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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 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 Development and may be used for the correction of such construction defects or related damages which are not corrected by the contractor, the Borrower or the City, as applicable, within a reasonable time following the demand by the Agency for such correction. (b) Replacement Reserve. A Replacement Reserve (the "RR ") shall be established and maintained until the termination of this Agreement. The RR shall be funded in the amount of Six Thousand Six Hundred Sixty -Three and No /100 Dollars ($6,663.00) per month, due on the first day of each and every month. The Agency may increase, at any time, the amount of the monthly payments to be made into the RR as necessary to, in its sole discretion, keep pace with increases in the costs of replacing major structural elements and equipment of the Development. The RR shall be used to replace major structural elements or equipment of the Development or for any other purpose consistent with maintaining the financial and physical integrity of the CHFA 53SLP.RIDGE.VIEW 12/14/89 Q02189 -9-