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December 4, 2002

A meeting of the Board of Directors of the San Francisco Municipal Railway Improvement Corporation was held on December 4, 2002, at 2:00 p.m. The meeting was held at 401 Van Ness Avenue, Suite 334, San Francisco, California.

The following Directors were present at the meeting:

Mr. James L. Ludwig, President of the Board
Mr. Michael J. Moylan
Mr. Rudy Nothenberg
Mr. Joseph Ozan

Director Lily J. Cuneo was not present.

Also present at the meeting were the following individuals:

Jose Cisneros, Deputy General Manager, Capital Projects & Legislative Affairs, Muni
Audrey Rice-Oliver, Special Assistant to the Executive Director, MTA
Ann Carey, Financial Manager, Muni
Christine Butler, Executive Secretary, Muni
Scott Emblidge, Partner, Moscone, Emblidge & Quadra
Douglas Wright, Principal, Douglas Wright Consulting
Andrew Fung, Assistant Vice President, U.S. Bank
Victor Ume-Ukeje, Managing Director, U.S. Bank
Chip Conley, Joie de Vivre Hospitality
Ozborn Erickson, Emerald Group
Norman Rolfe, member of the public

1. Call to Order

Board President James J. Ludwig, having determined that a quorum was present, called the meeting to order at 2:10 p.m.

2. Public Comment


3. Approval of Minutes of the Board Meeting of July 10, 2002

The minutes of the July 10, 2002, Board meeting were approved as submitted.

4. Report by Trustee on Investment Options

At the request of legal counsel, Item 7 on the agenda was taken out of order to accommodate the schedule of the Board's investment advisor. Mr. Victor Ume-Ukeje, a Managing Director at U.S. Bank, gave an overview of investment options for SFMRIC funds. Currently, U.S. Bank holds approximately $4.6 million of SFMRIC funds in non-interest bearing accounts. Mr. Ume-Ukeje suggested several short-term interest-bearing investments, including 6-month and 1-year Treasury bills, and 1, 1.5 and 2-year investments through the Federal Farm Credit Bank or the Federal Home Loan Bank. Current yields on these instruments range from 1.2% to 2.5%.

After some discussion of SFMRIC's outstanding obligations and likely funding requests from the Municipal Railway, Mr. Nothenberg moved that SFMRIC funds be invested as follows:

The motion was seconded by Mr. Moylan and adopted by the Board. Mr. Emblidge was directed to communicate these instructions to the investment manager.

5. Presentation by the Municipal Railway on the Mission and Stuart joint development project

At the request of Municipal Railway staff, Item 6 on the agenda was taken out of order to accommodate the schedule of the project consultants. Mr. Jose Cisneros, Deputy General Manager, Capital Planning & Legislative Affairs, gave a brief overview of the Mission and Steuart joint development project. He noted that site preparation and planning were completed in September 2001. In early 2002 the development team was granted an extension for the closing date to June 2003. The developer began making rental payments in September 2001 according to the rates set in the development agreement, including payment for the extended closing date; all payments are current. The Municipal Railway has received approximately one-half million dollars to date.

Mr. Chip Conley of Joie de Vivre Hospitality, one of the project partners, then gave an update on the hotel industry and the effect of the recession on the development project. He noted that hotel revenues have experienced a 42% decline in a two-year period, the biggest drop ever for the city. Analysts predict that San Francisco will see a significant rise in hotel revenue by the year 2004, and that by 2008 hotel revenues will have recovered fully to their originally projected levels. He noted that 90% of the development costs for the Mission-Steuart project were secured prior to September 11, 2001, and that those lenders are still committed. The development team is still looking for a "mezzanine lender" for the remaining 10% (approximately $6 million) and is in discussions with several lenders who appear seriously interested in the project. He also noted that the Emerald Fund has added 1,300 new residential units in San Francisco in the last two years.

Mr. Nothenberg asked the status of Art Commission approval for the site, and Mr. Cisneros said that the art enrichment component was under design. Mr. Nothenberg suggested that all approvals be secured in advance so that the project can proceed without interruption as soon as there are signs of an economic recovery and the development is ready to proceed. Mr. Cisneros also noted that the Municipal Railway is responsible for taking care of the ventilation shaft on the property.

In public comment, Mr. Norman Rolfe expressed his opinion that the project was a bad deal for the Municipal Railway. He suggested that the projected income from the project was not guaranteed, that there were considerable up-front capital costs for site preparation, and that it would result in higher operating costs. He questioned whether it was an appropriate use of SFMRIC funds to pay for studies of development options for Municipal Railway sites. While he would not object to development of "air rights" over Municipal Railway properties, he suggested that development projects should not interfere with operations.

Mr. Ludwig replied that SFMRIC has encouraged the Municipal Railway to look at the highest and best use of available properties. Mr. Nothenberg reiterated that he believes the Mission-Steuart project will be a profitable investment for the Municipal Railway. Under the lease agreement, the Municipal Railway retains ownership of the property and at the end of the lease will own the facility.

6. Presentation by Legal Counsel of new By-Laws and Articles of Incorporation

Mr. Scott Emblidge, legal counsel, presented the revised by-laws and articles of incorporation for the Board's consideration. He noted that the contracting provisions in the by-laws had been changed based on the Board's discussion in the July 10 meeting. The articles of incorporation remain largely unchanged from that meeting. Mr. Emblidge also noted a few minor changes from the draft he distributed to the Board members prior to today's meeting and indicated that these changes were not substantive in nature.

Upon review, Mr. Nothenberg questioned the need for Article VIII of the by-laws, designating the Municipal Transportation Agency (MTA) as the "Administrator" for the Corporation. He suggested that if and when the Board was requested to issue additional bonds, they should then consider having the MTA serve as Administrator, and that nothing in the by-laws prevents SFMRIC from entering into such an agreement. Until a new bond issue is undertaken, however, he did not see a need for an administrative services agreement with the MTA. Mr. Nothenberg moved that Article VIII of the by-laws be deleted; the motion was seconded and approved without objection.

Mr. Nothenberg then moved approval of the amended by-laws and articles of incorporation. The motion was seconded and approved without objection.

7. Nominations for new Board members

Mr. Ludwig opened the discussion by asking whether all present Board members are interested in remaining on the SFMRIC Board. Mr. Ludwig directed Mr. Emblidge to write to all Board members and request them to indicate in writing whether they intend to remain active on the Board. He noted that there are currently two vacancies that need to be filled. Mr. Emblidge clarified that any nominations would go to the Director of Transportation for approval before they are elected to the Board. Members suggested the following candidates for the Board:

Mr. Ludwig suggested that the Director of Transportation provide feedback on these potential candidates, and that the Board members continue to think about possible recommendations. He requested that this item be continued to the next Board meeting.

8. Review of contracts for Corporation accountant, legal counsel, and assistant secretary

At its meeting on March 19, 2002, the Board approved a contract with Mr. Scott Emblidge to serve as corporation counsel for six months and a contract with Mr. Douglas Wright to serve as assistant secretary for six months. At its meeting on May 29, 2002, the Board agreed to continue it contract with Mr. Matt Desmond to serve as its accountant for six months. At its meeting of July 10, 2002, the Board agreed to extend all three contracts until its next meeting.

With respect to Mr. Desmond's contract, Mr. Emblidge reported that Mr. Desmond had prepared SFMRIC's books, which were then turned over to an independent accountant for preparation of financial statements. He indicated that there were no complaints with Mr. Desmond's work and suggested that Mr. Desmond continue to serve as SFMRIC's accountant.

With respect to Mr. Wright's contract, Mr. Emblidge indicated that Mr. Wright's assistance had been invaluable to him during the last nine months as he became familiar with SFMRIC's history and operations. At the same time, he suggested that now that he is up to speed, there is no longer a need for a separate assistant secretary. Further, he noted that Mr. Wright had no ambition to continue as assistant secretary, but would be available to serve the Board as a project consultant on an as-needed basis. He recommended that all SFMRIC administrative paperwork and functions be turned over to him.

Finally, with respect to his own contract, Mr. Emblidge indicated that if the Board is satisfied with his services, he is available to serve under the same terms as his current contract.

Members of the Board expressed their sincerest thanks to Mr. Wright for his outstanding performance as assistant secretary following the death of Mr. Alfred Arnaud, SFMRIC's legal counsel. Mr. Wright's generous efforts provided a smooth transition to the new general counsel. The Board indicated that they would be interested in Mr. Wright's professional assistance on future projects or issues, as the need arises.

Mr. Nothenberg moved to continue the contract for accounting services with Mr. Desmond and the contract for legal services with Mr. Emblidge. The motion was seconded and approved without objection.

9. Report on the Corporation's insurance coverage

Mr. Emblidge reported that the Board currently does not have a policy for "officers and directors insurance" coverage. His office solicited quotes for such coverage and was advised that the annual premium would be approximately $25,000. He also noted that SFMRIC maintains a "public official's bond" covering Mr. Fred Clarke, Finance Manager with the Municipal Railway. With the concurrence of the Municipal Railway, the Board agreed that the public official's bond be discontinued when the current policy expires. The Board also agreed not to seek officers and directors insurance at this time, but to reconsider the matter if and when the Board undertakes additional financing activities on behalf of the Municipal Railway.

10. Other business

Mr. Emblidge noted that the election of officers was continued from the July 10, 2002, meeting until this meeting, but that the item had not been placed on the calendar. Therefore, Mr. Nothenberg moved to keep the current officers until the next meeting of the Board, at which time elections would take place. The motion was seconded and approved without objection.

11. Next Board meeting

The members agreed tentatively to set the next Board meeting date for February 26, 2003, at 2:00 p.m. Mr. Emblidge will confirm members' availability to ensure a quorum is available.

12. Adjournment

There being no further business before the Board, the meeting was adjourned at 3:45 p.m.

Christine Butler
Executive Secretary

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