman of the revised Section 2.05 21 1 (B) for the trust indenture? Which again is tab 41. 2 A. Yes, I was satisfied. 3 Q. And in your judgment and opinion, did those 4 provisions comply with the requirements of Ordinance 73? 5 A. I did -- in fact, I thought it was -- it 6 actually provided more protection to the County. 7 Q. In what regard? 8 A. As I mentioned before, Section 7 of the 9 ordinance requires that before the trustee can release 10 any funds for the project, the county has to provide a 11 certification it has enough funds and that the plans and 12 specs where the project is going to be built. 13 What this does, it requires that the Authority 14 actually has to produce the actual plans and specs. It 15 actually has to produce the detailed budget in this -- 16 in this context, a balanced budget; evidence that the 17 headquarters is going to be available. 18 These are actual physical deliveries that have 19 to be made to the trustees so the trustee can satisfy to 20 itself that the burden has been met. 21 It's quite different than a certification, 22 which you can get a member of the Authority to sign 23 which could have said anything. 24 Q. Is it your testimony that the requirements of 25 the trust indenture as revised at Section 2.05 (B) were 22 1 more stringent than the provisions of Section 7 (B) -- 7 2 (B) (I) of the Ordinance 73? 3 A. Yes. 4 Q. Now, you did mention the context of Section 5 2.05 (B) (2) in referring to a detailed budget. Would 6 you describe your opinion of the requirement of that 7 provision? 8 A. Again, as I said, in -- in this context, when 9 you -- in a municipal sense, you know, that's the 10 background that I think both this document is -- is 11 read, but also -- well, actually even outside of a 12 municipal context, when you think of a household budget, 13 you know, you're talking about revenues and expenses. 14 I work with municipalities and authorities all the 15 time. School districts are required to come up with a 16 budget every year. By statute, it's a balanced budget. 17 This budget requirement says, shall include an 18 itemization of costs. It doesn't mean, and exclude 19 revenues. I mean, it's -- in my interpretation and 20 understanding, when we came to this provision is, there 21 would be revenues, expenses and they'd have to show it 22 to the Authority. 23 Besides, the trustees would be getting this 24 and, you know, they have a fiduciary duty to the holder 25 of the obligation to make sure they're not releasing the 23 1 money. 2 You know, they're in the business of dealing 3 with construction projects all the time. They need to 4 see sources and uses. 5 Q. So it was clear to you in 2003 as special bond 6 counsel to the county that the requirement was for a 7 balanced budget? 8 A. Yes. 9 Q. Would you turn again to tab 10. And I'll focus 10 you on provisions of Ordinance 73. 11 If you would look at page 4 again of the 12 Ordinance 73, and focus upon Section 5, and just read 13 that to yourself, if you would. 14 A. Yeah, I'm familiar with it. 15 Q. And then I would ask you if you would flip to 16 tab 13, which is the county guaranty agreement. And 17 turn to page 9 to focus upon Section 3.17 of the 18 guaranty agreement. 19 A. Okay. 20 Q. Does the language -- and you prepared both 21 Section 5 of the ordinance and Section 3.17 of the 22 guaranty agreement? 23 A. Yes. 24 Q. Does the provide -- do the provisions of 25 Section 3.17 with regard to the county's approval of the 24 1 terms of the indenture and the reimbursement agreement 2 by the execution track the provisions of Section 5 of 3 Ordinance 73? 4 A. Yes. 5 Q. So that the language within the guaranty 6 agreement in Section 3.17, that is grounded in the 7 authorization within Section 5 of the ordinance; is that 8 correct? 9 A. Yeah. Section 5 gives the -- the authority of 10 the chair, tested by the -- the clerk to execute the 11 guaranty and the reimbursement agreement and gives them 12 the authority to take any other actions necessary to 13 effectuate the project and the issuance of the note and 14 the bonds. 15 I think they're consistent. 16 Q. Would you turn to the next page of Ordinance 73 17 and focus upon Section 8. 18 A. Okay. 19 Q. Is it fair to say that Section 8 amplifies that 20 authorization within Section 5 as part of Ordinance 73? 21 A. Yes, I think it does. 22 Q. In your opinion, was it your opinion in 2003 23 that Sections 5 and 8, in particular, but the entire 24 Ordinance 73, authorized the county to enter into and 25 execute the guaranty agreement as part of the support 25 1 for the 2003 financing of the convention center project? 2 A. Yes. And Section 5 delegates some of that 3 responsibility directly to the county chair. 4 Q. So in 2003, Chairman Thibault was authorized to 5 enter into the ancillary documents, including the 6 guaranty agreement? 7 A. Yeah. I know there's some question as to 8 whether there's -- in some manner by doing so, there was 9 a -- an amendment, if you will, of the authorization of 10 the ordinance. 11 I think contrary to that, by accepting the -- 12 the way the indenture was written, which actually 13 provides more protection to the county, you know, 14 frankly, why wouldn't he agree to enter into that 15 provision and sign the agreement. 16 Q. So again, based upon your prior testimony, the 17 county, through the requirements of the revisions to the 18 trust indenture, were requiring the Authority as the 19 issuer of the bond to provide more detailed information 20 than simply a certification; is that correct? 21 A. Oh, yeah. Absolutely. 22 Q. And is it your testimony that in providing and 23 complying with the requirements of Section 2.05 (B) of 24 the trust indenture, the Authority was, therefore, in 25 compliance with the requirements of Section 7 (B) of the 26 1 ordinance? 2 A. I may not have stated that as eloquently, but 3 that's exactly what's going on. The -- the guaranty -- 4 the execution of the guaranty was not in contravention 5 of the terms of the ordinance actually and enhanced the 6 county's position. 7 MR. FENNINGHAM: Thank you, Mr. Rauch. 8 Your Honor, that's all I have. 9 THE COURT: All right. Mr. Pittinsky? 10 MR. PITTINSKY: Your Honor, I have no questions 11 at this time. I may have a few after Mr. Kelin's cross. 12 THE COURT: Mr. Kelin? 13 MR. KELIN: Thank you, Your Honor. 14 CROSS EXAMINATION 15 BY MR. KELIN: 16 Q. Good morning, Mr. Rauch. 17 A. Good morning. 18 Q. So you said you graduated from law school in 19 '89? 20 A. That's right. 21 Q. And started work with your current firm in '96; 22 is that correct? 23 A. That's right. 24 Q. What did you do for the first seven years of 25 your legal career? 27 1 A. I worked initially doing securities, corporate 2 securities work. I was then drafted, if you will, into 3 the municipal finance group after a period of time. 4 Q. Okay. So you practiced municipal finance law, 5 the same thing you've been doing with your firm before 6 you were with your firm? 7 A. For a good bit of time, yes. 8 Q. And for those seven years, were you with 9 another law firm? 10 A. No. 11 Q. Have you ever been associated with Stevens & 12 Lee? 13 A. That's -- that's who I worked with from '86 14 to -- I'm sorry. '89 to '96. 15 Q. Okay. That's what I had asked, before you 16 started -- maybe I wasn't clear. 17 Before you started with your current firm, you 18 were with Stevens & Lee, correct? 19 A. Oh, I'm sorry. That's right. 20 Q. From '89 to '96, for those seven years? 21 A. Yes. 22 Q. Mr. Edelman had testified that he started at 23 Stevens & Lee in 1988, so I take it he was there already 24 when you arrived, correct? 25 A. Yeah. He was a first-year associate. 28 1 Q. And you were colleagues for those seven years 2 working in the same department, correct? 3 A. Eventually, yes. 4 Q. If you would look at Exhibit 10, please. 5 At the time you prepared the application form 6 and submitted Ordinance 73 from DCED, the guaranty 7 agreement and the trust indenture had not been prepared, 8 correct? 9 A. I believe so. 10 Q. You believe that's correct? 11 A. Yeah. 12 Q. Okay. And would you agree that when DCED 13 approved, gave its approval to this application, it was 14 approving a guaranty signed by the county in accordance 15 with Ordinance 73, but was not approving a guaranty 16 signed by the county to the extent it was not in 17 accordance with Ordinance 73. Would you agree with 18 that? 19 A. I don't know that DCED takes a position on -- 20 other than certain required text that has to be in the 21 guaranty, such as pledge of the full faith credit and 22 taxing power, of the given municipality. I don't know 23 that -- actually, I don't think they have a position on 24 it one way or the other. 25 Q. Well, they approved this ordinance, right? 29 1 A. They approved the incurrence of the lease 2 rental debt represented by the guaranty. 3 Q. As reflected in this ordinance that they 4 approved? 5 A. Yes. Yeah. 6 Q. Now, if you would turn to Exhibit 11, the 7 second page, which Mr. Fenningham had directed you to 8 before. 9 Do you see in Section 1, it says, the county 10 hereby ratifies and confirms its approval of the 11 project, and except as otherwise provided herein, the 12 county hereby ratifies and confirms all provisions of 13 the prior ordinance. 14 Do you see that? 15 A. Yes. 16 Q. All right. So Ordinance 74 changed only 17 Section 7 (A), it did not change Section 7 (B), correct? 18 A. Right. 19 Q. And, in fact, 7 (B) then remained in effect, 20 correct? 21 A. Yes. 22 Q. And for Section 7 (B) to be modified, it would 23 have to be modified through another ordinance; isn't 24 that correct? 25 A. Do you mean the amendment to 7 (B)? 30 1 Q. Yes. Yes. 2 A. Yes. 3 Q. You weren't intending, through your 4 negotiations of the guaranty and trust indenture, to 5 modify the requirements of Section 7 (B); isn't that 6 correct? 7 A. In negotiations of what? 8 Q. Through the negotiations it was not your intent 9 to modify the requirements of Section 7 (B) of the 10 ordinance? 11 A. No. 12 Q. And if you go back to tab 10, Ordinance 73, 13 Section 5, which Mr. Fenningham directed you to, and 14 Section 8, those sections authorize actions by the chair 15 with regard to a guaranty that was in conformance with 16 Ordinance 73, but not with respect to a guaranty that 17 was not in conformance with Ordinance 73. 18 Would you agree with that? 19 A. I think so. Yes. 20 Q. Now, focusing on Section 7 (B) of Ordinance 73, 21 would you agree that the intent there was to protect the 22 county and its taxpayers against the risk of having its 23 guaranty apply to a project that was started but not 24 completed? 25 A. Can you say that again? 31 1 Q. Sure. Well, let me take a step back. 2 Section 7 (B) requires that before any funds 3 can be released from the construction fund, the 4 Authority has to certify to its trustee that it has 5 sufficient funds to complete construction of the 6 facilities in full accord with the plans and 7 specifications; isn't that correct? 8 A. Yes. 9 Q. Okay. The intent there was to insure that the 10 county's guaranty wasn't applied to an incomplete 11 project. Wasn't that the idea? 12 A. I -- it depends on what you mean by incomplete 13 project. But I -- I think the -- the idea was to show 14 that the Authority had the wherewithal to go through 15 with it. 16 Q. Because the county didn't want a project 17 started if there weren't funds to complete the project, 18 isn't -- wasn't that the intent of why 7 (B) was 19 included? 20 A. I think that that's part of it. I think the 21 county committed -- at the time, it committed to the 22 project and were committed. They committed to -- up 23 to -- I forget the exact amount, $1.2 million a year, 24 but they wanted to make sure that there was adequate 25 attention to detail, for lack of a better term, so that 32 1 you actually had, you know, a project going forward. 2 Q. And completed, right? 3 A. Um -- 4 Q. Isn't that why the Authority -- 5 (Reporter interrupts.) 6 THE COURT: Let's try this again. 7 BY MR. KELIN: 8 Q. Why, yes, if you wish to elaborate on the prior 9 answer, go ahead. 10 A. Like I said, it wouldn't be complete until 11 after it was constructed. But what this calls for is, 12 you know, evidence of funds and the design. 13 Q. Before any money's spent on construction, 14 right? 15 A. Before the money can be released. 16 Q. If you would turn to the smaller notebook that 17 Mr. Fenningham was directing you to, and Exhibit 40, and 18 again, this is an e-mail from Mr. Edelman to you and 19 others from the morning of Wednesday, November 26th, 20 2003, correct? 21 A. That's right. 22 Q. And if you look at the second paragraph, he 23 says, the preliminary draft of the trust indenture was 24 circulated to selected members of the working group 25 earlier this week and will be circulated to everyone 33 1 later today. 2 Do you see that? 3 A. I do. 4 Q. Okay. Assuming that's true, then that means it 5 was circulated either a day or two before this e-mail. 6 The e-mail was sent on Wednesday. It would have been 7 circulated Monday or Tuesday? 8 A. Yes, I think that's logical. 9 Q. Then it says, we are awaiting the preliminary 10 drafts of the guaranty agreement and the reimbursement 11 agreement from special counsel to the county and ask 12 that they circulate these documents as soon as 13 possible. 14 That's you, right? 15 A. Yes. 16 Q. Special counsel? 17 A. That's right. 18 Q. So as of this time, you had not circulated 19 those drafts to Mr. Edelman or others, correct? 20 A. That's right. I didn't think we got approval 21 until -- what was the date on that? 22 Q. Are you looking for Exhibit 10? 23 A. November 19th. So it's -- there were other 24 issues that were taking place. But the time line is 25 about right. 34 1 Q. Okay. Now, if you go to the two paragraphs 2 down, it says, settlement has been scheduled for Monday, 3 December 15, 2003, in the offices of Stevens & Lee in 4 Lancaster. 5 The Authority has made it clear that settlement 6 must occur on this date, so it is imperative for all 7 parties to focus their attention on this project. 8 Do you see that? 9 A. Yes. 10 Q. Did you, in fact, have an understanding that 11 from the Authority's perspective, it was imperative to 12 close this deal promptly and by mid-December, as 13 reflected in this e-mail? 14 A. I don't remember -- I mean, yes, this e-mail 15 says that the Authority believes it's imperative at this 16 time, being November 26th, to close by December 15th. I 17 don't recall -- I don't remember the reason. 18 Q. Okay. If you would turn to the next exhibit, 19 41. And this is the e-mail from later that same day, 20 the 26th, later in the afternoon. Mr. Edelman, as you 21 testified earlier, is sending back to you and others 22 some changes that he had made to the indenture based on 23 a discussion he had with you, correct? 24 A. Yes. 25 Q. All right. So just in terms of framing the 35 1 time line here, Monday or Tuesday of that week, you get 2 a draft of the hundred-plus page indenture from 3 Mr. Edelman, correct? 4 A. Yes. 5 Q. Okay. You review it, give him your comments, 6 and he's back to you within a couple days with changes 7 based on your comments, correct? 8 A. If -- if Monday or Tuesday was the first draft 9 of the indenture, I don't know. I don't recall. It 10 could have been circulated earlier than that, too, and 11 just a subsequent draft. There are a number -- as 12 you'll see in my file, there are a number of drafts of 13 these documents over time until you get to the closing 14 table. 15 Q. Well, would you agree that Exhibit 40 talks 16 about a preliminary draft circulating -- 17 A. Yes, it's definitely a preliminary at this 18 point. 19 Q. Is it fair to say -- and you were also at the 20 same time working on the guaranty agreement and the 21 reimbursement agreement, correct? 22 A. Yes. 23 Q. Is it fair to say that at that time there was a 24 lot going on, you had a lot of work you were doing, all 25 within a fairly short time frame established by the 36 1 mid-December deadline? 2 A. Actually, I don't think that's fair to say. 3 You know, that's over two weeks, and I mean, it 4 wasn't -- you know, I can't even remember what actually 5 my workload was. 6 This was a very big project for us. So I'm 7 sure I had plenty of time to work on it to boot, but 8 I -- I can't tell you for sure what my workload was at 9 that time. But I don't think it's a short period of 10 time. 11 Q. As you sit here today, you don't remember any 12 sort of time crunch or feeling pressured to get two more 13 done in a short period of time than you felt you could 14 handle, is that fair? 15 A. Not that I can recall. 16 Q. Okay. I'd like you to look at this -- just 17 this poster board that I had prepared, it was used in 18 the other hearing, which has the portion of 7 (B) of 19 Ordinance 73 we've been discussing. 20 A. Yes. 21 Q. And Section 2.05 (B) from the trust indenture. 22 Now, you testified that you believe the 23 language in the trust indenture was more stringent than 24 the requirements of Ordinance 73, correct? 25 A. Yeah. I -- I also believe that they are in 37 1 conformity. 2 Q. Right. 3 Ordinance 73 says that the indenture has to 4 have a condition included within it that as a condition 5 of the release of the proceeds of the bonds, the 6 Authority has to certify to the trustee that it has 7 sufficient funds to complete construction of the 8 facilities, correct? 9 A. Yeah. 10 Q. Okay. Where in -- and you described the 11 certification as something that a party would write -- 12 they would have to write and sign it, correct? 13 A. That's what the -- I think not only the parties 14 to this document, but the trustee would understand. 15 Q. Okay. Where does it say in Section 2.05 (B) of 16 the trust indenture where it talks about providing a 17 budget that the Authority would have to sign anything or 18 make any representation about the budget under 19 signature? 20 MR. FENNINGHAM: Objection. The use of two 21 words there in the question, Your Honor. It simply is 22 the language of certifying, not representations as 23 Mr. Kelin added. 24 THE COURT: I didn't think there was anything 25 wrong with the question. Overruled. 38 1 THE WITNESS: There isn't any certification 2 called for in the indenture. It actually calls for 3 physical evidence what otherwise -- I mean, you could 4 have no way of knowing what was being certified to. 5 BY MR. KELIN: 6 Q. But it doesn't say that the Authority has to 7 sign the physical evidence in contrast to what you talk 8 about under certification, where the Authority would 9 have to sign a certification, correct? 10 A. I don't -- I'd have to look. I don't think so. 11 Q. Take your time and look, if you'd like. 12 A. I'm sure it doesn't. 13 Q. Also, you said that in the context of this 14 transaction that the language in the trust indenture 15 implies that the budget would have to be a balanced 16 budget, because your understanding is, you know, a 17 household budge, as you said, would be balanced; 18 municipal budgets have to be balanced by statute, and 19 the trustee would be expecting to balance the budget? 20 A. It's not implied, you know, that's -- it -- 21 it's used other places in the document and it's in the 22 context of the document. I think it means what it says. 23 Q. Where in the document does it say that the 24 budget has to be balanced? 25 A. I'm -- I'm referring to something that I think 39 1 you brought up in our deposition regarding some 2 testimony as to the definition of project. And -- 3 Q. Right. 4 A. -- providing sources of funds. 5 Q. And you said during your deposition that you 6 can't remember whether you were thinking about that 7 definition at the time you were focusing on that 8 language, correct? 9 A. I know that I was satisfied with the language 10 as it was. 11 Q. And the language you were satisfied with 12 doesn't say the budget has to be balanced; that's 13 something you see in the context of the overall 14 document. Is that a fair characterization? 15 A. I -- I think it's plain. 16 Q. Okay. Do you have any understanding as to 17 whether the Authority, Convention Center Authority, is 18 statutorily required to have a balanced budget, like the 19 municipalities you referred to? 20 A. I know we have to do -- I can't -- I know it's 21 in the statute. I don't remember exactly what it says. 22 I -- I can't say. I don't know. 23 Q. So you're not aware of any -- 24 A. But that's a budget as to, you know, operating 25 expenses and revenues in a year. 40 1 Q. Well, are you aware of any statutory 2 requirement that the Convention Center Authority's 3 budget for this project be a balanced budget? 4 A. I'm not aware of any. 5 Q. Now, given your testimony that the indenture 6 was in conformance and, indeed, more stringent than the 7 ordinance, I take it your understanding is there are no 8 circumstances where a risk would be imposed on the 9 county under the indenture that would be prohibited 10 under the ordinance? 11 A. I don't know if I understand what you mean. A 12 risk -- 13 Q. Well, there's a -- if there were circumstances 14 where under the indenture -- well, first of all, for 15 purposes of my next few questions, let's assume your 16 interpretation of the indenture applies, that it's a 17 balanced budget. 18 All right? 19 A. All right. 20 Q. All right. I take it you believe there are no 21 circumstances where a risk to the county that would be 22 prohibited under the ordinance would be exposed to the 23 county under the trust indenture. 24 MR. FENNINGHAM: Objection, Your Honor. This 25 assumes the fact of a risk under the ordinance. It's 41 1 not clear exactly where this is going. I think it's 2 irrelevant. 3 THE COURT: I think I know where it's going. 4 Overruled. 5 THE WITNESS: Can you ask that again? I'm -- 6 still unclear. 7 BY MR. KELIN: 8 Q. Okay. I'll ask it another time. That's fine. 9 Would you agree that part of your job was to 10 review what Mr. Edelman had prepared in the trust 11 indenture? 12 A. Yeah. 13 Q. And with regard to Section 7 (B) of the 14 ordinance, to make sure that the indenture included 15 language to avoid any risk to the county that would be 16 prohibited under Section 7 (B)? 17 A. That's right. 18 Q. So if there were a risk to which the county is 19 exposed under the indenture, where that same risk to the 20 county would be prohibited under the ordinance, then it 21 would have been inappropriate for the guaranty to have 22 been signed pursuant to the ordinance. Agree? 23 A. I need an example. I -- 24 Q. Well, before we get to the example, let's just 25 take that question. 42 1 Wouldn't you agree that if there's a risk -- 2 A. A risk. 3 Q. -- that the county is exposed to under the 4 indenture that would be prohibited under the ordinance, 5 that the county is not authorized under the ordinance to 6 sign the guaranty agreement? 7 A. I guess. 8 Q. Okay. 9 A. I can't put it in context. 10 Q. I'll put it in context, but for now I'll take 11 your answer. 12 Let's assume this scenario: 13 The $40 million bonds are sold as tax exempt 14 bonds and at that time, the Authority provides a budget 15 that shows they have sufficient funds to pay for the 16 project. 17 A. Okay. 18 Q. Okay? 19 But after the bonds are sold, the tax exempt 20 bonds are sold, but before construction funds are needed 21 from the bond revenues, there's a significant design 22 default uncovered that everyone agrees will cost $5 23 million to fix, throwing the budget out of balance. 24 Are you with me so far? 25 A. Yes. 43 1 Q. All right. Let's look first how that would be 2 applied under the ordinance. 3 This says that the indenture shall contain a 4 requirement that as a condition to the release of 5 proceeds of the bonds on the deposit and the 6 construction fund or project fund, the Authority shall 7 have certified with the trustee that the Authority has 8 sufficient funds to complete construction of the 9 facilities in full accord with plans and specifics. 10 A. Okay. 11 Q. Okay. Now, let's assume now, because of this 12 glaring design default, the plans and specifications are 13 modified as they're permitted to be pursuant to those 14 plans. 15 A. Okay. 16 Q. All right? The money can't be spent under 17 those circumstances, right? Funds cannot be released, 18 because you've got a $5 million budget deficit, correct? 19 MR. PITTINSKY: Your Honor, I have to object to 20 this. Mr. Kelin is making all kinds of legal 21 assumptions, many of which I think are incorrect. 22 I mean, I don't want to get into an argument in 23 front of the witness, obviously it's cross examination, 24 about this, but he's completely misinterpreting this 25 provision and asking questions -- I mean, I think it's 44 1 totally inappropriate. 2 THE COURT: Overruled. I think this is the 3 whole focus of this case here, Mr. Pittinsky. I'm going 4 to let him follow through. 5 I mean, that's the whole basis of the 6 contracts, is to anticipate things in the future. 7 MR. PITTINSKY: I understand, Your Honor. But 8 this agreement provides for one-time certification. It 9 doesn't provide for a series of certifications. It 10 provides for a one-time certification. It doesn't have 11 anything to do with future events, and anybody reading 12 this can see that it's a one-time certification. 13 THE COURT: We can deal with that in the final 14 arguments. We'll let him develop it at this particular 15 point. 16 BY MR. KELIN: 17 Q. All right. I'll tell you what. Let's assume 18 it's a one-time certification, all right? 19 A. Okay. 20 Q. We're in the ordinance. Let's assume it's a 21 one-time certification. 22 A. Okay. All right. 23 Q. No funds have been asked for. But you've got a 24 $5 million deficit. 25 Now, the Authority goes to the trustee and 45 1 says, we want money to pay for construction. And the 2 Authority says, under the ordinance -- I mean, the 3 trustee says, as required by the ordinance, you've got 4 to certify you've got a balanced budget and you can't do 5 that, 'cause you've got a $5 million deficit here. 6 Am I correct so far? 7 A. I think that would be the case in both 8 situations. 9 Q. Okay. Well, let's go to the other situation. 10 Am I correct so far under the ordinance? 11 A. If they hadn't -- if they hadn't applied up to 12 that point to the trustee, that's right. 13 Q. Okay. And that's -- and that's exactly what 14 I'm identifying in this scenario. 15 Now, let's go to the trust indenture. 16 First, if you would turn under tab 12 of the 17 trust indenture to page 49, Section 5.02 (C) in the bold 18 print. Do you see that? 19 A. Yes. 20 Q. And that says, no disbursement shall be made 21 from the construction cost of the project fund until the 22 interest rate on the bonds has been converted to a 23 tax-exempt variable rate or a tax-exempt term rate 24 pursuant to the provisions of this indenture. 25 Do you see that, sir? 46 1 A. Yes. 2 Q. Okay. Now, you can go back to page 24 of the 3 indenture, which is the same language here on the 4 poster, Section 2.05 (B). On or before the tax exempt 5 conversion date, that's the date the tax exempt bonds 6 are sold, right, sir? 7 A. That's right. 8 Q. Okay. The issuer shall cause to be delivered 9 to the trustee complete plans and specifications and 10 the project budget, right? 11 A. Plus, evidence that there's satisfactory 12 financing in the opinion of counsel. 13 Q. Where are you reading that? 14 A. That's three -- you're focusing on one and two; 15 there's a three, four and five. 16 Q. Right. Three is on the -- regarding the hotel, 17 correct? 18 A. That's right. 19 Q. All right. Not the convention center. Okay? 20 A. Oh, yes. Yes. 21 Q. So let's go back to my scenario. 22 Remember, at the time of the tax conversion, 23 the balance -- the budget is in balance. But before 24 construction funds are needed or requested, a $5 million 25 budget deficit arrives because of the discovery of a 47 1 design error and the plans and specifications are 2 modified to reflect what needs to be done to correct 3 that design error? 4 A. Right. 5 Q. Okay. This language from the indenture doesn't 6 protect the county, does it? 7 A. Sure it does. 8 Q. How? 9 A. Because the budget, you just said yourself, 10 it's now in deficit. 11 Q Right. But what's the timing of when the 12 budget needed to be in balance under the indenture? The 13 tax exempt conversion date, correct? 14 A. At the same -- it's basically the same time. 15 Q. In my scenario, Mr. Rauch, the deficit arises 16 after the tax exempt conversion date, doesn't it, sir? 17 A. I'm sorry? 18 Q. In my scenario, the deficit arises after the 19 tax exempt conversion date, doesn't it? 20 A. Oh, yeah. 21 Q. Okay. So there's nothing in the language in 22 the indenture to protect the county against that risk, 23 even though the language in the ordinance did protect 24 the county, correct? 25 A. The risk to the county doesn't increase. Their 48 1 obligation under the guaranty is -- is a set amount 2 of -- a set amount of funds. 3 Q. Sir, that's not what I asked. 4 A. I'm not sure what you're asking then. 5 Q. I'm asking about -- you agreed, or you said you 6 guess it would be true, that if there was a risk to the 7 county under the trust indenture that would have been 8 prohibited under the ordinance, that it would have been 9 inappropriate for the guaranty to have been signed, 10 because the ordinance says you can't sign the guaranty, 11 county, unless this indenture requirement is in the 12 trust indenture. 13 Now, wasn't that your testimony? 14 A. I -- I think so. 15 Q. Okay. And now we've just identified a scenario 16 where the budget is in balance at the time of the tax 17 conversion date. 18 A. Okay. 19 Q. So you're in compliance with the trust 20 indenture, but the deficit then arises before the trust 21 indenture funds are needed or requested from the 22 construction budget, and you're in violation of this 23 requirement in the ordinance. That risk is not 24 protected in the trust indenture; isn't that correct? 25 MR. FENNINGHAM: Objection, Your Honor. Now he 49 1 is into an area asserting a legal conclusion of a 2 violation based upon a presumption, and not carrying the 3 same chronology over to Ordinance 73, Section 7 (B). 4 That would also be tied to the tax exempt conversion 5 date as a matter of -- of the entire structure of the 6 financing. 7 So he's trying to create one scenario of risk 8 and it's an apples and oranges to a scenario of risk 9 under the ordinance. They're both the same and that's 10 what the witness is saying. 11 THE COURT: I'm not sure that's what he's 12 saying. I think that's what he's trying to develop 13 here. 14 MR. KELIN: Well, my point, Your Honor, is 15 exactly what I have been trying to point out, there is a 16 risk under the trust indenture that would have been 17 prohibited under the ordinance. 18 The ordinance says the timing of the 19 certification has to be when the funds are to be 20 released. They've accelerated that in the trust 21 indenture to the time when the tax exempt bonds are 22 sold. 23 So if a -- the way this deal was structured was 24 in violation of the requirement of the ordinance. It 25 created a gap. The gap that was created by the trust 50 1 indenture is that if the budget is in balance at the 2 time the tax exempt bonds are sold, the tax exempt 3 conversion date identified here in Section 2.05 (B). It 4 can be in balance then, but come out of balance 5 afterward but before the construction funds are needed. 6 And there would be no protection to the county 7 and its taxpayers under the trust indenture where that 8 protection was required in the ordinance as a condition 9 for signing of the guaranty. 10 MR. FENNINGHAM: And, Your Honor, I rose, 11 because at this point, if I may, Mr. Kelin is making his 12 final argument and asking the witness to agree with it. 13 The witness has already identified that -- 14 testified that he doesn't believe there's a risk. So 15 he's making final argument and asking for him to agree. 16 THE COURT: I understand your argument, because 17 that is the final argument. But regarding the -- asking 18 the witness the questions, I mean, this witness -- he's 19 the expert in this area. 20 MR. KELIN: Well, and I've just asked him if he 21 agrees with that and I'm waiting to hear if he agrees 22 with that. 23 MR. FENNINGHAM: But he's agreeing -- asking in 24 that question, asking him to agree to a violation of 25 something which is based upon an assumption of facts 51 1 that are just Mr. Kelin's predicate. 2 They're asking for speculation, even by an 3 expert, of events that could occur. 4 THE COURT: Well, I agree, we're asking -- I 5 agree this is all speculation. There's no question 6 about that. But that's the whole -- that's the whole 7 point they're making. 8 MR. PITTINSKY: Your Honor -- 9 THE COURT: Mr. Pittinsky -- 10 MR. PITTINSKY: Yes, Your Honor. My objection 11 is that Mr. Kelin has taken a piecemeal approach to what 12 are essentially three provisions, and that's why it is 13 final argument, and I think that's -- 14 THE COURT: Right. 15 MR. PITTINSKY: He's -- he's -- 16 THE COURT: We all -- 17 MR. PITTINSKY: He's now admitting the 18 provisions in Section 5.02 (C), which he started out 19 with a long time ago. He's omitting that section which 20 ties in with Section 2.05 (B) and both of them, 2.05 (B) 21 and 5.02 (C), relate back to Section 7 (B) of Ordinance 22 73 and to take at any one time just two of the three is 23 really not fair to the witness. And in any event, it's 24 all argument. And I agree with Mr. Fenningham, that we 25 should all reserve this until we have closings. 52 1 THE COURT: All right. I think we really are 2 approaching heavily into the argument at this particular 3 time, but I think that he's allowed to continue to ask 4 him and the witness is the person who drafted this up or 5 was instrumental in drafting this up and that's kind of 6 the reason I wanted him to be here today. 7 So that's why -- I mean, this was the one 8 person I wanted to hear from more than anything else. 9 THE WITNESS: Actually, Your Honor, I didn't -- 10 I didn't draft this document. This was from 11 Mr. Edelman. 12 MR. KELIN: He reviewed it. 13 THE COURT: You approved it on behalf of the 14 county. 15 THE WITNESS: That's correct. 16 THE COURT: That's correct. So, I mean, you 17 are a co-draftee of that. 18 THE WITNESS: I agree. 19 MR. KELIN: And, Your Honor, I agree I made 20 argument in response to the objection. 21 THE COURT: Right. 22 MR. KELIN: I wasn't arguing with the witness. 23 THE COURT: I know you weren't arguing with the 24 witness. 25 MR. KELIN: Thank you. 53 1 THE COURT: I said, this is the one witness I 2 wanted to hear, so I'm going to give you a lot of 3 leeway. So you can continue. 4 BY MR. KELIN: 5 Q. Mr. Rauch? 6 A. Yes. 7 Q. Let's go back now. 8 Do you agree that under this ordinance, 9 Ordinance 73, that the guaranty agreement was not 10 authorized to be signed unless the trust indenture 11 included what was identified as the indenture 12 requirement in Section 7 (B)? 13 A. Yeah. That's right. 14 Q. Okay. And would you agree that if the trust 15 indenture is drafted in a way that creates a 16 circumstance where the county is exposed to the very 17 risk that was prohibited by the Ordinance 73, that the 18 trust indenture doesn't satisfy the indenture 19 requirement? 20 A. I don't think so. I think the -- the -- I -- I 21 haven't got a chance to refamiliarize myself with this. 22 I think they're simultaneous. If they come ready to 23 utilize the funds, the tax exempt conversion date and 24 the request for funds are going to be on the same day. 25 Q. Says who? Says where? 54 1 A. That's -- just the way these transactions work. 2 Q. Okay. So this is implied, like balanced is 3 implied? 4 A. I'd have to read this. It may -- I can't 5 answer that. 6 Q. Well, in a lot of projects, very soon after the 7 construction funds are drawn down, they're used to pay 8 the architect for work that's been done, correct? 9 A. Yeah, that's true. 10 Q. Okay. Are you aware here that the architect 11 has been paid in course through other funds other than 12 the bond funds? 13 A. I don't -- I don't know much about any -- 14 again, our -- our role is limited. I don't know what 15 the status of the project is. 16 Q. So my question, Mr. Rauch, is still the same. 17 Wouldn't you agree that if there are circumstances in 18 which the risk to the county that was prohibited by 19 ordinance creates a situation under the trust indenture 20 where the county is exposed to that risk, that it was 21 inappropriate for the county to sign the guaranty 22 agreement? 23 MR. FENNINGHAM: Objection again, Your Honor. 24 THE COURT: Overruled. 25 THE WITNESS: I suppose that if you could 55 1 identify the risk. 2 BY MR. KELIN: 3 Q. I'm sorry? 4 A. I suppose if you could identify a risk, I would 5 agree. 6 MR. FENNINGHAM: I'm objecting because this has 7 been asked and answered. We're going through the same 8 process again. 9 THE COURT: I think it has been asked and 10 answered. 11 MR. KELIN: I'll take that as a cue that the 12 point has been made to Your Honor. 13 THE COURT: You may. 14 MR. KELIN: No further questions. 15 THE COURT: All right. Mr. Fenningham or 16 Mr. Pittinsky? 17 REDIRECT EXAMINATION 18 BY MR. FENNINGHAM: 19 Q. Mr. Rauch, I would like you to clarify one 20 point. Turn to tab 10 on the first page, which you 21 described earlier as a certificate of approval. 22 A. Yes. 23 Q. And in -- the top part of the first page of 24 Exhibit 10, is that the Commonwealth's approval 25 indication? 56 1 A. Yes. 2 Q. And is it fair to say they're assigning an 3 approval number for tracking purposes? 4 A. Yes. 5 Q. And they're approving a specified amount of 6 local debt to be incurred by the County of Lancaster? 7 A. Yes. 8 Q. And below, and within the form of the 9 application form itself, does it indicate what the 10 subject matter of the application is? 11 A. I'm sorry, what -- you mean -- 12 Q. What is being applied for? 13 A. Oh, for the approval of the department of the 14 incurrence of the debt. 15 Q. Was it your intent and, in fact, does the form 16 indicate that the county is asking DCED to approve the 17 form of Ordinance 73? 18 A. As I said before, in essence, that's right. 19 MR. FENNINGHAM: Excuse me, Your Honor. 20 MR. KELIN: That's all I have, Your Honor. 21 MR. PITTINSKY: Your Honor, if I may. 22 THE COURT: Yes, you may. 23 CROSS EXAMINATION 24 BY MR. PITTINSKY: 25 Q. Mr. Rauch, would you please turn to Exhibit 10 57 1 which again is Ordinance 73. And turn, please, to page 2 five where you have paragraph 7 (B). And, again, this 3 is a document, a paragraph which you drafted, correct? 4 A. Yes. 5 Q. Now, I see that you provided in 7 (B) that as a 6 condition to the release of the proceeds of the bonds on 7 deposit, in the construction fund or project fund, to be 8 established under the indenture, the Authority shall 9 have certified to the trustee the following. 10 Do you see that? 11 A. That's right. 12 Q. Right. Now, first of all, how many 13 certifications did you expect there to be, one or more 14 than one? 15 A. This is concentrating on the one. 16 Q. And did you contemplate on the release of the 17 proceeds that the proceeds were going to be released in 18 some kind of piecemeal or sequential fashion or did you 19 contemplate that the proceeds would be released in their 20 entirety at that time? 21 A. To the project fund? 22 Q. Yes. 23 A. I'm sorry. That's the answer to the project 24 fund, that's right. 25 Q. The entirety of the proceeds? 58 1 A. Yeah. 2 Q. So if there are $40 million worth of series 3 2003 bonds, it was your anticipation that upon the 4 certification that's called for here, all 40 million of 5 the bond proceeds would be released to the Authority for 6 its construction, correct? 7 A. That's right. 8 Q. Okay. Now, would you turn, please, to tab 12? 9 That's the trust indenture? 10 A. Right. 11 Q. And in particular, to page 49, which is Section 12 5.02 (C), the same Section Mr. Kelin referenced in his 13 cross examination. 14 A. On page 49? 15 Q. Yes. 16 A. Yeah, I have it. 17 Q. Now, as I understand it, from the questions 18 that His Honor asked you, you did not draft the trust 19 indenture, but because you had to approve its provisions 20 to the extent that related to Ordinance 73, you did 21 that, correct? 22 A. Yes. 23 Q. All right. And here there's a reference in 24 paragraph C to construction account of the project fund, 25 correct? 59 1 A. Yes. 2 Q. And it says, no disbursements shall be made 3 from the construction account of the project fund until 4 the interest rate on the bonds has been converted to a 5 tax exempt variable rate or a tax exempt term rate 6 pursuant to the provisions of this indenture. 7 Do you see that, sir? 8 A. Yes. 9 Q. And did you understand that that meant that the 10 Authority could not have the bond funds to construct the 11 convention center until the bonds were converted to tax 12 exempt bonds? 13 A. That's right. 14 Q. Right. So that the -- and the bonds that were 15 issued in December 2003 were not tax exempt bonds, 16 correct? 17 A. That's right. 18 Q. And -- and you understood that there was gonna 19 be some point in the future when these bonds -- when the 20 money would have to be released, when the bonds were 21 converted to tax exempt bonds, right? 22 A. That's the structure. Right. 23 Q. Right. And so now, if you go to page 24, which 24 is Section 2.05 (B), it states, and we're just talking 25 now about the provision -- I mean, it's a fairly 60 1 extensive paragraph, but the provision we have been 2 focusing on is on or before the tax exempt conversion 3 date. The issuer shall cause to be delivered to the 4 trustee, and item number one is, complete plans and 5 specifications -- 6 A. Yes. 7 Q. -- for the convention center. 8 And item number two is the project budget, 9 correct? 10 A. Yes. 11 Q. So does -- is there a relationship between 2.05 12 (B) and what we were just looking at, 50 -- on page 49, 13 5.02 (C)? 14 A. Yes. 15 Q. All right. Would you explain the relationship? 16 A. 2.05 (B) sets up the process by which the -- 17 the bonds are converted. And 5.02 (C) is -- it 18 addresses the construction fund and how disbursements 19 were made, but basically as you've read, you can't 20 disburse funds into the project funds until -- until the 21 bonds have been converted to tax exempt bonds. 22 Q. And you can't convert them to tax exempt bonds 23 until the issuer delivers to the trustee the plans and 24 specs and the project budget, correct? 25 A. That's right. 61 1 Q. And am I correct that once the issuer delivers 2 to the trustee the plans and specs for the convention 3 center and the project budget for the convention center, 4 and the trustee is satisfied with them, as you've 5 explained it, then -- and only then -- could you convert 6 these bonds to tax exempt bonds, correct? 7 A. That's right. 8 Q. And the -- if you go back to the Ordinance 73, 9 Ordinance 73, tab 10, please. 10 A. Yeah. 11 Q. That says, as a condition to the release of the 12 proceeds of the bonds, there has to be the 13 certification, correct? 14 A. That's right. 15 Q. And you couldn't release the proceeds until you 16 had a tax exempt bond, right? 17 A. Right. That's what I meant, I think, earlier. 18 After reading this, the actions were simultaneous. 19 Q. So -- so if the actions are simultaneous, and 20 there's only one certification, then do you see any 21 inconsistency or any contradiction between, on the one 22 hand, 2.05 (B) of the trust indenture, and 5.02 (C) of 23 the trust indenture, the two provisions we've been 24 focusing on? 25 A. No. 62 1 Q. Put them on the one hand and inconsistency or 2 contradiction between the two of them together and 3 Section 7 (B) of the ordinance? 4 A. No. 5 MR. PITTINSKY: I have no further questions, 6 Your Honor. 7 MR. KELIN: Nothing. 8 THE COURT: All right. 9 MR. FENNINGHAM: Nothing, Your Honor. 10 THE COURT: Thank you. 11 We're going to take a 15-minute recess. 12 MR. SPEICHER: Your Honor, is Mr. Rauch 13 excused? 14 THE COURT: As far as I'm concerned. 15 Unfortunately, the issue never came up. 16 (Recess taken.) 17 MR. FENNINGHAM: Your Honor, I move into 18 evidence Exhibits 39, 40 and 41. They were covered in 19 Mr. Rauch's testimony. 20 THE COURT: Any objection, Mr. Kelin? 21 MR. KELIN: No objection. It's my exhibit 22 book, Your Honor, how could I object? 23 MR. FENNINGHAM: And we appreciate that. 24 THE COURT: They are so admitted. 25 MR. FENNINGHAM: Thank you, Your Honor. 63 1 THE COURT: All right. We're ready for our 2 next witness then. 3 MR. PITTINSKY: Your Honor, we call Mark 4 Fitzgerald. MARK FITZGERALD, 5 Called as a witness, being duly sworn or affirmed, was examined and testified as follows: 6 DIRECT EXAMINATION 7 BY MR. PITTINSKY: 8 Q. Mr. Fitzgerald? 9 A. Yes. 10 Q. Good morning. 11 A. Good morning. 12 Q. Would you turn, please, to tab 44 in the book 13 that Mr. Kelin has so kindly provided for us. And it 14 would probably be helpful if you would take out of the 15 binder Exhibit 43 for the purpose of one or two of my 16 questions. 17 A. Okay. 18 Q. All right? First of all, did you prepare 19 Exhibit 44? 20 A. Yes, I did. 21 Q. And is this a sources and uses document? 22 A. Yes, it is. 23 Q. Would you explain what a sources and uses 24 document is, please? 25 A. Certainly. On a real estate development 64 1 project, it is -- you start the project by developing a 2 project pro forma. 3 As part of the project pro forma, you developed 4 capital sources and uses for the project. The top part 5 of the page represents the anticipated cost for the 6 project. They are generally broken down into site 7 acquisition costs, hard costs, soft costs for the 8 project, your financing costs for the project and then 9 your total project costs. 10 If you look at the bottom portion of that page, 11 you identify the funds to complete the construction for 12 the project that was identified above. 13 In that grouping, you would include the equity 14 that is being invested, any securitized financing or any 15 soft financing through the forms of various grants. In 16 the sources of funds, you would develop the budget, so 17 that that you have as a minimum the sources of funds 18 would equal the uses of funds. 19 Q. And what does this -- in terms of the sources 20 of funds and uses of funds, in terms of the bottom line, 21 what does this document show? 22 A. That we have a balanced budget. 23 Q. Now -- 24 A. And when I say we, I mean the hotel and the 25 convention center. This is an aggregate budget for both 65 1 the convention center component, as well as the hotel 2 component of the project. 3 Q. I have also placed in front of you Exhibit 43. 4 Have you seen that exhibit before? 5 A. Yes, I have. 6 Q. Do you know who prepared that exhibit? 7 A. Yes, I do. 8 Q. And who prepared that exhibit? 9 A. Tom Beckett. 10 Q. And there's a date on Exhibit 43. Is that 11 September 12, 2006? 12 A. Yes, it is. 13 Q. When did you prepare your Exhibit 44? 14 A. It was several days later, in preparation for 15 my deposition with Mr. Kelin. 16 Q. All right. 17 A. We had completed the sources and uses that you 18 have in Exhibit 44, and I believe it was the day prior 19 to the deposition working with the team from the 20 Convention Center Authority and myself. 21 Q. And the deposition was on September 21, so then 22 is it your testimony this was prepared, Exhibit 44, on 23 or about September 20? 24 A. That's correct. 25 Q. I notice that you have a hard cost that is 66 1 $101.103.823 on your exhibit. Do you see that? 2 A. That's correct. 3 Q. And Mr. Beckett has a hard cost of $105,514,517 4 on his document. Do you see that? 5 A. That is correct. 6 Q. What accounts for the difference? 7 A. If you look on Exhibit 43, the document that 8 Mr. Beckett prepared, directing you below the hard cost 9 line, you will see a deduction for value engineering and 10 tax savings of $4,515,000. 11 If you would subtract the $4,515,000 from the 12 $105,514,000, you would see that the numbers that 13 Mr. Beckett has and the numbers that I have are almost 14 identical. 15 Q. Now, you just referred to value engineering and 16 tax savings. 17 A. That's correct. 18 Q. What is the value engineering that you're 19 referring to? 20 A. The value engineering is a process that the 21 construction managers and the developer have gone 22 through since the time that the prime contract were 23 awarded to the prime contractors. 24 There was a series of meetings between the 25 construction manager, Reynolds Construction Management 67 1 Company, the design team, and communication with each of 2 the prime contractors where we asked the prime 3 contractors to review the construction documents and 4 identify potential areas for savings, so that we could 5 initiate a deduct change order to the contract which 6 would reduce the price and we did that for each of the 7 15 primes. 8 Q. Would you look at Exhibit 45, please? 9 A. Yes. 10 Q. What is that document? 11 A. That document is a summary document that was 12 prepared by Reynolds Construction Management Company on 13 August 30th, where Reynolds summarized all of the 14 potential value engineering ideas that were developed by 15 the prime contractors and their subcontractors. 16 Q. Right. And is the total on Exhibit 45 17 $2,750,000? 18 A. Yes, it is. 19 Q. To the best of your knowledge, would any of the 20 value engineering changes that are encompassed in that 21 2,750,000 adversely affect the quality of either the 22 convention center or the hotel? 23 A. No. I think, as I stated in my deposition, at 24 the time that the value engineering ideas were 25 identified by Reynolds, the next step in the process was 68 1 to meet with representatives from the owners, both the 2 Convention Center Authority, as well as Penn Square 3 Partners and the Redevelopment Authority, to review the 4 scope changes, to make sure that none of the potential 5 scope changes would reduce the quality of the project or 6 would prevent the hotel component of the project from 7 obtaining the certification by Marriott that we met the 8 design standards for Marriott. 9 So it is my belief that these changes are de 10 minimis, and the -- they are in complete conformance 11 with the joint development agreement and the quality 12 standards that were represented by both of the partners 13 in that agreement. 14 Q. Have the architects for the project been 15 involved in these discussions? 16 A. In fact, the architects were up from Atlanta 17 for two days' worth of meetings on Tuesday and Wednesday 18 where we reviewed most, but not all, of these prime 19 contracts. 20 They are coming in next week to complete that 21 process and I do believe, as does Reynolds Construction 22 Management, that there is a strong possibility that 23 we'll be able to increase the amount of value 24 engineering that's identified on this page. 25 The three trades that we did not get to this 69 1 week for confirmation were the general trades, the HVAC 2 trade, and the electrical trade. Each one of those 3 represents a significant component of the overall 4 project cost, and we believe that there is opportunity 5 to reduce those costs. 6 Q. Now, you just referred to meetings Tuesday and 7 Wednesday. 8 A. Yes. 9 Q. Was that Tuesday and Wednesday of this week? 10 A. I'm sorry, Tuesday and Wednesday of this week 11 for the trades that I did not just mention. All the 12 other trades. 13 Q. And is that 2,750,000 one of the two components 14 of the 4,515,000 that Mr. Beckett has on Exhibit 43? 15 A. Yes, it is. 16 Q. All right. What is the other component? 17 A. The other component was something that we 18 contemplated at the time we went out to bid was the 19 potential to have the owners who were both tax exempt 20 bodies to do what is called a direct material purchase. 21 And by procuring the materials directly, as the owners, 22 they have the opportunity to eliminate the Pennsylvania 23 sales tax on those materials. 24 We did an initial calculation on what those 25 potential savings would be and we would anticipate that 70 1 those savings would be at a minimum of $2 million. How 2 we derived at that number is we looked at the remaining 3 prime contracts to be completed, we excluded the facade 4 stabilization contract that's already been awarded and 5 the demolition contract that has already been awarded. 6 We applied a ratio of 35 percent of the project 7 costs to represent the material component of that 8 project. I think that's a conservative number, but we 9 wanted to be conservative in developing the pro forma. 10 And then we applied six percent against that 11 resultant number to come up with a number that was about 12 $2,100,000. 13 Q. And who would the purchasing entities be, as 14 you envision it, for these tax savings? 15 A. It would be the owners. It would be the 16 Redevelopment Authority of the City of Lancaster and it 17 would be the Lancaster County Convention Center 18 Authority. 19 I should note that I was actually, as I was 20 just sitting here in the courtroom today, that number 21 only represents the savings on the hard costs of the 22 project and what we should have reflected, in addition 23 to the 2.1 million is the tax savings on the FF&E 24 component of the project, which we had not done to date, 25 which would represent approximately another maybe 300 to 71 1 $500,000 worth of savings. 2 I think the 35 percent material costs for FF&E 3 is on the low side, so assuming you apply a higher ratio 4 of material to labor, I think ultimately we will save an 5 additional 3 to $500,000, which we do not have reflected 6 in the pro forma at this point. 7 Q. Is it your understanding that the Redevelopment 8 Authority and the Lancaster County Convention Center 9 Authority can purchase on a tax exempt basis? 10 A. Yes, it is. And if I could say, I'm not an 11 expert in that area, but that is information that we 12 obtained from Reynolds Construction Management, who has 13 done direct purchases on many public projects in the 14 past, as well as counsel for both the Redevelopment 15 Authority as well as the Convention Center Authority. 16 Q. Now, if you would go -- just turn to your 17 Exhibit 44. And I know this may be a little bit 18 tedious, Your Honor, but if you would -- 19 THE COURT: It's all been tedious. 20 BY MR. PITTINSKY: 21 Q. But if you would just go down the list first of 22 the uses, the costs. 23 A. Yes. 24 Q. And explain each of them after the hard costs, 25 which we've just discussed. 72 1 A. Okay. The site acquisition costs represents 2 the costs for both the -- the Watt & Shand site, as well 3 as the sites that are controlled by the Convention 4 Center Authority on the block where the convention 5 center project will be built. 6 It does not include the costs for the Swan -- 7 excuse me, the Swan Hotel or the Lancaster Laundromat 8 site. It's only the site cost for this project. 9 The sunk costs represent the carrying costs 10 from 1998 through the time of transfer of the Watt & 11 Shand building to the Redevelopment Authority of the 12 City of Lancaster, which occurred in January of this 13 year. 14 The hard costs, as we've spoken, represents the 15 net cost, net anticipated cost for both the hotel and 16 the convention center. It has deductions, as Mr. Kelin 17 knows, the -- if you look at the individual prime 18 contracts as a gross project cost, which is in excess of 19 this, you subtract from that cost the cost that's 20 allocated to the Historic Preservative Trust for their 21 component of the project. You subtract out the cost to 22 the Montgomery House for their costs associated with the 23 project. You subtract out the value engineering and the 24 anticipated tax savings for those contracts that have 25 been awarded. And you come up with a net number of 73 1 $1,103,000. 2 Working through the soft costs for the project, 3 and I should add those -- that $101 million is based on 4 the contracts that are in place today. Those contracts, 5 as you know, were approved by both the Redevelopment 6 Authority, as well as the Convention Center Authority. 7 The FF&E represents a very detailed budget that 8 was prepared by interstate hotels for both the hotel and 9 the convention center, making sure that the FF&E package 10 conforms with the Marriott standards for a full-service 11 Marriott hotel. 12 The architectural and engineering fees 13 represent the contract amount for Cooper Kerry, who is 14 the lead architect for the project, as well as the other 15 design team members, which would include the engineers, 16 interior designers, landscape architects, et cetera. 17 The professional fees represent the actual and 18 anticipated professional fees and legal fees for the 19 Redevelopment Authority of the City of Lancaster, Penn 20 Square Partners and the Convention Center Authority, as 21 it relates to the structuring of this transaction. 22 The legal fees for the Convention Center 23 Authority for litigation are not included in this line 24 item here of $2,406,000. 25 Technical service fees are fees that are paid 74 1 by each of the owners to interstate hotels as part of 2 their services in setting up the operations for both the 3 hotel and the convention center. And those amounts are 4 stipulated by contract. 5 The pre-opening expenses are budgeted expenses 6 that were prepared by interstate hotels on behalf of the 7 hotel component, and I believe Rob Hazard and Dan Logan, 8 working in conjunction with interstate hotels for the 9 convention center component of the project. 10 Working capital is working capital cash that's 11 put in up front at the time the projects are opening so 12 you can pay your bills. And then a contingency of four 13 and a half percent on the future hard costs and FF&E 14 of -- excuse me, future hard costs of the project. 15 Q. Let me just stop you for a moment. 16 A. Yes. 17 Q. Is that contingency primarily to cover change 18 orders? 19 A. Yes, it is. 20 Q. And then you have a total soft cost of 21 $37,834,066? 22 A. That's correct. 23 Q. And would you now address the financing costs, 24 please? 25 A. Certainly. The financing cost represents the 75 1 cost to secure the financing for both the hotel and the 2 convention center. 3 The first line item represents legal fees and 4 placement fees for the IFIP bonds. As you recall, we 5 have secured a commitment from the Commonwealth for an 6 annual grant for $1 million per year for 20 years. 7 Those grant proceeds will be used to retire 8 debt. We anticipate, based on interest rates on a tax 9 exempt basis, that we would be able to secure $13.6 10 million of debt for the IFIP component of the project. 11 And that would be the cost to basically structure and 12 place those -- those bonds. 13 The debt service reserve for the IFIP is $1 14 million, one year's debt service, as was agreed to in 15 the city guaranty as the city has guaranteed the IFIP 16 financing. 17 The capitalized interest of $700,000 represents 18 the interest expense during the construction period on 19 the IFIP bonds. 20 And I should note that when you look down at 21 the sources side of the ledger, you'll see that that 22 amount is offset by the annual grant that comes in from 23 the Commonwealth. 24 You'll recognize that it's below the $1 25 million, the grant is a maximum of $1 million, but no 76 1 more than the actual debt service that you actually 2 pay. 3 So in this case, based on the draw schedule, 4 it's actually less than the grant amount. That number 5 could increase, and we still have sufficient funds from 6 the Commonwealth to pay that. 7 Placement and legal fees for the Convention 8 Center Authority, capitalized interest for the 9 Convention Center Authority and the hotel, the hotel's 10 $24 million mortgage that is financing the construction 11 component of the project, and then the debt service 12 reserve fund for the convention center. 13 If you add the sum of those, it's $10,838,000. 14 Q. And your total is $155,407,070? 15 A. That's correct. 16 Q. All right. Would you now address the sources 17 of the funds to build and construct the convention 18 center and the hotel? 19 A. Certainly. 20 On the equity side, the equity is comprised of 21 two components. As you know, per our agreement, Penn 22 Square Partners has agreed to increase their equity 23 contribution to the project from $10 million to $11 24 million. 25 Q. Is that cash? 77 1 A. Excuse me? 2 Q. Is that cash? 3 A. That would be cash. That's correct. 4 In addition to that, the Convention Center 5 Authority, to date, has invested just over $9 million of 6 funds that were collected from the bed tax, from -- and 7 I may have my year wrong, but it might be 1998, I think, 8 is when the bed tax was created. 9 Q. '99? 10 A. 1999, excuse me, through today. And it is the 11 portion of those funds that have been applied to the 12 cost component of this project. 13 There is additional funds that have been 14 collected by the Convention Center Authority that have 15 gone for the operation of the Convention Center 16 Authority's office. And to pay, unfortunately, 17 significant legal fees from 1999 to today. 18 So that -- 19 Q. Just so it's clear, are you referring to the 20 litigation that is known as the Bold One and Bold Two 21 cases? 22 A. I am. 23 And -- and the most recent Horst case that was 24 recently dropped? 25 Q. Right. 78 1 A. The anticipated bed tax of $5.3 million 2 represents the anticipated net proceeds that the 3 Convention Center Authority will receive from the 4 commencement of vertical construction, which we would 5 anticipate to begin on October 1st of this year, through 6 the completion of the project, which, I believe, is now 7 scheduled for September of 2008. 8 So during that time frame, based on historical 9 tax receipts, it's anticipated that the Authority would 10 be able to save $5.3 million to be applied towards the 11 project costs. 12 The OGP, UDP and IDP grants are three grants that 13 have been secured by the Redevelopment Authority of the 14 City of Lancaster and those funds have been fully 15 invested into the project. The $5 million R-Cap grant 16 is a grant that's been awarded by the Commonwealth to 17 the Redevelopment Authority, the City of Lancaster, for 18 phase one of the project. 19 As you recall, phase one represents the facade 20 stabilization and the demolition and site preparation of 21 the -- of the site. 22 And we do have a commitment from the 23 Commonwealth for that $7 million, as well. The $15 24 million is the R-cap grant that is going to the 25 Convention Center Authority. 79 1 There is a contract in place and with the 2 Commonwealth for the $15 million R-cap. 3 I think you've recently seen as one of the 4 things that we identified as a source to fill the 5 project gap was additional grant proceeds that 6 Representative Sturla put in the capital budget for 7 2006, 2007 of $1,500,000. 8 We received, and I may have my date wrong, it 9 was the day prior to, I think, my deposition or the day 10 of my deposition or the day prior to Representative 11 Sturla's deposition, we received a letter from the 12 secretary awarding the $1.5 million to the Redevelopment 13 Authority. 14 Q. If I may direct you to Exhibit 56 for just a 15 moment. 16 A. Yes. 17 Q. Is that the letter you're referring to? 18 A. Yes, it is. 19 Q. A letter dated September 20, 2006, from the 20 Governor's office by the office -- the secretary of the 21 office of budget to Mr. Simms? 22 A. That's correct. 23 Q. The chair of RACL, R-A-C-L? 24 A. That's correct. 25 Q. All right. That accounts for the 1.5 million? 80 1 A. That's correct. 2 Q. Facade grant? 3 A. That's correct. 4 Q. Would you continue, please? 5 A. Certainly. 6 The interest income represents the anticipated 7 interest income that will be earned on the $54 million 8 of bond proceeds that the Authority will float and place 9 in a bank account until those funds are actually used to 10 pay the contractors that will earn interest on those 11 bond proceeds. 12 Q. All right. Continue. 13 A. The IFIP mortgage and -- this should be changed 14 to bond, I apologize. The IFIP bond represents the 15 funds that will be secured through the state grant to 16 RACL. 17 Q. That's the million dollars a year for 20 years? 18 A. That is correct. 19 Q. All right. 20 A. We have been in conversation with Fulton Bank 21 to purchase those bonds, and we believe, based on an 22 interest rate of 4 percent interest for 20 years, we 23 would be able to secure $13.6 million worth of bond 24 proceeds. 25 Q. Is that -- as a layman, does that mean 81 1 basically you're taking the present value of -- of a 2 payment of a million dollars a year for 20 years and 3 you're trying to get that present value for that? 4 A. That's exactly what that represents. That's 5 exactly what it represents. And then that $13.6 million 6 can be used to fund construction costs for the project. 7 Q. Go ahead. 8 A. The IFIP grant, that's the grant for the 9 two-year period during the construction period. The 10 hotel mortgage is a first mortgage on the hotel. That 11 will be first provided by a bank during the construction 12 period, and that will be taken out with a forward 13 commitment from a life insurance company for $24 million 14 for a 20-year period. 15 It will be co-terminus with the lease that Penn 16 Square Partners has with the Redevelopment Authority. 17 And then the $54 million represents two series 18 of bonds that the Convention Center Authority will 19 sell. The first one is $40 million that was identified 20 in the series 2003 financing. 21 Q. Is that the remarketing? 22 A. That is the remarketing from the current 23 taxable to tax exempt. And then a second series, B 24 series, of $14 million. 25 And based on where interest rates are today and 82 1 the cash flow that has been generated from the bed tax, 2 based on the analysis of the financial advisor, Tom 3 Beckett, the Convention Center Authority believes they 4 can secure $54 million worth of total bond proceeds for 5 the project. 6 Q. And the total is $155,207,628; is that correct? 7 A. That's correct. 8 Q. All right. And you believe those two, 9 therefore, are in balance; is that correct, the sources 10 and the uses? 11 A. I do. 12 Q. Now, many -- am I correct that there is nothing 13 that you've identified in the sources column that 14 relates to the naming rights for the convention center? 15 A. That is correct. 16 Q. All right. So if -- if you can generate more 17 money from naming rights, that would be additional funds 18 on the sources side? 19 A. That is correct. 20 Q. How much are you trying to -- I know you're not 21 doing it personally? 22 A. Right. 23 Q. But how much is the Convention Center Authority 24 trying to raise through naming rights? 25 A. I had a conversation with Dan Logan on Tuesday. 83 1 Q. Would you describe who he is, please? 2 A. Yeah. Dan Logan -- I'm trying to remember the 3 name of his company. I can't remember the name of his 4 company right now. 5 Q. Is he a consultant? 6 A. He is a consultant for the Convention Center 7 Authority. He has been on board for a number of years. 8 He was involved in the pre-opening and marketing 9 activities for the Convention Center Authority. He has 10 primary lead on securing the funds for the naming 11 rights. 12 He has developed a package, informational 13 package. I believe he has spoken to 26 or 27 either 14 individuals or companies about securing between 2.5 and 15 $3.5 million for the naming rights. 16 And when I say 2.5 to 3.5, I mean the present 17 value of 2.5 to 3.5. That could either come in the form 18 of a check up front or, I think, more typically how 19 these things are done and how it was done in the 20 ballfield's case is there was a commitment for a 10-year 21 period of time on an annual basis and then you would 22 look at that, as we did the IFIP, and figure out what 23 the present value of those annual proceeds would be, the 24 Convention Center Authority would secure financing 25 through a local bank and make those funds available for 84 1 the project. 2 Q. All right. And to the extent -- 3 A. And again, if you'll recall, I mentioned the 4 additional 300 to $500,000 worth of tax savings on the 5 FF&E that we do not have included in the tax savings for 6 the hard costs. 7 Q. Right. And so to the extent that you can have 8 tax savings on the FF&E and to the extent that you could 9 have value engineering savings greater than 2.7 million, 10 that would reduce the total cost of 1,554,077, correct? 11 A. No. Actually, it would do two things. 12 To the extent it was the tax savings component, 13 it would reduce the costs and create a positive 14 variance. 15 To the extent that we brought in the naming 16 rights, that would increase the funds. So -- 17 Q. No. I -- I think you may have misheard my 18 question. 19 A. I'm sorry. 20 Q. I didn't refer to the naming rights. 21 A. I'm sorry. 22 Q. I referred to the tax savings on the FF&E. 23 A. Yes. 24 Q. And an increase in value engineering. 25 A. Those were -- 85 1 Q. Beyond 2.7 million? 2 A. Yes. 3 Q. From Reynolds management? 4 A. They would both. 5 Q. To that extent, those two components from it 6 materialized -- 7 A. Uh-huh. 8 Q. -- would decrease the total cost of 9 $155,407,070? 10 A. That is correct. 11 Q. And to the extent that you were able to 12 generate anything from the sale of naming rights, that 13 would increase the sources of $155,407,628? 14 A. That is correct. 15 Q. All right. Now, do you recall that when the 16 bids came in in late July of this year, at that time 17 there were public statements made by people from the 18 mayor to the owners that there was approximately a $20 19 million gap at that time between the sources and the 20 uses? 21 A. I do. 22 Q. All right. Could you tell us how you were able 23 to close that gap between late July and today? 24 A. Certainly. 25 There was a series of steps that we've taken to 86 1 reduce the gap. I think first and foremost, the largest 2 solution was to approach the mayor and the parking 3 authority and to see if we can modify the existing 4 agreement that the Convention Center Authority had with 5 the parking authority to develop a replacement garage on 6 the Lancaster laundromat site. 7 As you know, in the sources of funds, the 8 Convention Center Authority had allocated approximately 9 $7 million worth of their bond proceeds towards the 10 construction of the replacement garage. And what we 11 were able to do through a series of discussions and 12 negotiations with the mayor and the parking authority, 13 is to modify that agreement, whereby the Convention 14 Center Authority is no longer required to build the 15 replacement garage; therefore, freeing up $7 million of 16 funds that they were able to raise through the bed tax 17 to be applied toward the construction cost of the 18 project. That was $7 million. 19 Q. Now, explain who -- I mean, is the garage still 20 going to be built? 21 A. A garage. 22 Q. A garage? 23 A. A garage will be built. 24 Q. Explain. 25 A. A garage -- 87 1 Q. Please explain who, if not the convention 2 center or RACL or Penn Square Partners, who is going to 3 build this garage? 4 A. Certainly. There's really a series of 5 agreements that need to be entered into which deal with 6 this -- this reallocation of funds. 7 The first is the modification of the agreements 8 between the Convention Center Authority and the parking 9 authority freeing up those funds. 10 In addition to that, the Convention Center 11 Authority has purchased the Lancaster laundromat site. 12 There is an agreement that the Convention Center 13 Authority will sell to the parking authority the 14 Lancaster laundromat site for its cost, no profit, 15 transfer the acquisition carry costs to the parking 16 authority. 17 In addition to that, the Convention Center 18 Authority will make certain improvements on that site, 19 razing several of the buildings on the site, surfacing 20 the parking lot, putting in lighting and putting in the 21 necessary equipment so that that site can be utilized by 22 the parking authority as a surface parking lot and it is 23 anticipated that the parking authority will be able to 24 get about 125 parking spaces on that site. 25 The parking authority will be able to purchase 88 1 on a turnkey basis that site through a loan that is 2 being made by either Lancaster Newspapers or an 3 affiliate of Lancaster Newspapers for a three-year 4 basis -- for a three-year term equal to $3 million at 5 zero interest for three years. 6 In addition to that, Lancaster Newspapers has 7 agreed to construct a structured parking garage on the 8 corner of Prince and Vine Street, which would be 9 adjacent to the existing garage that they own. 10 I believe the current plans that have already 11 been done for that site would allow for a minimum of 12 375-car parking structure on that site. And that -- 13 that site will provide parking for either hotel guests, 14 convention guests or the general public would be allowed 15 to park in that parking garage. 16 So the -- between the building of the 17 replacement garage, a replacement garage on Prince 18 Street and Vine Street, investing land and building of 19 about $7 million, plus the $3 million loan, Lancaster 20 Newspapers and an affiliate of Lancaster Newspapers is 21 making an additional investment into the project into 22 the City of $10 million. 23 Q. Were the value engineering savings of 24 approximately 2.7 million that are reflected in Exhibit 25 45, were they developed after the 20 million gap of late 89 1 July? 2 A. Yes, they -- yes, they were. 3 Q. All right. Were the -- 4 A. They are a component of the gap filler, if you 5 will. So that's the second piece that we identified 6 would be -- I'm sorry, do you have a question? 7 Q. No. 8 A. Would be the value engineering and the tax 9 savings component. 10 Q. All right. The tax savings that was 2 million, 11 that was developed after late July? 12 A. That's correct. 13 Q. Was the grant that is reflected in Exhibit 56, 14 the 1.5 million? 15 A. That was also developed after the initial 16 announcement. 17 Q. Were any of the IFIP grants or sources 18 developed after late July? 19 A. Yes, they were. 20 Q. And could you explain that? 21 A. Certainly. It was anticipated at the time that 22 we secured the commitment, the IFIP grant commitment 23 from the Commonwealth, that the $1 million in annual 24 grant proceeds would be able to amortize approximately 25 $12 million worth of bond proceeds. 90 1 Based on negotiations with Fulton Bank, we were 2 able to secure more favorable interest rates on a tax 3 exempt basis and that allows us to increase the bond 4 proceeds from $12 million to $13.6 million without -- 5 and I want to stress this -- without increasing any risk 6 to the residents of the city, because the debt service 7 which was guaranteed by the city remained constant at 8 100 thousand -- excuse me, $1 million. 9 So we merely were able to increase the amount 10 of bond proceeds based on a more favorable interest 11 rate. 12 Q. Was any additional equity put in after late 13 July? 14 A. Yes, it was. 15 Q. Describe that, please. 16 A. It was the million dollars additional equity 17 that was committed by Penn Square Partners. 18 Q. Were there any additional bonds? 19 A. Yes, there were. 20 Q. After late July? 21 A. Yes, there were. 22 Q. Would you describe that, please? 23 A. Certainly. At the time the initial pro forma 24 was developed, the Convention Center Authority was 25 assuming $51 million worth of bond proceeds based on the 91 1 anticipated bed tax. 2 The -- based on the actual bed tax and based on 3 the interest rate environment, the financial advisor for 4 the Convention Center Authority felt that they could 5 increase the amount of the B piece, if you will, not the 6 $40 million, but the secondary piece, by an additional 7 $3 million. 8 Additionally, it was $11 million and they were 9 able to increase that amount to $14 million. 10 Q. Have there been any reductions or additions in 11 financing costs or pre-funded costs since late July? 12 A. Yes, there has. 13 First, with respect to the financing costs, the 14 original strategy that was publicly discussed back in 15 December, and I don't even remember the year now, I 16 think it was 2005, we talked about a $24 million bond 17 issue by the Redevelopment Authority of the City of 18 Lancaster. We were doing that -- that bond issue in 19 order to protect against rising interest rates, 20 basically secure the bonds, lock in the interest rate 21 and then use the -- the bond proceeds as a construction 22 permanent loan during the hold period. 23 That's an expensive way to finance a project. 24 It does give you the benefit of locking in your interest 25 rate, but there's two additional costs associated with 92 1 that. 2 One, the placement cost for a bond offering is 3 much higher than the placement cost for conventional 4 financing, either life insurance or bank financing. 5 Secondarily, and probably even larger and more 6 important, is that there is what's called negative 7 arbitrage by going that approach. 8 You borrow the money 100 percent up front and 9 you're paying interest on that at a rate, and let's for 10 argument sake say that rate is six and a half percent. 11 While those funds are held in the bank, they 12 are earning interest at, say, a rate of one percent. So 13 you have negative arbitrage between the interest that 14 you're earning on those funds in the bank against the 15 cost that you're paying and that is a cost to the 16 project that would have been included in the capitalized 17 interest costs. 18 The approach that we are using now, using a 19 forward commitment take-out, we were able to secure the 20 same fixed rate financing for the 20-year period of the 21 lease, but we don't have to pay the negative arbitrage. 22 In addition to that, we are able to use 23 conventional construction financing, which would be 24 provided by a bank, and you only pay interest on the 25 funds that are advanced, so you save the capitalized 93 1 interest during the construction period. 2 So those two added together did reduce the 3 overall financing cost of the project. 4 In addition to that, the Convention Center 5 Authority, from the time that the original pro forma or 6 the last pro forma was put together, has gone back and 7 has accounted for all of their pre-funded expenses that 8 were attributable to the overall project cost. 9 And those numbers have increased, as well, 10 meaning more of the bed tax that has been collected has 11 been applied to the construction of the project than was 12 previously estimated. 13 Q. Now, have I covered everything that explains or 14 have you covered everything maybe more precisely that 15 explains the -- 16 A. You have the list, so you tell me. 17 Q. Well -- 18 A. I think so. We can go through them. 19 It's the parking that we moved. It's the equity 20 that was increased by the convention center -- excuse 21 me -- by Penn Square Partners. It was the increase in 22 the bond proceeds by the Convention Center Authority. 23 It was the increase in the IFIP financing. It was the 24 increase in the grant by the Commonwealth for the facade 25 stabilization, facade restoration for the Watt & Shand 94 1 building. It was the reduction of financing costs for 2 the hotel. It was the increase in pre-funded expenses 3 by the Convention Center Authority. 4 Q. And the value engineering and the tax savings? 5 A. And the value engineering tax savings. I think 6 that covers all of them. 7 Q. Now, I believe that Commissioner Henderson 8 testified that one of her concerns about this project 9 was the lack of private contributions. 10 Would you please tell us, to the best of your 11 knowledge, all of the private contributions being made 12 by private parties to the development of the convention 13 center and the hotel? 14 A. Sure. I think that's one of the biggest 15 misconceptions out there about this project. 16 When Penn Square Partners originally proposed 17 this project in conjunction with the Convention Center 18 Authority, the assumption was that we would be investing 19 approximately $6 million of equity into this project, 20 and receiving close to a market rate return on that 21 investment. 22 Since that period of time, through negotiations 23 with the Convention Center Authority and discussions 24 with the community stakeholders, we have increased that 25 equity contribution, that direct equity contribution, 95 1 from $6 million to $11 million, nearly doubling the 2 amount of equity that is going into the project. 3 In addition to that, and I'm gonna stick with 4 the project itself, and then I'll talk about the other 5 things that the partners are doing with respect to 6 making this project go forward -- in addition to that, 7 the general partner or affiliates of the general 8 partner, in order to secure the permanent financing 9 take-out. 10 As part of our negotiations with the life 11 insurance company, we have agreed to guarantee $8 12 million worth of the $24 million permanent financing. 13 So that is a covenant by either the general partners or 14 affiliates of the general partner that in the event that 15 the operations of the project do not meet the pro forma, 16 that the lender would have the ability to reduce the 17 loan amount by that corresponding amount. 18 Once we hit certain milestones, that guarantee 19 will burn off. 20 In addition to the guarantee on the financing, 21 the -- the partnership, as well as the individual 22 partners within the partnerships, will be providing a 23 guarantee for the securing of the Marriott franchise 24 agreement. It's typical in a franchise-type 25 arrangement. 96 1 Initially, we were able to negotiate a burn-off 2 of that guarantee. Given the extension of time on this 3 project, Marriott has modified their requirements and 4 are now imposing an obligation on the partners at least 5 equal to $3,750,000 that would stay in place during the 6 duration of the franchise agreement. 7 So if you add those two together, you're 8 looking at an additional exposure to the partners of 9 $11,750,000 as a minimum. 10 In addition to that, as I previously spoke, in 11 order to structure the revised parking arrangement, 12 which -- which they didn't have to do, they agreed to 13 step into the shoes of the Convention Center Authority, 14 who was obligated under a previous agreement to build 15 the parking garage, but they stepped up and put an 16 additional investment into the development of 375 17 parking spaces within the city, that I said, between the 18 land and the construction, is probably somewhere 5 and 19 $7 million. We don't have that fully costed yet. 20 And then the partners are making a $3 million 21 interest-free loan to the parking authority of the City 22 of Lancaster. 23 So I think if you add up all those numbers, 24 you're looking at a total exposure to either the 25 partnership or affiliates of the partnership in excess 97 1 of $34 million. 2 Q. As an affiliate of Penn Square General Corp. or 3 Penn Square General Corp. itself, the general partner of 4 Penn Square Partners provided an additional net worth 5 covenant for the non-recourse carve-out obligations. 6 And if you could explain what those are, that 7 would be helpful. 8 A. Thank you. Yes, we have. 9 There are certain conditions contained within 10 mortgage documents that allow for recourse obligations 11 to the borrower and to the general partner of the 12 borrower. 13 In misapplication of funds by the manager, 14 misapplication of insurance proceeds, environmental 15 indemnities, in the event there is an environmental 16 problem, either caused by the partners or not caused by 17 the partners, the lender would have the ability to not 18 only foreclose the property, but would also have the 19 ability to seek additional funds from the general 20 partner. 21 We have an agreement in the permanent take-out 22 to provide a net worth covenant of 5 million to the 23 lender in the event one of those non-recourse carve-out 24 obligations would come to bare. 25 And I would like to add that from the 98 1 perspective of Penn Square General Corp, as an affiliate 2 of High Properties, High Industries, the High companies, 3 the financing structure that I just reviewed with you is 4 very atypical. 5 It is not something that is part of our normal 6 operating procedures for the development, ownership and 7 management of an extensive portfolio in all of the 8 financing that I have done. 9 In the 17 years now that I have been with the 10 company, I have never seen a package that has been put 11 together that creates that type of obligation onto the 12 partnership. 13 Q. Have you undertaken these commitments as part 14 of your commitment to the project? 15 A. Absolutely. 16 MR. PITTINSKY: I have no further questions, 17 Your Honor. 18 THE COURT: Mr. Fenningham, do you have any 19 questions? 20 MR. FENNINGHAM: I have none, Your Honor. 21 THE COURT: All right. Mr. Kelin. 22 MR. KELIN: Thank you, Your Honor. 23 CROSS EXAMINATION 24 BY MR. KELIN: 25 Q. Good morning, Mr. Fitzgerald. 99 1 A. Good morning. 2 Q. I take it from your testimony that the 3 developer would prefer not to engage in negative 4 arbitrage for a number of years by taking a loan before 5 they have a project to build? 6 A. If there are alternative means available, 7 that's correct. 8 Q. With regard to the private contributions you 9 were discussing near the end of your testimony, I just 10 want to review that and make sure I have an 11 understanding. 12 The private equity went from 6 million to 10 13 million and then recently to 11, correct? 14 A. That's correct. 15 Q. Now, am I correct that all of the other 16 contributions have been very recent, the guaranty by the 17 general partner, an affiliate of High of $8 million, 18 that's a recent development, correct? 19 A. Well, it's still not finalized, so I don't know 20 if it's a recent development. 21 I would say that as we developed the transition 22 from the bond financing to the construction financing 23 with a life insurance take-out, which would help us 24 bridge the gap, it became a requirement in order to 25 avail ourselves of that -- that type of financing. 100 1 Q. And the guaranty that you mentioned that 2 Marriott is now requiring, the $3, I think, point 75 3 guaranty, that's recent? 4 A. Again, as I stated, there was an initial 5 guaranty required in the initial franchise agreement, 6 that language that we had negotiated previously allo