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such laws. Specifically, the Borrower also acknowledges the existence of Article XXXIV of the California Constitution and agrees that the project shall be operated so as to comply therewith. 6. Establishment and Use of Reserve Funds. The Borrower shall establish and maintain the following reserve and escrow accounts. Unless otherwise specified herein or approved by the Agency, in its sole discretion, such accounts (i) shall be established on or before the Closing Date, (ii) shall be funded with cash, (iii) shall be under the control of the Agency at all times, (iv) may be invested by the Agency provided that income earned on such funds shall accrue to the account, (v) shall be used for the prescribed purposes, and (vi) shall have any remaining balance, when terminated, returned to the Borrower. (a) Special Reserve Account. At or before the Closing Date the Borrower shall establish with the Agency a Special Reserve Account (the "SRA ") in the amount of Two Million and No /100 Dollars ($2,000,000.00) to be used for the purposes set forth below and to be maintained until such time as two (2) full consecutive Development fiscal years have passed in which the audited annual financial statement accepted by the Agency shows that Gross Income is sufficient to meet all Operating Expenses. The City of Pleasanton may satisfy this requirement on behalf of the Borrower by depositing Two Million and No /100 Dollars ($2,000,000.00) cash with the Bank of Pleasanton, pursuant to a written depository agreement for the benefit of and otherwise satisfactory to the Agency. The SRA may be used for the following purposes: (i) to pay for nonconstruction expenses necessary to make the Development operational, including, without limitation, advertising expenses, office expenses, marketing staff payroll, model apartment and common area furniture, maintenance tools and equipment, first -year hazard insurance premiums and estimated property tax impounds; (ii) to pay any Operating Expenses which exceed the amounts available from Gross Income and other available funds; and (iii) as security for construction defects but only in an amount equal to two and one -half percent (2 1/2 %) of the construction contract or such greater amount as may, in the reasonable discretion of the Agency, be necessary to adequately secure the Agency and the Development against construction defects. The term "construction defects ", as used herein, shall mean all construction related problems including, but not limited to, deviations from the approved final plans and specifications for the Development. Such Construction Defect Security shall be kept available for construction defects which are discovered within twelve (12) months following the final completion of the CHFA 53SLP /RIDGEVIEW 12/2/88 V01517(DNB) -8-