Harbor Bancorp & Subsidiaries - Page 7

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               With respect to each project, SBE operated as a general                
          partner of a partnership formed to act as the developer.  The               
          developer of the Whitewater Project was the Whitewater Limited              
          Partnership (Whitewater, Ltd.), and the developer of the Ironwood           
          Project was Ironwood Apartments, Ltd. (Ironwood, Ltd.).                     

          Credit Enhancement                                                          

              As security for the loan, each developer was to obtain an              
          irrevocable letter of credit, in exchange for a second                      
          developer's note, called a "reimbursement note", secured by a               
          mortgage on the property to be developed.  The provider of the              
          letter of credit would then discount the developer's note to                
          another entity--the "mortgage purchaser"--in exchange for cash              
          that the letter of credit provider would use to acquire, from a             
          solid financial institution, a "guaranteed investment contract"             
          (GIC).  The GIC would be pledged to secure payment of interest              
          and principal, under the letter of credit, to the bondholders.              
          In effect, each developer would issue a second note in order to             
          obtain a guaranteed means of repayment on its first note.                   
               For the Ironwood project, the letter of credit provider was            
          to be Mercantile Capital Finance Corp. No. 30 (MCFC No. 30) and             
          for the Whitewater project, Mercantile Capital Finance Corp. No.            
          47 (MCFC No. 47).  The sole shareholder of each of these                    
          corporations was James J. Keefe.  The mortgage purchaser for both           
          projects was Unified Capital Corp. (Unified).  This entity was              




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Last modified: May 25, 2011