Making Rancho Santa Fe the Most Connected Community in the World

Prepared for:

Prepared by:
RSF Board Tech Committee
Mike Licosati
Philip Wilkinson
Charlie Crist
Rob Strickland
Alex Kaiser
Kim Eggleston
John Ryan

Overview of the Proposed Transaction with Hotwire Communications

RSF Association Board Meeting - May 5th, 2016

Process
Early 2015: Tech Committee conducts market research including community surveys
March 2015: Privately-funded feasibility study presented to Board (over 500 responses)
March August 2015: Tech Committee performs detailed technical and legal due diligence
September 2015: Tech Committee issues detailed RFQP
October November 2015: Tech Committee reviews 11 responses; interviews 4 short-listed bidders

Process Cont.
December 2015: Tech Committee issues term sheet and negotiates with 3 remaining bidders
January February 2016: Two bidders put forward revised proposals in response to RSFs preferred terms
February 2016: Tech Committee recommends Hotwire as preferred provider
March 2016: Tech Committee explores funding options and negotiates deal terms with Hotwire
April 2016: Tech Committee and Hotwire agree to comprehensive LOI subject to Board approval

Early Sounding
Early proposals asked RSF to pay millions of dollars to telecom providers so that they could
update their existing infrastructure to provide marginally better Internet service (e.g. not high
speed fiber)
Existing providers are either too small or view RSF as having too low density to justify making a
major capital investment in the community
The deal terms under any scenario where the Association invests capital in the network are
significantly better: greater investment yields greater control and greater returns. The primary risks of
financing the network are (1) a lack of market uptake leads to insufficient revenue to payback the
investment, which may be mitigated by upfront signup commitments (2) construction, which should
be mitigated through a robust construction contract with an experienced and credit-worthy contractor
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Principles
Tech Committee and the Board determined that if RSF was going to spend millions of dollars:
1. RSFs money must be treated as an investment and not a grant for a telecom provider to upgrade its
assets
2. The infrastructure needs to provide a long term solution, including at least Gigabit Internet service
3. The network needs to be capable of connecting every home and business on consistent terms
4. Every dollar in-and-out of the network needs to be accounted for in a transparent manner

Request for Qualifications and Proposals

Tech Committee:
1. Performed market research
2. Completed a comprehensive feasibility study
3. Surveyed the community
4. Designed and issued a request for qualifications and proposals (RFPQ) for the implementation of a
fiber-to-the-home network that would make RSF the most connected community in America while
adhering to the Principles

Short Listed Proposals

There were 11 responses to the RFQP
The Tech Committee short listed 4 bidders based primarily on their technical qualifications
Based on interviews the shortlisted bidders were reduced to 3
Each short listed bidders proposal varied substantially from the other bidders
To elicit proposals aligned with the Principles the Tech Committee designed a term sheet for the
remaining bidders to respond to
Responses to the term sheet allowed the Tech Committee to compare bids on an apples-to-apples basis

Selection
Tech Committee:
1. Selected Hotwires proposal
2. Explored whether to seek co-investors or if RSF could fund the full cost of construction
3. Determined, with the concurrence of the Finance Committee, to recommend that RSF fund the full cost of
construction through a combination of funds on hand and bank loan(s) to the Association
4. Finalized a detailed binding letter of intent signed by Hotwire for the Boards consideration (see LOI)

About
The ultra-connected, 4K video-streaming, home automation world of tomorrow with blazing
internet speeds is now a reality.
Hotwire Communications has been at the forefront of the Gigabit revolution, installing fiber optic
networks and delivering 10 Gbps connectivity to multi-family and multi-tenant communities for over
a decade.
Hotwires residential customers are connected by Fiber-to-the-Premise (FTTP) technology allowing
Gigabit speeds - over 100 times faster than the average US broadband connection.
Hotwire also provides a One stop shop for the digital world, including Digital HD Television, High
Speed Data, Telephone, Security, and Smart Home Technology capability. These services are all
provided through Hotwires personalized concierge customer experience, unparalleled in the
industry.

Summary of Hotwire Deal Terms

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Responsibilities Design/Build
Hotwire

RSF

Owners Rep

Permitting & ROW

Design/Engineering

QA/QC on Design/Engineering

Warranties on Design/Engineering

Construction

QA/QC on Construction

Warranties on Construction

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Responsibilities Operations & Maintenance

Hotwire

RSF

Owners Rep

Hotwire Contract Management

Hotwire Performance Management

SPE Management

Retail Service Delivery

Customer Service

Billing

Operations & Maintenance

Upgrade Management

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Project
Installation of a high speed fiber-to-the-home network in the Rancho Santa Fe Protective
Covenant area capable of connecting to every home and business and providing Gigabit,
Gigabit dedicated and 10 Gigabit Internet services and television, telephone and other high
end telecommunications services
Despite the communitys low-density environment, the project will afford residents and
businesses with a standard Gigabit Internet offering plus television and phone services at
competitive rates on a national basis
The Project will make the Rancho Santa Fe community one of the most connected
communities in the country (if not the most)

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Cost and Ownership

Total Cost of Construction: approx. $13.5 million, 100% funded by the RSF
Association
The RSF Association (or an SPE established by the RSF Association) will own the
network subject to final regulatory review
Hotwire has committed to invest approx. $5 million in additional near network
infrastructure to best light and support the project

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Design
Preliminary design complete
Hotwire is prepared to move quickly into final design, and has committed to work with RSF
and its advisors to further assess opportunities to optimize network construction, including as
examples:
1. Use of RSF trails to reduce total fiber layout
2. Acquisition, leasing or other potential transactions with any existing fiber infrastructure
in the Covenant

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Construction
Hotwire will manage all aspects of design and construction of the Project under a turnkey
contract
Hotwire will warranty the design and construction work
Once entitlements are received it will take approximately 9 months to complete construction
of the Project and begin delivering services
A key schedule driver will be obtaining the county entitlements, which is a mutual obligation
of RSF and Hotwire

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Projected Connection Fees

As currently modeled, each customer who participates in a pre-signup program will pay a
one-time fee to connect their home or business to the network backbone:
Gigabit Internet service: $525.00
Gigabit dedicated Internet service: $1,500.00
10 Gigabit Internet service: $2,000.00
RSF will receive the first $525.00 of each connection fee; the balance reflects the cost of
equipment to Hotwire for the network to deliver these optimal services
Actual connection fees may vary and the above fees may be promotional amounts for the
pre-signup program only

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Maintenance
Hotwire will operate and maintain the network under a full-scope agreement, and will
warranty its maintenance work
Hotwire is responsible for obtaining all licenses, franchises, permits and other entitlements
required to operate and maintain the network
In return for operating and maintaining the network Hotwire will receive a $12 per home /
per month maintenance fee based on the network passing 1912 homes (e.g. base of approx.
$275,000 per year), which is escalated 3% annually
A maintenance reserve for major equipment replacement etc. will be funded from an
allocation of 15% of RSFs share of gross retail service revenues starting in year-3 of operations

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Retail Services
Hotwire will provide retail services to customers under an SLA that will include
performance parameters commensurate with leading residential broadband services.
Retail services will include, at a minimum:
1. Standard Gigabit Internet
2. Optional Gigabit dedicated Internet
(e.g. for power users and home based businesses)
3. Optional 10 Gigabit Internet
4. A range industry leading cable television packages
5. Home telephone

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Revenue Sharing
RSF will share gross revenues from retail services as follows:
1.
2.
3.
4.

Internet service (all classes) 50%

Cable television service 5%
Phone service 20%
Other services 20%

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Projected Pricing
As currently modeled, projected per-month retail rates (subject to annual escalation not to exceed 6%) for
residential end-customers are:
1.
2.
3.
4.
5.

Gigabit Internet service - $129.99

Gigabit dedicated Internet services - $199.99
10 Gigabit Internet service - $299.99
Cable television packages see HW rate sheet
Home telephone service - see HW rate sheet

Business rates to be separately determined

Actual rates may vary and the above may be promotional rates for the pre-signup program only
Rates do not include taxes and other fees (approx. 20% consistent with industry standard) or equipment
leased or purchased from Hotwire (such as set top boxes) see HW rate sheet

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Returns
Based on the assumptions set forth in this presentation and other assumptions discussed
with the Tech Committee (including discussions regarding RSFs financing options and cost
thereof) the pro forma projects that RSFs share of gross network revenues will be
sufficient to repay in full (including principal and interest) all loans obtained to fund
construction costs at year 10 of operations and by year 15 of operations to deliver an
appropriate return on other amounts invested by RSF, which may be reinvested in the
network or the community in accordance with the requirements of RSFs tax exempt status
RSF has some of the worst connectivity in the world; diligence suggests that fixing this
problem will improve quality of life and it will also have a material positive impact on
home values and business attraction

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Conditions to Proceed
The LOI provides that RSFs obligation to enter into the transaction is subject to the
satisfaction of the following conditions precedent:
1.
2.
3.
4.

Hotwire demonstrating regulatory compliance

Parties agreeing to the definitive project agreements
RSF securing financing on acceptable terms, determined in its sole discretion
RSF putting the transaction to a community vote

In addition, the LOI provides that the parties will not be obligated to commence full
construction until the following conditions are met:
1.
2.
3.

The parties having secured any land use approvals

The parties having secured pre-signups of at least 1,200 customers
RSF receiving a clean regulatory opinion on the project structure

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Key Risks
Key risks to RSF include:
1. Achieving assumed uptake (e.g. 80% on Internet)
2. Technology advances that may occur in the first 10 years and provide a more
attractive Internet alternative
3. Project performance (e.g. customer satisfaction)
4. Unanticipated regulatory changes
These risks can be mitigated, in part, through the implementation of an education
and pre-signup program seeking 5-year subscription commitments prior to the start of
construction

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Next Steps
Board to issue a resolution approving and authorizing entry into the LOI
Request for Board to approve $50,000 for final design and engineering (the $50k is
in the $13.5m Project budget)
Tech Committee to develop an education/outreach and pre-signup program
Tech and Finance Committees to develop financing plan for community vote

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Timeline
Months 1 - 3
1.
2.
3.
4.

Complete Final Design & Engineering

Achieve community signup threshold
Finalize Definitive Project and Financing Agreements
Community Vote

Months 1 - 6
1.

Obtain Entitlements

Months 7 - 18
1.

Construction and Activations

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