<PAGE>
 
                                                                    EXHIBIT 10.4

                            REIMBURSEMENT AGREEMENT

                                    BETWEEN


                        UNION BANK OF CALIFORNIA, N.A.

                                      AND

                             WEST VALLEY MRF, LLC


                           Dated as of June 1, 1997

                                       1
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE> 
<CAPTION> 

                                                                            Page
                                                                            ----

<S>                                                                          <C>
SECTION 1.  Application, Reimbursement and Other Payments; Definitions.......  1

SECTION 2.  Conditions Precedent to the Issuance of the Letter of Credit..... 11

SECTION 3.  Approval of Construction Fund Disbursements...................... 14

SECTION 4.  Obligations of the Borrower...................................... 18

SECTION 5.  Representations and Warranties of the Borrower................... 19

SECTION 6.  Affirmative Covenants of the Borrower............................ 22

SECTION 7.  Negative Covenants of the Borrower............................... 28

SECTION 8.  Events of Default................................................ 29

SECTION 9.  Rights and Remedies.............................................. 32

SECTION 10.  Amendments, Etc................................................. 34

SECTION 11.  Addresses For Notices........................................... 34

SECTION 12.  No Waiver; Remedies; Set-off.................................... 35

SECTION 13.  Indemnification................................................. 35

SECTION 14.  Continuing Obligation........................................... 37

SECTION 15.  Transfer of Letter of Credit; Reduction of Letter of
      Credit Commitment and Related Matters.................................. 37

SECTION 16.  Liability of the Bank........................................... 37

SECTION 17.  Permitted Contests.............................................. 38

SECTION 18.  Governing Law................................................... 38

SECTION 19.  Assignment by the Bank.......................................... 38

SECTION 20.  Representations and Warranties of the Bank...................... 38

SECTION 21.  Headings........................................................ 39

SECTION 22.  Further Assurances.............................................. 39
</TABLE>

                                       1
<PAGE>
 
<TABLE>
<S>                                                                          <C>
SECTION 23.  Survival of Representations and Warranties...................... 39

SECTION 24.  Severability of Provisions...................................... 39

SECTION 25.  Execution in Counterparts....................................... 39

SECTION 26.  Time............................................................ 40
</TABLE> 

EXHIBITS

A - Form of Letter of Credit
B - Initial DSR Deposit Schedule
C - Form of Deed of Trust
D - Disbursement Schedule
E - Agreement to Furnish Insurance
F - List of Material Contracts, Permits and Franchises
G - Schedule of Financial Covenants
H - Notice of Default

                                       2
<PAGE>
 
                            REIMBURSEMENT AGREEMENT


     REIMBURSEMENT AGREEMENT, dated as of June 1, 1997, made by WEST VALLEY MRF,
LLC, a California limited liability company (the "BORROWER"), in favor of UNION
BANK OF CALIFORNIA, N.A. (the "BANK").

     WHEREAS, the Borrower has requested the California Pollution Control
Financing Authority, a public instrumentality and political subdivision of the
State of California (the "ISSUER"), to finance, pursuant to a Loan Agreement
dated as of June 1, 1997 (the "LOAN AGREEMENT") between the Issuer and the
Borrower, a part of the cost of acquiring and financing certain facilities
described in the Loan Agreement (the "PROJECT"), by the issuance pursuant to an
Indenture dated as of June 1, 1997 (the "Indenture"), between the Issuer and BNY
Western Trust Company, as trustee (the "TRUSTEE"), of $9,500,000 in principal
amount of the Issuer's Variable Rate Demand Solid Waste Disposal Revenue Bonds
(West Valley MRF, LLC Project) Series 1997A (the "BONDS"); capitalized terms
used herein without definition shall have the respective meanings ascribed to
them in the Indenture or the Loan Agreement; and

     WHEREAS, the Borrower has requested the Bank to issue a letter of credit
substantially in the form of Exhibit A hereto (the "LETTER OF CREDIT"), in an
amount of up to $9,640,548 (the "Letter of Credit Commitment") of which not more
than $9,500,000 may be drawn with respect to principal on the Bonds and not more
than the lesser of (i) 45 days' interest on the Bonds at an interest rate equal
to 12% per annum or (ii) $140,548 may be drawn with respect to interest on the
Bonds. 

     NOW, THEREFORE, in consideration of the premises and in order to induce the
Bank to issue the Letter of Credit, the parties hereby agree as follows:

     SECTION 1.  Application, Reimbursement and Other Payments; Definitions.
                 ----------------------------------------------------------

          (a) The Borrower hereby applies to the Bank for, and authorizes and
instructs the Bank to issue, for the Borrower's account, the Letter of Credit in
the amount of the Letter of Credit Commitment subject to reduction as therein
provided.

          (b) The Borrower hereby agrees to pay to the Bank (i) on the date that
any amount is drawn under the Letter of Credit, a sum equal to the amount drawn
under the Letter of Credit; provided however that, (1) with respect to any
drawing under the Letter of Credit made pursuant to a liquidity drawing
certificate in the form of Exhibit 2 to the Letter of Credit (a "Liquidity
Drawing"), the Borrower agrees to repay to the Bank, on or before the one
hundred and twentieth (120th) day following the date of the Liquidity Drawing,
an aggregate amount equal to such Liquidity Drawing together with interest on
the unpaid balance thereof at an interest rate equal to one percent (1%) above
the Bank's Reference Rate (as defined below); and (2) upon receipt by the Bank,
funds representing the remarketing proceeds of Bank Bonds shall be applied by
the Bank to reduce, pro tanto, the Borrower's repayment obligation with respect
                    --- -----
to Liquidity Drawings; (ii) upon each transfer of the Letter of Credit, a sum in
such amount as shall be necessary to cover the transfer fee and costs and
expenses of the Bank incurred in connection with each transfer of the Letter of
Credit in accordance with its terms to a successor trustee under the Indenture;
(iii) on demand, any amount that is paid by the Bank in connection with its
exercise of its discretionary rights pursuant to paragraph (b) of Section 9 of
this Agreement or pursuant to the Borrower Agreements (as hereinafter defined)
or any security agreement entered into pursuant to Section 6(k) hereof; (iv)
concurrently with each drawing under the Letter of Credit a drawing fee in the
amount of One Hundred Dollars ($100); (v) on demand, interest on any and all
amounts unpaid by the Borrower when due hereunder from the date such amounts
become due until payment in full at a rate per annum (computed for

                                       1
<PAGE>
 
the actual number of days elapsed on the basis of a year of 360 days) equal to
four percent (4%) per annum above the Reference Rate (as defined below) as in
effect from time to time, but in no event shall such fluctuating rate exceed the
maximum rate of nonusurious interest allowed from time to time by law as is now
or, to the extent allowable by law, as may hereafter be in effect; and (vi) on
demand, any and all reasonable out-of-pocket charges and expenses which the Bank
may pay or incur (including reasonable attorneys' fees) in enforcing any rights
under this Agreement.

          (c) The obligations of the Borrower under this Agreement are
guaranteed pursuant to the Guaranties and upon fulfillment of the conditions set
forth in Section 3(a) below are expected to be secured pursuant to the Deed of
Trust.

          (d) If any change in any law or regulation or in the interpretation
thereof (whether or not having the force of law) by any court or administrative
or governmental authority charged with the administration thereof shall either
(i) impose, modify or deem applicable any capital adequacy, reserve, special
deposit, tax or similar requirement or modify any deduction, credit, tax
preference item or other allowance for federal income tax purposes with respect
to this Agreement, the Letter of Credit or letters of credit issued by, or
assets held by, or outstanding commitments of, or deposits in or for the account
of, the Bank or any bank or financial institution participating in the Bank's
rights and obligations hereunder or under the Letter of Credit (a
"Participant"), or (ii) impose on the Bank or any Participant any other
condition regarding this Agreement or the Letter of Credit, or (iii) subject the
Bank or any Participant to any tax, charge, fee, deduction or withholding of any
kind whatever (except for a change in the rate of tax on the overall net income
of the Bank or such Participant) and the result of any event referred to in
clause (i), (ii) or (iii) above shall be to increase the cost to the Bank of
issuing or maintaining the Letter of Credit or the cost to such Participant of
participating herein or in the Letter of Credit or reduce the amount of any
payment receivable by the Bank or such Participant (which increase in cost or
reduction in payment shall be the result of the Bank's or such Participant's
reasonable allocation of the aggregate of such cost increases or payment
reductions resulting from such events), then, upon demand by the Bank after
notice has been given as provided below (acting on its own behalf or on behalf
of such Participant), the Borrower shall promptly pay to the Bank from time to
time as specified by the Bank all additional amounts which are necessary to
compensate the Bank and/or such Participant (as the case may be) for such
increased costs or reduction in payments. Bank shall provide ten (10) Business
Day's prior written notice to Borrower prior to the imposition of any of the
foregoing items. All payments in respect of increased costs or reduced payments
shall be accompanied by interest thereon from the date of demand until payment
in full thereof at the Reference Rate. A certificate as to such increased cost
or reduced payment incurred by the Bank or such Participant as a result of any
event mentioned in clause (i), (ii) or (iii) above, showing the manner of
calculation thereof, shall be submitted by the Bank or such Participant to the
Borrower and shall be rebuttably presumed to be correct.

          (e) The Borrower hereby agrees to pay to the Bank, on demand, any and
all expenses, including reasonable attorneys' fees and legal expenses, incurred
or paid by the Bank in connection with (i) the preparation and negotiation of
this Agreement and the instruments referred to herein, (ii) the closing of the
transactions contemplated hereby, (iii) collecting the Borrower's indebtedness
to the Bank under this Agreement, (iv) protecting or foreclosing against or
otherwise enforcing any collateral security therefor, or (v) protecting,
exercising or enforcing any or all of the Bank's rights and remedies against the
Borrower, including, without limitation, all reasonable fees and disbursements
of counsel for the Bank in any reorganization, insolvency or bankruptcy
proceeding affecting the Borrower or any Guarantor.

          (f) On the date of issuance of the Letter of Credit (the "DATE OF
ISSUANCE") the Borrower shall pay to the Bank (i) a non-refundable letter of
credit fee for the period from the Date of Issuance to June 1, 1998 in an amount
equal to the sum resulting when One Hundred Sixty Eight Thousand 

                                       2
<PAGE>
 
Seven Hundred and Ten Dollars ($168,710) is multiplied by a fraction the
numerator of which is the number of days from the Date of Issuance to June 1,
1998 and the denominator of which is 365; and (ii) the sum of Seventy Two
Thousand Three Hundred and Four Dollars ($72,304), representing the unpaid
balance of the nonrefundable commitment fee payable to the Bank. On June 1, 1998
and on the first Business Day of each September, December, March and June and
thereafter (each of said dates being referred to in this paragraph as a
"commitment fee payment date"), the Borrower shall pay to the Bank a
nonrefundable quarterly commitment fee in an amount equal to the amount
resulting when the amount available to be drawn under the Letter of Credit on
such commitment fee payment date is multiplied by the appropriate quarterly
percentage set forth below:

<TABLE>
<CAPTION>
========================================================================
  ANNUAL RATE        QUARTERLY RATE         LETTER OF CREDIT AMOUNT
========================================================================
<S>                    <C>                   <C>
     1.75%             0.4375%               $7,230,411 - $9,640,548
------------------------------------------------------------------------ 
     1.60%               0.40%               $4,820,274 - $7,230,410
------------------------------------------------------------------------ 
     1.40%               0.35%               $2,410,137 - $4,820,273
------------------------------------------------------------------------ 
     1.25%             0.3125%                    $0 - $2,410,136
------------------------------------------------------------------------
</TABLE>


          (g) Reference is made to the DSR Deposit Schedule attached hereto as
Exhibit B (the "DSR DEPOSIT SCHEDULE"). On or before the Date of Issuance, the
Borrower shall establish an interest bearing deposit account (the "DSR ACCOUNT")
with the Bank, which account shall be utilized by the Borrower and the Bank as
follows:

              (i) So long as the Letter of Credit is outstanding, during each
month of the twelve-month period ending in April of each of the years listed in
the DSR Deposit Schedule, the Borrower shall deposit into the DSR Account an
amount equal to one twelfth of the amount set forth on the DSR Deposit Schedule
opposite each such calendar year, so that on or before April 15 of each such
year the aggregate amount on deposit in the DSR Account equals or exceeds the
appropriate amount specified in the DSR Deposit Schedule (as such annual deposit
amounts are adjusted each year in accordance with clause (v) below); provided,
however, that in each of the months of January, February, March and April of
1998, the Borrower shall deposit $25,000 into the DSR Account.

              (ii) Promptly after the receipt thereof, the Borrower shall also
deposit into the DSR Account: (a) 100% of the net proceeds of any new debt
and/or equity offering(s), excluding debt incurred for the purchase and/or lease
of equipment used in operations; and (b) 100% of the net proceeds of the sale of
any assets, excluding sales in the ordinary course of business.

              (iii) Not later than forty-five (45) days after the end of each
fiscal quarter, Borrower shall deposit into the DSR Account a sum equal to fifty
percent (50%) of the Excess Cash Flow for such fiscal quarter.

              (iv) So long as no Event of Default shall have occurred and be
continuing hereunder, monies on deposit in the DSR Account shall be used to
prepay the Borrower's obligations under the Loan Agreement (or to reimburse the
Bank in connection with any such prepayment) on the Interest Payment Date in
June of each year from and including 1998 to and including 2011, by the amount
on deposit in the DSR Account on the date the Borrower gives notice of
prepayment under Section 8.5 of the Loan Agreement, which notice the Borrower
agrees to give not later than April 17 of each year from 1998 

                                       3
<PAGE>
 
through 2011; provided, however, that (i) in no event shall the amount specified
in any notice of prepayment in any year be less than the amount specified for
such year on the DSR Deposit Schedule (as adjusted from time to time pursuant to
clause (v) below); and (ii) the amount of the prepayment shall be at least
$100,000 and in increments of $5,000 each thereafter. In accordance with Section
4.01 of the Indenture, the Borrower shall direct the Issuer to call the Bonds
for partial optional redemption and the Trustee to give notice of such
redemption. The Bank shall provide its written consent to each such prepayment
as required under the Indenture and, when the Letter of Credit has been drawn
upon in the amount of the prepayment, shall withdraw from the DSR Account the
amount necessary to reimburse itself. Monies deposited into the DSR Account
after the notice of prepayment given in 2011 shall be used to reimburse the Bank
for any unreimbursed draws on the Letter of Credit and otherwise to satisfy any
unpaid obligations of the Borrower to the Bank hereunder.

              (v) Promptly after each Bond redemption effected pursuant to
clause (iv) above, the DSR Deposit Schedule shall be adjusted as follows: an
amount equal to the portion of the total Bond redemption which is derived from
payments made by the Borrower into the DSR Account pursuant to clauses (ii) and
(iii) of this Section 1(g) shall be applied to reduce the amount of all
subsequent Annual DSR Deposit Amounts, with thirty percent (30%) of such amount
being allocated to all remaining Annual DSR Deposit Amounts so that each such
Annual DSR Deposit Amount is reduced by the same ratio that the 30% aggregate
reduction bears to the aggregate of all remaining Annual DSR Deposit Amounts,
and seventy percent (70%) being applied to such Annual DSR Deposit Amounts in
inverse order of maturity. After each annual adjustment in the DSR Deposit
Schedule, the remaining equal monthly DSR Deposits required under clause (i)
above shall be reduced accordingly.

              (vi) Until such time as the Letter of Credit has expired and all
obligations of the Borrower hereunder have been paid and performed in full,
monies on deposit in the DSR Account including the interest earnings thereon
shall be used solely for the purpose described in clause (iv) above; provided
however that upon the occurrence of an Event of Default, the Bank shall have the
right to withdraw monies from the DSR Account and apply such monies toward
payment of any obligation of the Borrower then due and payable hereunder. To
secure payment and performance of its obligations hereunder, the Borrower hereby
grants to the Bank a security interest in the DSR Account, and in all the
proceeds thereof and earnings thereon.

              (vii) Monies on deposit in the DSR Account shall be invested in
money-market funds or such other liquid, short-term investments as are mutually
satisfactory to the Borrower and the Bank. Interest earnings shall be retained
in the DSR Account and the Borrower shall be entitled to a credit against its
regular monthly deposit obligation described in clause (i) above in an amount
equal to the interest earnings credited to the DSR Account during the preceding
month.

              (viii) The Borrower may make prepayments and optional redemptions
in addition to those described in clauses (i), (ii) and (iii) above, provided
that the Borrower shall have deposited the amount of such additional
prepayment/optional redemption into the DSR Account not later than the date on
which the Borrower gives notice of prepayment under Section 8.5 of the Loan
Agreement. There shall also be deposited into the DSR Account any casualty
insurance proceeds received by the Bank which are not utilized to repair or
replace damaged collateral. Unless otherwise agreed to by the Borrower and the
Bank the aggregate amount of such additional deposits made in any year shall be
added to the amount specified in the annual notice of prepayment given each year
and shall be used to reimburse the Bank for the amounts drawn on the Letter of
Credit when the Bonds are redeemed in June. The Borrower acknowledges that, upon
the occurrence of certain events specified in the Guaranties, the Bank shall
have the right to demand of the Kaiser Guarantors or the Burrtec Guarantors, as
the case may be, that such Guarantors make certain payments to the Bank which,
upon receipt by the Bank, shall be deposited into the

                                       4
<PAGE>
 
DSR Account. The Borrower hereby acknowledges that it has received a copy of the
Guaranties and consents to all the provisions thereof, including the provisions
regarding mandatory deposits by the Guarantors to the DSR Account.

          (h) All payments to the Bank by the Borrower hereunder shall be made
in lawful currency of the United States and in immediately available funds to
the Bank at its office at 530 B Street, Fourth Floor, San Diego, California
92101 or such other office as the Bank may hereafter notify the Borrower in
writing.

          (i) As used herein the following terms shall have the following
respective meanings:

          "Agreement to Furnish Insurance" shall mean the Agreement to Furnish
           ------------------------------
     Insurance substantially in the form attached hereto as Exhibit E.

          "Borrower Agreements" means the Security Agreement, the Deed of Trust,
           -------------------
     the Environmental Agreement, the ADR Agreement executed by the Borrower in
     favor of the Bank, the Application and each other agreement executed by the
     Borrower evidencing or securing the Borrower's obligations to the Bank in
     connection with the Letter of Credit, the Bonds or the Project.

          "Borrower's Funds" shall mean the sum of $ n/a or such other sum as
           ----------------                          ---
     may be determined by Bank in accordance with Sections 3(b)(vii) and 6(o)
     hereof to be made available by Borrower in a form satisfactory to Bank for
     disbursement in the manner and for the purposes described in this
     Agreement. Borrower's Funds shall be disbursed prior to disbursement of any
     Bond proceeds.

          "Borrower's Funds Account" shall mean a special non-interest bearing
           ------------------------
     account with the Bank into which Borrower's Funds shall be deposited
     pending any disbursement thereof.

          "Burrtec Guarantor" means each or any of the following Guarantors:
           -----------------
     Burrtec Waste Industries, Inc., a California corporation ("BWI"); West
     Valley Recycling & Transfer, Inc., a California corporation ("WVRT");
     Edward G. Burr, Sandra L. Burr; and E. Cole Burr and Tracy A. Burr, both
     individually and as trustees of the Cole and Tracy Burr Family Trust.

          "Burrtec Guaranty" means the Guaranty executed by the Burrtec
           ----------------
     Guarantors.



          "BWI" means Burrtec Waste Industries, Inc., a California corporation.
           ---

          "BWI Performance Guaranty" means that certain Performance Guaranty and
           ------------------------
     Indemnification Agreement dated June 19, 1997 given by BWI in favor of the
     Borrower, KRC and KRC's affiliates.

          "Certified Invoice" shall mean a certified invoice for progress
           -----------------
     payments as customarily used by Bank, a copy of which has been delivered by
     Bank to Borrower prior to or concurrently with the execution of this
     Agreement.

          "Change Order" shall mean any amendment or modification to the General
           ------------
     Contract or any subcontract.

          "Completion Date" shall mean February 15, 1998; provided however that
           ---------------
upon the 

                                       5
<PAGE>
 
occurrence of any Force Majeure Delays the Completion Date shall be extended by
the number of days in each such Force Majeure Delay; provided however that in no
event shall the Completion Date be later than May 15, 1998.

          "Cost Breakdown" means an itemized schedule on a component, unit and
           --------------
     trade breakdown basis covering all costs of constructing and completing the
     Improvements.

          "Cumulative Change Order Amount" shall mean $250,000.
           ------------------------------

          "Corporate Guarantor" means each or any of the following corporations:
           -------------------
     Kaiser Ventures Inc., a Delaware corporation ("KVI"); Kaiser Recycling
     Corporation, a Delaware corporation ("KRC"); BWI and WVRT.

          "Debt" of any Person means, at any date without duplication: (a) all
           ----
     obligations of such Person for borrowed money; (b) all obligations of such
     Person evidenced by bonds, debentures, notes or other similar instruments;
     (c) all obligations of such Person to pay the deferred purchase price of
     property or services (excluding normal trade payables not overdue that are
     incurred in the ordinary course of such Person's business); (d) all
     indebtedness created or arising under any conditional-sale or other title-
     retention agreement with respect to property acquired by such Person (even
     though the rights and remedies of the seller or lender under such agreement
     in the event of default are limited to repossession or sale of such
     property); (e) all obligations of such Person as lessee under leases that
     have been or should be, in accordance with generally accepted accounting
     principles, recorded as capitalized leases; (f) all obligations, contingent
     or otherwise of such Person under acceptance, letter-of-credit or similar
     facilities; (g) all obligations of such Person to purchase, redeem, retire,
     defease or otherwise acquire for value any capital stock of such Person or
     any warrants, rights or options to acquire such capital stock, valued, in
     the case of redeemable preferred stock, at the greater of its voluntary and
     involuntary liquidation preference plus accrued and unpaid dividends; (h)
     all executory obligations of such Person in respect of interest-rate swap
     agreements and other similar agreements designed to hedge against
     fluctuations in interest rates; (i) all Debt referred to in any of clauses
     (a) through (h) above that is guaranteed directly or indirectly by such
     Person, or in effect guaranteed directly or indirectly by such Person
     through an agreement (i) to pay or purchase such Debt or to advance or
     supply funds for the payment or purchase of such Debt, (ii) to purchase,
     sell or lease (as lessee or lessor) property, or to purchase or sell
     services, primarily for the purpose of enabling the debtor to make payment
     of such Debt or to assure the holder of such Debt against loss, (iii) to
     advance or supply funds to maintain working capital or equity capital of
     another Person or otherwise to maintain the net worth or solvency of such
     Person (including any agreement in the nature of a support arrangement to
     pay for property or services irrespective of whether such property is
     received or such services are rendered) or (iv) otherwise to assure a
     creditor against loss; and (j) all Debt referred to in any of clauses (a)
     through (h) above secured by (or for which the holder of such Debt has an
     existing right, contingent or otherwise, to be secured by) any Lien on
     property (including accounts receivable and contract rights) owned by such
     Person, even though such Person has not assumed or become liable for the
     payment of such Debt.

          "Debt Service Coverage Ratio" shall have the meaning ascribed thereto
           ---------------------------
     on Exhibit G hereto.

          "Deed of Trust" means the Deed of Trust and Assignment of Leases and
           -------------
     Rents executed by the Borrower in favor of the Bank substantially in the
     form of Exhibit C.

          "Default" means any event or condition that, with the giving of notice
           -------
     or the lapse of time, 

                                       6
<PAGE>
 
     or both, would become an Event of Default.

          "Default Rate" means the applicable rate set forth in Section 1(b)(v)
           ------------
     hereof.

          "Design Professional" shall mean J.R. Miller & Associates, the person
           -------------------
     or firm which prepared the Plans and Specifications.

          "Disbursement Schedule" shall mean the Disbursement Schedule attached
           ---------------------
     hereto as Exhibit D providing for the manner of disbursement of Bond
     proceeds to pay for the costs of Project.

          "EBITDA" means, for any fiscal period for any Person, net income (or
           ------
     net loss), plus the sum of (a) net interest expense and letter of credit
     fees, (b) income-tax expense, (c) depreciation expense, (d) amortization
     expense, and (e) noncash write-downs or write-offs of assets, in each case
     determined in accordance with generally accepted accounting principles for
     such period.

          "Environmental Agreement" has the meaning set forth in Section
           -----------------------
     3(a)(viii) hereof.

          "Event of Default" has the meaning set forth in Section 8 hereof.
           ----------------

          "Excess Cash Flow" means for any fiscal quarter, EBITDA as measured
           ----------------
     for the quarter, less a) monthly deposits into the DSR Account made in
     accordance with the adjusted annual DSR Deposit Schedule; b) voluntary
     prepayments of Debt owed to Bank; c) actual interest expense and letter of
     credit fees paid; d) accrued taxes; e) Permitted Unfinanced Capital
     Expenditures actually made; f) increases in net working capital; g)
     scheduled principal amortization of Funded Debt; and h) cash distributed to
     members (not to exceed monthly deposits into the DSR Account made in
     accordance with the adjusted Annual DSR Deposit Schedule).

          "Final Disbursement" shall have the meaning ascribed thereto in
           ------------------
     Section 3(d)(iii) hereof.

          "Force Majeure Delay" shall mean any delay caused by civil
           -------------------
     disturbance, riot, natural disaster, act of God (including but not limited
     to fires, storms or earthquakes), unforeseeable shortage of materials or
     other event beyond the reasonable control of the Borrower.

          "Funded Debt" means all Debt of Borrower evidenced by notes, bonds,
           -----------
     debentures or other similar instruments, including Debt under capitalized
     leases but excluding trade payables, accrued expenses incurred in the
     ordinary course of business and advances under revolving credit facilities
     which, if repaid, are available to be re-borrowed by the Borrower.

          "General Contract" shall mean the construction contract executed or to
           ----------------
     be executed by and between Borrower and the General Contractor.

          "General Contractor" shall mean Shook Building Systems, Inc.
           ------------------

          "Governmental Action" means any authorization, approval, consent,
           -------------------
     waiver, exception, license, filing, registration, permit, notarization,
     notification or other requirement of any Governmental Person.

          "Governmental Authority" means the authority of the United States, the
           ----------------------
     State of California, any political subdivision thereof and any city and any
     agency, department, commission, board, 

                                       7
<PAGE>
 
     bureau or instrumentality of any of them.

          "Governmental Person" means, whether domestic or foreign, any
           -------------------
     national, federal, state or local government, any political subdivision
     thereof, or any governmental, quasi-governmental, judicial, public or
     statutory instrumentality, authority, body or entity, including any central
     bank and any comparable authority.

          "Governmental Rule" means any treaty, law, rule, regulation,
           -----------------
     ordinance, order, code, interpretation, judgment, writ, injunction, decree,
     determination, directive, guideline, policy or similar form of decision of
     any Governmental Person.

          "Guarantor" means any of the Burrtec Guarantors and either of the
           ---------
     Kaiser Guarantors.

          "Guarantor Agreements" means the Guaranties and the ADR Agreements
           --------------------
     executed by the Guarantors.

          "Guaranty" means each Guaranty and Mandatory DSR Deposit Agreement
           --------
     dated as of the date hereof executed by a Guarantor in favor of the Bank.

          "Improvements" shall mean the improvements being constructed or
           ------------
     acquired and installed as a part of the Project as described in the Plans,
     including on-and offsite improvements and equipment.

          "Kaiser Guarantor" means each of KVI and KRC.
           ----------------

          "Kaiser Guaranty" means the Guaranty executed by the Kaiser
           ---------------
     Guarantors.
     
          "KRC" means Kaiser Recycling Corporation, a Delaware corporation.
           ---

          "KVI" means Kaiser Ventures Inc., a Delaware corporation.
           ---

          "KVI Performance Guaranty" means that certain Performance Guaranty and
           ------------------------
     Indemnification Agreement dated June 19, 1997 given by KVI in favor of the
     Borrower, WVRT and WVRT's affiliates.

          "Lien" means, with respect to any asset, (a) any lien, charge, option,
           ----
     claim, mortgage, deed of trust, security interest, pledge or other
     encumbrance of any kind in respect of such asset or (b) the interest of a
     vendor or lessor under any conditional-sale agreement, capital lease or
     other title retention agreement relating to such asset.

          "Obligations" means all payment obligations of the Borrower to the
           -----------
     Bank outstanding from time to time under this Agreement and the other
     Related Documents to which the Borrower is a party, whether for principal,
     interest, fees, expenses, indemnification or otherwise.

          "Permitted Liens" means such of the following as to which no
           ---------------
     enforcement, collection, execution, levy or foreclosure proceeding has been
     commenced: (a) Liens for taxes, assessments and governmental charges or
     levies to the extent not required to be paid under the Deed of Trust; (b)
     pledges or deposits to secure obligations under workers compensation laws
     or similar legislation or to secure public or statutory obligations; (c)
     easements, rights of way and other encumbrances on title to real property
     that do not, in the Bank's good faith discretion, render title to the
     property 

                                       8
<PAGE>
 
     encumbered thereby unmarketable or materially and adversely affect the use
     of such property for its present purposes; (d) deposits to secure the
     performance of bids, trade contracts (other than for borrowed money),
     leases, statutory obligations, surety and appeal bonds, performance bonds
     and other obligations of like nature incurred in the ordinary course of
     business; and (e) purchase money liens.

          "Permitted Unfinanced Capital Expenditures" shall have the meaning
           -----------------------------------------
     ascribed thereto in Section 7(f)(ii).

          "Person" means an individual, a corporation, a partnership, an
           ------
     association, a business trust or any other entity or organization,
     including any Governmental Person.

          "Plans" shall mean the final plans and specifications (including any
           -----
     AIA general conditions incorporated in the specifications or other general
     conditions acceptable to the Bank and any addenda thereto) for the
     construction of the Improvements prepared by the Architect, and approved as
     required in this Agreement and all amendments and modifications thereof
     made by approved Change Orders.

          "Project" shall have the meaning ascribed thereto in the first whereas
           -------
     clause of this Agreement.

          "Property" shall mean, collectively, the Real Property together with
           --------
     all buildings, structures and other improvements now or hereafter located
     on the Real Property.

          "Real Property" shall mean the real property located in San Bernardino
           -------------
     County, California, and more particularly described on Exhibit A to the
     Deed of Trust.

          "Reference Rate" means the variable rate of interest per annum
           --------------
     announced by the Bank from time to time as its "reference rate." Such
     "reference rate" is set by the Bank as a general reference rate of
     interest, taking into account such factors as the Bank may deem
     appropriate, it being understood that many of the Bank's commercial or
     other loans are priced in relation to such rate, that it is not necessarily
     the lowest or best rate actually charged to any customer and that the Bank
     may make various commercial or other loans at rates of interest having no
     relationship to such rate. For purposes of this Agreement, each change in
     the Reference Rate shall be effective as of the opening of business on the
     date announced as the effective date of any change in such "reference
     rate."

          "Related Documents" shall have the meaning ascribed thereto in Section
           -----------------
     4(a)(i) hereof.

          "Requirements" shall have the meaning ascribed to such term in Section
           ------------
     5(k).
     
          "Security Agreement" has the meaning ascribed thereto in Section
           ------------------
     2(a)(ix).
     
          "Subsidiary" of any Person means any corporation, partnership, joint
           ----------
     venture, trust or estate of which (or in which) more than 50% of (a) the
     outstanding capital stock having ordinary voting power to elect a majority
     of the Board of Directors of such corporation (irrespective of whether at
     the time capital stock of any other class or classes of such corporation
     has or might have voting power upon the occurrence of any contingency), (b)
     the interest in the capital or profits of such partnership or joint venture
     or (c) the beneficial interest of such trust or estate is at the time
     directly or indirectly owned by such Person, by such Person and one or more
     of its other Subsidiaries, or by one or more of such Person's other
     Subsidiaries.

                                       9
<PAGE>
 
          "Title Company" shall mean Chicago Title Company.
           -------------

          "WVRT" means West Valley Recycling & Transfer, Inc., a California
           ----
     corporation.
     
          (j) Unless otherwise specified herein, all accounting terms used
herein shall be interpreted, all accounting determinations hereunder shall be
made, and all financial statements required to be delivered hereunder shall be
prepared, in accordance with generally accepted accounting principles as in
effect from time to time, on a basis consistent with the financial statements
previously delivered to the Bank.

          (k) In this Agreement, the singular includes the plural; words
importing any gender include the other genders; references to statutes are to be
construed as including all statutory provisions consolidating, amending or
replacing the statute referred to; references to "writing" include printing,
typing, lithography and other means of reproducing words in a tangible visible
form; the words "including," "includes" and "include" are deemed to be followed
by the words "without limitation"; references to articles, sections (or
subdivisions of sections), recitals, exhibits, annexes or schedules are to those
of this Agreement unless otherwise indicated; references to agreements and other
contractual instruments are deemed to include all subsequent amendments and
other modifications to such instruments, but only to the extent such amendments
and other modifications are not prohibited by the terms of this Agreement; and
references to Persons include their respective permitted successors and assigns.

     SECTION 2.  Conditions Precedent to the Issuance of the Letter of Credit.
                 ------------------------------------------------------------
Subject to the prior fulfillment of the following conditions precedent set forth
in clauses (a) through (d) below, the Bank shall issue the Letter of Credit,
effective on the Date of Issuance:

          (a) The Bank shall have received, on or before the Date of Issuance,
the following, in form and substance satisfactory to the Bank:

              (i) Good standing certificates for the Borrower and for all
Corporate Guarantors from the offices of the Secretaries of State of California
and Delaware, as applicable, together with copies of (i) all Borrower action
authorizing the execution, delivery and performance by the Borrower of this
Agreement, the Deed of Trust, and the Loan Agreement and other Borrower
Agreements and approving the Letter of Credit; (ii) the Members Operating
Agreement for the Borrower, the Borrower's Certificate of Formation (Form LLC-1)
and all amendments thereto; (iii) the Operation and Maintenance Agreement
between the Borrower and WVRT relating to the Project Site; (iv) the BWI
Performance Guaranty and the KVI Performance Guaranty; (v) all action of the
Corporate Guarantors authorizing the execution, delivery and performance of the
Corporate Guaranties and the ADR Agreements; and (vi) the Corporate Guarantors'
Articles of Incorporation and By-laws and all amendments thereto;

              (ii) A certificate of the secretary or assistant secretary of each
Corporate Guarantor and of two members of the Executive Committee of the
Borrower, certifying the name and true signatures of the individuals authorized
to sign this Agreement and the other documents to be delivered by the Borrower
or any Corporate Guarantor hereunder;

              (iii) The favorable opinion of Orrick, Herrington & Sutcliffe, as
bond counsel, as to the validity of the Bonds and as to federal income tax
matters, and a favorable opinion of McCabe & Voss, as special counsel to the
Borrower, and Gresham, Savage, Nolan and Tilden, LLP, as counsel to the Borrower
as to such other matters as the Bank may reasonably request;

              (iv) An executed counterpart of the Loan Agreement;

                                       10
<PAGE>
 
              (v) An executed counterpart of the Indenture;

              (vi) Original insurance policies or certificates thereof or other
evidence for the insurance required by Section 6(d) hereof satisfactory to the
Bank;

              (vii) the Kaiser Guaranty duly executed and delivered by the
Kaiser Guarantors;

              (viii) the Burrtec Guaranty duly executed and delivered by the
Burrtec Guarantors;

              (ix) A fully executed counterpart of the Alternative Dispute
Resolution Agreements duly executed and delivered by each of the Borrower and
the Guarantors (collectively, the "ADR Agreements" and individually, each or any
"ADR Agreement");

              (x) A fully-executed counterpart of the Application for
Irrevocable Standby Letter of Credit (the "Application"); provided, however,
                                                          --------  -------
that in the event of any inconsistency between the terms of this Agreement and
the Application, this Agreement shall control and govern; and

              (xi) Such other documents, instruments, approvals (and, if
requested by the Bank, certified duplicates of executed copies thereof) or
opinions as the Bank may reasonably request on or before the Date of Issuance.

          (b) The following statements shall be true and correct on the Date of
Issuance and the Bank shall have received a certificate signed by a duly
authorized agent of the Borrower, dated the Date of Issuance, so stating:

              (i) the representations and warranties contained in Section 5
hereof, or made by the Borrower or any Guarantor in any statement, certificate
or document delivered by the Borrower or any Guarantor in connection with this
Agreement, are correct in all material respects on and as of the Date of
Issuance as though made on and as of such date; and

              (ii) no Event of Default (as defined in Section 8 hereof) has
occurred and is continuing, or would result from the issuance of the Letter of
Credit, and no event has occurred and is continuing which would constitute an
Event of Default but for the requirement that notice be given or time elapse or
both.

          (c) On or before the Date of Issuance:

              (i) the Issuer shall have duly adopted resolutions authorizing the
execution, delivery and performance by the Issuer of the Loan Agreement and the
Indenture, and on the Date of Issuance such resolutions shall continue to be in
full force and effect;

              (ii) the Trustee shall have accepted the trusts of the Indenture;

              (iii) all conditions precedent to the issuance of the Bonds shall
have occurred;

              (iv) The Bank shall have received written notice from Fitch's
Rating Service that it has assigned a rating or ratings for the Bonds of not
lower than the current long- and short-term 

                                       11
<PAGE>
 
ratings (as applicable) assigned to the Bank by such rating agency; and

              (v) the Issuer shall have duly executed, issued and delivered the
Bonds to the Trustee and the Trustee shall have authenticated and delivered the
Bonds to the underwriter.

          (d) No change shall have occurred in any law or regulation thereunder
or interpretation thereof which in the opinion of counsel for the Bank would
make it illegal for the Bank to issue the Letter of Credit as provided herein.

     SECTION 3.  Approval of Construction Fund Disbursements.
                 -------------------------------------------

      On the Date of Issuance, an initial requisition of Bond Proceeds in the
amount of $190,000 (the "Initial Requisition") shall be disbursed by the Trustee
for Costs of Issuance subject to compliance with the requirements of the
Indenture. Unless approved by the Bank in writing, no further funds shall be
disbursed without the prior fulfillment of all the conditions precedent set
forth in clauses (a) and (b), below; except that notwithstanding the foregoing
the Trustee may disburse all funds in the Authority Subaccount of the Costs of
Issuance Account which funds were provided by the Issuer's Small Business
Assistance Fund.

          (a) The Bank shall have received at least one Business Day before the
date of the first Borrower requisition following the Initial Requisition (the
"Subsequent Requisition Date"), and the Borrower hereby covenants that the Bank
shall receive on or before July 15, 1997, the following, in form and substance
satisfactory to the Bank:

              (i) A fully executed copy of the General Contract in form
satisfactory to Bank and an Assignment of Construction Contract in form
satisfactory to Bank and written consent thereto by the General Contractor.

              (ii) An Assignment of the Plans and of the agreement with the
Design Professional pursuant to which the Plans were prepared, in form
satisfactory to Bank together with written consent thereto by the Design
Professional.

              (iii) The Deed of Trust fully executed and acknowledged by the
Borrower;

              (iv) Preliminary Site Assessment (the "PSA") performed by the
Bank's Hazardous Materials Department or an engineering firm satisfactory to the
Bank, conducted in accordance with the Bank's scope of work; together with (i)
hazardous materials studies with satisfactory results prepared by environmental
engineers approved by the Bank; (ii) satisfactory soils report by soils engineer
approved by the Bank confirming, among other things, that the soil at the
Project Site is of sufficient stability to support the Facilities; and (iii)
receipt of a Release of Liability from the California Department of Toxic
Substances Control;

              (v) an MAI Appraisal of the Land and Improvements performed by an
appraiser, and in form and substance and showing an appraised value,
satisfactory to the Bank in its sole discretion;

              (vi) An ALTA LP-10 loan policy or policies of title insurance, or
its equivalent or a written commitment by the title insurer to issue one, with a
liability limit of $9,640,548, issued by a title insurer acceptable to the Bank
insuring the interests of the Bank under the Deed of Trust as a valid first
priority lien on the Project; said policy or policies shall contain only such
exceptions from its coverage as have been approved in writing by the Bank;

                                       12
<PAGE>
 
              (vii) Original insurance policies or certificates thereof for the
insurance specified in that certain Agreement to Furnish Issuance being executed
concurrently herewith;

              (viii) Executed counterparts of Environmental Compliance Agreement
(the "Environmental Agreement") as executed by the Borrower for the benefit of
the Bank;

              (ix) Form UCC-1 Financing Statements executed by the Borrower
required to perfect the personal property security interests granted to the Bank
under the Deed of Trust;

              (x) the first page of a copy of the Plans signed and all pages
initialed by Borrower, Bank and General Contractor, if required by Bank;

              (xi) the Cost Breakdown;

              (xii) the building permit and any other authorization, if any,
which may be required from any Governmental Authority having jurisdiction over
the Property or the construction of the Improvements;

              (xiii) A Security Agreement (the "SECURITY AGREEMENT") duly
executed and delivered by the Borrower;

              (xiv) Form UCC-1 Financing Statement(s) executed by the Borrower
required to perfect the personal property security interests granted to the Bank
under the Security Agreement;

              (xv) Such other documents, instruments, approvals (and, if
requested by the Bank, certified duplicates of executed copies thereof) or
opinions as the Bank may reasonably request.

          (b) Each Borrower requisition from the Trustee, submitted as required
by Section 3.2 of the Loan Agreement shall be approved as to form by the Bank
prior to submission thereof by the Borrower to the Trustee. Any obligation of
the Bank to approve the form of any requisition shall be subject to the prior
fulfillment of all of the following conditions precedent:

              (i) no Event of Default shall have occurred and be continuing and
no event which with notice or lapse of time or both would become such an Event
of Default shall have occurred and be continuing hereunder or under any Borrower
Agreement;

              (ii) the representations and warranties of the Borrower made
hereunder or in connection herewith shall be true and correct in all material
respects on the date of such requisition fully as if made on and as of such date
and, as to each of the foregoing conditions, the Borrower shall have so
certified in writing to the Bank;

              (iii) each of the conditions precedent set forth in Section 2(a)
through (d) and Section 3(a) hereof shall have been fulfilled;

              (iv) each requisition shall be accompanied by Certified Invoices,
receipts or other evidence satisfactory to the Bank in its good faith discretion
as to the cost of the item with respect to which the requisition is being
submitted;

              (v) if Bank requests, it shall have received a list of the names
and addresses of 

                                       13
<PAGE>
 
all material dealers, laborers and subcontractors with whom agreements have been
made by the General Contractor and/or Borrower to deliver materials to and/or
perform work on the Improvements;

              (vi) the Improvements shall not have been materially injured or
damaged by fire or other casualty unless insurance proceeds are available in an
amount which the Bank deems sufficient, which when combined with Borrower's
Funds, in its reasonable judgment to effect the satisfactory restoration of the
Improvements and to permit the completion thereof prior to the Completion Date;

              (vii) Borrower shall have deposited with Bank cash in the amount,
estimated by Bank, necessary to pay for the costs of completion of construction
of the Improvements to the extent that the aggregate amount of the undisbursed
Bond proceeds and Borrower's Funds, designated for the payment of the remaining
costs to be incurred in the completion of construction of the Improvements is,
in the opinion of Bank, insufficient therefor;

              (viii) Advice from Bank's Inspection Department to the effect
that, to date, the Improvements have been constructed in accordance with the
Plans and that the present state of construction of the Improvements will,
barring then unforeseen and unknown delays, permit completion of construction of
the Improvements on or before the Completion Date;
 
              (ix) if Bank so requests, (a) Title Company shall have issued its
continuation endorsement (CLTA Endorsement 122 or comparable endorsement) to
Bank indicating that since the last preceding disbursement to Borrower or
General Contractor, there has been no change in the state of title, that there
are no intervening liens which may now or hereafter take priority over the
disbursement to be made and that there are no survey exceptions not theretofore
approved by Bank; and (b) upon completion of the foundation(s), Title Company
has issued its foundation endorsement (CLTA Endorsement 102.5 or comparable
endorsement) insuring Bank that the foundation(s) is constructed wholly within
the boundaries of the Property and does not encroach on any easements nor
violate any covenants, conditions or restrictions of record; and

              (x) with respect to all items of personal property specified in
such requisition, if requested by the Bank, form UCC-1 financing statements
identifying such personal property and duly executed by the Borrower.

          (c) Prior to authorizing the final disbursement of Bond Proceeds, the
following conditions shall have been satisfied:

              (i) No Event of Default, or fact or circumstance which, with the
giving of notice or the passage of time, or both, would constitute an Event of
Default, shall exist hereunder or under any of the Borrower Agreements;

              (ii) If Bank requests, it shall have received a list of the names
and addresses of all material dealers, laborers and subcontractors with whom
agreements have been made by the General Contractor and/or Borrower to deliver
materials to and/or perform work on the Improvements;

              (iii) The representations and warranties of Borrower made in
Section 5 hereof shall be true and correct in all material respects on and as of
the date of the disbursement with the same effect as if made on such date;

              (iv) The Improvements shall not have been materially damaged by
fire or other casualty unless insurance proceeds are available and (when
combined with Borrower's Funds) are sufficient 

                                       14
<PAGE>
 
in the Bank's good faith judgment to effect the satisfactory restoration of the
Improvements and to permit the completion thereof prior to the Completion Date;

              (v) Advice from Bank's Inspection Department to the effect that
the Improvements have been completed substantially in accordance with the Plans,
as modified pursuant to any approved Change Orders;

              (vi) Evidence that Borrower has filed the Notice of Completion of
the Improvements necessary to establish commencement of the shortest statutory
period for the filing of mechanics' and materialmen's liens;

              (vii) Subsequent to expiration of the period during which any lien
for labor, services or material may be validly recorded against the Property or
the Improvements, Title Company shall have rewritten and reissued the Title
Policy with such endorsements as Bank may require, including, without
limitation, CLTA Endorsements 100 (unmodified), 102.5, 103.7, 104.7, 110.9,
111.5 and 116, which reissued Title Policy shall insure that the Improvements
have been completed free of all mechanics' and materialmen's liens or claims
thereof;

              (viii) Evidence of approval of completion of the Improvements by
Borrower; and

              (ix) Evidence of the approval by all Governmental Authorities of
the Improvements in their entirety for permanent occupancy, to the extent any
such approval is a condition of the lawful use and occupancy of the
Improvements.

          (d) The Bond proceeds and Borrower's Funds shall be used only for the
payment of costs of construction of the Improvements and the acquisition and
installation of equipment in accordance with the Plans and other costs related
thereto, as set forth on the Disbursement Schedule, and shall be disbursed as
follows:

              (i) Upon satisfaction of the conditions of clause (a) of this
Section 3, Bank shall authorize disbursement of Bond Proceeds in accordance with
the Disbursement Schedule the amounts necessary to pay all costs, charges and
expenses incurred or to be incurred (as estimated by Bank) in connection with
the Letter of Credit and the Bond financing or payable pursuant to this
Agreement or the other Related Documents, excluding direct costs of labor and
materials related to the Improvements, and including but not limited to the
initial fees payable to the Bank (which are deemed earned on the Date of
Issuance and are not refundable in whole or part), predevelopment, permitting
and offsite costs, service charges, title charges, tax and lien service charges,
recording fees, escrow fees, appraisal fees, legal fees, real property taxes and
assessments, insurance premiums, fees payable in connection with any commitment
to provide permanent financing of the Improvements, and any amount required to
pay existing encumbrances affecting the Property and amounts required to
complete the purchase of the Property;

              (ii) Upon satisfaction of the conditions of clause (b) of this
Section 3, Bank shall authorize disbursement of Bond Proceeds directly to
Borrower such sums as are required for the payment of the costs and expenses of
constructing, acquiring or installing the Improvements, which disbursements
shall be made in accordance with the applicable provisions of the Disbursement
Schedule. All funds disbursed hereunder to Borrower shall be received by
Borrower in trust and Borrower agrees that the same shall be used only for the
payment of those items contemplated by the particular disbursement; and

                                       15
<PAGE>
 
              (iii) The Final Disbursement shall be the payment of any monies
retained from progress payments or draws as set forth in the Disbursement
Schedule. Subject to the provisions of this Agreement, the final disbursement
shall be made only after Borrower has satisfied the conditions of clause (c) of
this Section 3, and delivered or caused to be delivered to Bank, in addition to
the Title Policy and endorsements or coverages required pursuant to the terms
hereof, such additional endorsements to the Title Policy as Bank may require.
Bank may withhold the Final Disbursement until Borrower has furnished Bank with
the written approval of such final disbursement by Title Company and the surety
on any bond required by Bank.

          (e) The Borrower understands and agrees that in no event shall the
Bank be required to approve aggregate requisitions for more than $9,500,000. The
Borrower acknowledges and agrees that its costs and expenses incurred in
connection with the Project exceed the amounts for which the Bank will approve
requisitions and that the Borrower shall be directly liable for the payment of
such costs.

     SECTION 4.  Obligations of the Borrower.
                 ---------------------------

          (a) The obligations of the Borrower under this Agreement shall be
absolute, unconditional and irrevocable subject to and in accordance with the
terms of this Agreement, and shall be performed strictly in accordance with the
terms of this Agreement, under all circumstances whatsoever, including without
limitation the following circumstances:

              (i) any lack of validity or enforceability of the Letter of
Credit, the Bonds, the Loan Agreement, the Indenture, the Borrower Agreements or
the Guarantor Agreements (collectively, the "Related Documents");

              (ii) any amendment or waiver of or any consent to departure from
all or any of the Related Documents;

              (iii) the existence of any claim, set-off, defense or other rights
which the Borrower may have at any time against the Trustee, any beneficiary or
any transferee of the Letter of Credit (or any persons or entities for whom the
Trustee, any such beneficiary or any such transferee may be acting), the Bank,
any Guarantor or any other person or entity, whether in connection with this
Agreement, the Related Documents or any unrelated transaction;

              (iv) any breach of contract or other dispute between the Borrower
and the Trustee, any beneficiary or any transferee of the Letter of Credit (or
any persons or entities for whom the Trustee, any such beneficiary or any such
transferee may be acting), the Issuer, the owners of the Bonds, the Bank, any
Guarantor or any other person or entity;

              (v) any statement or any other document presented under the Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect
whatsoever; or

              (vi) payment by the Bank under the Letter of Credit against
presentation of a sight draft or certificate which does not comply with the
terms of the Letter of Credit, provided that such payment shall not have
constituted gross negligence or willful misconduct of the Bank.

          (b) The Bank shall not be obligated to issue any further credits, to
cure any defaults under the Indenture, the Loan Agreement, any Related Document
or otherwise, or in any other manner to extend any financial consideration to
the Borrower beyond performance by the Bank of its obligations under 

                                       16
<PAGE>
 
the Letter of Credit.

          (c) The Bank shall not be deemed to have waived or released any of its
rights or remedies (whether specified in or arising under this Agreement or
otherwise available to it by law or agreement) unless it signs a written waiver
or release. Delay or failure to act on the Bank's part shall not constitute a
waiver of or otherwise preclude enforcement of any of its rights and remedies.
All of the Bank's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. The Bank need not resort to any particular right or
remedy before exercising or enforcing any other, and the Bank's resort to any
right or remedy shall not preclude the exercise or enforcement of any other
right and remedy.

     SECTION 5.  Representations and Warranties of the Borrower. The Borrower
                 ----------------------------------------------
  represents and warrants as follows:

          (a) The Borrower was duly organized and is validly existing under the
laws of the state of its formation and is duly qualified to do business in and
is in good standing under the laws of any other jurisdiction in which the
conduct of its business or the ownership of its properties makes such
qualification necessary.

          (b) The execution, delivery and performance by the Borrower of this
Agreement and of each of the Related Documents to be executed, delivered and
performed by the Borrower are within the Borrower's powers, have been duly
authorized by all necessary Borrower action, do not contravene (i) the
Borrower's Articles of Organization and its Members Operating Agreement or (ii)
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any indenture, agreement, lease, instrument or other
contractual restriction binding on or affecting the Borrower and (except as
provided in this Agreement) do not result in or require the creation of any
lien, security interest or other charge or encumbrance upon or with respect to
any of its properties other than the liens created by the Borrower Agreements or
any other Related Documents. The Borrower is not in violation of or in default
under (in any material respect) any such law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any such indenture,
agreement, lease, instrument or other contractual restriction. All legally
required orders, consents, easements, permits or other authorizations or
approvals of any public boards or bodies have been duly and validly issued and
remain in full force and effect, and no additional authorization, approval,
consent, agreement, permit, order or other action by, and no notice to or filing
or registration with, any governmental authority or regulatory body is required
for (1) the due execution, delivery and performance by the Borrower of this
Agreement or any of the Related Documents to be executed, delivered and
performed by the Borrower; or (2) the acquisition, construction and maintenance
of the Project.

          (c) This Agreement, the Loan Agreement and each of the Borrower
Agreements have each been duly authorized, executed and delivered and constitute
the legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

          (d) There is no pending action or proceeding before any court,
governmental agency or arbitrator against or directly involving the Borrower
and, to the best of the Borrower's knowledge, there is no threatened action or
proceeding affecting the Borrower or before any court, governmental agency or
arbitrator which may materially and adversely affect the financial condition or
operations of the Borrower.

          (e) If the Borrower shall have any employee benefit plan subject to
the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") the Borrower shall be in 

                                       17
<PAGE>
 
compliance in all material respects with Part I of Subtitle B of Title I thereof
and the regulations and published interpretations thereunder. No Reportable
Event (as defined in Section 4043(b) of ERISA) shall have occurred with respect
to any employee benefit plan, which is subject to the provisions of Title IV of
ERISA and which is maintained for employees of the Borrower (a "Plan"),
administered by the Borrower or any administrator designated by the Borrower.
There shall be no unfunded vested liability, on an aggregate basis, with respect
to the Plans administered by the Borrower or the administrators designated
thereunder as of the date hereof.

          (f) To the best of Borrower's knowledge after due inquiry, no
information furnished by the Borrower to the Bank in connection with this
Agreement or any Related Document includes any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
made, in the light of the circumstances in which they were made, not misleading.

          (g) There are no actions, suits or proceedings pending, or to the
knowledge of the Borrower threatened against or affecting the validity or
enforceability of this Agreement or any Borrower Agreement or the priority of
the liens thereof, at law or in equity, or before or by any governmental
authority or local authority.

          (h) The Borrower has good title to its material assets and the same
are not subject to any liens or encumbrances other than encumbrances as have
been previously disclosed by the Borrower, in writing, to the Bank or reflected
in the financial statements delivered to the Bank.

          (i) The Borrower possesses all necessary trademarks, trade names,
copyrights, patents, patent rights and licenses to conduct its business as now
operated, without any known conflict with the valid trademarks, trade name,
copyrights, patents and license rights of others.
 
          (j) Attached hereto as Exhibit "F" is a true, complete and correct
list of all material agreements, contracts, franchises, and permits owned by or
held in the name of the Borrower (collectively the "MATERIAL AGREEMENTS,"
individually each or any "MATERIAL AGREEMENT").

          (k) The Property and the actual use thereof by Borrower complies in
all material respects with all laws, regulations, orders, building restrictions
and requirements of, and all permits and approvals from, and agreements with and
commitments to, all Governmental Authority, judicial or legal authorities having
jurisdiction over the Property or any business conducted thereon or therefrom,
and with all restrictive covenants and other title encumbrances encumbering the
Property (all collectively, the "Requirements"). Borrower has received no
notices of violations of any Requirements.

          (l) With the exception of leased equipment used in the ordinary course
of business and equipment owned and provided by the Project operator, Borrower
owns or will own directly, all of the personal property and fixtures necessary
for the operation and management of the Property following construction of the
Improvements for the uses intended to be conducted thereon or required by Bank
as additional security for the Borrower's obligations hereunder, in each case
free and clear of all liens, encumbrances and adverse claims (other than
Permitted Liens) and the security interest of Bank in such personal property
shall be a first lien thereon.

          (m) Borrower has not received, except from the Bank or the Authority,
financing for either the acquisition of the Project or the construction and
installation of the Improvements.

          (n) The Plans are satisfactory to Borrower and to the extent required
by applicable law or any effective restrictive covenant, by all applicable
Governmental Authority and the beneficiary of any 

                                       18
<PAGE>
 
such covenant respectively; the Plans so approved have been initialed by
Borrower and General Contractor, all construction, if any, heretofore performed
on the Improvements has been performed within the perimeter of the Property in
accordance with the Plans and any restrictive covenants applicable thereto;
there are no structural defects in the Improvements, and no violation of any
Local Requirement exists with respect thereto.

          (o) All utility services necessary for the construction of the
Improvements and the operation thereof for their intended purpose are either
available at the boundaries of the Property or all necessary steps have been
taken by Borrower and all governmental authorities having jurisdiction over the
Property to assure the complete construction and installation thereof, including
water supply, storm and sanitary sewer facilities, gas, electric and telephone
facilities.

          (p) All roads necessary for the full utilization of the Improvements
for their intended purposes have either been completed or the necessary rights-
of-way therefor have either been acquired by applicable Governmental Authority
or have been dedicated to public use and accepted by applicable Governmental
Authority and all necessary steps have been taken by Borrower and applicable
Governmental Authority to assure the complete construction and installation
thereof.

          (q) Borrower has examined, is familiar with, and the Improvements will
in all respects conform to and comply with all covenants, conditions,
restrictions, reservations and zoning ordinances affecting the Property.

          (r) Borrower has not dealt with any person, firm or corporation who is
or may be entitled to any finder's fee or brokerage commission (other than the
Borrower's financial advisors, underwriters and remarketing agents in connection
with the sale of the Bonds) in connection with the execution of this Agreement
or the consummation of the transactions contemplated hereby and Borrower does
hereby indemnify and agree to hold Bank harmless from and against any and all
loss, cost liability or expense, including reasonable attorneys' fees, Bank may
suffer or sustain should such warranty or representation prove inaccurate in
whole or in part.

     SECTION 6. Affirmative Covenants of the Borrower. So long as the Expiration
                -------------------------------------
Date (as defined in the Letter of Credit) has not occurred or so long as any
amount is due and owing to the Bank hereunder, unless the Bank shall otherwise
consent in writing the Borrower will:

          (a) Maintain its existence and remain qualified to do business in
California and maintain its principal place of business in California.

          (b) Comply in all material respects with all applicable laws, rules,
regulations and orders of any governmental authority, non-compliance with which
would materially and adversely affect the ability of the Borrower to perform its
obligations hereunder or under any Borrower Agreement, such compliance to
include, without limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon it or upon its property,
except to the extent compliance with any of the foregoing is then being
contested as provided in Section 17 hereof.

          (c) Maintain, at its own cost and expense, all of the liens created
under the Borrower Agreements as duly perfected liens on the property encumbered
thereby, subject only to Permitted Liens and such other liens, claims and
exceptions as the Bank shall have consented to in writing.

          (d) Obtain, maintain and, upon request, furnish or cause to be
furnished to the Bank (i) copies of policies for the insurance required to be
maintained as provided in the Agreement to Furnish 

                                       19
<PAGE>
 
Insurance attached hereto as Exhibit "E"; and, without duplication of the
foregoing, (ii) casualty insurance with fire and extended coverage (with
lender's loss payable endorsements in favor of the Bank); third-party
environmental liability and general public liability insurance naming the Bank
as an additional insured and worker's compensation insurance (but only if and
when the Borrower has employees), with the same coverage amounts, terms and
conditions as are currently in existence as of the date of this Agreement; the
insurance company or companies providing such insurance may be changed upon not
less than ten (10) Business Days prior written notice to the Bank but without
having to obtain the Bank's prior written consent as long as the replacement
insurance company has an A.M. Best's rating of B+ or above; all such policies
shall require at least thirty (30) days' prior notice to the Bank of
cancellation or reduction in coverage; and, if requested, receipts showing
payment of all insurance premiums shall be provided to the Bank.

          (e) Pay and discharge all lawful claims, including taxes, assessments
and governmental charges or levies imposed upon it or its income or profits or
upon the Project prior to the date upon which penalties attach thereto; provided
that the Borrower shall not be required to pay any such tax, assessment, charge
or levy, the payment of which is being contested as permitted under Section 17
hereof.

          (f) Comply promptly with any valid requirement of any Governmental
Authority where noncompliance would materially and adversely affect the ability
of the Borrower to perform its obligation hereunder.

          (g) The Bank may assume that the statements, facts, information and
representations contained in any affidavits, orders, receipts or other written
instruments which are filed with, or exhibited to, the Bank by or on behalf of
the Borrower are true and correct in all material respects and may rely thereon
without any investigation or inquiry and any action taken by the Bank in
reliance thereon shall conclusively be deemed to be in the discharge of the
Bank's obligations hereunder.

          (h) At any reasonable time and upon reasonable notice to the Borrower,
from time to time and as may be reasonably requested, permit the Bank or any
agents or representatives thereof to examine and make copies of and abstracts
from the records and books of account of, and visit the properties of, the
Borrower and consult with any of its agents and representatives. The Bank agrees
to use reasonable efforts to ensure that any information obtained pursuant to
this paragraph which is not contained in a report or other document otherwise
available to the public generally, to the extent permitted by law and except as
may be required by valid subpoena or in the normal course of business operations
(which shall include the Bank's sharing of its liability under the Letter of
Credit with other banks which give appropriate assurances of confidential
treatment of such information), will be treated confidentially by the Bank and
will not be distributed or otherwise made available by the Bank to any person or
entity, other than their respective employees, authorized agents or
representatives who need to review or be informed of such information in
connection with their employment by Bank.

          (i) Keep proper books of record and account, in which full and correct
entries shall be made of financial transactions and the assets and business of
the Borrower in accordance with generally accepted accounting principles.

          (j) Furnish to the Bank the following: (i) as soon as reasonably
possible, and in any event within ten (10) days, after the occurrence of each
Event of Default (as hereinafter defined) of which the Borrower has knowledge, a
statement signed by the Borrower setting forth the details of such Event of
Default and the action which the Borrower proposes to take with respect thereto;
(ii) upon request, copies of all federal income tax returns of the Borrower
promptly after the same are filed with the taxing authorities; (iii) within 45
days of each March 31, June 30 and September 30, balance sheets of the Borrower
(including a reconciliation of net worth) as at said dates and income and
expense statements  for 

                                       20
<PAGE>
 
the year-to-date period ending on each of said dates, certified by two members
of the Executive Committee of the Borrower accompanied by the certificate of
such two members certifying (A) that, as at the end of such period there existed
no Event of Default hereunder nor any known event which with notice, lapse of
time or both would constitute an Event of Default hereunder; and (B) compliance
by the Borrower with the financial covenants required under this Agreement and
setting forth the calculations demonstrating such compliance; (iv) within 120
days of the end of each fiscal year of the Borrower the complete annual
financial statements of the Borrower for such fiscal year, accompanied by a
review report thereon of a nationally or regionally recognized firm of certified
public accountants; and (v) such other information respecting the business,
properties or the condition or operations, financial or otherwise, of the
Borrower which the Bank may from time to time reasonably request. All financial
reports and statements required hereunder shall be prepared in accordance with
generally accepted accounting principles consistently applied. All financial
statements, tax returns and the information contained therein shall be deemed
confidential and shall be handled in the manner specified in Section 6(h) of
this Agreement.

          (k) From time to time, record, register and file all such notices,
statements and other documents and take such other reasonable steps, including,
but not limited to, the amendment of the Borrower Agreements or the execution of
any other security agreement relating hereto and any instruments perfecting
interests thereunder, as may be necessary or advisable to render fully valid and
enforceable under all applicable laws the rights, liens and priorities of the
Bank with respect to all security from time to time furnished in connection with
this Agreement or intended to be so furnished, in each case in such form and at
such times as shall be satisfactory to the Bank, and pay all fees and expenses
(including reasonable attorneys' fees) incident to compliance with this
paragraph; provided that the amendment to any Borrower Agreements shall not
change the business terms of this Agreement or the transactions contemplated
hereby.

          (l) Duly and punctually pay or cause to be paid all principal and
interest on the Debt of the Borrower to third parties in excess of $50,000 in
principal amount, comply with and perform all material conditions, terms and
obligations of the notes evidencing such Debt and the security agreements, deeds
of trust and mortgages securing it, promptly inform the Bank of any default, or
anticipated default, under any such material provision of any such note,
security agreement, deed of trust or mortgage, and forward to the Bank a copy of
any notice of default or notice of an event that might result in default under
any such note, security agreement, deed of trust or mortgage; provided that the
Borrower shall not be required to pay any such Debt, the payment of which is
being contested as permitted in Section 17 hereof.

          (m) Maintain an interest bearing deposit account with the Bank (the
"PROJECT RESERVE ACCOUNT") in an amount of not less than $650,000; any draws on
the Project Reserve Account must be fully refunded within ninety (90) days of
drawing and, in any event, prior to any future distributions to the Borrower's
LLC members, whichever occurs first.

          (n) Attached hereto (and incorporated herein by this reference) as
Exhibit G is a schema setting forth financial ratios and covenants relating to
the Borrower. The Borrower covenants that it shall comply with each of the
financial covenants set forth on such Exhibit G.

          (o) At the time and in amounts required by Bank, Borrower shall
deposit Borrower's Funds in the Borrower's Funds Account. Borrower's Funds shall
be disbursed from such account in the manner provided in Section 3 hereof.
Should it appear at any time that the Bond proceeds then held by the Trustee are
insufficient, in Bank's reasonable judgment, to provide the financing for the
completion of the Improvements, Borrower, within ten (10) days following receipt
of written demand by Bank for additional funds, shall pay to Bank an amount
equal to such deficiency as expressed in said demand for deposit in the
Borrower's Funds Account.

                                       21
<PAGE>
 
          (p) Borrower shall at its own cost and expense, maintain the Deed of
Trust as a first lien on the Property and deliver or cause to be delivered to
Bank from time to time such endorsements to the Title Policy and such other
title insurance coverages as Bank shall require.

          (q) Borrower shall allow Bank, or its representatives (and Bank shall
have the right) to enter upon the Property, inspect the Improvements and all
materials to be used in the construction thereof and to examine the Plans and
all detailed plans and shop drawings which are or may be kept at the
construction site and will cooperate, and cause the General Contractor or, if
none, the subcontractors, to cooperate with Bank. Inspection by Bank of
construction shall be for the purpose of protecting the security of Bank and
such inspection is in no way to be construed as a representation that there is a
compliance with the Plans or that the construction is free from faulty material
or workmanship. The Borrower agrees to pay the Bank its standard construction
inspection fee (not to exceed $500) in connection with each such inspection.

          (r) Unless prior arrangements satisfactory to both Bank and Title
Company have been made, Borrower shall not commence construction of the
Improvements, including grading and site clearance, or undertake any act on the
Property prior to recordation of the Deed of Trust, the result of which would
cause any mechanics' or materialman's lien thereafter filed to take priority
over the lien of the Deed of Trust. Borrower shall cause construction of the
Improvements to be commenced not more than thirty (30) days after the
recordation of the Deed of Trust. Following the commencement of construction,
Borrower shall cause the construction of the Improvements to be prosecuted with
diligence and continuity. In any event, on or before the Completion Date,
Borrower shall cause the construction of the Improvements to be completed
substantially in accordance with the Plans, free and clear of liens or claims
for liens, and shall cause all licenses and permits necessary for the occupancy
and use of the Improvements to be issued.

          (s) Borrower shall not permit any change in the Plans or the
performance of any work pursuant to any Change Order, which when added to the
cumulative amount of all Change Orders previously agreed to by Borrower and all
increases in the General Contract price resulting from Change Orders heretofore
agreed to by Borrower, will result in a change in the General Contract price or
in the cost of construction of the Improvements in excess of the Cumulative
Change Order Amount, or which will materially reduce the square foot area of the
Improvements, unless it shall have received the specific approval of Bank to
such Change Order and provided that the additional funds necessary to pay for
such Change Orders are provided as Borrower's Funds. Bank is hereby authorized
to and shall disburse said funds in accordance with the Disbursement Schedule
for the payment of such Change Orders upon completion of such changes to Bank's
satisfaction.

          (t) Borrower shall not modify the Cost Breakdown without Bank's prior
written consent, which consent shall be conditioned upon Bank having received
evidence satisfactory to it that (i) the change in the Cost Breakdown is
reasonably necessary; and (ii) in the opinion of Bank, there remains sufficient
funds in the undisbursed portion of the Loan and of Borrower's Funds designated
herein and allocated on the Disbursement Schedule for the costs of construction
of the Improvements to pay for all remaining costs of completion of construction
of the Improvements.

          (u) Borrower shall require covenants from the General Contractor to
the same effect as the covenants made by Borrower in Paragraphs (r), (s) and (t)
of this Section 6, and that General Contractor will, upon request, deliver to
Bank the names of all persons with whom General Contractor has contracted or
intends to contract for the construction of the Improvements or for the
furnishing of labor or materials therefor.

                                       22
<PAGE>
 
          (v) Borrower shall not execute any contract or become party to any
arrangement for the performance of work on the Property except with the General
Contractor or except with the consent of the Bank.

          (w) Borrower shall deliver to Bank, on demand, any contracts, bills of
sale, statements, receipted vouchers or agreements, under which Borrower claims
title to any materials, fixtures or articles incorporated in the Improvements.

          (x) Upon demand of Bank, Borrower shall correct any defect in the
Improvements or any departure from the Plans not approved by Bank; the advance
of any Loan proceeds shall not constitute a waiver of Bank's right to require
compliance with this covenant with respect to any such defects or departures
from the Plans not theretofore discovered by, or called to the attention of
Bank.

          (y) Borrower shall receive the disbursements to be made hereunder as a
trust fund for the purpose of paying the costs of acquisition, installation and
construction of the Improvements and related soft costs and it will apply the
same first to such payment before using any part thereof for any other purpose.

          (z) Borrower shall notify Bank immediately on completion of the
foundation of the Improvements.

          (aa) Borrower shall not install materials, personal property,
equipment, or fixtures subject to any security agreement or other agreement or
contract wherein the right is reserved to any person, firm or corporation to
remove or repossess any such material, equipment or fixtures, or whereby title
to any of the same is not completely vested in Borrower at time of installation,
without Bank's written consent.

          (bb) All easements, declarations of covenants, conditions and
restrictions, and private or public dedications affecting the Property shall be
submitted to Bank for its approval and such approval shall be obtained prior to
the execution or granting of any thereof by Borrower, accompanied by a drawing
or survey showing the precise location of each thereof.

          (cc) Borrower shall comply promptly with all Requirements of any
Governmental Authorities having jurisdiction over the Property or the
construction and operation of the Improvements thereon. Borrower shall obtain,
preserve and maintain in good standing, as applicable, all rights and privileges
necessary or desirable for the operation of the Property and the conduct of
Borrower's business thereon and therefrom.

          (dd) Borrower shall promptly notify Bank in writing of:

              (i) any litigation affecting the Borrower or the Property that may
reasonably be expected to result in a material adverse change in (i) Borrower's
ability to timely perform any of its obligations hereunder or under any of the
Borrower Agreements, or (ii) the physical condition or operation of the
Property;

              (ii) any notice that the Improvements or construction thereof, the
Property or Borrower's business fails in any material respect to comply with any
applicable Requirement; and

              (iii) any other circumstance, event or occurrence that results in
a material adverse change in (i) the physical condition or operation of the
Property, (ii) the financial condition of the

                                       23
<PAGE>
 
Borrower, or (iii) Borrower's ability to perform in a timely manner any of its
obligations hereunder or under any of the Borrower Agreements.

     SECTION 7. Negative Covenants of the Borrower. So long as the Expiration
                ----------------------------------
Date has not occurred or any amount is due and owing to the Bank hereunder,
unless the Bank shall otherwise consent in writing, the Borrower shall not:

          (a)  [INTENTIONALLY OMITTED]

          (b) Compliance with ERISA. (i) Voluntarily terminate any Plan (if any
              ---------------------
such Plan is in existence) so as to result in any material (in the reasonable
opinion of the Bank) liability of the Borrower to the Pension Benefit Guaranty
Corporation ("PBGC") or (ii) enter into any Prohibited Transaction (as defined
in Section 4975 of the Internal Revenue Code of 1986, as amended, and in ERISA)
involving any Plan which results in any material (in the reasonable opinion of
the Bank) liability of the Borrower to PBGC, (iii) cause any occurrence of any
Reportable Event (as defined in Section 4043(b) of ERISA) which results in any
material (in the reasonable opinion of the Bank) liability of the Borrower to
PBGC or (iv) allow or suffer to exist any other event or condition known to the
Borrower which results in any material (in the reasonable opinion of the Bank)
liability of the Borrower to PBGC.

          (c) Amendment of Related Documents. Enter into or consent to any
              ------------------------------
amendment of or supplement to any Related Document.

          (d) Liens and Encumbrances. Create, incur, assume or permit to exist,
              ----------------------
any mortgage, deed of trust, lien, security interest (whether possessory or
nonpossessory) or other encumbrance of any kind (including without limitation
the charge upon property purchased under a conditional sale or other title
retention agreement) upon property of any kind, whether real, personal or mixed,
now owned or hereafter acquired by the Borrower or upon the income or profits
thereof, except to Bank and except for (a) Permitted Liens existing as of the
date hereof; (b) future purchase money security interests encumbering only the
property (other than inventory) purchased; (c) liens arising in connection with
leases of specific items of equipment; (d) liens for taxes, fees, assessments or
other governmental charges or levies, either not delinquent or are being
contested in good faith by appropriate proceedings, provided the same (except
for real property taxes or assessments) have no priority over any of Bank's
security interests; (e) liens of materialmen, mechanics, warehousemen, carriers,
or other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent or are being contested in good faith by
appropriate proceedings; (f) liens arising out of a judgment or award not
exceeding One Hundred Thousand Dollars ($100,000) (exclusive of amounts covered
by insurance) with respect to which an appeal is being prosecuted, a stay of
execution pending appeal having been secured; (g) leases or subleases and
licenses granted to others not interfering in any material respect with the
business of Borrower; (h) easements, rights of way, servitudes or zoning or
building restrictions and other minor encumbrances on real property and
irregularities in the title to such property which do not in the aggregate
materially impair the use or value of such property or risk the loss or
forfeiture of title thereto; (i) liens which constitute banker's liens, rights
of setoff or similar rights and remedies as to deposit accounts or other funds
maintained with any bank or other financial institution, whether arising by
operation of law or pursuant to contract and (j) liens incurred in connection
with the extension, renewal or refinancing of the indebtedness secured by liens
of the type described in clauses (a) through (c) above, provided that any
extension, renewal or replacement lien is limited to the property encumbered by
the existing lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.

          (e) Acquisitions. During any fiscal year, acquire whether through the
              ------------
purchase of assets or the purchase of shares, partnership interests or other
ownership interests, a controlling interest in 

                                       24
<PAGE>
 
any entity or substantially all the assets of any entity or sole proprietorship
(an "Acquisition") unless, prior thereto, the Bank has, in its sole discretion,
approved such Acquisition in writing.

          (f) Capital Expenditures. (i) During the period from the Date of
              --------------------
Issuance through March 31, 1998, permit the aggregate amount of capital
expenditures (other than capital expenditures financed with Bond proceeds) to
exceed Six Hundred Thousand Dollars ($600,000); and (ii) during the period from
April 1, 1998 through December 31, 1998 and during each fiscal year thereafter
permit the aggregate amount of unfinanced capital expenditures to exceed Two
Hundred Fifty Thousand Dollars ($250,000). Capital expenditures permitted under
clause (ii) of this Section 7(f) are referred to as "Permitted Unfinanced
Capital Expenditures."

          (g) Limitation on Aggregate Debt. Permit aggregate outstanding Debt to
              ----------------------------
exceed One Million Dollars ($1,000,000).

          (h) Limitation on Distributions. Permit the aggregate amount of
              ---------------------------
distributions to its members (including both distributions actually paid and
distributions which are accrued and payable) in any fiscal quarter to exceed the
amount of scheduled DSR Deposits paid into the DSR Account in such quarter, as
adjusted pursuant to Section 1(g)(v), plus the amount of any Excess Cash Flow
payments deposited into the DSR Account during such quarter.

          (i) Breach or Sale of Material Agreements, Franchises or Permits.
              ------------------------------------------------------------
Promptly upon obtaining any knowledge of any material default under any Material
Agreement, the Borrower shall give the Bank written notice of such default and
advise the Bank in writing of the action proposed to be taken to cure such
default.

     SECTION 8. Events of Default. The occurrence of any of the following events
                -----------------
shall be an "Event of Default" hereunder unless waived by the Bank in writing:

          (a) The Borrower shall fail to pay when due any amount due hereunder
and such failure shall continue for five (5) days after such due date;

          (b) Any representation or warranty made by the Borrower hereunder or
under any Borrower Agreement or in any statement, certificate or document
delivered by the Borrower in connection with this Agreement or any Related
Document shall prove to have been incorrect in any material respect when made;
or

          (c) The Borrower shall fail to perform or observe any other term,
covenant or agreement contained in this Agreement or any of the Borrower
Agreements and any such failure shall be impossible for the Borrower to remedy
or which shall remain unremedied for thirty (30) days after written notice
thereof shall have been given to the Borrower by the Bank; provided however any
such failure which is not impossible to cure but which is not reasonably
susceptible of cure within a 30-day period shall not constitute an Event of
Default hereunder unless either (A) the Borrower shall fail to initiate and
diligently pursue all action necessary to remedy such failure; or (B) such
failure is not remedied within sixty (60) days after written notice thereof to
the Borrower from the Bank; or

          (d) An Event of Default specified in any of the Borrower Agreements
shall have occurred; or

          (e) An Event of Default (as defined in the Indenture) shall have
     occurred under the Indenture; or

                                       25
<PAGE>
 
          (f) A Loan Default Event (as defined in the Loan Agreement) shall have
occurred under the Loan Agreement; or

          (g) Any material provision of this Agreement or any Borrower Agreement
shall at any time for any reason cease to be valid and binding on the Borrower,
or shall be declared to be null and void, or the validity or enforceability
thereof shall be contested by the Borrower or any governmental agency or
authority (other than the Issuer) and the happening of the events heretofore set
forth in this paragraph (g) shall materially and adversely affect the Bank's
rights under this Agreement, or the Borrower shall deny that it has any or
further liability or obligation under this Agreement or any Borrower Agreement;
or

          (h) The Borrower shall (i) fail to make any payment, equal to or
exceeding $50,000 of any principal of or interest or premium on any Debt (as
defined below) when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such Debt, or (ii) fail to perform or observe any material term,
covenant or condition on its part to be performed or observed under any
agreement or instrument relating to any Debt when required to be performed or
observed, and such failure shall continue after the applicable grace period, if
any, specified in such agreement or instrument, if the effect of such failure to
perform or observe is to accelerate, or to permit the acceleration of, the
maturity of any Debt, the unpaid principal amount of which then equals or
exceeds $50,000. "Debt" of the Borrower (which shall not include any
indebtedness hereunder) means (A) indebtedness for borrowed money or for the
deferred purchase price of property or services in respect of which the Borrower
is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in
respect of which the Borrower otherwise assures a creditor against loss and (B)
obligations under leases which shall have been or should be, in accordance with
generally accepted accounting principles, recorded as capital leases in respect
of which obligations the Borrower is liable, contingently or otherwise, as
obligor, guarantor or otherwise, or in respect of which obligations the Borrower
assures a creditor against loss; or

          (i) Any membership interests in the Borrower shall be held by any
person or entity other than KRC, KVI, BWI or WVRT; or

          (j) The Borrower or any Guarantor shall become insolvent or generally
fail to pay, or admit in writing its inability to pay, debts as they become due
or the Borrower or any Guarantor applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian for the Borrower or any
Guarantor and property thereof, or makes a general assignment for the benefit of
creditors; or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for the Borrower or any
Guarantor, or for a substantial part of the property thereof and is not
discharged within 45 days; or any bankruptcy, reorganization, debt arrangement,
or other case or proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding, is commenced in respect of the Borrower
or any Guarantor, or any event shall occur similar to any of the foregoing under
the laws of any jurisdiction, and if such case or proceeding is not commenced by
the Borrower or any Guarantor, it is consented to or acquiesced in by the
Borrower or any Guarantor or remains for 45 days undismissed; or the Borrower or
any Guarantor takes any action to authorize, or in furtherance of, any of the
foregoing; or

          (k) the occurrence of a Payment Event of Default under the Kaiser
Guaranty; or
     
          (l) Borrower or General Contractor shall fail to (i) commence
construction of the Improvements within the time periods required in this
Agreement; (ii) proceed diligently and continuously with the construction of the
Improvements or the construction of the Improvements is otherwise discontinued
for a period of ten (10) consecutive business days or more, for any reason other
than Force 

                                       26
<PAGE>
 
Majeure Delay; or (iii) complete the construction of the Improvements and cause
the issuance of all licenses and permits necessary for the occupancy, use or
sale of the Improvements, on or before the Completion Date; or

          (m) Borrower voluntarily suspends the transaction of business or there
is an attachment, execution or other judicial seizure of any portion of
Borrower's assets and such seizure is not discharged within ten (10) business
days; or

          (n) Any person obtains an order or decree in any court of competent
jurisdiction enjoining the construction of the Improvements or enjoining or
prohibiting Borrower or Bank or either of them from performing this agreement,
and such proceedings are not discontinued and such decree is not vacated within
ten (10) days after the granting thereof; or

          (o) Borrower neglects, fails or refuses to keep in full force and
effect any permit or approval with respect to the construction of the
Improvements or the use and occupancy thereof; or

          (p) If any bonded notice to withhold in connection with the Project is
served on Bank in accordance with the provision of California law and within
five (5) business days of the receipt of such notice the claim set forth therein
is not discharged or, if the amount claimed is disputed in good faith by
Borrower or General Contractor, an appropriate counter bond or equivalent
acceptable to Bank is filed with Bank; or

          (q) The imposition, voluntary or involuntary, of any lien or
encumbrance upon the Property without Bank's written consent or unless an
adequate counter bond is provided and such lien is accordingly released within
ten (10) days of the imposition of such lien; or

          (r) Bank fails to have an enforceable first lien on or security
interest in any property given as security for the Borrower's obligations
hereunder.

    SECTION 9.  Rights and Remedies.
                -------------------

          (a) Defaults under this Agreement. Upon the occurrence of an Event of
              -----------------------------
Default hereunder, or at any time thereafter while such default continues, the
Bank, in its sole discretion, may:

              (i) send notice to the Trustee of the occurrence of such Event of
Default (in substantially the form attached hereto as Exhibit H) whereupon the
Trustee shall immediately declare a mandatory redemption of the Bonds under
Section 7.01 of the Indenture; and

              (ii) exercise any rights and remedies available to it by law,
hereunder under any Related Document or under any other agreement including,
without limitation, the Borrower Agreements, and any agreement executed pursuant
to Section 6(k) hereof; and

              (iii) enter the Property and take possession of it, whether in
person, by agent or by court-appointed receiver, perform any and all work and
labor necessary to complete the Improvements substantially in accordance with
the Plans, collect rents and otherwise protect its collateral and rights
hereunder or under the Borrower Agreements. If Bank exercises any of the rights
or remedies provided in this subparagraph (iii), that exercise shall not make
Bank a partner or joint venturer of Borrower. All sums which are expended by
Bank in completing the Improvements or in preserving its collateral shall be
considered a loan to Borrower secured by the Deed of Trust and bearing interest
at the Default Rate; and

                                       27
<PAGE>
 
              (iv) terminate all disbursements of Borrower's Funds or Bond
proceeds; and

              (v) take possession of all funds and deposits of Borrower on hand
or deposit in any account at Bank or any branch at Bank and apply said funds in
such order at priority as Bank may elect in connection with the obligations of
Borrower under the Loan Documents.

          (b) Default under Other Documents. The Bank may cure an Event of
              -----------------------------
Default under any Related Document, provided, however, that nothing contained
herein shall obligate the Bank to cure such an Event of Default.

          (c) Requirement of Full Collateralization. Upon the occurrence and
              -------------------------------------
during the continuance of an Event of Default hereunder, an amount equal to the
sum of (i) the then Stated Amount of the Letter of Credit, (ii) any unreimbursed
drawings thereunder, and (iii) any and all amounts due to the Bank under the
Letter of Credit, this Agreement or any of the Related Documents shall become
immediately due and payable by the Borrower to the Bank, without presentment,
demand, protest or other requirements of any kind, all of which are hereby
expressly waived by the Borrower, and such amount shall be immediately deposited
by the Borrower into a special interest bearing account with the Bank as
collateral security to be held for the benefit of the Bank for the reimbursement
of any drawings under the Letter of Credit and other amounts due and payable
under this Agreement. Effective one hundred twenty-six (126) days following the
receipt of the full amount due and owing under this Agreement, the Bank shall
execute such releases with respect to the obligations to it of the Borrower as
are necessary and appropriate and this Agreement shall thereupon terminate,
provided that no event described in Section 8(i) hereof has occurred before or
during such one hundred twenty-six (126) day period. The Bank shall cause any
cash collateral received by it to be invested in a manner so as not to cause the
Bonds to be treated as "arbitrage bonds" under the Code and the Regulations.

          (d) Curing of Default by Disbursement. Upon the occurrence of a
              ---------------------------------
default which may be cured by the payment of money, the Bank, without waiving
any right of enforcement or foreclosure under the Borrower Agreements which the
Bank may have by reason of such default, or any other right the Bank may have
against the Borrower because of such default, shall have the right to make such
payment from any account of Borrower maintained with Bank thereby curing the
default.

          (e) Remedies are Cumulative. All remedies of the Bank provided for
              -----------------------
herein are cumulative and shall be in addition to any and all other rights and
remedies provided in any Related Document or any other document or by law. The
exercise of any rights of the Bank hereunder shall not in any way constitute a
cure or waiver of a default hereunder or elsewhere, or invalidate any act done
pursuant to any notice of default, or prejudice the Bank in the exercise of any
of its other rights hereunder or elsewhere, or invalidate any act done pursuant
to any notice of default, or prejudice the Bank in the exercise of any of its
other rights hereunder or elsewhere unless, in the exercise of said rights, the
Bank realizes all amounts owed to it hereunder and under any Related Document or
any other document. This Agreement hereby incorporates any alternative dispute
resolution agreement previously, concurrently or hereafter executed between the
Borrower and the Bank.

          (f) Power of Attorney. Upon the occurrence of an Event of Default,
              -----------------
Borrower hereby constitutes and appoints Bank its true and lawful attorney in
fact with the power and authority, including full power of substitution, as
follows:

              (i) To take possession of the Property and complete the
Improvements.

              (ii) To use any of Borrower's Funds and any Bond proceeds which
may 

                                       28
<PAGE>
 
remain undisbursed under the Indenture for the purpose of completing the
Improvements and for other costs related thereto.

              (iii) To make such additions and changes and corrections in the
Plans as may be necessary or desirable as Bank in its sole discretion deems
proper to complete the Improvements.

              (iv) To employ such contractors, subcontractors and agents,
architects and inspectors as are required to complete the Improvements.

              (v) To employ security personnel to protect the Property and
Improvements from injury.

              (vi) To pay, settle or compromise all existing bills and claims
against Borrower's Funds or any Bond proceeds which may remain undisbursed under
the Indenture or as may be necessary or desirable, as Bank in its sole
discretion deems proper, for the completion of the Improvements or for
protection or clearance of title to the Property and Personal Property or for
the protection of Bank's interest with respect thereto.

              (vii) To prosecute and defend all actions and proceedings in
connection with the construction of the Improvements.

              (viii) As Bank in its sole discretion deems proper, to execute,
acknowledge, and deliver all instruments and documents in the name of Borrower
which may be necessary or desirable to do and to do any and every act with
respect to the construction of the Improvements which Borrower might do on its
own behalf. This Power of Attorney is a power coupled with an interest and
cannot be revoked and any costs or expenses incurred by Bank in connection with
any acts by Bank under or pursuant to this Section 9(f) shall be at the cost and
expense of Borrower, repayable on demand by Borrower to Bank with interest
thereon at the Default Rate, with any such advances made or costs or expenses
incurred by Bank to be secured by the Deed of Trust and the Borrower Agreements.

          (g) Disclaimer. WHETHER OR NOT BANK ELECTS TO EMPLOY ANY OR ALL OF THE
              ----------
REMEDIES AVAILABLE TO IT UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, BANK SHALL
NOT BE LIABLE FOR THE CONSTRUCTION OF OR FAILURE TO CONSTRUCT OR COMPLETE OR
PROTECT THE IMPROVEMENTS OR FOR PAYMENT OF ANY EXPENSE INCURRED IN CONNECTION
WITH THE EXERCISE OF ANY REMEDY AVAILABLE TO BANK OR FOR THE CONSTRUCTION OR
COMPLETION OF THE IMPROVEMENTS OR FOR THE PERFORMANCE OR NON-PERFORMANCE OF ANY
OTHER OBLIGATION OF BORROWER.

     SECTION 10.  Amendments, Etc. No amendment or waiver of any provision of
                  ---------------
this Agreement nor consent to any departure by the Borrower therefrom shall in
any event be effective unless the same shall be in writing and signed by the
Bank or its authorized representative, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
it was given.

     SECTION 11.  Addresses For Notices. All notices and other communications
                  ---------------------
provided for hereunder shall be in writing and, if to the Borrower, mailed or
delivered to it, addressed to it at West Valley MRF, LLC, c/o Burrtec Waste
Industries, Inc., 9890 Cherry Avenue, Fontana, California 92335, Attn: Mr. David
Marriner, CFO; and Kaiser Ventures Inc., 3633 E. Inland Empire Blvd., Suite 850,
Ontario, CA 91764, Attn: Mr. James F. Verhey, Senior Vice President, or if to
the Bank, mailed or delivered to it, addressed to it at 530 B Street, 4th Floor,
San Diego, California 92101, Attention: Regional Office/Michael

                                       29
<PAGE>
 
Conboy, or at such other address as shall be designated by such party in a
written notice to the other party. All such notices and other communications
shall, when mailed, be effective five (5) days after the date of deposit in the
mails, addressed as aforesaid.

     SECTION 12.  No Waiver; Remedies; Set-off.
                  ----------------------------

          (a) No failure on the part of the Bank to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right hereunder preclude any further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.

          (b) Upon the occurrence and during the continuance of any Event of
Default hereunder, the Bank is hereby authorized at any time and from time to
time, without notice to the Borrower (any such notice being expressly waived by
the Borrower) to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by the Bank to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter existing
hereunder, irrespective of whether or not the Bank shall have made any demand
hereunder and although such obligations may be contingent and unmatured.

          (c) The rights and authorization granted to the Bank in the foregoing
paragraph (b) shall be available to any bank or financial institution acquiring
a participation in, or otherwise reimbursing the Bank for drawings made under,
the Letter of Credit to the same extent as if such bank or financial institution
had issued a letter of credit hereunder on behalf of the Borrower in the amount
of such participation or reimbursement.

     SECTION 13.  Indemnification. The Borrower shall indemnify and hold the
                  ---------------
Bank harmless from and against any and all claims, damages, losses, liabilities,
costs or expenses whatsoever which the Bank may incur (or which may be claimed
against the Bank by any person or entity whatsoever) by reason of or in
connection with (a) any breach by the Borrower of any representation, warranty
or covenant contained in this Agreement; (b) the execution and delivery or
transfer (to a successor trustee) of, or payment or failure to pay under, the
Letter of Credit; provided, however, that the Borrower shall not be required to
                  --------  -------
indemnify the Bank for any claims, damages, losses, liabilities, costs or
expenses to the extent, but only to the extent, caused by (i) the willful
misconduct or gross negligence of the Bank in determining whether a sight draft
or certificate presented under the Letter of Credit complied with the terms of
the Letter of Credit or (ii) the Bank's grossly negligent or willful failure to
pay under the Letter of Credit after the presentation to it by the Trustee or a
successor trustee of a sight draft or certificate strictly complying with the
terms and conditions of the Letter of Credit; (c) any failure by the Borrower,
the Issuer or any underwriter to comply with applicable federal and state laws
and regulations pertaining to the offer and sale of the Bonds including in
particular any such laws applicable to the Letter of Credit; and (d) the
Project, or the conditions, occupancy, use, possession, conduct or management
of, or work done in or about, or from the planning, design, acquisition,
installation or construction of the Project or any part thereof (including
liability arising from loss or damage to any property or injury to or death of
any person occurring on or about or resulting from any defect in the Project);
(e) the issuance of any Bonds or any certifications or representations made in
connection therewith (except those made by the Bank) and the carrying out of any
of the transactions contemplated by the Loan Agreement; or (f) any untrue
statement or alleged untrue statement of any material fact or omission or
alleged omission to state a material fact necessary to make the statements made,
in light of the circumstances under which they were made, not misleading in any
official statement or other offering circular utilized by the Issuer in
connection with the sale of any Bonds, except with respect to statements or
omissions which are the result of information provided by the Bank. The Borrower
further covenants and agrees, to the extent permitted by law, to pay or to
reimburse the Bank for any and all costs, 

                                       30
<PAGE>
 
reasonable attorneys' fees, liabilities or expenses incurred in connection with
investigating, defending against or otherwise arising or incurred in connection
with any such losses, claims, damages, liabilities, expenses or actions.
Promptly upon obtaining actual knowledge that it has incurred any such damages,
costs, fees, liabilities or expenses, the Bank shall give notice thereof to the
Borrower. The provisions of this Section shall survive the expiration of the
Letter of Credit. Promptly after receipt of notice of commencement of any
action, suit or proceeding against the Bank in respect of which a claim is to be
made against the Borrower under this Section 13, the Bank shall notify the
Borrower of the commencement of such action, suit or proceeding, enclosing a
copy of all papers served, but the omission so to notify the Borrower of any
such action, suit or proceeding shall not relieve it from any liability which it
may have to the Bank otherwise than under this Section 13. In case any such
action, suit or proceeding shall be brought against the Bank and it shall notify
the Borrower of the commencement thereof, the Borrower shall be entitled to
participate in, and to assume the defense thereof, with counsel satisfactory to
the Bank and after notice from the Borrower to the Bank of the Borrower's
election so to assume the defense thereof the Borrower shall not be liable to
the Bank for any legal or other expenses, other than reasonable costs of
investigation subsequently incurred by the Bank in connection with the defense
thereof. The Bank shall have the right to employ its own counsel in any such
action, but the fees and expenses of such counsel shall be at the expense of the
Bank, unless (i) the employment of counsel by the Bank has been authorized by
the Borrower, (ii) the Bank shall have reasonably concluded that there may be a
conflict of interest between the Borrower and the Bank in the conduct of the
defense of such action (in which case the Borrower shall not have the right to
direct the defense of such action on behalf of the Bank), or (iii) the Borrower
shall not in fact have employed counsel to assume the defense of such action.
The Borrower shall not be liable for any settlement of any action or claim
effected without its consent. For the purposes of this Section 13, the term
"Bank" shall include, and the Borrower's indemnity hereunder shall run to the
benefit of, the directors, officers, employees and agents of the Bank. The
indemnification in this Section 13 is in addition to (but not in duplication of)
the Borrower's reimbursement obligation contained in Section 1 hereof.

     SECTION 14.  Continuing Obligation.
                  ---------------------

          (a) This Agreement is a continuing obligation and shall (i) be binding
upon the Borrower, its successors and assigns, and (ii) inure to the benefit of
and be enforceable by the Bank and its successors, transferees and assigns;
provided, however, that the Borrower may not assign all or any part of this
Agreement without the prior written consent of the Bank.

     SECTION 15.  Transfer of Letter of Credit; Reduction of Letter of Credit
                  -----------------------------------------------------------
Commitment and Related Matters.
------------------------------

          (a) The Letter of Credit may be transferred in accordance with the
provisions set forth therein.

          (b) If the Letter of Credit Commitment is reduced as provided in the
Letter of Credit on account of the payment, prepayment or redemption of the
Bonds, then the Bank shall have the right to require the Trustee (at no charge
to the Borrower or the Trustee) to surrender the outstanding Letter of Credit to
the Bank on or before the tenth (10th) business day following the effective date
of such partial reduction of the Letter of Credit Commitment and to accept on
such date, in substitution for the then outstanding Letter of Credit, a
substitute irrevocable letter of credit in the form of Exhibit A hereto, dated
such date, in a Stated Amount equal to the amount to which the Letter of Credit
Commitment shall have been so reduced but otherwise having terms identical to
the then outstanding Letter of Credit.

                                       31
<PAGE>
 
     SECTION 16.  Liability of the Bank. The Borrower assumes all risks of the
                  ---------------------
acts or omissions of the Trustee and any transferee of the Letter of Credit with
respect to its use of the Letter of Credit; provided, however, this assumption
with respect to the Bank is not intended to, and shall not, preclude the
Borrower's pursuing such rights and remedies as it may have against the Trustee
or any transferee at law or under any other agreement. Neither the Bank nor any
of its officers, employees, agents or directors shall be liable or responsible
for: (a) the use which may be made of the Letter of Credit or for any acts or
omissions of the Trustee and any transferee of the Letter of Credit in
connection therewith; (b) the validity, sufficiency or genuineness of documents,
or of any endorsement(s) thereon, even if such documents should in fact prove to
be in any or all respects invalid, insufficient, fraudulent or forged; (c)
payment by the Bank against presentation of documents which do not comply with
the terms of the Letter of Credit, including failure of any documents to bear
any reference or adequate reference to the Letter of Credit; or (d) any other
circumstances whatsoever in making or failing to make payment under the Letter
of Credit; provided, however, anything in the preceding clauses (a) (b), (c) and
           --------  -------
(d) to the contrary notwithstanding, the Borrower shall have a claim against the
Bank, and the Bank shall be liable to the Borrower, to the extent, but only to
the extent, of any direct, as opposed to consequential, damages suffered by the
Borrower which the Borrower proves were caused by (i) the Bank's willful
misconduct or gross negligence or (ii) the Bank's willful failure to pay under
the Letter of Credit after the presentation to it by the Trustee (or a successor
trustee under the Indenture to whom the Letter of Credit has been transferred in
accordance with its terms) of a sight draft and certificate strictly complying
with the terms and conditions of the Letter of Credit. In furtherance and not in
limitation of the foregoing, the Bank may accept documents that appear on their
face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary; provided, however, that
if the Bank shall receive written notification at 1980 Saturn Street, Monterey
Park, California, Attention: Letter of Credit Department (with a copy to the
Bank at 530 B Street, Fourth Floor, San Diego, California 92101, Attn: Michael
Conboy) from both the Trustee and the Borrower that sufficiently identified (in
the reasonable opinion of the Bank) documents to be presented to the Bank are
not to be honored, the Bank agrees that, upon being indemnified to its
satisfaction by the Trustee and the Borrower, it will not honor such documents
thereafter.

     SECTION 17.  Permitted Contests. The Borrower shall not be required to (a)
                  ------------------
pay any tax, assessment or other charge or comply with any statute, law, rule,
regulation or ordinance referred to in Section 6 hereof, or (b) make any payment
of any Debt referred to in paragraph (h) of Section 8 hereof, or (c) pay any
Debt referred to in Section 6(l) hereof so long as the Borrower shall (i)
contest, in good faith, the existence, amount or validity thereof, the amount of
damages caused thereby or the extent of its liability therefor, by appropriate
proceedings which shall operate during the pendency thereof to prevent (A) the
collection of, or other realization upon, the tax, assessment, charge, lien,
encumbrance, indebtedness, or obligation so contested, or (B) the sale,
forfeiture or loss or any collateral therefor or any property of the Borrower or
any part thereof, and (ii) give such security to the Bank as may be demanded by
the Bank or, in the alternative, provide the Bank with evidence satisfactory to
the Bank in its good faith judgment of sufficient bonding to ensure payment and
to ensure compliance with the foregoing provisions of this Section 17. The
Borrower shall give prompt written notice to the Bank of the commencement of any
contest referred to in this Section 17.

     SECTION 18.  Governing Law. This Agreement shall be governed by, and
                  -------------
construed and interpreted in accordance with, the laws of the State of
California.

     SECTION 19.  Assignment by the Bank. The Bank may assign, negotiate, pledge
                  ----------------------
or otherwise hypothecate, or grant participations in, all or any portion of its
rights and security hereunder, including, without limitation, the instruments
securing the Borrower's obligations hereunder. In case of such assignment, the
Borrower shall accord full recognition thereto and agree that all rights and
remedies of the 

                                       32
<PAGE>
 
Bank in connection with the interest so assigned shall be enforceable against
the Borrower by such assignee with the same force and effect and to the same
extent as the same would have been enforceable by the Bank, but for such
assignment. No such assignment by the Bank, however, will relieve the Bank of
its obligations under this Agreement either voluntarily or by operation of law.
In connection with any proposed assignment, the Bank may disclose to the
proposed assignee any information that the Borrower is required to deliver to
the Bank pursuant to this Agreement; provided, however, in the event of any such
disclosure, the Bank shall obtain from the proposed assignee appropriate
assurances of confidential treatment of the disclosed information.

     SECTION 20.  Representations and Warranties of the Bank. The Bank
                  ------------------------------------------
represents and warrants that the Letter of Credit and this Agreement are valid
and enforceable against the Bank except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).

     SECTION 21.  Headings. Section headings in this Agreement are included
                  --------
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.

     SECTION 22.  Further Assurances. The Borrower agrees to do such further
                  ------------------
acts and things and to execute and deliver to the Bank such additional
assignments, agreements, powers and instruments, as the Bank may require or deem
advisable to carry into effect the purposes of his Agreement or to better assure
and confirm unto the Bank its rights, powers and remedies hereunder. Bank shall
have the right, in its reasonable discretion, to obtain new appraisals or update
existing appraisals at any time while the Letter of Credit remains outstanding.
Borrower agrees to cooperate with Bank and the appraiser (and use best efforts
to cause the tenants on the Project to cooperate with Bank and the appraiser) in
permitting access to the Property and in obtaining operating and other relevant
information on the Property. Following an Event of Default hereunder or in the
case of a request to transfer the Property pursuant to the Deed of Trust,
Borrower shall pay all reasonable appraisal fees and related expenses incurred
by Bank in obtaining such appraisal reports.

     SECTION 23.  Survival of Representations and Warranties. All agreements,
                  ------------------------------------------
representations and warranties made in this Agreement and in any certificates
delivered pursuant hereto shall survive the execution and delivery of this
Agreement and the issuance of the Letter of Credit hereunder until any and all
sums payable under this Agreement, or which are secured by the Borrower
Agreements have been paid in full.

     SECTION 24.  Severability of Provisions. Any provision of this Agreement
                  --------------------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.

     SECTION 25.  Execution in Counterparts. This Agreement may be executed in
                  -------------------------
any number of counterparts and by different parties hereto on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same Agreement.

                                       33
<PAGE>
 
     SECTION 26.  Time. Time is of the essence of this Agreement, and each and
                  ----
every provisions hereof in which time is an element.

     IN WITNESS WHEREOF, the parties hereto have caused this Reimbursement
Agreement to be duly executed and delivered as of the date first above written.


                                 WEST VALLEY MRF, LLC,
                                 a California limited liability company


                                 By:  Kaiser Recycling Corporation,
                                           a Delaware corporation, member


                                      By:  /s/ James F. Verhey
                                         ------------------------------
                                         Name: James F. Verhey
                                         Title: Sr. Vice President Finance & CFO


                                 By:  West Valley Recycling & Transfer, Inc.,
                                      a California corporation, member



                                      By:  /s/ Eric D. Herbert
                                         ------------------------------
                                         Name: Eric D. Herbert
                                         Title: Vice President



                                 UNION BANK OF CALIFORNIA, N.A.



                                 By:  /s/ Mike E. Conboy
                                    ---------------------------
                                    Name: Michael E. Conboy
                                    Title: Vice President

                                       34
<PAGE>
 
                     EXHIBITS AND SCHEDULES NOT ATTACHED.

                         THEY WILL BE FURNISHED TO THE

 SECURITIES AND EXCHANGE COMMISSION UPON THE WRITTEN REQUEST OF THE SECURITIES

                           AND EXCHANGE COMMISSION.
                                        

                                       35