KW 12.31.2012 10-K/A
    

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-33824
Kennedy-Wilson Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
26-0508760
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA
 
90212
(Address of Principal Executive Offices)
 
(Zip Code)
(310) 887-6400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
______________________________________________________________________
Title of Each Class
 
Name of Each Exchange on which Registered
Common Stock, $.0001 par value
 
NYSE
Securities registered pursuant to Section 12(g) of the Act: None
______________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
o
 
  
Accelerated filer
 
x
 
 
 
 
 
Non-accelerated filer
 
o
  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x
Based on the last sale at the close of business on June 29, 2012, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $231,047,904.
The number of shares of common stock outstanding as of March 8, 2013 was 63,772,598.


DOCUMENTS INCORPORATED BY REFERENCE
Part III of the registrant's Annual Report on Form 10-K filed on March 12, 2013 incorporates certain information by reference from the registrant’s proxy statement for the annual meeting of stockholders to be held on or around June 20, 2013, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2012.




    

EXPLANATORY NOTE

Kennedy-Wilson Holdings, Inc., a Delaware corporation (the “Company”), is filing this Amendment No. 1 (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which was originally filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2013 (the “Original Report”), to amend Item 15 of the Original Report and include separate financial statements of the following entities, as required pursuant to Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934, as amended:

Bay Fund Opportunity, LLC and Subsidiary
KW Property Fund II, L.P. And Subsidiaries
KW Real Estate Fund IV, L.P.
Bay Area Smart Growth Fund II, LLC
KW Stadium Gateway Partners, LLC
KWF Real Estate Venture VI, L.P.
KWI America Multifamily, LLC and KW SV Investment West Coast, LLC
KW Residential, LLC
KW Property Fund III, L.P. and KW Property Fund III (QP-A), L.P.
KW/WDC Portfolio Member LLC and One Carlsbad
SJ Real Estate Investors, LLC

Other than as set forth herein, this Amendment does not affect any other parts of, or exhibits to, the Original Report, and those unaffected parts or exhibits are not included in this Amendment. This Amendment continues to speak as of the date of the Original Report, and the Company has not updated the disclosure contained in this Amendment or the Original Report to reflect events that have occurred since the filing of the Original Report. Accordingly, this Amendment should be read in conjunction with the Company's other filings with the SEC since the filing of the Original Report.





    

PART IV
 


Item 15.
Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this annual report:
(1)
Financial Statements. See the Index to Consolidated Financial Statements, which appears on page 41 of the Original Report. The Report of Independent Registered Public Accounting Firm, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to Consolidated Financial Statements, which appear beginning on page 44 of the Original Report, are incorporated by reference into this Item 15.
(2)
Financial Statement Schedules. Schedules III and IV are listed in the Index to Consolidated Financial Statements, which appear beginning on page 95 of the Original Report, are incorporated by reference into this Item 15. All other Financial Statement Schedules have been omitted because the information required to be set forth therein is either not applicable or is included in the Consolidated Financial Statements or the notes thereto.
(3)
Exhibits. See Item 15(b) below.

(b) Exhibits. The exhibits listed on the Exhibit Index set forth below on page 5 are filed as part of, or are incorporated by reference into, this annual report on Form 10-K.
(c) Financial Statements Required by Rule 3-09 of Regulation S-X. The financial statements required by Rule 3-09 of Regulation S-X under the Securities Exchange Act of 1934, as amended, are filed as schedules to this report and are incorporated by reference into this Item 15.






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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th day of March 2013.
 
 
 
 
KENNEDY-WILSON HOLDINGS, INC.,
a Delaware corporation
 
 
By:
 
/s/    WILLIAM J. MCMORROW        
 
 
William J. McMorrow
 
 
Chief Executive Officer


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EXHIBIT INDEX

Exhibit
No.
Description
2.1(1)
Agreement and Plan of Merger, by and among Prospect Acquisition Corp., KW Merger Sub Corp. and Kennedy- Wilson, Inc., dated as of September 8, 2009.
2.2(1)
Amendment No. 1 to the Agreement and Plan of Merger dated October 22, 2009 between Prospect Acquisition Corp., KW Merger Sub Corp. and Kennedy-Wilson, Inc.
2.3(1)
Amendment No. 2 to the Agreement and Plan of Merger dated October 26, 2009 between Prospect Acquisition Corp., KW Merger Sub Corp. and Kennedy-Wilson, Inc.
3.1(2)
Second Amended and Restated Certificate of Incorporation.
3.2(6)
Amendment to Second Amended and Restated Certificate of Incorporation.
3.3(3)
Amended and Restated Bylaws.
4.1(14)
Specimen Common Stock Certificate.
4.2(4)
Form of Warrant Certificate.
4.3(5)
Amended and Restated Warrant Agreement between Continental Stock Transfer & Trust Company and Kennedy- Wilson Holdings, Inc.
4.4(21)
Indenture, dated as of April 5, 2011, among Kennedy-Wilson, Inc., as Issuer, Kennedy-Wilson Holdings, Inc., as guarantor, certain subsidiaries of the Issuer signatories thereto, as guarantors, and Wilmington Trust FSB, as trustee, including the form of 8.750% Notes due 2019.
4.5(21)
Registration Rights Agreement, dated April 5, 2011, among Kennedy-Wilson, Inc., Kennedy-Wilson Holdings, Inc., certain subsidiaries of the Issuer signatories thereto, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated.
4.6(22)
Registration Rights Agreement, dated April 12, 2011, among Kennedy-Wilson, Inc., Kennedy-Wilson Holdings, Inc., certain subsidiaries of the Issuer signatories thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
4.7(23)
Certificate of Designation of Series A Preferred Stock.
4.8(24)
Certificate of Designation of Series B Preferred Stock.
4.9(26)
First Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., KW Residential Group, Inc. and Wilmington Trust, National Association.
4.10(26)
Second Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., KW Telstar Partners, LLC and Wilmington Trust, National Association.
4.11(26)
Third Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., KWF Manager V, LLC and Wilmington Trust, National Association.
4.12(26)
Fourth Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., KW Fund IV - Kohanaiki, LLC and Wilmington Trust, National Association.
4.13(26)
Fifth Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., Kennedy Wilson Property Equity IV, LLC and Wilmington Trust, National Association.
4.14(26)
Sixth Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., KW Ireland, LLC and Wilmington Trust, National Association.
4.15(26)
Seventh Supplemental Indenture dated August 5, 2011 among Kennedy-Wilson, Inc., KW Manager IV, LLC and Wilmington Trust, National Association.
4.16(26)
Eighth Supplemental Indenture dated September 26, 2011 among Kennedy-Wilson, Inc., KWF Investors IV, LLC, KWF Investors V, LLC and Wilmington Trust, National Association.
4.17(26)
Ninth Supplemental Indenture dated December 28, 2011 among Kennedy-Wilson, Inc., KW Anaheim Land Partners LLC, Pacifica West Coast Partners, LLC, KW Multi-Family Management Group, KW Mill Creek Property Manager, LLC, KW Sunrise Carlsbad, LLC, Sunrise Property Associates, LLC, certain guarantors listed therein and Wilmington Trust, National Association.
4.18(31)
Tenth Supplemental Indenture, dated as of June 12, 2012, among Kennedy-Wilson, Inc., Meyers Research, LLC, KW Armacost, LLC, Santa Maria Land Partners Manager, LLC, KW Investment Adviser, LLC, NWLACDFI - Southern Oaks, LLC, Kennedy-Wilson Capital, KW Captowers Partners, LLC, KW Four Points, LLC, KW Loan Partners VII, LLC and Wilmington Trust, National Association, as trustee
4.19(32)
Eleventh Supplemental Indenture, dated as of November 21, 2012, among Kennedy-Wilson, Inc., NWLACDFI-Southern Oaks, LLC, the subsidiary guarantor parties thereto, Kennedy-Wilson Holdings, Inc., and Wilmington Trust, National Association, as trustee

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4.20(33)
Twelfth Supplemental Indenture, dated as of November 21, 2012, among Kennedy-Wilson, Inc., KWF Investors VII, LLC, KWF Manager VII, LLC, KW Residential Capital, LLC, KW Boise Plaza, LLC, KW Loan Partners VIII, LLC, KW UR Investment 1, LLC, KW UR Investment 2, LLC, Kennedy Wilson Property Services IV, L.P., Kennedy Wilson Property Services IV GP, LLC, KW/CV Third-Pacific Manager, LLC, KW EU Loan Partners II, LLC, KWF Investors VIII, LLC, KWF Manager VIII, LLC, KW HP 11, LLC, KW 1200 Main LLC, KW
4.21**
Thirteenth Supplemental Indenture, dated as of February 13, 2013, among Kennedy-Wilson, Inc., KW Fund IV La Barranca, LLC (formerly KW HP 11, LLC), the subsidiary guarantor parties thereto, Kennedy-Wilson Holdings, Inc., and Wilmington Trust, National Association, as trustee
4.22**
Fourteenth Supplemental Indenture, dated as of February 14, 2013, among Kennedy-Wilson, Inc., KWF Manager X, LLC, KWF Manager XI, LLC, KWF Manager XII, LLC and Wilmington Trust, National Association, as trustee
4.23(29)
Form on Indenture, dated as of November 28, 2012, between Kennedy-Wilson, Inc. and Wilmington Trust, National Association, as trustee
4.24(30)
Supplemental Indenture No. 1, dated as of November 28, 2012, among Kennedy-Wilson, Inc., Kennedy-Wilson Holdings, Inc., the subsidiary guarantor parties thereto and and Wilmington Trust, National Association, as trustee
4.25**
Supplemental Indenture No. 2, dated as of February 14, 2013, among Kennedy-Wilson, Inc., the subsidiary guarantor parties thereto and Wilmington Trust, National Association, as trustee
4.26(34)
Registration Rights Agreement, dated as of December 6, 2012, among Kennedy-Wilson, Inc., Kennedy-Wilson Holdings, Inc., the subsidiary guarantor parties thereto, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC
10.2(37)
Forfeiture Agreement dated September 8, 2009 by and among Prospect Acquisition Corp., De Guardiola Advisors, Inc., De Guardiola Holdings, Inc., Flat Ridge Investments LLC, LLM Structured Equity Fund L.P., LLM Investors L.P., CMS Platinum Fund, L.P., SJC Capital LLC, Michael P. Castine, Daniel Gressel, Michael Downey, James J. Cahill, John Merchant and Kennedy-Wilson, Inc.)
10.3(37)
Letter Agreement dated September 17, 2009 by Prospect Acquisition Corp. and Citigroup Global Markets Inc. Ladenburg Thalmann & Co. Inc. and I-Bankers Securities, Inc.
10.4(37)
Letter Agreement dated September 4, 2009 by Prospect Acquisition Corp. and De Guardiola Advisors, Inc.
10.5(37)
Lock-Up Agreement by Prospect Acquisition Corp. and certain stockholders of Prospect.
10.6(38)
Kennedy-Wilson Holdings, Inc. 2009 Equity Participation Plan.
10.7(39)
Form of Amended and Restated Consultant Restricted Stock Award Agreement to Kennedy-Wilson Holdings, Inc. 2009 Equity Participation Plan.
10.8(39)
Form of Amended and Restated Employee Performance Unit Award Agreement to Kennedy-Wilson Holdings, Inc. 2009 Equity Participation Plan.
10.9(39)
Form of Amended and Restated Employee Restricted Stock Award Agreement to Kennedy-Wilson Holdings, Inc. 20009 Equity Participation Plan.
10.10(36)
Promissory Note issued by Kennedy-Wilson, Inc. to The Guardian Life Insurance Company of America on November 3, 2008.
10.11†(37)
Fifteenth Amendment to Employment Agreement by Kennedy-Wilson, Inc. and William J. McMorrow.
10.12†(37)
Employment Agreement dated August 14, 1992 between Kennedy-Wilson and William J. McMorrow.
10.13†(37)
Amendment to Employment Agreement dated as of January 1, 1993 between Kennedy-Wilson and William J. McMorrow.
10.14†(37)
Second Amendment to Employment Agreement dated as of between January 1, 1994 Kennedy-Wilson and William J. McMorrow.
10.15(40)
Third Amendment to Employment Agreement dated as of March 31, 1995 between Kennedy-Wilson and William J. McMorrow.
10.16†(40)
Fourth Amendment to Employment Agreement dated as of January 1, 1996 Kennedy-Wilson and William J. McMorrow.
10.17†(37)
Amendment to Employment Agreement dated as of February 28, 1996 between Kennedy-Wilson and William J. McMorrow.
10.18†(15)
Fifth Amendment to Employment Agreement dated as of May 19, 1997 between Kennedy-Wilson and William J. McMorrow.

6

    

10.19†(37)
Sixth Amendment to Employment Agreement dated as of August 20, 1998 between Kennedy-Wilson and William J. McMorrow.
10.20†(37)
Seventh Amendment to Employment Agreement dated as of August 9, 1999 between Kennedy-Wilson and William J. McMorrow.
10.21†(37)
Eighth Amendment to Employment Agreement dated as of January 3, 2000 between Kennedy-Wilson and William J. McMorrow.
10.22†(37)
Ninth Amendment to Employment Agreement dated as of October 1, 2000 between Kennedy-Wilson and William J. McMorrow.
10.23†(37)
Tenth Amendment to Employment Agreement dated as of April 22, 2002 between Kennedy-Wilson and William J. McMorrow.
10.24†(37)
Eleventh Amendment to Employment Agreement dated as of October 1, 2003 between Kennedy-Wilson and William J. McMorrow.
10.25†(37)
Twelfth Amendment to Employment Agreement dated as of April 21, 2004 between Kennedy-Wilson and William J. McMorrow.
10.26†(37)
Thirteenth Amendment to Employment Agreement dated as of January 1, 2008 between Kennedy-Wilson and William J. McMorrow.
10.27†(37)
Fourteenth Amendment to Employment Agreement dated as of February 1, 2009 between Kennedy-Wilson and William J. McMorrow.
10.28†(37)
Second Amendment to Employment Agreement by Kennedy-Wilson, Inc. and Mary L. Ricks.
10.29†(37)
Employment Agreement dated February 1, 2009 between Kennedy-Wilson and Mary L. Ricks.
10.30†(37)
First Amendment to Employment Agreement dated June 1, 2009 between Kennedy-Wilson and Mary L. Ricks.
10.31†(37)
First Amendment to Employment Agreement by Kennedy-Wilson, Inc. and Donald J. Herrema.
10.32†(37)
Employment Agreement dated June 15, 2009 between Kennedy-Wilson and Donald J. Herrema.
10.33†(37)
Employment Agreement dated April 1, 1996 between Kennedy-Wilson and Freeman Lyle.
10.34†(37)
Amendment to Employment Agreement dated April 1, 1997 between Kennedy-Wilson and Freeman Lyle.
10.35†(37)
Second Amendment to Employment Agreement dated April 1, 1998 between Kennedy-Wilson and Freeman Lyle.
10.36†(37)
Third Amendment to Employment Agreement dated as of August 15, 1998 between Kennedy-Wilson and Freeman Lyle.
10.37†(37)
Fourth Amendment to Employment Agreement dated as of April 1, 1999 between Kennedy-Wilson and Freeman Lyle.
10.38†(37)
Fifth Amendment to Employment Agreement dated as of April 1, 2000 between Kennedy-Wilson and Freeman Lyle.
10.39†(37)
Sixth Amendment to Employment Agreement dated as of January 1, 2001 between Kennedy-Wilson and Freeman Lyle.
10.40†(37)
Seventh Amendment to Employment Agreement dated as of March 28, 2001 between Kennedy-Wilson and Freeman Lyle.
10.41†(37)
Eighth Amendment to Employment Agreement dated as of September 1, 2002 between Kennedy-Wilson and Freeman Lyle.
10.42†(37)
Ninth Amendment to Employment Agreement dated October 1, 2003 between Kennedy-Wilson and Freeman Lyle.
10.43†(37)
Tenth Amendment to Employment Agreement dated January 1, 2004 between Kennedy-Wilson and Freeman Lyle.
10.44†(37)
Eleventh Amendment to Employment Agreement dated January 1, 2005 between Kennedy-Wilson and Freeman Lyle.
10.45†(37)
Twelfth Amendment to Employment Agreement dated January 1, 2006 between Kennedy-Wilson and Freeman Lyle.
10.46†(37)
Thirteenth Amendment to Employment Agreement dated January 1, 2007 between Kennedy-Wilson and Freeman Lyle.
10.47†(37)
Fourteenth Amendment to Employment Agreement dated March 1, 2007 between Kennedy-Wilson and Freeman Lyle.
10.48†(37)
Fifteenth Amendment to Employment Agreement dated January 1, 2008 between Kennedy-Wilson and Freeman Lyle.

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10.49†(37)
Sixteenth Amendment to Employment Agreement dated June 1, 2008 between Kennedy-Wilson and Freeman Lyle.
10.50†(37)
Seventeenth Amendment to Employment Agreement dated January 1, 2009 between Kennedy-Wilson and Freeman Lyle.
10.51†(37)
Amendment to Employment Agreement dated as of August 1, 2006 between KW Multi-Family Management Group and Robert Hart.
10.52†(37)
Second Amendment to Employment Agreement dated as of January 1, 2007 between KW Multi-Family Management Group and Robert Hart.
10.53†(37)
Third Amendment to Employment Agreement dated as of January 1, 2008 between KW Multi-Family Management Group and Robert Hart.
10.54†(37)
Fourth Amendment to Employment Agreement dated as of January 1, 2009 between KW Multi-Family Management Group and Robert Hart.
10.55†(37)
Business Loan Agreement dated July 29, 2009 between Kennedy-Wilson, Inc. and Pacific Western Bank.
10.56†(41)
Amended and Restated Loan Agreement dated June 5, 2008 between Kennedy-Wilson, Inc. and U.S. Bank National Association.
10.57†(37)
Junior Subordinated Indenture dated, January 31, 2007 between Kennedy-Wilson, Inc. and The Bank of New York Trust Company, National Association, as trustee.
10.58†(37)
First Amendment to Office Lease dated March 5, 1999 between Wilshire-Camden Associates and Kennedy-Wilson, Inc.
10.59(37)
Second Amendment to Lease dated June 2, 1999 between Wilshire-Camden Associates and Kennedy-Wilson, Inc.
10.60(37)
First Amendment to Office Lease dated March 5, 1999 between Wilshire-Camden Associates and Kennedy-Wilson, Inc.
10.61(37)
Second Amendment to Lease dated June 2, 1999 between Wilshire-Camden Associates and Kennedy-Wilson, Inc.
10.62(37)
Third Amendment to Office Lease dated December 20, 2002 between Brighton Enterprises, LLC and Kennedy-Wilson, Inc.
10.63(37)
Fourth Amendment to Office Lease dated September 11, 2003 between Wilshire-Camden Associates and Kennedy-Wilson, Inc.
10.64(37)
Fifth Amendment to Office Lease dated January 7, 2006 between Douglas Emmett 2000, LLC and Kennedy-Wilson, Inc.
10.65(37)
Standard Office Lease dated March 3, 2009 by and among 9701-Hempstead Plaza, LLC, 9701-Carolina Gardens LLC, 9701-West Point Realty LLC, 9701-Dakota Leasing LLC and 9701-Iowa Leasing LLC and Kennedy-Wilson Inc.
10.66(37)
Second Amended and Restated Guaranty of Payment dated November 4, 2008 by Arthur S. Levine, as Trustee of the Ray J. Rutter Trust, Arthur S. Levine, as Trustee of the Susan Ray Rutter Trust, and Arthur S. Levine, as Trustee of the Robert Jonathan Rutter Trust, and Kennedy-Wilson Inc., to Bank Midwest N.A.
10.67(37)
Amended and Restated Guaranty dated October 25, 2007 Agreement by Kennedy-Wilson, Inc. in favor of Bank of America, N.A., as agent for lenders.
10.68(37)
Amendment to Irrevocable standby letters of credit dated October 26, 2007 from Bank of America to the beneficiary, City of Walnut Creek on behalf of Fairways 340 LLC.
10.69( 37)
Guaranty Agreement made as of August 14, 2007 by Kennedy-Wilson, Inc. in favor of Bank of America, N.A., as agent for lenders.
10.70 (37)
Repayment Guaranty made as of September 4, 2007 by Kennedy-Wilson, Inc. in favor of Wachovia Bank, N.A., as agent for lenders.
10.71( 37)
Commercial Guaranty made as of September 13, 2007 by Kennedy-Wilson, Inc., to Pacific Western Bank, on behalf of Windscape Village LLC.
10.72(37)
Repayment Guaranty made as of May 9, 2007 by Kennedy-Wilson, Inc. and KW Property Fund I, L.P. for the benefit of Wachovia Bank National Association.
10.73(37)
Commercial Guaranty dated January 16, 2009 to Pacific Western Bank by KWI Property Fund I, L.P.
10.74 (37)
Guaranty made as of May 29, 2008 by Kennedy-Wilson, Inc. and KW Property Fund III, L.P. for the benefit of Deutsche Bank, AG.
10.75(37)
Guaranty made as of September 9, 2005, by Kennedy-Wilson, Inc., a Delaware corporation, in favor of Bank of America, N.A.

8

    

10.76 (37)
Guaranty made as of May 29, 2008 by Kennedy-Wilson, Inc. and KW Property Fund III, L.P. for the benefit of Deutsche Bank, AG.
10.77 (37)
Guaranty made as of September 9, 2005, by Kennedy-Wilson, Inc., a Delaware corporation, in favor of Bank of America, N.A.
10.78 (37)
Repayment Guaranty made as of September 4, 2007 by KWI Property Fund I, L.P. and KW Property Fund II, L.P., Delaware limited partnerships in favor of Wachovia Bank, N.A., as agent for lenders. x
10.79(40)
Fifteenth Amendment to Employment Agreement dated January 1, 2009 between Kennedy-Wilson Properties and James Rosten.
10.80(40)
Eighteenth Amendment to Employment Agreement dated January 1, 2009 between Kennedy-Wilson and Freeman Lyle.
10.81(40)
Fifth Amendment to Employment Agreement dated January 1, 2009 between KW Multi-Family Group, Ltd. and Robert Hart.
10.82(40)
First Amendment to Forfeiture Agreement dated October 22, 2009 between Prospect Acquisition Corp., De Guardiola Advisors, Inc., De Guardiola Holdings, Inc., Flat Ridge Investments LLC, LLM Structured Equity Fund L.P, LLM Investors L.P., CMS Platinum Fund, L.P., SJC Capital LLC, Michael P. Castine, Daniel Gressel, Michael Downey, James J. Cahill, John Merchant and Kennedy-Wilson, Inc.
10.83†(40)
Waiver and Modification with respect to Employment Agreements dated October 22, 2009 between Kennedy-Wilson, Inc. and William J. McMorrow, Mary L. Ricks and Donald J. Herrema.
10.84(42)
Agreement, dated as of November 11, 2009, by and between Prospect Acquisition Corp. and Victory Park Capital Advisors, LLC.
10.85(42)
Stock Purchase Agreement, by and between Prospect Acquisition Corp. and Victory Park Special Situations Master Fund, LTD.
10.86(42)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Credit Suisse Securities (USA) LLC.
10.87(42)
Stock Purchase Agreement, dated as of November 11, 2009, by and between Prospect Acquisition Corp. and Nisswa Acquisition Master Fund, Ltd.
10.88(42)
Share Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Milton Arbitrage Partners, LLC.
10.89(43)
Stock Purchase Agreement.
10.90(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Arrowgrass Master Fund Ltd.
10.91(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Bulldog Investors.
10.92(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Del Mar Master Fund Ltd.
10.93(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Citigroup Global Markets Inc.
10.94(44)
Share Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and IBS (MF) Ltd. In Respect of Glazer Merger Arbitrage Series.
10.95(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Glazer Offshore Fund Ltd.
10.96(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and Glazer Capital Management, LP.
10.97(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and HFR MA Select Opportunity Master Trust.
10.98(44)
Stock Purchase Agreement, dated as of November 12, 2009, by and between Prospect Acquisition Corp. and GSS Offshore SPC-Glazer Segregated Portfolio.
10.99(45)
Waiver and Modification With Respect to Employment Agreement Amendments.
10.100(46)
Securities Purchase Agreement, dated June 28, 2011, by and among Kennedy-Wilson Holdings, Inc., a Delaware corporation and the Purchasers named thereto.
10.101(47)
Transfer Agreement dated December 28, 2011 between KW Executive Loan Partners I LLC and K-W Properties.
10.102(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KW Summer House Manager, LLC, K-W Properties, KW Summer House Executives, LLC and the members of KW Summer House Executives, LLC as set forth therein.

9

    

10.103(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KW Montclair, LLC, K-W Properties, KW Montclair Executives, LLC and the members of KW Montclair Executives, LLC set forth therein.
10.104(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KW Montclair, LLC, K-W Properties, KW Montclair Executives, LLC and the members of KW Montclair Executives, LLC set forth therein
10.105(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KW Blossom Hill Manager, LLC, K-W Properties, KW Blossom Hill Executives, LLC and the members of KW Blossom Hill Executives, LLC set forth therein.
10.106(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KWF Investors I, LLC, K-W Properties, KWF Executives I, LLC and the members of KWF Executives I, LLC set forth therein
10.107(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KWF Investors II, LLC, K-W Properties, KWF Executives II, LLC, and the members of KWF Executives II, LLC set forth therein.
10.108(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KWF Investors III, LLC, K-W Properties, KWF Executives III, LLC, and the members of KWF Executives III, LLC set forth therein.
10.109(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KWF Investors V, LLC, K-W Properties, KWF Executives V, LLC, and the members of KWF Executives V, LLC set forth therein.
10.110(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among KW - Richmond, LLC, K-W Properties, KW Executives - Richmond, LLC, and the members of KW Executives - Richmond, LLC set forth therein.
10.111(47)
Membership Interest Acquisition Agreement dated December 28, 2011 by and among SG KW Venture I Manager, LLC, K-W Properties, SG KW Venture I Executives, LLC, and the members of SG KW Venture I Executives, LLC set forth therein.
10.112(48)
Kennedy-Wilson Holdings, Inc. Amended and Restated 2009 Equity Participation Plan.
10.113(49)
Modification Agreement, dated June 29, 2012, by and among Kennedy-Wilson, Inc., U.S. Bank National Association, as administrative agent, U.S. Bank National Association, as lender and East-West Bank, as lender
10.114**
Form of First Amendment to Kennedy-Wilson Holdings, Inc. Amended and Restated 2009 Equity Participation Plan Restricted Stock Award Agreement
10.115†**
Form of Kennedy-Wilson Holdings, Inc. Amended and Restated 2009 Equity Participation Plan Employee Restricted Stock Award Agreement
10.116†**
Form of Kennedy-Wilson Holdings, Inc. Amended and Restated 2009 Equity Participation Plan Consultant Restricted Stock Award Agreement
21**
List of Subsidiaries
23.1*
Consent of Independent Accounting Firm
23.2*
Consent of Independent Accounting Firm
23.3*
Consent of Independent Accounting Firm
23.4*
Consent of Independent Accounting Firm
23.5*
Consent of Independent Accounting Firm
23.6*
Consent of Independent Accounting Firm
23.7*
Consent of Independent Accounting Firm
23.8*
Consent of Independent Accounting Firm
23.9*
Consent of Independent Accounting Firm
23.10*
Consent of Independent Accounting Firm
23.11*
Consent of Independent Accounting Firm
23.12*
Consent of Independent Accounting Firm
24**
Power of Attorney.
31.1*
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of the Principal Executive Officer.
31.2*
Certification Pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934 of the Principal Financial Officer.

10

    

32.1*
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer.
32.2*
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer
101**
The following materials from Kennedy-Wilson Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (ii) the Consolidated Statements of Operations and Comprehensive (Loss) Income (iii) the Consolidated Statements of Equity (iv) the Consolidated Statements of Cash Flows (v) related notes to those financial statements and (vi) Schedule III - Real Estate and Accumulated Depreciation.

__________
Management contract or compensation plan or arrangement.
*
Filed herewith.
**
Previously filed.
(1)
Filed as Annex A to Amendment No. 5 to the Registrant's Registration Statement on Form S-4 (File No.: 333-162116) filed on October 28, 2009 and incorporated by reference herein.
(2)
Filed as Annex D to Amendment No. 5 to the Registrant's Registration Statement on Form S-4 (File No.: 333-162116) filed on October 28, 2009 and incorporated by reference herein.
(3)
Filed as Exhibit 3.2 to Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-145110) filed October 26, 2007 and incorporated by reference herein.
(4)
Filed as Exhibit A to Annex C to Amendment No. 5 to the Registrant's Registration Statement on Form S-4 (File No.: 333-162116) filed on October 28, 2009 and incorporated by reference herein.
(5)
Filed as Annex C to Amendment No. 5 to the Registrant's Registration Statement on Form S-4 (File No.: 333-162116) filed on October 28, 2009 and incorporated by reference herein.
(6)
Incorporated by reference to the final two paragraphs under the caption “Amendment to Amended and Restated Certificate of Incorporation” in the Registrant's Definitive Proxy Statement on Schedule 14A (File. No. 001-33824 filed on August 9, 2010.
(7)
Reserved.
(8)
Reserved.
(9)
Reserved.
(10)
Reserved.
(11)
Reserved
(12)
Reserved.
(13)
Reserved.
(14)
Filed as an Exhibit to the Registrant's Registration Statement on Amendment no. 1 to Form 8-A (File No.: 333-145110) filed on November 16, 2009 and incorporated by reference herein.
(15)
Reserved.
(16)
Reserved.

11

    

(17)
Reserved.
(18)
Reserved.
(19)
Reserved.
(20)
Reserved.
(21)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed April 7, 2011.
(22)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed April 13, 2011.
(23)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed May 21, 2010.
(24)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed August 16, 2010.
(25)
Reserved.
(26)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed December 30, 2011.
(27)
Reserved.
(28)
Filed as Exhibit 10.1 to Kennedy-Wilson Holding, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed June 29, 2012.
(29)
Filed as Exhibit 4.3 to Kennedy-Wilson Holding, Inc.'s Registration Statement on Form S-3 (File No. 333-184752) filed November 5, 2012.
(30)
Filed as Exhibit 4.2 to Kennedy-Wilson Holding, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed November 28, 2012.
(31)
Filed as Exhibit 4.11 to Kennedy-Wilson Holding, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed December 7, 2012.
(32)
Filed as Exhibit 4.12 to Kennedy-Wilson Holding, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed December 7, 2012.
(33)
Filed as Exhibit 4.13 to Kennedy-Wilson Holding, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed December 7, 2012.
(34)
Filed as Exhibit 4.14 to Kennedy-Wilson Holding, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed December 7, 2012.
(35)
Filed as Exhibit 10.105 to Kennedy-Wilson Holdings, Inc.'s Registration Statement on Form S-4 (File No.: 333-162116) filed September 24, 2009.
(36)
Filed as Exhibit 10.11 to Kennedy-Wilson Holdings, Inc.'s Current Report on Form 10-K (File No.: 001-33824) filed on March 31, 2008 and incorporated by reference herein.
(37)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Registration Statement on Form S-4 (File No.: 333-162116) filed on September 24, 2009 and incorporated by reference herein.
(38)
Filed as Annex E to Amendment No. 5 to Kennedy-Wilson Holdings, Inc.'s Registration Statement on Form S-4 (File No.: 333-162116) filed on October 28, 2009 and incorporated by reference herein.
(39)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Registration Statement on Form S-8 (File No.: 333-164928) filed on February 16, 2010 and incorporated by reference herein.

12

    

(40)
Filed as an Exhibit to Amendment No. 2 to Kennedy-Wilson Holdings, Inc.'s Registration Statement on Form S-4 (File No.: 333-162116) filed on October 23, 2009 and incorporated by reference herein.
(41)
Filed as an Exhibit to Amendment No. 1 to Kennedy-Wilson Holdings, Inc.'s Registration Statement on Form S-4 (File No.: 333-162116) filed on October 16, 2009 and incorporated by reference herein.
(42)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed November 11, 2009.
(43)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed November 12, 2009.
(44)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed November 13, 2009.
(45)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed November 19, 2009.
(46)
Filed as an Exhibit to Kennedy-Wilson Holdings, Inc.'s Current Report on Form 8-K (File No.: 001-33824) filed June 29, 2011 and incorporated by reference herein.
(47)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed December 30, 2011.
(48)
Filed as an Exhibit to the Registrant's Current Report on Form 8-K (File No.: 001-33824) filed January 30, 2012..
(49)    Filed as an Exhibit to Registrant's Current Report on Form 8-K (File No.: 001-33824) filed June 29, 2012 and
incorporated by reference herein.


13

    

3-09 FINANCIAL STATEMENTS
Kennedy-Wilson Holdings, Inc.
Index to 3-09 Financial Statements
 
 
 
Page
3-09 Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 


14

    



Independent Auditors' Report
The Members
Bay Fund Opportunity, LLC and Subsidiaries:

We have audited the accompanying consolidated financial statements of Bay Fund Opportunity, LLC and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, members' equity, and cash flows for each of the years in the two-year period then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bay Fund Opportunity, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the two-year period then ended, in accordance with U.S. generally accepted accounting principles.
The accompanying consolidated statements of operations, members' equity, and cash flows for the year ended December 31, 2010 were not audited by us, and accordingly, we do not express an opinion on them.


/s/ KPMG LLP

Dallas, Texas
March 21, 2013


15

    

BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Consolidated Balance Sheets

 
 
December 31,
 
 
2012
 
2011
 
 
 
 
 
Assets
 
 
 
 
Real estate
 
 
 
 
Land
 
$
21,874,072

 
$
21,874,072

Building and improvements
 
87,566,335

 
87,566,335

Fixtures and equipment
 
838,938

 
714,011

Total
 
110,279,345

 
110,154,418

Less accumulated depreciation
 
(10,335,695
)
 
(8,043,048
)
Total real estate, net
 
99,943,650

 
102,111,370

Cash and cash equivalents
 
1,219,321

 
1,019,796

Tax escrow
 
143,449

 
303,964

Capital and financing escrow deposits
 
714,749

 
727,364

Deferred financing costs, net
 
230,298

 
380,760

Accounts receivable
 
47,521

 
47,157

Prepaid expenses and other assets
 
37,837

 
43,703

Total assets
 
$
102,336,825

 
$
104,634,114

Liabilities and members equity
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
1,451,183

 
$
1,483,085

Reserve for future warranty claims
 
392,000

 
392,000

Security deposits from tenants
 
384,303

 
397,235

Prepaid rent
 
4,723

 
3,121

Mortgages payable
 
57,998,348

 
58,890,863

Total liabilities:
 
60,230,557

 
61,166,304

Commitments and contingencies (note 6)
 
 
 
 
Members' Equity
 
 
 
 
Bay Fund Opportunity, LLC's Equity
 
42,106,268

 
43,467,810

Noncontrolling interest
 

 

Total Equity
 
42,106,268

 
43,467,810

Total liabilities and members' equity
 
$
102,336,825

 
$
104,634,114

The accompanying notes are an integral part of these consolidated financial statements.


16

    

BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Consolidated Statements of Operations

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
(Unaudited)
Revenue
 
 
 
 
 
 
Rental income
 
$
8,088,922

 
$
7,711,417

 
$
7,293,504

Other income
 

 
831,948

 
1,083,479

Total revenue
 
8,088,922

 
8,543,365

 
8,376,983

Expenses
 
 
 
 
 
 
Real estate and other taxes
 
1,356,675

 
1,185,142

 
1,620,627

Property insurance
 
57,797

 
56,981

 
53,871

Homeowners association fees
 
1,926,489

 
1,850,042

 
1,820,321

Repairs, maintenance and utilities
 
560,523

 
530,743

 
516,429

Depreciation
 
2,292,647

 
2,277,048

 
2,273,816

Marketing and promotion
 
148,936

 
141,646

 
145,945

General, administrative and other
 
85,963

 
68,977

 
210,182

Management fees (note 5)
 
399,906

 
510,427

 
620,616

Letter of credit fees
 
50,000

 
67,764

 
72,165

Mortgage interest
 
1,746,528

 
2,676,208

 
3,012,459

Total expenses
 
8,625,464

 
9,364,978

 
10,346,431

Net loss
 
(536,542
)
 
(821,613
)
 
(1,969,448
)
Net loss attributable to noncontrolling interest
 

 
553,885

 
2,004,070

Net income (loss) attributable to Bay Fund Opportunity, LLC
 
$
(536,542
)
 
$
(267,728
)
 
$
34,622

The accompanying notes are an integral part of these consolidated financial statements.


17

    

BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Consolidated Statements of Members' Equity
 
 
Members' Equity
 
Noncontrolling Interest
 
Total
Balance, December 31, 2009 (unaudited)
 
$
37,003,889

 
$
2,557,955

 
$
39,561,844

Contributions (unaudited)
 
197,027

 

 
197,027

Net income (loss) (unaudited)
 
34,622

 
(2,004,070
)
 
(1,969,448
)
Balance, December 31, 2010 (unaudited)
 
37,235,538

 
553,885

 
37,789,423

Contributions
 
6,500,000

 

 
6,500,000

Net loss
 
(267,728
)
 
(553,885
)
 
(821,613
)
Balance, December 31, 2011
 
43,467,810

 

 
43,467,810

Distributions
 
(825,000
)
 

 
(825,000
)
Net loss
 
(536,542
)
 

 
(536,542
)
Balance, December 31, 2012
 
$
42,106,268

 
$

 
$
42,106,268

The accompanying notes are an integral part of these consolidated financial statements.


18

    

BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Consolidated Statements of Cash Flows
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
(Unaudited)
Net loss
 
$
(536,542
)
 
$
(821,613
)
 
$
(1,969,448
)
Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
 
 
 
 
 
 
Depreciation
 
2,292,647

 
2,277,048

 
2,273,816

Amortization of deferred financing costs
 
266,817

 
184,802

 
95,626

Change in assets and liabilities:
 
 
 
 
 
 
Tax escrow
 
160,515

 
18,330

 
114,972

Accounts receivable
 
(364
)
 
24,977

 
9,487

Prepaid expenses and other assets
 
5,866

 
(1,145
)
 
13,177

Accounts payable and accrued expenses
 
(31,902
)
 
(770,838
)
 
(569,271
)
Security deposits from tenants
 
(12,932
)
 
(11,468
)
 
3,264

Prepaid rent
 
1,602

 
(1,945
)
 
(7,179
)
Net cash flow provided by (used in) operating activities
 
2,145,707

 
898,148

 
(35,556
)
Cash flows from investing activities:
 
 
 
 
 
 
Additions to real estate
 
(124,927
)
 
(109,011
)
 
(70,841
)
Net cash flow used in by investing activities
 
(124,927
)
 
(109,011
)
 
(70,841
)
Cash flow from financing activities:
 
 
 
 
 
 
Principal payments on mortgage loans
 
(892,515
)
 
(6,358,936
)
 

Mortgage loan costs
 
(116,355
)
 
(327,831
)
 

Changes in capital and financing escrow deposits
 
12,615

 
57,276

 
(6,930
)
Contributions from members
 

 
6,500,000

 
197,027

Distributions to members
 
(825,000
)
 

 

Net cash flow provided by (used in) financing activities
 
(1,821,255
)
 
(129,491
)
 
190,097

Net increase in cash and cash equivalents
 
199,525

 
659,646

 
83,700

Cash and cash equivalents, beginning of year
 
1,019,796

 
360,150

 
276,450

Cash and cash equivalents, end of year
 
$
1,219,321

 
$
1,019,796

 
$
360,150

Supplemental disclosure of noncash financing activities:
 
 
 
 
 
 
Interest paid
 
$
1,504,773

 
$
2,601,842

 
$
2,919,414

The accompanying notes are an integral part of these consolidated financial statements.


19

Table of Contents
BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010 (Unaudited)

NOTE 1ORGANIZATION
Bay Fund Opportunity, LLC (the Company), a California limited liability company, was formed by and among, KW - Richmond, LLC, a Delaware limited liability company, KW Fund III - Richmond, LLC, a Delaware limited liability company, and BASGF II - Richmond, LLC, a Delaware limited liability company (collectively, the Managers). The Company was formed upon the filing of the Articles of Formation with the California Secretary of State on April 18, 2008. The term of the Company extends until the date that the Company is terminated pursuant to the terms defined in the Company's operating agreement.
The Company was organized to form, invest in, capitalize and own 50% of the equity in Emerald Marina Shores Richmond, LLC, a Delaware limited liability company, and 50% of the equity in Emerald Marina Cove Richmond, LLC, a Delaware limited liability company, which collectively own the real property located in Richmond, California (Marina Cove and Shores). Initial capital contributions to acquire these investments are $6,076,000 from KW - Richmond, LLC, $5,000,000 from KW Fund III - Richmond, LLC, and $14,000,000 from BASGF II - Richmond, LLC, for a total initial investment of $25,076,000.
The Managers may elect from time to time to distribute available cash to the Members in proportion to their percentage interests at the time of distribution.
The limited liability companies (LLCs) within the accompanying consolidated balance sheets will continue in existence until dissolved in accordance with the provisions of their operating agreements and are funded through the equity contributions of their members. As LLCs, except as may otherwise be provided under applicable law, no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual companies. The members are not obligated to restore capital deficits.
Profit and loss for each fiscal period shall be allocated among the members in proportion to their percentage interests. If any membership interest is transferred or otherwise changed during any fiscal year, profit and loss for that fiscal year, shall be assigned pro rata to each day in the particular period of that fiscal year to which such item is attributable and shall be allocated to the members based upon their respective percentage interest at the close of that day. Gain or loss of the Company realized in connection with a sale or other disposition of any of the assets of the Company shall be allocated solely to the parties owning membership interests as of the date that sale or other disposition occurs.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION—The Company consolidates entities in which it holds a greater than 50% voting interest and real estate entities that are deemed variable interest entities (VIEs) in which the Company was determined to be the primary beneficiary. The Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.
VARIABLE INTEREST ENTITIES—The VIEs (Marina Cove and Shores) lease, manage, operate, improve, finance and sell real estate property. Management determined that the Company is the primary beneficiary of the VIEs by determining the Company has (i) the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the right to receive benefits or the obligation to absorb losses which could potentially be significant to the VIE based on the terms of the VIE's operating agreement. Activities that most significantly impact the VIE's performance include selling real estate.
USE OF ESTIMATES—The preparation of the accompanying financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of income and expenses. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
CASH AND CASH EQUIVALENTS—Cash and cash equivalents include highly liquid investments purchased with original maturities of three months or less. Periodically, the Company maintains cash balances in various bank accounts in excess of federally insured limits. To date, no losses have been experienced related to such amounts. The Company places cash with quality financial institutions and does not believe there is a significant concentration of credit risk.
REAL ESTATE ASSETS—Real estate is carried at depreciated cost, less impairment, if any. Depreciation on buildings and improvements has been provided for in the accompanying consolidated financial statements using the straight-line method based on estimated useful lives of 40 years for building and improvements and five to ten years for fixtures and equipment. Maintenance and repairs are charged to expense as incurred, and costs of renewals or betterments are capitalized and depreciated at the appropriate rates.

20

Table of Contents
BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010 (Unaudited)

IMPAIRMENT OF LONG-LIVED ASSETS—In accordance with accounting guidance for long‑lived assets, the asset or asset group is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, the Company will evaluate the property by comparing the carrying amount of the asset or asset group to the estimated future undiscounted cash flows of the property. Estimated future cash flows include estimated costs to develop the property whether these costs would be recognized as an expense or capitalized in future periods. Future interest costs that are necessary to develop the property, and therefore capitalizable, are also included. If impairment exists, an impairment loss will be recognized based on the amount by which the carrying amount exceeds the fair value of the asset or asset group. For the years ended December 31, 2012, 2011, and 2010, there were no impairments recorded.
CONCENTRATION OF RISK—The Company's real estate is concentrated in California. Adverse conditions in the sector or geographic location would likely result in a material decline in the value of the Company's investments.
NONCONTROLLING INTERESTS—Noncontrolling interests in the consolidated financial statements reflect the interests of noncontrolling members in Marina Cove and Shores.
ACCOUNTS RECEIVABLE—Accounts receivable primarily consist of amounts due for rental and operating expense payments in accordance with tenants' lease agreements.
REVENUE RECOGNITION—Rental revenue related to multifamily investments is recognized on the straight-line basis over the terms of the lease.
DEFERRED FINANCING COSTS, NET—Financing costs incurred in obtaining long-term debt are capitalized and amortized over the term of the related debt on a straight-line basis.
INCOME TAXES—As a limited liability company, the members elected for the Company to be a pass-through entity for income tax purposes; therefore, the Company's taxable income or loss is allocated to members in accordance with their respective ownership, and no provision or liability for income taxes has been included in the financial statements.
Management has evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements in order to comply with the provisions of this guidance. The Company is not subject to income tax examinations by U.S. federal, state or local tax authorities for years before 2009.
NOTE 3MORTGAGES PAYABLE
Mortgages secured by Marina Cove and Shores totaled $57,998,348 and $58,890,863 as of December 31, 2012 and 2011, respectively. The mortgages are collateralized by the properties and bear interest of LIBOR plus 2.25% (2.464% at December 31, 2012). The mortgages mature on June 26, 2013 and require monthly principal and interest payments through maturity.
The Company intends to pay off the existing mortgages with the proceeds of new mortgages in the aggregate principal amount of $48,400,000 and additional capital contributions from the members. If management is unable to obtain new mortgages, management will use additional capital from Kennedy-Wilson, Inc., an affiliate of the Company, to make the required pay downs.
NOTE 4MEMBERSHIP INTEREST CHANGES
In May 2011, KW - Richmond, LLC acquired an additional interest of 24.07% in the Company for $7,000,000 from BASGF II - Richmond, LLC, increasing its interest in the Company from 24.23% to 48.30%.
Marina Cove and Marina Shores had mortgage notes payable that had total balances of $65,249,799 (unaudited) at December 31, 2010. On December 2, 2011, their loans were extended to June 26, 2013, with a required principal paydown of $6,358,937, which was funded by the capital contributions from two of the three members of the Company. These capital contributions increased KW - Richmond, LLC's interest from 48.30% to 48.61% and KW Fund III - Richmond, LLC's interest from 19.94% to 25.43%.
On December 28, 2011, KW Executives - Richmond, LLC transferred its interest in KW - Richmond, LLC to the Company, in exchange for a 3.57% interest directly in the Company. As a result of this exchange, KW - Richmond, LLC's interest in the Company was reduced from 48.61% to 45.04%.

21

Table of Contents
BAY FUND OPPORTUNITY, LLC AND SUBSIDIARIES
(A California Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010 (Unaudited)

Membership interest as of December 31, 2012, 2011, and 2010 (Unaudited)
 
 
KW Richmond, LLC
 
KW Richmond, LLC
 
BASGF II Richmond, LLC
 
KW Executives Richmond, LLC
 
Total
12/31/2012
 
45.04
%
 
25.43
%
 
25.96
%
 
3.57
%
 
100.00
%
12/31/2011
 
45.04
%
 
25.43
%
 
25.96
%
 
3.57
%
 
100.00
%
12/31/2010 (unaudited)
 
24.23
%
 
19.94
%
 
55.83
%
 
%
 
100.00
%
NOTE 5FEES PAID TO AFFILIATES
The Company has entered into an agreement with Emerald Fund, Inc., an affiliate of the Company to provide various asset and property management services in return for a management fee. During the years ended December 31, 2012, 2011, and 2010, management fees incurred for such services totaled $399,906, $510,427, and $620,616 (unaudited), respectively.
NOTE 6COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Currently, the Company does not have any material commitments or contingencies.
NOTE 7SUBSEQUENT EVENTS
In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition and disclosure through March 21, 2013, the date at which the consolidated financial statements were available to be issued, and determined there are no other items to disclose.



22

    



Independent Auditors' Report
The General and Limited Partners
KW Property Fund II, L.P. and Subsidiaries:

We have audited the accompanying consolidated financial statements of KW Property Fund II, L.P. and subsidiaries (the Partnership) which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations, partner's capital, and cash flows for the year then ended , and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of KW Property Fund II, L.P. and subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year then ended December 31, 2012 in accordance with U.S. generally accepted accounting principles.
The accompanying consolidated statements of operations, partners' capital, and cash flows for each of the years in the two-year period ended December 31, 2011 and 2010 were not audited by us, and accordingly, we do not express an opinion on them.
/s/ KPMG LLP

Dallas, Texas
March 21, 2013





23

    

KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Balance Sheets

 
 
December 31,
 
 
2012
 
2011
 
 
 
 
(Unaudited)
Assets:
 
 
 
 
Real estate at fair value (cost $29,668,316 in 2012 and $48,488,557 (unaudited) in 2011) (note 4)
 
$
12,570,000

 
$
23,120,000

Investments in real estate joint ventures (note 5)
 
75,330,305

 
70,278,132

Total fair value of real estate and investments in real estate
joint ventures
 
87,900,305

 
93,398,132

Cash and cash equivalents
 
386,841

 
976,585

Deposits in escrow
 
1,003,245

 
1,036,987

Accounts receivable, net
 
31,370

 
139,313

Other assets, net
 
99,228

 
83,476

Total assets
 
$
89,420,989

 
$
95,634,493

 
 
 
 
 
Liabilities and Partners' Capital
 
 
 
 
Liabilities:
 
 
 
 
Loans secured by real estate at fair value (note 6)
 
$
8,829,014

 
$
20,337,382

Partner loans (note 1)
 
20,154,158

 
20,154,158

Loans from affiliate (note 1)
 
25,320,474

 
21,317,104

Accounts payable and accrued liabilities
 
4,878,309

 
6,185,463

Security deposits from tenants
 
152,793

 
154,092

Prepaid rent
 
48,230

 
22,190

Total liabilities
 
59,382,978

 
68,170,389

Commitments and contingencies (note 10)
 
 
 
 
Partners' capital
 
30,038,011

 
27,464,104

Total liabilities and partners' capital
 
$
89,420,989

 
$
95,634,493

The accompanying notes are an integral part of these consolidated financial statements.



24

    

KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Operations

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
Rental
 
$
1,751,039

 
$
2,549,003

 
$
3,316,377

Equity in income from investments in real estate joint ventures (note 5)
 
2,005,354

 
3,406,126

 
2,906,266

Other
 
133,276

 
61,370

 
56,784

Total revenues
 
3,889,669

 
6,016,499

 
6,279,427

Expenses:
 
 
 
 
 
 
Property operating expenses
 
1,354,830

 
1,748,423

 
1,858,434

Real estate taxes
 
279,121

 
352,266

 
449,937

General, administrative and other
 
481,478

 
307,657

 
331,544

Provision for (recovery of) doubtful accounts
 
(12,090
)
 
7,090

 
(2,144
)
Interest expense
 
7,740,195

 
5,482,936

 
1,994,585

Asset management fees (note 9)
 
744,465

 
1,171,768

 
1,222,442

Total expenses
 
10,587,999

 
9,070,140

 
5,854,798

Net investment income (loss)
 
(6,698,330
)
 
(3,053,641
)
 
424,629

Realized and unrealized gain on investments:
 
 
 
 
 
 
Net change in unrealized depreciation on investments in real estate
 
(501,563
)
 
(4,344,996
)
 
(10,072,985
)
Net change in unrealized appreciation (depreciation) on investments in real estate joint ventures
 
8,946,237

 
(18,372,458
)
 
(5,624,276
)
Net change in unrealized depreciation (appreciation) on loans secured by real estate
 
925,452

 
1,451,046

 
(230,080
)
Realized gain on investments in real estate
 
2,596,575

 

 

Realized loss on investments in real estate joint ventures
 
(597,873
)
 

 

Realized gain (loss) on loans secured by real estate
 
(2,096,591
)
 
1,537,345

 

Net income (loss)
 
$
2,573,907

 
$
(22,782,704
)
 
$
(15,502,712
)
See accompanying notes to consolidated financial statements.



25

    

KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Partners' Capital

 
 
Limited Partners
 
General Partner and Special Limited Partner
 
Total
Balance, January1, 2010 (unaudited)
 
$
73,764,971

 
$
(999,469
)
 
$
72,765,502

Contributions (unaudited)
 
7,557,495

 

 
7,557,495

Net loss (unaudited)
 
(15,502,712
)
 

 
(15,502,712
)
Balance, December 31, 2010 (unaudited)
 
65,819,754

 
(999,469
)
 
64,820,285

Recharacterization of equity to partner loans (note 1) (unaudited)
 
(14,573,477
)
 

 
(14,573,477
)
Net loss (unaudited)
 
(22,782,704
)
 

 
(22,782,704
)
Balance, December 31, 2011 (unaudited)
 
28,463,573

 
(999,469
)
 
27,464,104

Net income
 
2,573,907

 

 
2,573,907

Balance, December 31, 2012
 
$
31,037,480

 
$
(999,469
)
 
$
30,038,011

See accompanying notes to consolidated financial statements.



26

    

KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
(Unaudited)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
2,573,907

 
$
(22,782,704
)
 
$
(15,502,712
)
Adjustments to reconcile net income (loss) to net cash used in operating
     activities:
 
 
 
 
 
 
Amortization of deferred financing costs
 
55,493

 
77,200

 
96,983

Provision for doubtful accounts
 
(12,090
)
 
7,090

 
(2,144
)
Net change in unrealized depreciation on investments in real
 estate
 
501,563

 
4,344,996

 
10,072,985

Net change in unrealized depreciation (appreciation) on investments in real estate joint ventures
 
(8,946,237
)
 
18,372,458

 
5,624,276

Net change in unrealized depreciation (appreciation) on loans secured by real estate
 
(925,452
)
 
(1,451,046
)
 
230,080

Realized gain on investments in real estate
 
(2,596,575
)
 

 

Realized loss (gain) on loans secured by real estate
 
2,096,591

 
(1,537,345
)
 

Realized loss on investments in real estate joint ventures
 
597,873

 

 

Equity in income from investments in real estate joint ventures
 
(2,005,354
)
 
(3,406,126
)
 
(2,906,266
)
Changes in assets –(increase) decrease:
 
 
 
 
 
 
Deposits held in escrow for property taxes and insurance
 
34,466

 
140,498

 
(43,007
)
Accounts receivable
 
(35,645
)
 
(33,420
)
 
(8,767
)
Other assets
 
(18,421
)
 
318,057

 
(3,552
)
Changes in liabilities – increase (decrease):
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
(666,232
)
 
5,756,005

 
(508,486
)
Security deposits from tenants
 
12,292

 
(17,666
)
 
11,475

Prepaid rent
 
29,858

 
(58,306
)
 
(2,566
)
Net cash flow used in operating activities
 
(9,303,963
)
 
(270,309
)
 
(2,941,701
)
Cash flows from investing activities:
 
 
 
 
 
 
Additions to real estate
 
(181,563
)
 
(814,996
)
 
(997,762
)
Proceeds from capital expenditure escrows and reserves
 
90,867

 
118,794

 
1,470,934

Decrease in capital contributions due to investments in real estate joint ventures
 

 

 
(4,486,934
)
Investment in real estate joint ventures
 
(2,792,928
)
 
(25,008,686
)
 
(1,765,758
)
Proceeds from disposition of investments in real estate joint
 ventures
 
5,750,000

 

 

Distributions from unconsolidated real estate entities
 
2,344,473

 
2,354,609

 
576,028

Net cash flow provided by (used in) investing
 activities
 
5,210,849

 
(23,350,279
)
 
(5,203,492
)
Cash flows from financing activities:
 
 
 
 
 
 
Repayments of loans secured by real estate
 

 
(9,500,000
)
 

Costs related to repayments of loans secured by real estate
 

 
(8,890
)
 

Proceeds from loans secured by real estate
 

 
7,000,000

 

Establishment of interest reserve
 
(500,000
)
 

 

Deferred financing fees
 

 
(233,224
)
 

Decrease in capital contributions receivable
 

 

 
392,364

Contributions
 

 

 
7,557,495

Proceeds from partner loans
 

 
5,580,681

 

Proceeds from loans from affiliate
 
4,003,370

 
21,317,104

 

Net cash flow provided by financing activities
 
3,503,370

 
24,155,671

 
7,949,859

Net increase (decrease) in cash and cash equivalents
 
(589,744
)
 
535,083

 
(195,334
)
Cash and cash equivalents, beginning of year
 
976,585

 
441,502

 
636,836

Cash and cash equivalents, end of year
 
$
386,841

 
$
976,585

 
$
441,502

See accompanying notes to consolidated financial statements.

27

    

KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows (continued)

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
(Unaudited)
 
(Unaudited)
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 
$
6,560,045

 
$
1,489,709

 
$
1,897,662

Supplemental disclosure of noncash investing activities:
 
 
 
 
 
 
During the year ended December 31, 2012, one investment in real estate with a fair value of $10,230,000 was exchanged in foreclosure for the loan which secured the investment. The foreclosure included net other liabilities of $91,575.

 
 
Supplemental disclosure of noncash financing activities:
 
 
 
 
 
 
During the year ended December 31, 2011, equity contributions in the amount of $14,573,477 were converted to partner loans (unaudited).

 
 

See accompanying notes to consolidated financial statements.


28

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


NOTE 1ORGANIZATION
ORGANIZATION—KW Property Fund II, L.P. (the Partnership) was formed on October 31, 2005 by and among: Kennedy Wilson Property Services II, Inc., a Delaware corporation (the General Partner); Kennedy Wilson Property Special Equity II, Inc., a Delaware corporation (the Special Limited Partner); Kennedy Wilson Property Equity II, Inc. (KWPE II), a Delaware corporation and California Public Employees' Retirement System (collectively, the Limited Partners). The Partnership was formed as a limited partnership under the Delaware Revised Uniform Limited Partnership Act, as amended (the Revised Uniform Act), by the filing of the Certificate with the Office of the Secretary of State of Delaware on June 25, 2003. The parties mentioned above agree to continue the Partnership.
The General Partner of the Partnership and KWPE II are affiliates of Kennedy‑Wilson, Inc. (KWI). KWPE II owns and contributes up to 5% of the limited partner interests of the Partnership. The Partnership forms separate limited partnerships to purchase properties such that KW Property Fund II, L.P. is the sole limited partner of each limited partnership and owns 100% of the general partner interest of each limited partnership. The Partnership also invests in joint ventures.
In accordance with the Agreement of Limited Partnership the General Partner and the Special Limited Partner shall contribute $1,000 each to the capital of the Partnership and have no further obligation to contribute capital. The Partnership offered an aggregate of up to $200,000,000 in limited partnership interests of which Kennedy Wilson Property Equity II, Inc. is obligated to purchase 5% of all limited partnership interests and make a capital commitment equal to the lesser of $10,000,000 or 5% of the total limited partner capital commitments. Effective October 26, 2007, the Agreement of Limited Partnership was amended to extend the original two-year subscription period, which was to expire on October 31, 2007, to March 31, 2008.
Effective November 15, 2011, the Agreement of Limited Partnership was amended to continue the Partnership through October 31, 2013. The General Partner, with the consent of nondefaulting limited partners with aggregate participation percentages in excess of 80%, may elect to extend the term of the Partnership for an additional one-year period to October 31, 2014 and again for an additional six-month period to April 30, 2015. This amendment also provided for the re-characterization of certain equity contributions as partner loans bearing interest at 15% per annum. Further, if the General Partner determines that additional capital is required, the Limited Partners have the right, but not the obligation to fund additional partner loans, and the General Partner or its affiliate may provide additional loans bearing interest at 15% per annum to fund any remaining requirements. This partnership amendment changed the calculation of the investment management fee and provides for an additional performance fee as further discussed in note 9. It also included a buy-sell agreement whereby the General Partner shall within 150 days of November 15, 2011 present each nondefaulting Limited Partner with an offer to acquire its interest for not less than 90% of the offeree's total share of the fair value of its investment, including capital contributions, partner loans and accrued interest thereon.
On April 13, 2012, the General Partner offered to acquire the partnership interests of each nondefaulting Limited Partner. All offers were calculated using 90% of the appraised value of the Partnership's underlying properties. Four Limited Partners accepted this offer and their interests were subsequently acquired by the General Partner.
Effective December 6, 2012, the Agreement of Limited Partnership was amended to allow the Special Limited Partner to act as a member of the Oversight Board in exchange for the General Partner foregoing the payment of any additional Investment Management Fees. More information on this amendment is provided in note 9.
As of December 31, 2012, the following Limited Partners have made commitments and capital contributions as indicated below and have the resulting participation percentages shown after the re-characterization of equity to loans.
Investor
 
Capital commitments
 
Partnership interest
 
Capital contributions
 
Participation percentage
 
 
 
 
 
 
 
 
 
Kennedy Wilson Property Equity II, Inc.
 
$
5,294,055

 
5.00
%
 
$
5,294,055

 
5.27
%
Kennedy Wilson Property Services II, Inc.
 
70,587,052

 
66.67

 
70,587,052

 
70.28

Los Angeles Board of Fire and Police Pension Commissioners
 
30,000,000

 
28.33

 
24,556,185

 
24.45

 
 
$
105,881,107

 
100.00
%
 
$
100,437,292

 
100.00
%

29

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


As of December 31, 2011 (unaudited), the following Limited Partners had made commitments and capital contributions as indicated below and had the resulting participation percentages shown after the re-characterization of equity to loans.
Investor
 
Capital commitments
 
Partnership interest
 
Capital contributions
 
Participation percentage
 
 
 
 
 
 
 
 
 
Kennedy Wilson Property Equity II, Inc.
 
$
5,294,055

 
5.00
%
 
$
5,294,055

 
5.27
%
California Public Employees' Retirement System
 
50,000,000

 
47.22

 
50,000,000

 
49.78

CSFB Strategic Partners III RE, LP. (Credit Suisse)
 
1,593,000

 
1.51

 
1,593,000

 
1.59

CS Strategic Partners IV RE Holdings, LP. (Credit Suisse)
 
8,407,000

 
7.94

 
8,407,000

 
8.37

Firstar Capital Corporation (U.S. Bank)
 
5,292,997

 
5.00

 
5,292,997

 
5.27

General Electric Real Estate Equities, Inc.
 
5,294,055

 
5.00

 
5,294,055

 
5.27

Los Angeles Board of Fire and Police Pension Commissioners
 
30,000,000

 
28.33

 
24,556,185

 
24.45

 
 
$
105,881,107

 
100.00
%
 
$
100,437,292

 
100.00
%
As of December 31, 2012, the following partner loans had been made to the Partnership including equity re-characterized as loans. Also, Kennedy-Wilson, Inc., an affiliate of the General Partner, had made loans to the Partnership in the total amount of $25,320,474, bearing interest at 15% per annum in accordance with the provisions of the amended Agreement of Limited Partnership.
Partners
 
Funded loans
 
Recharacterized equity
 
Total loans
 
 
 
 
 
 
 
Kennedy Wilson Property Equity II, Inc.
 
$
900,516

 
$
456,483

 
$
1,356,999

Kennedy Wilson Property Services II, Inc.
 
1,168,811

 
11,740,260

 
12,909,071

Los Angeles Board of Fire and Police Pension Commissioners
 
3,511,354

 
2,376,734

 
5,888,088

Total partner loans
 
5,580,681

 
14,573,477

 
20,154,158

Loans from affiliate
 
25,320,474

 

 
25,320,474

Total partner loans and loan from affiliate
 
$
30,901,155

 
$
14,573,477

 
$
45,474,632

As of December 31, 2011 (unaudited), the following partner loans had been made to the Partnership including equity re-characterized as loans. Also, Kennedy-Wilson, Inc. an affiliate of the General Partner, has made loans to the Partnership in the total amount of $21,317,104, bearing interest at 15% per annum in accordance with the provisions of the amended Agreement of Limited Partnership.



30

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


Partners
 
Funded loans
 
Recharacterized equity
 
Total loans
 
 
 
 
 
 
 
Kennedy Wilson Property Equity II, Inc.
 
$
900,516

 
$
456,483

 
$
1,356,999

California Public Employees' Retirement System
 

 
9,854,293

 
9,854,293

CSFB Strategic Partners III RE, LP. (Credit Suisse)
 

 
155,014

 
155,014

CS Strategic Partners IV RE Holdings, LP. (Credit Suisse)
 

 
818,079

 
818,079

Firstar Capital Corporation (U.S. Bank)
 
549,167

 
456,392

 
1,005,559

General Electric Real Estate Equities, Inc.
 
619,644

 
456,482

 
1,076,126

Los Angeles Board of Fire and Police Pension Commissioners
 
3,511,354

 
2,376,734

 
5,888,088

Total partner loans
 
5,580,681

 
14,573,477

 
20,154,158

Loans from affiliate
 
21,317,104

 

 
21,317,104

Total partner loans and loan from affiliate
 
$
26,897,785

 
$
14,573,477

 
$
41,471,262

Distributions of net cash flow to the partners are generally as follows:
(a)    First, to the Limited Partners in accordance with their participation percentages until the Limited Partners have received distributions equal to their total capital contributions;
(b)    Then, to the Limited Partners in accordance with their participation percentages until the Limited Partners have received their cumulative preferred returns;
(c)    Then, to the General Partner until the General Partner has received distributions equal to its capital contributions;
(d)    Then, to the General Partner until the General Partner has received its cumulative preferred return;
(e)    Thereafter, 80% to the Limited Partners in accordance with their participation percentages and 20% to the General Partner and the Special Limited Partner.
Preferred return accrues at the rate of 12% per annum, compounded quarterly, with respect to the capital contributions made by the partners.
The partnership follows the Hypothetical Liquidation at Book Value (HLBV) method for purposes of determining the allocation of net income or loss to the partners. Under the HLBV method, net income or loss is allocated between the partners to achieve each partner's claim on the net assets of the Partnership. Each partner's claim on the net assets of the Partnership is calculated as the amount that the partner would receive (or be obligated to pay) if the Partnership were to liquidate all of its assets at year end at the net book value and distribute the resulting cash to creditors and partners in accordance with their respective priorities.
PURPOSE OF THE PARTNERSHIP—The Limited Partnership Agreement states that the purpose of the Partnership is to (i) achieve total long-term risk-adjusted returns on equity that exceed market averages for its Partners by investing its funds in high-quality office and industrial properties located in selected markets in the Western, Mid-Western and Southern United States; (ii) purchase existing real estate income properties consisting solely of high quality office and industrial properties, including those that need additional renovation and capital improvements, in major growth markets that are expected to maintain above-average employment and growth rates over the next 10 to 20 years; (iii) acquire either on its own or in ventures with others, controlling equity interests in other entities, the business of which is to acquire, finance, manage, operate or dispose of, or is otherwise related to, any of the foregoing properties; and (iv) engage in all other activities related or incidental thereto.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES

31

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


PRINCIPLES OF CONSOLIDATION—The consolidated financial statements include the accounts of the Partnerships and its subsidiaries for which the Partnership has a majority voting or controlling financial interest. All significant intercompany items have been eliminated in the accompanying consolidated financial statements. The Partnership has no involvement with variable interest entities.
USE OF ESTIMATES—The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenues and expenses. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
LIQUIDITY—During 2012, the Partnership had negative cash flows from operations and has funded the liquidity requirements through affiliate loans. Management has taken steps to reduce operating costs and improve cash flows; however, there can be no guarantee the Partnership will generate positive cash flows.
CASH AND CASH EQUIVALENTS—Cash and cash equivalents include highly liquid investments purchased with original maturities of three months or less. The Partnerships consider their investment in a money market account to be a cash equivalent for purposes of the statement of cash flows.
The Partnerships maintain their cash in federally insured banking institutions. The account balances at these institutions periodically exceed the Federal Deposit Insurance Corporation's (FDIC) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC's insurance coverage. To mitigate this risk, the Partnerships place their cash with quality financial institutions.
DEPOSITS IN ESCROW—Deposits in escrow are typically funds held by a mortgage lender that are restricted in use to payment of real estate taxes, property insurance, loan interest, leasing commissions and certain capital expenditures. Funds held in tax, insurance, and interest escrows are used to pay real estate taxes, insurance premiums, and period interest costs directly to the taxing authorities, insurance agencies, and lenders, respectively. Funds held in leasing commissions and capital expenditure escrows are generally disbursed as reimbursement to the borrower upon submission of satisfactory evidence that the related expenditures are incurred as anticipated. These escrow deposits are returned to the borrower upon disposition of the property serving as collateral for the mortgage loan.
FAIR VALUE MEASUREMENTS—Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date.
A three-level hierarchy was established for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy level assigned to each investment in the Partnerships is based on the assessment of the transparency and reliability of the inputs used in the valuation of such investment at the measurement date. The three hierarchy levels are defined as follows:
Level 1 - Valuations based on unadjusted quoted market prices in active markets for identical instruments.
Level 2 - Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar instruments and quoted prices in markets that are not active.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.
The availability of valuation techniques and observable inputs can vary from investment to investment. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Accordingly, the degree of judgment exercised by the General Partner in determining fair value is greatest for investments classified as Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

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Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the General Partner's own assumptions are set to reflect those that market participants would use in valuing the asset or liability at the measurement date. The General Partner uses prices and inputs that it believes are current as of the measurement date.
Valuation of Investments—The Partnerships' investments in real estate and real estate related entities are stated at fair value determined by the General Partner by considering the projected operating cash flows or sales of comparable assets, if any. The operating cash flows are estimated on an asset-by-asset basis with a capitalization rate applied to the reversion year cash flows for the respective holding period and discounted back to present value.
The accuracy of estimating fair value for Level 3 investments cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active markets, and may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
The Partnerships' investments in real estate and real estate related assets and real estate related notes payable are accounted for on a closing-date basis.
Investment in Real Estate Joint Ventures—Investments in real estate joint ventures are carried at fair value and are presented in the accompanying consolidated financial statements using the equity method of accounting since control of the investment is shared with the respective venture member. Under the equity method, the investment is initially recorded at the original investment amount, increased by additional amounts invested, reduced by distributions received and subsequently adjusted for the Partnership's share of undistributed earnings or losses (including unrealized appreciation and depreciation) from the underlying entity.
Loans Secured by Real Estate—The Partnership has made the election to record its loan secured by real estate at fair value. Election of the fair value option is made on an instrument-by-instrument basis at inception and is irrevocable. The Partnership reports unrealized gains and losses due to the changes in fair value in earnings at each subsequent reporting date. The fair value of the loans are determined by discounting future contractual cash flows to the present value using a current market interest rate. The market rate is determined by giving consideration to one or more of the following criteria as appropriate: (i) interest rates for loans of comparable quality and maturity and (ii) the value of the underlying collateral.
REVENUE RECOGNITION—Rental revenue is recognized using the accrual method based on contractual amounts provided for in the lease agreements. No revenue is recognized during periods of rental abatement. In the normal course of business, the Partnership extends credit to its tenants, which consist of local, regional and national based tenants. The General Partner does not believe this represents a material risk of loss with respect to its financial position.
INCOME TAX MATTERS—The Partnership is not subject to federal or state income taxes, and accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The partners are required to report their proportional share of income, gains, loss, credit, or deduction on their respective tax returns.
The Partnership is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, which could result in the Partnership recording a tax liability that would reduce net assets. Based on its analysis, the Partnership has determined that there are no tax benefits that would have a material impact on the Partnership's financial position or results of operations. The Partnership is no longer subject to income tax examinations for years before 2009.
NOTE 3FAIR VALUE OF INVESTMENTS

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Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


The following tables present the classification of the Partnerships' fair value measurements as of December 31, 2012 and 2011 (unaudited):
 
 
Quoted prices in active markets for identical assets (Level 1)
 
Significant other observable inputs (Level 2)
 
Unobservable inputs (Level 3)
 
Total December 31, 2012
Real estate
 
$

 
$

 
$
12,570,000

 
$
12,570,000

Real estate joint ventures
 

 

 
75,330,305

 
75,330,305

 
 
$

 
$

 
$
87,900,305

 
$
87,900,305

Loans secured by real estate
 
$

 
$

 
$
8,829,014

 
$
8,829,014


 
 
Quoted prices in active markets for identical assets (Level 1)
 
Significant other observable inputs (Level 2)
 
Unobservable inputs (Level 3)
 
Total December 31, 2011
Real estate
 
$

 
$

 
$
23,120,000

 
$
23,120,000

Real estate joint ventures
 

 

 
70,278,132

 
70,278,132

 
 
$

 
$

 
$
93,398,132

 
$
93,398,132

Loans secured by real estate
 
$

 
$

 
$
20,337,382

 
$
20,337,382

The following is quantitative information about significant unobservable inputs used in Level 3 fair value measurements on a recurring basis as of December 31, 2012:
Type
 
Fair Value
 
Valuation technique
 
Unobservable inputs
 
Ranges
 
 
 
 
 
 
 
 
 
Real estate
 
$
12,570,000

 
Discounted cash flow
 
Terminal cap rate Discount cap rate
 
7.50%
9.00%
 
 
 
 
 
 
 
 
 
Investment in real estate joint ventures of which components include:
 
$
75,330,305

 
 
 
 
 
 
Real estate
 
 
 
Discounted cash flow
 
Terminal cap rate Discount cap rate
 
6.25%-7.00%
7.50%-8.00%
Debt
 
 
 
Discounted cash flow
 
Credit spread
 
2.00%-9.30%
 
 
 
 
 
 
 
 
 
Loans secured by real estate
 
$
8,829,014

 
Discounted cash flow
 
Credit spread
 
3.90%
The following table presents the reconciliation of the beginning and ending balances for real estate measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2012 and 2011 (unaudited):

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Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


 
 
2012
 
2011
Beginning balance
 
$
23,120,000

 
$
26,650,000

Purchases
 
181,563

 
814,996

Foreclosure
 
(10,230,000
)
 

Unrealized depreciation included in consolidated statements of operations
 
(501,563
)
 
(4,344,996
)
Ending balance
 
$
12,570,000

 
$
23,120,000

 
 
 
 
 
The amount of total losses for the year included in earnings attributable to the change in unrealized losses relating into investments still held at December 31
 
$
(501,563
)
 
$
(4,344,996
)
The following table presents the reconciliation of the beginning and ending balances for investments in real estate joint ventures measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2012 and 2011 (unaudited):
 
 
2012
 
2011
Beginning balance
 
$
70,278,132

 
$
62,590,387

Equity in income of unconsolidated investments
 
2,005,354

 
3,406,126

Total realized and unrealized gains included in consolidated statements
of operations
 
8,348,364

 
(18,372,458
)
Contributions to real estate joint ventures
 
2,792,928

 
25,008,686

Distributions from real estate joint ventures
 
(2,344,473
)
 
(2,354,609
)
Sales
 
(5,750,000
)
 

Ending balance
 
$
75,330,305

 
$
70,278,132

 
 
 
 
 
The amount of total gains (losses) for the year included in earnings attributable to the change in unrealized gains (losses) relating to investments still held at December 31
 
$
8,946,237

 
$
(18,372,458
)

















35

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


The following table presents the reconciliation of the beginning and ending balances for loans secured by real estate measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2012 and 2011 (unaudited):
 
 
2012
 
2011
 
 
 
 
 
Beginning balance
 
$
20,337,382

 
$
25,990,687

Purchases
 

 
7,000,000

Paydowns and foreclosure
 
(12,735,000
)
 
(9,508,890
)
Total realized and unrealized losses (gains) included in consolidated
statements of operations
 
1,226,632

 
(2,911,191
)
Debt issuance costs
 

 
(233,224
)
Ending balance
 
$
8,829,014

 
$
20,337,382

 
 
 
 
 
The amount of total losses for the year included in earnings attributable to the change in unrealized gains relating to loans secured by real estate still held at December 31
 
$
(925,452
)
 
$
(1,451,046
)
Since inception, all investments have been classified as Level 3 investments, and there have been no transfers between other levels of the hierarchy.
NOTE 4INVESTMENTS IN REAL ESTATE
The following tables detail the real estate owned and investments in real estate joint ventures as of December 31, 2012 and 2011:
 
 
2012
 
2011
 
 
Fair value
 
Cost
 
Fair value
 
Cost
Real estate and improvements:
 
 
 
 
 
(Unaudited)
 
(Unaudited)
1860 Howe, Sacramento, California
 
$
10,590,000

 
$
18,978,554

 
$
10,910,000

 
$
18,871,839

Howe Corporate Center, Sacramento, California
 

 

 
10,230,000

 
19,001,804

Metro Executive Park, Phoenix, Arizona
 
1,980,000

 
10,689,762

 
1,980,000

 
10,614,914

Total real estate
 
$
12,570,000

 
$
29,668,316

 
$
23,120,000

 
$
48,488,557

See notes regarding investments for Howe Corporate Center and Metro Executive Park under note 6.
NOTE 5INVESTMENTS IN REAL ESTATE JOINT VENTURES
The following table details the investments in real estate joint ventures as of December 31, 2012 and 2011:
 
 
2012
 
2011
 
 
Fair value
 
Cost
 
Fair value
 
Cost
Investments in real estate joint ventures:
 
 
 
 
 
(Unaudited)
 
(Unaudited)
300 California, San Francisco, California
 
$
12,778,457

 
$
17,737,068

 
$
10,026,493

 
$
15,628,071

The Oaks at Westlake, Westlake Village, California
 
22,846,299

 
35,276,700

 
22,366,986

 
35,347,942

One Technology, San Antonio, Texas
 
3,024,309

 
4,898,610

 
3,518,372

 
4,354,126

303 North Glenoaks, Burbank, California
 
9,924,859

 
10,130,113

 
9,024,869

 
10,084,778

333 North Glenoaks, Burbank, California
 
5,601,353

 
5,683,437

 
4,945,941

 
5,700,539

Burbank Executive, Burbank, California
 
1,726,204

 
1,455,351

 
2,114,501

 
1,473,306

7060 Hollywood, Los Angeles, California
 

 

 
6,143,663

 
5,675,003

6100 Wilshire, Beverly Hills, California
 
19,428,824

 
26,529,013

 
12,137,307

 
26,871,932

Total real estate joint ventures
 
$
75,330,305

 
$
101,710,292

 
$
70,278,132

 
$
105,135,697


36

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


The following is a summary of the assets and liabilities, at fair value, underlying the Partnership's investments in real estate
joint ventures as of and for the years ended December 31, 2012 and 2011:
 
 
2012
 
2011
 
 
 
 
(Unaudited)
Land
 
$
375,780,000

 
$
440,930,000

Other assets
 
7,139,081

 
9,634,300

Mortgage loans
 
(240,926,101
)
 
(284,646,296
)
Other liabilities
 
(6,720,169
)
 
(15,424,786
)
Net assets
 
$
135,272,811

 
$
150,493,218

 
 
 
 
 
Partnership's share of real estate joint venture net assets
 
$
75,330,305

 
$
70,278,132

The following is a summary of the operating results underlying the Partnership's investments in real estate joint ventures as of and for the years ended December 31, 2012, 2011, and 2010:
 
 
2012
 
2011
 
2010
 
 
 
 
(Unaudited)
 
(Unaudited)
Operating revenues
 
$
35,442,802

 
$
40,690,749

 
$
34,435,192

Operating expenses
 
(16,320,484
)
 
(17,192,720
)
 
(16,703,853
)
Interest expense
 
(13,422,624
)
 
(17,127,240
)
 
(11,314,523
)
Net change in unrealized appreciation (depreciation)
 
11,330,976

 
(29,851,391
)
 
(11,553,338
)
Net income (loss)
 
$
17,030,670

 
$
(23,480,602
)
 
$
(5,136,522
)
 
 
 
 
 
 
 
Partnership's share or net investment income
 
$
2,005,354

 
$
3,406,126

 
$
2,906,226

Partnership's share of net change in unrealized appreciation
(depreciation) on investments
 
8,946,237

 
(18,372,458
)
 
(5,624,276
)

During 2007, the Partnership made its initial investment in 300 California, The Oaks at Westlake and One Technology, all of which hold commercial real estate properties. The Partnership is listed as a guarantor on mortgage loans for these investments (see further discussion below and at note 10).
During 2008, the Partnership made its initial investment in 303 North Glenoaks, 333 North Glenoaks, Burbank Executive, 7060 Hollywood and 6100 Wilshire, all of which hold commercial real estate properties. During October 2011, 303 North Glenoaks, 333 North Glenoaks, Burbank Executive and 6100 Wilshire were refinanced in a mortgage package consisting of a first lien mortgage and a mezzanine loan. Although both loans are nonrecourse, the Partnership guarantees certain nonrecourse obligations.
During 2013, certain loans of the Partnership's real estate joint ventures mature based on the contractual maturity dates. Loans maturing in 2013 relate to the Partnership's joint venture investments in One Technology and 300 California and totaled approximately $20,815,000 and $35,538,000, respectively, at December 31, 2012. The fair value of the Partnership's investment in these joint ventures totaled $15,802,766 as of December 31, 2012.
The Partnership's maximum guaranty related to the One Technology loan is approximately $5,330,000. This guaranty requires the Partnership to maintain compliance with certain financial covenants. These covenants require, among other things, the Partnership to maintain a minimum tangible net worth of $40,000,000. In conjunction with the second amendment to the Agreement of Limited Partnership (see note 1), the conversion of certain partners' capital to partner loans reduced the tangible net worth of the Partnership. The conversion resulted in a reclassification of approximately $14,573,000 (unaudited) of previously existing partners' capital to partner loans as of December 31, 2011. These covenants also require the Partnership to maintain a minimum of $1,000,000 in liquid assets (as defined in the guarantor agreement). As of December 31, 2012, the Partnership is not in compliance with the minimum tangible net worth or the minimum liquid asset requirement. Management's plan is to request the lender to waive these requirements.

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Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


As of the issuance of this report the lender has not exercised any rights or remedies, including their right to foreclose on the related property or accelerate the maturity of all amounts owed, including the guaranteed amount. The Partnership would need to replace the loans if such a demand was made or management would need to obtain additional capital from investors, including KWI. Management believes they will be successful in selling the property prior to maturity or executing a new loan on acceptable terms. If pay downs are required to satisfy the lender, management will use additional capital and affiliate loans from investors, including KWI, and the Partnership's existing cash balances to make the necessary pay down at the time of the maturity.
Under the terms of the existing loan agreement related to 300 California, the maturity date can be extended for a period of one year to November 15, 2014. This extension option requires certain conditions to be satisfied including a loan-to-value ratio of no more than 85%, a debt service coverage ratio equal to or greater than 1.05, and an extension fee equal to 0.25% of the then outstanding unpaid principal balance. Management believes they will be successful in exercising the existing extension. If pay downs are required to satisfy the lender, management will use additional capital and affiliate loans from investors, including KWI, and the Partnership's existing cash balances to make the necessary pay down at the time of the maturity.
NOTE 6LOANS SECURED BY REAL ESTATE
The following table presents the Partnership's loans secured by real estate as of December 31, 2012 and 2011:

 
 
2012
 
2011
 
 
 
 
(Unaudited)
Loan payable secured by 1860 Howe bearing interest at 3.5% over 3-month LIBOR with
a 4.5% floor (4.5% at December 31, 2012). Interest only until first draw from $2,000,000
holdback; 25-year amortization thereafter to maturity in July 2014. $2,000,000
paydown required October 1, 2013 if term of the Partnership not extended to
October 31, 2015.
 
$
7,000,000

 
$
7,000,000

Loan payable secured by Howe Corporate Center bearing interest at 6.37% to maturity
in August 2011. Property was in receivership October 27, 2011 (see below).
 

 
12,750,000

Loan payable secured by Metro Executive Park bearing interest at 5.72% interest-only
payments until maturity (see below).
 
7,700,000

 
7,700,000

Total outstanding principal
 
14,700,000

 
27,450,000

Unrealized depreciation
 
(5,870,986
)
 
(7,112,618
)
Total fair value
 
$
8,829,014

 
$
20,337,382

Aggregate principal payments due under the loans secured by real estate are as follows:
2013
 
$
7,700,000

(1)
2014
 
7,000,000

 
2015
 

 
2016
 

 
2017
 

 
Thereafter
 

 
Total
 
$
14,700,000

 
—————
(1)    The loan on Metro Executive Park matured in January 2012. After several months of negotiation with the lender, a notice of default was recorded on the property. A mutually acceptable resolution could not be negotiated, and on February 27, 2012, the property was placed into receivership and is still held in receivership as of December 31, 2012.
On February 15, 2012, Howe Corporate Center was foreclosed by the lender after having been in receivership since October 27, 2011.
In accordance with the loan agreement of 1860 Howe, if by October 1, 2013, the term of the Partnership agreement is not extended to October 31, 2015, the Partnership shall make a payment to the lender by October 1, 2013 of $2,000,000. Management expects to extend the Partnership agreement's term to satisfy the above covenant and avoid the $2,000,000 payment. If the

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Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


Partnership's term is not extended, management will use additional capital and affiliate loans from investors, including KWI, and the Partnership's existing cash balances to make the necessary pay down.
NOTE 7LEASE ARRANGEMENTS
The following is a schedule of future minimum rentals to be received under noncancelable operating leases as of December 31,2012:
2013
 
$
751,164

2014
 
615,989

2015
 
554,305

2016
 
330,878

2017
 
284,974

Thereafter
 
864,942

Total
 
$
3,402,252

Base rentals are normally increased over the term of the lease. Depending on local market factors, increases may be structured as a fixed percentage increase for each year of the lease or as an increase based on the Consumer Price Index. Also, concessions in the form of free rent may sometimes be provided.
In addition to base rent, most tenants are assessed monthly for their proportionate share of estimated net increases in property operating costs and real property taxes. Such expense reimbursements are typically amounts in excess of the tenants' share of expenses attributable to a base year stipulated in the lease.
The above schedule does not include minimum rents for Metro Executive Park which was placed in receivership on February 27, 2012 as indicated in note 6 above.
NOTE 8CONCENTRATION OF RISK
This Partnership invests solely in commercial real estate and derives revenue and investment returns based completely on the strength of this market sector. The lack of diversity into other areas of the real estate market has resulted in a concentration of risk in this sector. The downturn in the economy could impact the Partnership's ability to maintain its current rates of return and adversely affect its cash flows. This concentration of risk related to the market sector is somewhat mitigated by the Partnership's local geographical diversity within a state. At December 31, 2012, the only real estate investment, exclusive of Metro Executive Park, is located in California. Also, 96% of the investments in real estate joint ventures were located in California and 4% were located in Texas.
NOTE 9TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
The Limited Partnership Agreement provides for the General Partner to be paid an annual investment management fee equal to 1.25% of the total capital commitment of all partners through the original commitment period, which ended on October 31, 2009. After the end of the commitment period until October 31, 2011, the annual asset management fee will be equal to 1.25% of the unrecovered capital contributions made by all partners. After November 1, 2011, the investment management fee is 0.75% of the aggregate capital contributions attributable to existing investments, but it shall not be less than $300,000 per year unless certain milestones related to proceeds from capital transactions are not met. This asset management fee is estimated and paid quarterly in advance.
Pursuant to the partnership agreement amendment effective in December 6, 2012, the Partnership shall no longer pay the General Partner an annual investment management fee.
Pursuant to the partnership agreement amendment effective in December 6, 2012, the Partnership shall pay the General Partner a performance fee equal to 6% of amounts distributed or paid in excess of the December 31, 2011 appraised value of investments from November 1, 2011 through October, 31, 2012; 3.50% of such amounts distributed or paid from November 1, 2012 through October 31, 2013; and 1% of such amounts distributed or paid from November 1, 2013 through April 30, 2015.
Affiliates of the General Partner receive leasing commissions ranging from 2% to 4% of the gross lease revenue, a construction management fee equal to 4% of construction cost, reimbursements for certain billed management and administrative related costs and disposition brokerage fees equal to 1% of the sales price of a Partnership property.

39

Table of Contents
KW PROPERTY FUND II, L.P. AND SUBSIDIARIES
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2012, and December 31, 2011, (Unaudited) and 2010 (Unaudited)


Fees earned by KWI and its affiliates were the following for the years ended December 31, 2012, 2011 and 2010:
 
 
2012
 
2011
 
2010
 
 
 
 
(Unaudited)
 
(Unaudited)
Asset management
 
$
744,465

 
$
1,171,768

 
$
1,222,442

Management and administrative related cost reimbursement
 
123,200

 
274,200

 
274,800

Leasing commissions
 
2,330

 
47,098

 
2,674

Construction management
 
21,446

 
4,722

 
48,591

 
 
$
891,441

 
$
1,497,788

 
$
1,548,507

NOTE 10COMMITMENTS AND CONTINGENCIES
The Partnership has certain guarantees associated with loans secured by Partnership assets as well as assets held in various joint venture investments. The maximum potential amount of future payments (undiscounted) the Partnership could be required to make under the guarantees was approximately $30.5 million and $44.7 million (unaudited) as of December 31, 2012 and 2011, respectively. The guarantees expire through 2017 and the Partnership's performance under the guarantees would be required to the extent there is a shortfall in liquidation between the principal amount of the loan and the net sales proceeds of the asset. Based upon the Partnership's evaluation of all guarantees, the estimates fair value of guarantees made as of December 31, 2012 and 2011 (unaudited) are immaterial.
NOTE 11SUBSEQUENT EVENTS
Management has evaluated all subsequent events through March 21, 2013, the date that the financial statements are available for issuance, and determined that there are no additional events that require disclosure.

40

    




Independent Auditors’ Report


The Partners
Kennedy Wilson Real Estate Fund IV, L.P.:

Report on the Financial Statements
We have audited the accompanying statements of financial condition of Kennedy Wilson Real Estate Fund IV, L.P. (the Partnership), including the schedules of investments, as of December 31, 2012, and the related statements of operations, partners' capital, and cash flows for the year then ended.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Kennedy Wilson Real Estate Fund IV, L.P. as of December 31, 2012, and the results of its operations and its cash flows for the year then ended, in accordance with U.S. generally accepted accounting principles.
The accompanying statements of financial condition of Kennedy Wilson Real Estate Fund IV, L.P. (the Partnership), including the schedules of investments, as of December 31, 2011, and the related statements of operations, partners' capital, and cash flows for the period from January 28, 2011 (inception) through December, 31, 2011, were not audited by us, and accordingly, we do not express an opinion on them.



/s/ KPMG LLP

Los Angeles, California
March 27, 2013




41

    

KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Combined Statements of Financial Condition

 
 
December 31,
 
 
2012
 
2011
 
 
 
 
(Unaudited)
Assets
 
 
 
 
Investments at fair value (cost $128,447,755 in 2012 and
$59,385,870 (unaudited) in 2011)
 
$
143,763,155

 
$
61,407,239

Cash and cash equivalents
 
1,607,141

 
2,885,066

Accounts receivable
 
67,127

 

Prepaid expenses
 
534,424

 
383,353

Total assets
 
$
145,971,847

 
$
64,675,658

Liabilities and partners' capital
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
17,245

 
$
1,821

Notes payable
 
3,012,905

 

Total liabilities
 
3,030,150

 
1,821

Partners' capital
 
 
 
 
General partner and special limited partner
 
1,508,996

 
125,145

Limited partners
 
141,432,701

 
64,548,692

Total partners’ capital
 
142,941,697

 
64,673,837

Total liabilities and partners’ capital
 
$
145,971,847

 
$
64,675,658

See accompanying notes to financial statements.



42

    

KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Combined Statements of Investments
December 31, 2012
Ownership interest
 
Security description
 
Percentage of total investments
 
Cost
 
Fair value
 
 
Interests in real estate assets:
 
 
 
 
 
 
100.00
%
 
KW Fund IV-Westview Heights, LLC, a single-purpose entity holding a fee simple interest in a 132-unit multifamily project located in Portland, Oregon
 
6.17
%
 
$
6,266,117

 
$
8,874,960

100.00

 
KW Fund IV-Westview Heights 66, LLC, a single-purpose entity holding a fee simple interest in a 66-unit multifamily project located in Portland, Oregon
 
3.36

 
3,281,351

 
4,825,682

100.00

 
KW Royal Beverly Glen, LLC, a single-purpose entity holding a fee simple interest in a four-story, 77,749 square foot office building and a four-level subterranean parking garage located in Los Angeles,California
 
7.65

 
10,800,000

 
10,993,087

100.00

 
KW Tricenter, LLC, a single-purpose entity holding a fee simple interest in a four-story 143,256 square foot office building and a four-level parking structure located in Van Nuys, California
 
7.67

 
11,200,000

 
11,022,602

50.00

 
KW Stadium Gateway, LLC, a single-purpose entity holding a fee simple interest in a six-story, 272,826 square foot office building with surface parking located in Anaheim, California
 
5.20

 
3,700,000

 
7,475,003

50.00

 
KW CapTowers, LLC, a single-purpose entity holding a fee simple interest in a 409-unit apartment building comprised of a fifteen-story tower and 206 garden-style villas located in Sacramento, California
 
5.62

 
8,100,000

 
8,074,933

50.00

 
KW Huntington, LLC, a single-purpose entity holding a fee simple interest in a 277-unit multifamily project located in Huntington Beach, California
 
7.63

 
9,833,348

 
10,975,839

50.00

 
KW Residential Capital, an entity holding a participating loan interest in a single-purpose entity owning a project under development consisting of 79 single-family residences located in Santa Clarita, California
 
1.27

 
1,818,801

 
1,818,801

50.00

 
KW Marina View, LLC, an entity holding a fee simple interest in a six-story, 60,918 square foot office building with 14,774 square feet of ground floor retail space and a two-level parking deck located in Marina del Rey, California
 
3.72

 
5,250,000

 
5,341,561

48.81

 
KW University Partners, LLC, an entity holding an interest in a single-purpose entity holding a fee simple interest in a 209,329 square foot retail center located in Orem, Utah
 
3.43

 
4,600,000

 
4,927,848

33.33

 
Kennedy Wilson 16501 Ventura, LLC, a single-purpose entity holding a fee simple interest in a six-story, 185,393-square foot office building and a five-level subterranean parking garage located in Encino, California
 
5.06

 
5,977,352

 
7,276,266

33.33

 
KW Telstar, LLC, a single-purpose entity holding a fee simple interest in a two-story, 246,912-square-foot flex building and a four-level parking structure located in El Monte, California
 
4.94

 
5,481,119

 
7,095,687

33.33

 
Kennedy Wilson 145 Fairfax, LLC, a single-purpose entity holding a fee simple interest in a four-story, 55,574-square foot office building and a two-level subterranean parking garage located in Los Angeles, California
 
2.13

 
2,206,301

 
3,060,758

33.33

 
KW Warner Atrium, LLC, a single-purpose entity holding a fee simple interest in a three-story, 126,436-square foot office building and a three-level parking structure located in Woodland Hills, California
 
1.47

 
1,826,817

 
2,116,849

25.00

 
KW 9301 Partners, LLC, an entity holding an interest in a single purpose entity holding a fee simple interest in a six-story, 86,529 square foot office building and a three-level subterranean parking garage located in Beverly Hills, California
 
4.00

 
4,308,563

 
5,762,247

20.00

 
KW Hilltop Manager, LLC, an entity holding an interest in a single purpose entity holding a fee simple interest in a 1,008-unit multifamily project located in Richmond, California
 
6.20

 
9,748,884

 
8,915,710

15.57

 
KW/CV Sunset, LLC, a single-purpose entity holding a fee simple interest in a 251-unit multifamily projected located in West Covina, California
 
1.58

 
2,052,225

 
2,278,277

15.00

 
KW Kohanaiki Shores Member, LLC, an entity holding an interest in a single-purpose entity holding a fee simple interest in a 450-acre planned community under development for up to 474 residences and a golf course on the Kona Coast of Hawaii
 
18.78

 
27,020,000

 
27,010,690

10.00

 
Guardian/KW Hayward, LLC, a single-purpose entity holding a fee simple interest in a 544-unit multifamily project located in Hayward, California
 
2.12

 
2,286,825

 
3,042,021

 
 
Interests in notes:
 
 
 
 
 
 
25.00

 
KW Loan Investors VII, LLC, an entity holding a portfolio initially consisting of nine construction and term loans with an outstanding principal balance of approximately $51,000,000, collateralized by seven retail properties located in Arizona, California and Utah.
 
2.00

 
2,690,052

 
2,874,334

 
 
Total investments
 
100.00
%
 
$
128,447,755

 
$
143,763,155

See accompanying notes to combined financial statements

43

    

KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Combined Statements of Investments
(Unaudited)
December 31, 2011
Ownership interest
 
Security description
 
Percentage of total investments
 
Cost
 
Fair value
 
 
Interests in real estate assets:
 
 
 
 
 
 
100.00
%
 
KW Fund IV-Westview Heights, LLC, a single-purpose entity holding a fee simple interest in a 132-unit multifamily project located in Portland, Oregon
 
12.15
%
 
$
7,766,117

 
$
7,463,772

100.00

 
KW Fund IV-Westview Heights 66, LLC, a single-purpose entity holding a fee simple interest in a 66-unit multifamily project located in Portland, Oregon
 
5.08

 
3,281,351

 
3,121,592

33.33

 
Kennedy Wilson 16501 Ventura, LLC, a single-purpose entity holding a fee simple interest in a six-story, 185,393-square foot office building and a five-level subterranean parking garage located in Encino, California
 
10.32

 
5,589,724

 
6,339,290

33.33

 
KW Telstar, LLC, a single-purpose entity holding a fee simple interest in a two-story, 246,912-square-foot flex building and a four-level parking structure located in El Monte, California
 
9.77

 
5,481,119

 
5,999,302

33.33

 
Kennedy Wilson 145 Fairfax, LLC, a single-purpose entity holding a fee simple interest in a four-story, 55,574-square foot office building and a two-level subterranean parking garage located in Los Angeles, California
 
3.27

 
1,784,655

 
2,006,110

33.33

 
KW Warner Atrium, LLC, a single-purpose entity holding a fee simple interest in a three-story, 126,436-square foot office building and a three-level parking structure located in Woodland Hills, California
 
3.84

 
1,426,857

 
2,360,993

25.00

 
KW 9301 Partners, LLC, an entity holding an interest in a single purpose entity holding a fee simple interest in a six-story, 86,529 square foot office building and a three-level subterranean parking garage located in Beverly Hills, California
 
6.97

 
3,633,563

 
4,278,586

20.00

 
KW Hilltop Manager, LLC, an entity holding an interest in a single purpose entity holding a fee simple interest in a 1,008-unit multifamily project located in Richmond, California
 
14.41

 
9,417,484

 
8,840,021

15.00

 
KW Kohanaiki Shores Member, LLC, an entity holding an interest in a single-purpose entity holding a fee simple interest in a 450-acre planned community under development for up to 474 residences and a golf course on the Kona Coast of Hawaii
 
34.19

 
21,005,000

 
20,997,573

 
 
Total investments
 
100.00
%
 
$
59,385,870

 
$
61,407,239

See accompanying notes to financial statements

44

    

KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Combined Statements of Operations

 
 
Year ended December 31,
 
From January 28 (inception) through December 31,
 
 
2012
 
2011
 
 
 
 
(Unaudited)
 
 
 
 
 
Investment income:
 
 
 
 
Dividends
 
$
1,842,575

 
$
555,302

Interest
 
1,854,804

 
4,110

Total investment income
 
3,697,379

 
559,412

Expenses:
 
 
 
 
Management fees
 
1,720,041

 
691,195

Organization costs
 
409,387

 
590,613

Interest expense
 
585,404

 

Other professional and administrative costs
 
566,602

 
193,991

Total expenses
 
3,281,434

 
1,475,799

Net investment income (loss)
 
415,945

 
(916,387
)
Realized and unrealized gain on investments:
 
 
 
 
Net change in unrealized appreciation on investments
 
13,294,030

 
2,021,369

Net income
 
$
13,709,975

 
$
1,104,982

See accompanying notes to financial statements.


45

    

KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Combined Statements of Partners' Capital

 
 
General and special limited partner
 
Limited partners
 
Total
Partners' capital, January 28, (inception) (unaudited)
 
$

 
$

 
$

Capital contributions (unaudited)
 
136,761

 
69,239,847

 
69,376,608

Capital distributions (unaudited)
 
(11,616
)
 
(5,796,137
)
 
(5,807,753
)
Net income (unaudited)
 
4,203

 
1,100,779

 
1,104,982

Partners' capital, December 31, 2011 (unaudited)
 
129,348

 
64,544,489

 
64,673,837

Capital contributions
 
173,646

 
88,529,511

 
88,703,157

Capital distributions
 
(48,291
)
 
(24,096,981
)
 
(24,145,272
)
Net income
 
1,254,293

 
12,455,682

 
13,709,975

Partners' capital, December 31, 2012
 
$
1,508,996

 
$
141,432,701

 
$
142,941,697

See accompanying notes to financial statements.


46

    

KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Combined Statements of Cash Flows

 
 
Year ended December 31,
 
From January 28 (inception) through December 31,
 
 
2012
 
2011
 
 
 
 
 (Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
13,709,975

 
$
1,104,982

Adjustments to reconcile net income to net cash used in operating
     activities:
 
 
 
 
Change in accreted interest
 
(1,852,806
)
 

Net change in unrealized appreciation on investments
 
(13,294,030
)
 
(2,021,369
)
Change in operating assets and liabilities:
 
 
 
 
Purchases of investments
 
(97,157,671
)
 
(59,385,870
)
Proceeds on sale of investments
 
29,948,591

 

Accounts receivable
 
(67,127
)
 

Prepaid expenses
 
(151,071
)
 
(383,353
)
Accounts payable and accrued expenses
 
15,424

 
1,821

Net cash flow used in operating activities
 
(68,848,715
)
 
(60,683,789
)
Cash flow from financing activities:
 
 
 
 
Borrowings under line of credit
 
26,461,756

 

Payments under line of credit
 
(23,448,851
)
 

Capital contributions
 
88,703,157

 
69,376,608

Capital distributions
 
(24,145,272
)
 
(5,807,753
)
Net cash flow provided by financing activities
 
67,570,790

 
63,568,855

Net (decrease) increase in cash and cash equivalents
 
(1,277,925
)
 
2,885,066

Cash and cash equivalents, beginning of year
 
2,885,066

 

Cash and cash equivalents, end of year
 
$
1,607,141

 
$
2,885,066

Supplemental disclosure of cash paid for during the year:
 
 
 
 
Cash paid for interest
 
$
568,259

 
$

See accompanying notes to financial statements.



47

Table of Contents
KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Notes to Combined Financial Statements
December 31, 2012 and 2011 (Unaudited)


NOTE 1ORGANIZATION
Kennedy Wilson Real Estate Fund IV, L.P. (the Partnership), a Delaware limited partnership, was formed on January 28, 2011. The Agreement of Limited Partnership of the Partnership (Partnership Agreement) was executed on May 13, 2011. The general partner of the Partnership is Kennedy Wilson Property Services IV, L.P., a Delaware limited partnership (the General Partner), and the special limited partner is Kennedy Wilson Property Special Equity IV, LLC, a Delaware limited liability company (the Special Limited Partner). The Partnership's investment objective is to acquire office, multifamily and other real estate investments, including real estate loans and condominiums. In accordance with this objective, the Partnership may form joint ventures with appropriate strategic co-investors or invest in real estate related financings, such as first trust deeds. Partnership investments will generally involve real estate located in the western United States and Hawaii. Under the terms of the Partnership Agreement, the Partnership shall continue until the eighth anniversary of the effective date of May 13, 2011 and may be extended for an additional one-year period by the General Partner in its discretion, and for an additional one-year period by the General Partner with the prior consent of the limited partners with a majority of aggregate commitments.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES—The preparation of the accompanying financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and the reported amounts of revenues and expenses. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
CASH AND CASH EQUIVALENTS—The Partnership considers its investment in a money market account to be a cash equivalent for purposes of the statement of cash flows.
The Partnership maintains its cash in federally insured banking institutions. The account balances at these institutions periodically exceed the Federal Deposit Insurance Corporation's (FDIC) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC's insurance coverage. To mitigate this risk, the Partnership places its cash with quality financial institutions and does not believe there is a significant concentration of credit risk.
FAIR VALUE MEASUREMENT—Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date.
A three-level hierarchy was established for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy level assigned to each investment in the partnerships is based on the assessment of the transparency and reliability of the inputs used in the valuation of such investment at the measurement date. The three hierarchy levels are defined as follows:
Level 1 - Valuations based on unadjusted quoted market prices in active markets for identical securities.
Level 2 - Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets and quoted prices in markets that are not active.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.
The availability of valuation techniques and observable inputs can vary from investment to investment. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Accordingly, the degree of judgment exercised by the General Partner in determining fair value is greatest for investments classified as Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.


48

Table of Contents
KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Notes to Combined Financial Statements
December 31, 2012 and 2011 (Unaudited)



Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the General Partner's own assumptions are set to reflect those that market participants would use in valuing the asset or liability at the measurement date. The General Partner uses prices and inputs that it believes are current as of the measurement date.
VALUATION OF INVESTMENTS—The Partnership's investments in real estate assets are stated at fair value using the income and market approaches. For the Limited Liability Companies (LLC) in which the Partnership has a partial ownership interest, the LLC's investments in real estate are also stated at fair value using the income and market approaches. The income approach requires the General Partner to estimate the projected operating cash flows of the real estate on an asset-by-asset basis, apply a capitalization rate to the reversion year's cash flows and discount the cash flows with a risk-adjusted rate for the respective holding periods. The market approach requires the General Partner to identify transactions for similar assets, if any, and apply asset specific adjustments for items such as location, physical condition and other pertinent factors which would impact fair value. The Partnership's investments in real notes are stated at fair value based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and the credit risk of the borrower to the current yield of similar fixed income securities.
The accuracy of estimating fair value for Level 3 investments cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active markets, and may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
The Partnerships' investments in real estate and real estate related assets and real estate related fixed income securities are accounted for on a closing-date basis.
CONCENTRATION OF RISK—Substantially all of the Partnerships' investments are concentrated in real estate related investments in California, Oregon, and Hawaii. Adverse conditions in the sector or geographic locations would likely result in material declines in the value of the Partnerships' investments.
REVENUE RECOGNITION—Dividend income from investments in real estate and real estate related entities is recorded when a disbursement has been approved and declared from the underlying investments of the Partnership. Undistributed earnings from real estate and real estate related entities are considered by the General Partner in estimating the fair value of these investments.
INCOME TAXES—The Partnership is not subject to federal or state income taxes, and accordingly, no provision for income taxes has been made in the accompanying combined financial statements. The partners are required to report their proportional share of income, gains, loss, credit, or deduction on their respective tax returns.
The Partnership is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, which could result in the Partnership recording a tax liability that would reduce net assets. Based on its analysis, the Partnership has determined that there are no tax benefits that would have a material impact on the Partnership's financial position or results of operations. The tax year 2011 (year of inception) is the earliest year that remains open to examination by the taxing jurisdictions to which the Partnership is subject.
NOTE 3FAIR VALUE OF INVESTMENTS
The following table presents the classification of the Partnerships' fair value measurements as of December 31, 2012:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments in real estate assets
 
$

 
$

 
$
140,888,821

 
$
140,888,821

Investments in notes
 

 

 
2,874,334

 
2,874,334

 
 
$

 
$

 
$
143,763,155

 
$
143,763,155

The following table presents changes in Level 3 investments for the year ended December 31, 2012:



49

Table of Contents
KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Notes to Combined Financial Statements
December 31, 2012 and 2011 (Unaudited)


 
 
January 1, 2012
 
Purchases
 
Sales
 
Realized gains or (losses)
 
Unrealized appreciation (depreciation)
 
Total
Investments in real estate assets
 
$
61,407,239

 
$
67,871,834

 
$
(1,500,000
)
 
$

 
$
13,109,748

 
$
140,888,821

Investments in notes
 

 
31,138,643

 
(28,448,591
)
 

 
184,282

 
2,874,334

 
 
$
61,407,239

 
$
99,010,477

 
$
(29,948,591
)
 
$

 
$
13,294,030

 
$
143,763,155

The net change in unrealized appreciation on investments that use Level 3 inputs still held as of December 31, 2012 was $13,294,030.
The following table (unaudited) presents the classification of the Partnerships' fair value measurements as of December 31, 2011:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments in real estate assets
 
$

 
$

 
$
61,407,239

 
$
61,407,239

 
 
$

 
$

 
$
61,407,239

 
$
61,407,239


The following table (unaudited) presents changes in Level 3 investments for the year ended December 31, 2011:
 
 
January 1, 2011
 
Purchases
 
Sales
 
Realized gains or (losses)
 
Unrealized appreciation (depreciation)
 
Total
Investments in real estate assets
 
$

 
$
59,385,870

 
$

 
$

 
$
2,021,369

 
$
61,407,239

 
 
$

 
$
59,385,870

 
$

 
$

 
$
2,021,369

 
$
61,407,239

The net change in unrealized appreciation on investments that use Level 3 inputs still held as of December 31, 2011 was $2,021,369 (unaudited).
Since inception, all investments have been classified as Level 3 investments and there have been no transfers between other levels of the hierarchy.
In estimating fair value of investments in real estate assets the Fund considers significant inputs such as capitalization and discount rates. The table below describes the range of inputs used as of December 31, 2012 and 2011 (unaudited):
 
 
Cap rate
 
Discount rate
 
 
Min
 
Max
 
Min
 
Max
Multifamily
 
5.75
%
 
7.00
%
 
8.50
%
 
9.00
%
Office
 
6.25

 
7.50

 
8.00

 
9.75

Retail
 
8.00

 
8.00

 
12.00

 
12.00

Valuing real estate related assets and indebtedness, the Fund considers significant inputs such as the term of the debt, value of collateral, current loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used by the Fund for these types of investments range from 2.00% to 7.90% (unaudited).
The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision, cannot be substantiated by comparison to quotes prices in active markets, and may not be realized in a current sale of immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including cap rates, discounts rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.



50

Table of Contents
KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Notes to Combined Financial Statements
December 31, 2012 and 2011 (Unaudited)


NOTE 4RELATED PARTY TRANSACTIONS
MANAGEMENT FEE—During the Investment Period which commenced on May 13, 2011 and expires on the earlier of the third anniversary of such date or when all of the commitments of the nonaffiliated limited partners have been invested, the Partnership shall pay the General Partner a management fee equal to 1.500% per annum of the invested capital contributed by the nonaffiliated limited partners and 1.00% per annum of the difference between the aggregate capital commitments of the nonaffiliated limited partners and the invested capital contributed by the nonaffiliated limited partners. After the Investment Period expires, the Partnership shall pay the General Partner a management fee equal to 1.500% per annum of the invested capital contributed by the nonaffiliated limited partners. The Partnership incurred $1,720,041 for the year ended December 31, 2012 and $691,195 (unaudited) in management fees for the period from January 28, 2011 (inception) through December 31, 2011.
The management fee shall be reduced, in any calendar quarter, by the nonaffiliated limited partners’ percentage of any organizational expenses that the Partnership pays in excess of $1,000,000. In the event that the amount of fee reduction exceeds the management fee for such quarterly period, such excess shall be carried forward to reduce the management fee payable in following quarterly periods. There have been no reductions for the years ended December 31, 2012 and 2011 (unaudited).
ORGANIZATION EXPENSE—The Partnerships shall pay or reimburse the General Partner for up to $1 million of organizational expenses incurred on behalf of the Partnerships. Organization expenses in excess of $1 million will reduce the management fee paid to the General Partner. The Partnership incurred organization costs of $409,387 in the year ended December 31, 2012 and $509,613 (unaudited) for the period from January 28, 2011 (inception) through December 31, 2011.
NOTE 5PARTNERS' CAPITAL
CONTRIBUTION—The total committed capital of the Partnership is $156,578,947 as of December 31, 2012 of which $131,347,622 or 83.89% has been called, and $118,421,053 (unaudited) as of December 31, 2011 of which $63,877,158 (unaudited) or 53.94% (unaudited) has been called.
The General Partner is authorized to call additional capital in its sole discretion when additional capital is required to acquire investments, provide working capital, establish reserves, or pay expenses, costs, losses, or liabilities of the Partnership. However, only nonaffiliated limited partners are required to fund management fees or excess organization costs as described above. No limited partner shall be required to make any additional capital contributions in excess of its capital commitment. Any portion of a limited partner's capital commitment that has not been called by the General Partner within the period ending three years from the effective date of May 13, 2011(the Investment Period) may not be drawn to fund new commitments for investments. However, the partners shall remain obligated to make capital contributions throughout the duration of the Partnership in order to fund commitments for new investments in existence at the end of the Investment Period, to pay for management fees and other partnership expenses, to fund requirements of existing investments in an aggregate amount not to exceed 15% of the aggregate commitments, or to pay continuing obligations of the Partnership under any line of credit or permitted indebtedness.
The General Partner may cause the Partnership to return to the partners any portion of a capital contribution that is not invested in an investment or used to pay partnership expenses, that is a contribution for bridge financing that is recouped by the Partnership within twelve months, or is invested in a portion of an investment sold to either an executive fund or related parallel fund. All such returned capital contributions shall be returned to the partners in proportion to the cash contribution made by each partner and shall be treated as not having been called or funded.
DISTRIBUTIONS—Distributions of net cash flow shall initially be made to the partners based on the percentage of their aggregate investment contributions to the aggregate investment contributions made by all partners. The initial amount apportioned to the limited partners shall be distributed to the limited partners and the Special Limited Partner as follows:
(i) First, 100% to limited partners until the limited partners have received cumulative distributions equal to the sum of their aggregate contributions for investments and partnership costs;
(ii) Second, 100% to limited partners until the unpaid preferred return of ten percent (10%), compounded annually, due to the limited partners is reduced to zero,
(iii) Third, 50% to the Special Limited Partner and 50% to the limited partners to the extent necessary so that the aggregate distributions to the Special Limited Partner equal 20% of the cumulative amount of distributions made to limited partners pursuant to (ii) and (iv), and
(iv) Thereafter, 20% to the Special Limited partner and 80% to the limited partners.


51

Table of Contents
KENNEDY WILSON REAL ESTATE FUND IV, L.P.
Notes to Combined Financial Statements
December 31, 2012 and 2011 (Unaudited)


Notwithstanding the above, the General Partner shall have authority to make distributions to the Special Limited Partner in an amount equal to the tax liability on its carried interest. Such distributions shall be treated as advances of distributions to the Special Limited Partner and shall reduce future distributions due to the Special Limited Partner.
ALLOCATION OF PARTNERSHIP INCOME AND LOSSES—The allocation of Partnership income and loss will generally follow the allocation of distributions.
NOTE 6FINANCIAL HIGHLIGHTS
The Internal Rate of Return (IRR) of the limited partners of the Partnership, net of all fees and profit allocations to the Special Limited Partner, is 11.16% at December 31, 2012 and 3.47% (unaudited) from inception through December 31, 2011.
The IRR was computed based on the actual dates of the cash inflows (capital contributions), outflows (cash distributions), and the ending net assets at the end of the period (residual value) of the limited partners' capital accounts as of December 31, 2012.
 
 
2012
 
2011
 
 
 
 
(Unaudited)
Ratio to average limited
     partners’ capital:
 
 
 
 
Net investment income (loss)
 
0.47
%
 
2.98
%
Total expenses
 
3.68
%
 
4.81
%
Incentive allocation
 
1.37
%
 
%
Total expenses and incentive
     allocation
 
5.05
%
 
4.81
%
The net investment income and total expense ratios (including incentive allocation) are calculated for the limited partners taken as a whole. The computation of such ratios, based on the amount of net investment income, expenses, and incentive allocation assessed to an individual investor, may vary from these ratios based on the timing of capital transactions. The above ratios are computed based upon the weighted average limited partners' capital of the Partnerships as measured at the end of each monthly accounting period for the year ended December 31, 2012.
NOTE 7SUBSEQUENT EVENTS
On January 1, 2013, the Partnership Agreement was amended and restated to extend the subscription period from eighteen months after the original effective date of May 13, 2011 to March 31, 2013.
Management has evaluated all other subsequent events through March 28, 2013 the date that the financial statements are available for issuance.




52

    




Independent Auditors' Report
The Members
Bay Area Smart Growth Fund II, LLC:

We have audited the accompanying financial statements of Bay Area Smart Growth Fund II, LLC which comprise the balance sheets as of December 31, 2012 and 2011, and the related statements of operations, members' equity, and cash flows for each of the years in the two-year period then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Bay Area Smart Growth Fund II, LLC as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period then ended, in accordance with U.S. generally accepted accounting principles.
The accompanying statements of operations, members' equity, and cash flows for the year ended December 31, 2010 were not audited by us, and accordingly, we do not express an opinion on them.



/s/ KPMG LLP

Dallas, Texas
March 21, 2013


53

    

BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Balance Sheets

 
 
December 31,
 
 
2012
 
2011
 
 
 
 
 
Assets
 
 
 
 
Investments in unconsolidated real estate entities (note 3)
 
$
21,445,083

 
$
20,814,601

Cash and cash equivalents
 
133,144

 
18,803

Accounts receivable
 
5,148

 

Note receivable from affiliate (note 4)
 

 
1,209,428

Prepaid expenses and other assets
 
5,740

 
172,996

Total assets
 
$
21,589,115

 
$
22,215,828

Liabilities and members' equity
 
 
 
 
Liabilities
 
 
 
 
Accrued expenses (note 4)
 
$
419,296

 
$

Total liabilities
 
419,296

 

Commitments and contingencies (note 5)
 
 
 
 
Members' equity
 
21,169,819

 
22,215,828

Total liabilities and members' equity
 
$
21,589,115

 
$
22,215,828

The accompanying notes are an integral part of these consolidated financial statements.


54

    

BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Statements of Operations

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
(Unaudited)
Revenues:
 
 
 
 
 
 
Interest income
 
$
57,940

 
$

 
$

Total revenues
 
57,940

 

 

Expenses:
 
 
 
 
 
 
General,administrative and other
 
121,577

 
106,667

 
119,170

Management fees (note 4)
 
667,179

 
674,470

 
656,242

Interest expense (note 4)
 

 
57,386

 
52,276

Total expenses
 
788,756

 
838,523

 
827,688

Equity in loss from investments in unconsolidated real estate entities
(note 3)
 
(315,193
)
 
(604,819
)
 
(404,058
)
Net realized loss on disposition of investment in unconsolidated real estate
   entity (note 3)
 

 
(2,359,686
)
 

Net loss
 
$
(1,046,009
)
 
$
(3,803,028
)
 
$
(1,231,746
)
The accompanying notes are an integral part of these consolidated financial statements.




55

    

BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Statements of Members' Equity

 
 
Managing Member
 
Nonmanaging Members
 
Special Member
 
Total
Balance, January 1, 2010 (unaudited)
 
$
1,362,530

 
$
25,888,072

 
$

 
$
27,250,602

Net loss (unaudited)
 
(61,587
)
 
(1,170,159
)
 

 
(1,231,746
)
Balance, December 31, 2010 (unaudited)
 
1,300,943

 
24,717,913

 

 
26,018,856

Net loss
 
(190,152
)
 
(3,612,876
)
 

 
(3,803,028
)
Balance, December 31, 2011
 
1,110,791

 
21,105,037

 

 
22,215,828

Transfer of nonmanaging member interests to
managing member (note 1)
 
10,508,731

 
(10,508,731
)
 

 

Net loss
 
(76,797
)
 
(969,212
)
 

 
(1,046,009
)
Balance, December 31, 2012
 
$
11,542,725

 
$
9,627,094

 
$

 
$
21,169,819

The accompanying notes are an integral part of these consolidated financial statements.



56

    

BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Statements of Cash Flows

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
$
(1,046,009
)
 
$
(3,803,028
)
 
$
(1,231,746
)
Adjustments to reconcile net loss to net cash used in
     operating activities:
 
 
 
 
 
 
Realized loss on disposition of investment in unconsolidated
   real estate entity
 

 
2,359,686

 

Equity in loss from investments in unconsolidated real
    estate entities
 
315,193

 
604,819

 
404,058

Change in assets and liabilities:
 
 
 
 
 
 
Accounts receivable
 
(5,148
)
 

 

Prepaid expenses and other assets
 
167,256

 
(157,871
)
 
3,167

Accrued expenses
 
419,296

 
(1,043,930
)
 
657,267

Net cash flow used in operating activities
 
(149,412
)
 
(2,040,324
)
 
(167,254
)
Cash flows from investing activities:
 
 
 
 
 
 
Advances under note receivable from affiliate
 

 
(1,209,428
)
 

Repayment of note receivable from affiliate
 
1,209,428

 

 

Contributions to unconsolidated real estate entities
 
(1,203,294
)
 
(2,783,867
)
 
(780,524
)
Distributions from unconsolidated real estate entities
 
257,619

 

 

Proceeds from disposition of investment in unconsolidated real
   estate entity
 

 
7,000,000

 

Net cash flow provided by (used in) investing activities
 
263,753

 
3,006,705

 
(780,524
)
Cash flow from financing activities:
 
 
 
 
 
 
Proceeds from note payable
 

 

 
947,678

Repayments of note payable
 

 
(947,678
)
 

Net cash flow provided by (used in) financing activities
 

 
(947,678
)
 
947,678

Net increase (decrease) in cash and cash equivalents
 
114,341

 
18,703

 
(100
)
Cash and cash equivalents, beginning of year
 
18,803

 
100

 
200

Cash and cash equivalents, end of year
 
$
133,144

 
$
18,803

 
$
100

Supplemental disclosure of noncash financing activities:
 
 
 
 
 
 
Cash paid for interest
 
$

 
$
109,662

 
$

The accompanying notes are an integral part of these consolidated financial statements.



57


Table of Contents        
BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2012, 2011, and 2010 (Unaudited)

NOTE 1ORGANIZATION
Bay Area Smart Growth Fund II, LLC (the Company) was formed by and among KW BASGF II Manager, LLC, a Delaware limited liability company (Managing Member); Pacific National Bank, Far East National Bank, First Bank, Union Bank, United Commercial Bank, US Bank National Association, Washington Mutual Community Development, Inc. and Mechanics Bank (collectively, the Nonmanaging Members); and Bay Area Council, a California nonprofit corporation (Special Member); collectively, the Members. The Company was formed upon the filing of the Company's Certificate of Formation in the office of the Secretary of State of the State of Delaware on February 5, 2007. The term of the Company initially extends to August 31, 2016 and can be extended to facilitate the realization of investments.
The Company was formed to invest in retail, office, commercial and industrial projects, and in multi-family housing projects. The purposes of the Company are to achieve double bottom line fund returns (i.e., produce a risk-adjusted market rate of return for members while generating positive economic, social and environmental benefits for the neighborhoods that are within the San Francisco Bay Area region, the Double Bottom Line).
The Managing Member of the Company is an affiliate of Kennedy-Wilson, Inc. (KWI). It is anticipated that the Company will form and be the sole member of separate limited liability companies to purchase real estate interests.
Cumulative capital contributions and commitments were as follows as of December 31, 2012 and 2011:
 
 
2012
 
2011
 
 
 
 
 
KW BASGF II Manager, LLC
 
$
14,312,483

 
$
1,312,483

FDIC as Receiver for Pacific National Bank
 

 
3,000,000

Far East National Bank
 
3,000,000

 
3,000,000

First Bank
 
1,000,000

 
1,000,000

Union Bank
 
2,624,967

 
2,624,967

East West Bank (formerly United Commercial Bank)
 
3,000,000

 
3,000,000

US Bank National Association
 
1,312,221

 
1,312,221

JP Morgan Chase (formerly Washington Mutual Community
Development, Inc.)
 

 
10,000,000

Mechanics Bank
 
1,000,000

 
1,000,000

 
 
$
26,249,671

 
$
26,249,671

During 2010, the original members, United Commercial Bank and Pacific National Bank, were taken over by East West Bank and US Bank, respectively. Due to an agreement between US Bank and FDIC, Pacific National Bank's investment in the Company was transferred to FDIC. During 2012, the interests of FDIC as Receiver for Pacific National Bank and JP Morgan Chase (formerly Washington Mutual Community Development, Inc.) were transferred to KW BASG II Manager, LLC.
Distributions of investment proceeds to the Members are calculated and made with respect to each investment made by the Company generally as follows:
a) First to the Members pro rata in proportion to, and to the extent of, the amount necessary so that each Member has received on a cumulative basis an amount equal to 100% of such Members invested capital with respect to such investment.
b) Then, to the Members pro rata in proportion to and to the extent of the amount necessary so that each such Member has received on a cumulative basis an amount equal to a preferred rate of return on the Member's Capital with respect to such investment at the rate of ten percent (10%) per annum compounded annually.
c) Then, pari passu 79% to the Managing Member, 8.316% to the Special Member, and 12.684% to Members in proportion to capital contributions until such time as the Managing Member has received 19% of the amounts distributed to the Members pursuant to paragraph (b) above and this paragraph (c), and the Special Member has received 2% of the amounts distributed to the Members pursuant to paragraph (b) above and this paragraph (c).
d) Thereafter, pari passu 79% to all Members in proportion to capital contributions, 19% to the Managing Member, and 2% to the Special Member.

58


Table of Contents        
BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2012, 2011, and 2010 (Unaudited)

Any other cash or other property received by the Company shall be allocated among, and distributed to, the Members in a manner determined by the Managing Member to be fair and equitable to the Members and as nearly as practicable to the provisions above.
The Members have agreed to allocate income and loss for financial reporting purposes in a manner which they believe reflects the Members' respective economic interests in the total reported Members' capital of the Company as of and for each year ended December 31.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES—Preparing the Company's financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION—The Company consolidates entities in which it holds a greater than 50% voting interest, or when certain conditions are met for variable interest entities. The Company has no involvement with variable interest entities. The Company accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.
ORGANIZATION OF LIMITED LIABILITY COMPANIES—The limited liability companies (LLCs) within the accompanying financial statements will continue in existence until dissolved in accordance with the provisions of their operating agreements and are funded through the equity contributions of the members. As LLCs, except as may otherwise be provided under applicable law, no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual companies. The members are not obligated to restore capital deficits.
INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES—In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 323, Investment —Equity Method and Joint Ventures, unconsolidated equity method investments are initially recorded at cost and subsequently are adjusted for the Company's share of the venture's earnings or losses and cash distributions.
In accordance with the guidance, the allocation of profit and losses should be analyzed to determine how an increase or decrease in net assets (determined in conformity with GAAP) will affect cash payments to the investor over the life of the entity and on its liquidation. Because certain agreements contain preferences with regard to cash flows from operations, capital events and/or liquidation, the Company reflects its share of profits and losses by determining the difference between its “claim on the investee's book value” at the end and the beginning of the period. This claim is calculated as the amount that the Company would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to creditors and investors in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value method.
Costs incurred in connection with the acquisition of investments in unconsolidated real estate entities are capitalized as part of the Company's basis in the investments in the entities. The Company amortizes any excess of the carrying value of its investments over the book value of the underlying equity over the estimated useful lives of the underlying operating property, which represents the assets to which the excess is most clearly related.
On a periodic basis, the Company assesses whether there are any indicators that the value of its investments may be impaired. An investment is impaired only if management's estimate of the value of the investment is less than the carrying value of the investments, and such decline in value is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment. The Company's estimates of estimated fair value for each investment are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates and operating costs of the property. As these factors are difficult to predict and are subject to future events that may alter these assumptions, the values estimated by the Company in its impairment analysis may not be realized. During the year ended December 31, 2011, the Company recognized a loss on the transfer of a portion of its interest in the Marina Shores and Marina Cove investment of $2,359,686 (see note 3). As of December 31, 2012 and 2011, the Company determined there was no impairment related to the investments in unconsolidated real estate entities.
CASH AND CASH EQUIVALENTS—Cash and cash equivalents include highly liquid investments purchased with a maturity of three months or less. Periodically, the Company maintains cash balances in various bank accounts in excess of federally insured limits. To date, no losses have been experienced related to such amounts. The Company places cash with quality financial institutions and does not believe there is a significant concentration of credit risk.

59


Table of Contents        
BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2012, 2011, and 2010 (Unaudited)

INCOME TAX MATTERS—As a limited liability company, the members elected for the Company to be a pass‑through entity for income tax purposes; therefore, the Company's taxable income or loss is allocated to members in accordance with their respective ownership, and no provision or liability for income taxes has been included in the financial statements.
Management has evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements in order to comply with the provisions of this guidance. The Company is not subject to income tax examinations by U.S. federal, state or local tax authorities for years before 2009.
SUBSEQUENT EVENTS—In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 21, 2013, and determined there are no other items to disclose.
NOTE 3INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES
During 2008, the Company acquired a member's interest in the following unconsolidated real estate entities: 300 California Partners, LLC (300 California) and Bay Fund Opportunity, LLC (Marina Shores and Marina Cove). The Company acquired its interests in these entities in May 2008 and June 2008, respectively.
300 California is a venture between the Company and two other members affiliated through common management and a common investor. 300 California owns and leases an office building located in San Francisco, California. 300 California had a mortgage note payable that had a balance of $37,537,646 (unaudited) at its original maturity date in August 2010 and at December 31, 2010. This loan has been extended to November 14, 2013 with a required $2,000,000 paydown made January 14, 2011 and a required $3,000,000 letter of credit also provided January 14, 2011. The $2,000,000 paydown was funded by a short-term loan from Kennedy-Wilson Holdings, Inc., an affiliate of the Managing Member to the property. This short-term loan was paid off from capital contributions from the investors in 2011. The maturity date of the mortgage note can be extended to November 15, 2014. This extension option requires certain conditions to be satisfied including a loan-to-value ratio of no more than 85%, a debt service coverage ratio equal to or greater than 1.05, and an extension fee equal to 0.25% of the then outstanding unpaid principal balance. Management plans to exercise the option available to extend the maturity date.
Marina Shores and Marina Cove each separately own a multifamily housing complex, both of which are located in Richmond, California, and are in close proximity to one another. Marina Shores and Marina Cove are under common management and ownership. On May 4, 2011, the Company sold 24.07% of its interest in Bay Fund Opportunity, LLC for $7,000,000 to an affiliate of the Managing Member, reducing the Company's interest from 55.83% to 31.76%. The transfer of interest resulted in a realized loss on disposition of $2,359,686, which is shown on the 2011 statement of operations as a realized loss on disposition of investment in unconsolidated real estate entity. Marina Cove and Marina Shores had mortgage notes payable that had total balances of $65,249,799 (unaudited) at December 31, 2010. In December 2, 2011, these loans were extended to June 26, 2013 with a required principal paydown of $6,358,937, which was funded by capital contributions from other investors in Bay Fund Opportunity, LLC. These capital contributions reduced the Company's interest from 31.76% to 25.96%. Management of the Company intends to pay off the existing mortgages with the proceeds of new mortgages in the aggregate principal amount of $48,400,000 and additional capital contributions from the members of the joint venture. If management is unable to obtain new mortgages, management will use additional capital from Kennedy-Wilson, Inc., an affiliate of the Managing Member, to make the required pay downs.
The following presents summarized financial information of the unconsolidated real estate entities as of and for the year ended December 31, 2012:


60


Table of Contents        
BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2012, 2011, and 2010 (Unaudited)

 
 
 
 Marina Cove
 
 
 
 
 
 and
 
 
 
 300 California
 
 Marina Shores
 
 Total
 
 
 
 
 
 
Land and buildings
$
61,789,366

 
$
99,943,650

 
$
161,733,016

Other assets
1,656,197

 
2,393,175

 
4,049,372

Mortgage loans
(35,537,646
)
 
(57,998,348
)
 
(93,535,994
)
Other liabilities
(758,207
)
 
(2,232,209
)
 
(2,990,416
)
      Net assets
$
27,149,710

 
$
42,106,268

 
$
69,255,978

Company's share of net assets
$
10,514,317

 
$
10,930,766

 
$
21,445,083

Operating revenues
$
3,506,476

 
$
8,088,922

 
$
11,595,398

Property operating expenses
(2,696,149
)
 
(6,590,804
)
 
(9,286,953
)
    Rental operations, net
810,327

 
1,498,118

 
2,308,445

Nonoperating expense, net
(25,335
)
 
(288,133
)
 
(313,468
)
Interest expense
(1,311,550
)
 
(1,746,528
)
 
(3,058,078
)
      Net loss
$
(526,558
)
 
$
(536,543
)
 
$
(1,063,101
)
Company's share of net loss
$
(175,906
)
 
$
(139,287
)
 
$
(315,193
)
The following presents summarized financial information of the unconsolidated real estate entities as of and for the year ended December 31, 2011:
 
 
 
 Marina Cove
 
 
 
 
 
 and
 
 
 
 300 California
 
 Marina Shores
 
 Total
 
 
 
 
 
 
Land and buildings
$
61,267,565

 
$
102,111,370

 
$
163,378,935

Other assets
865,877

 
2,522,744

 
3,388,621

Mortgage loans
(35,537,646
)
 
(58,890,863
)
 
(94,428,509
)
Other liabilities
(2,391,450
)
 
(2,275,441
)
 
(4,666,891
)
      Net assets
$
24,204,346

 
$
43,467,810

 
$
67,672,156

Company's share of net assets
$
9,530,359

 
$
11,284,242

 
$
20,814,601

Operating revenues
$
2,056,010

 
$
7,711,417

 
$
9,767,427

Property operating expenses
(2,103,605
)
 
(6,198,017
)
 
(8,301,622
)
    Rental operations, net
(47,595
)
 
1,513,400

 
1,465,805

Nonoperating (loss) income, net
(15,400
)
 
341,195

 
325,795

Interest expense
(1,314,783
)
 
(2,676,208
)
 
(3,990,991
)
      Net loss
$
(1,377,778
)
 
$
(821,613
)
 
$
(2,199,391
)
Company's share of net loss
$
(460,272
)
 
$
(144,547
)
 
$
(604,819
)
The following presents summarized income statement of the unconsolidated real estate entities as of and for the year ended December 31, 2010 (unaudited):

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Table of Contents        
BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2012, 2011, and 2010 (Unaudited)

 
 
 
 Marina Cove
 
 
 
 
 
 and
 
 
 
 300 California
 
 Marina Shores
 
 Total
 
 
 
 
 
 
Operating revenue
$
1,908,236

 
$
7,293,504

 
$
9,201,740

Property operating expenses
(2,275,405
)
 
(6,557,192
)
 
(8,832,597
)
      Rental operations, net
(367,169
)
 
736,312

 
369,143

Nonoperating income, net
858,944

 
306,699

 
1,165,643

Interest expense
(1,759,145
)
 
(3,012,459
)
 
(4,771,604
)
    Net loss
$
(1,267,370
)
 
$
(1,969,448
)
 
$
(3,236,818
)
Company's equity in income (loss) of real estate
$
(423,387
)
 
$
19,329

 
$
(404,058
)
NOTE 4TRANSACTIONS WITH THE MANAGING MEMBER AND AFFILIATES
The limited liability agreement provides for the Managing Member to be paid a fund management fee in advance on the first day of each calendar quarter in the amount of 2% per annum of the aggregate capital commitments for all Members as of such date less aggregate repaid capital of all Members, and for the Special Member to be paid an advisory fee of 0.5% on the same terms. However, the management fee paid to the Managing Member shall not be less than $320,000 per year, and the Special Member fee shall not be less than $80,000 per year if the total fair value of all real property interests held directly or indirectly by the Company is at least $50,000,000; and the management fee paid to the Managing Member shall not be less than $600,000 per year and the Special Member fee shall not be less than $150,000 if the total fair value of all real property interests held directly or indirectly by the Company is at least $100,000,000.
It is contemplated that an affiliate of the Managing Member may perform property management services and/or construction management services for the Company. The compensation and other terms for such services provided shall be at rates and on terms which are no less favorable to the Company than the prevailing market rates and terms for such services obtained on an arm's-length basis in the applicable market area. Affiliates of the Managing Member may also perform development management services for the Company.
During 2012, 2011, and 2010, the Managing Member earned $533,743, $539,576, and $524,994 (unaudited) in fund management fees and the Special Member earned $133,436, $134,894, and $131,248 (unaudited) in advisory fees, respectively. As of December 31, 2012, $319,037, and $100,259 in fund management and advisory fees were due to the Managing Member and the Special Member, respectively, and are reflected in accrued expenses. As of December 31, 2011, $0 and $0 in fund management and advisory fees were due to the Managing Member and the Special Member, respectively.
During 2011, the Company advanced $1,209,428 to KW Property Fund II, L.P. (an affiliate of the Managing Member) in order to fund follow-on investments in 300 California. The amount was subject to a promissory note with a maximum amount of the $1,500,000 bearing interest at a rate of 15% per annum on the principal balance and a maturity date of June 30, 2012. At December 31, 2011, the balance of this note receivable was $1,209,428 and is included in the accompanying balance sheet as note receivable from affiliate. This note was paid off in its entirety during 2012 along with interest in the amount of $57,940, which is included in interest income on the statement of operations.
During 2010, the Company borrowed funds from Kennedy-Wilson Holdings, Inc, an affiliate of the Managing Member in order to fund investment requirements and general and administrative expenses. On November 2, 2010, a promissory note was executed to document these borrowings with a $1,000,000 maximum bearing 10% interest per annum on the funded amount and a maturity date of December 31, 2011. At December 31, 2010, the balance of this note payable was $947,678 (unaudited). This note was paid off in full on May 5, 2011. Interest expense on this note in the amount of $57,386 and $52,276 (unaudited), respectively, is included in the 2011 and 2010 statements of operations as interest expense.
In addition, the Company paid an affiliate of the Managing Member reimbursements for administrative and accounting services in connection with the annual audits. These reimbursements were $7,500 per year for each of the years ended December 31, 2012, 2011, and 2010 (unaudited).



62


Table of Contents        
BAY AREA SMART GROWTH FUND II, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2012, 2011, and 2010 (Unaudited)

NOTE 5COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Currently, the Company does not have any material commitments or contingencies.


63




Independent Auditors' Report
The Members
KW Stadium Gateway Partners, LLC:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of KW Stadium Gateway Partners, LLC and subsidiary, which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations, members' capital, and cash flows for the period from April 9, 2012 (inception) through December 31, 2012, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KW Stadium Gateway Partners, LLC and subsidiary as of December 31, 2012, and the results of their operation and their cash flows for the period from April 9, 2012 (inception) through December 31, 2012 in accordance with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Los Angeles, California
March 29, 2013



64

Table of Contents

KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Consolidated Balance Sheet
December 31, 2012

Assets
 
 
Real estate:
 
 
Land
 
$
13,021,688

Buildings and improvements
 
33,288,998

Total
 
46,310,686

Accumulated depreciation
 
(382,791
)
Real estate, net
 
45,927,895

Cash
 
597,510

Debt service escrows and deposits
 
2,837,075

Deferred leasing costs, net of accumulated amortization of $1,975
 
69,914

Deferred financing fees, net of accumulated amortization of $41,501
 
279,188

Acquired in place lease value, net of accumulated amortization of $1,629,483
 
8,443,517

Acquired intangible for above market leases, net of accumulated amortization of $295,970
 
1,534,030

Deferred rent
 
134,639

Utility deposits
 
107,470

Tenant receivables
 
4,913

Prepaid expenses
 
91,884

Total assets
 
$
60,028,035

Liabilities and members' capital
 
 
Liabilities
 
 
Mortgage loan payable
 
$
53,002,036

Prepaid rent
 
430,565

Tenant deposits
 
99,157

Accounts payable and accrued expenses
 
416,435

Acquired intangible for below market leases, net of accumulated amortization of $96,218
 
498,782

Total liabilities
 
54,446,975

Members' capital
 
5,581,060

Total liabilities and members' capital
 
$
60,028,035

See accompanying notes to consolidated financial statements.



65

Table of Contents

KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Operations
Period from April 9, 2012 (inception) through December 31, 2012

Revenue
 
 
Rental income
 
$
2,799,028

Operating expense recoveries
 
175,471

Other
 
3,620

Total revenue
 
2,978,119

Operating Expenses
 
 
Property taxes
 
310,675

Utilities
 
324,553

Repairs and maintenance
 
353,887

Salaries and wages
 
110,982

Management fees
 
104,101

General and administrative
 
51,938

Insurance
 
68,567

Depreciation
 
382,791

Amortization
 
1,631,458

Interest expense
 
1,334,417

Acquisition-related costs
 
123,690

Total operating expenses
 
4,797,059

Net loss
 
$
(1,818,940
)
See accompanying notes to consolidated financial statements.



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Table of Contents

KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Members' Capital
Period from April 9, 2012 (inception) through December 31, 2012

 
 
 
Capital contributions
 
$
7,400,000

Net loss
 
(1,818,940
)
Members' capital at December 31, 2012
 
$
5,581,060

See accompanying notes to consolidated financial statements.




67

Table of Contents

KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Cash Flows
Period from April 9, 2012 (inception) through December 31, 2012

Cash flows from operating activities:
 
 
Net (loss)
 
$
(1,818,940
)
Adjustments to reconcile net loss to net cash
     used in operating activities:
 
 
Depreciation
 
382,791

Amortization
 
1,631,458

Amortization of deferred financing costs
 
41,501

Amortization of fair value adjustment to mortgage
 
(120,456
)
Adjustment to revenue for above and below market leases
 
199,752

Change in assets and liabilities:
 
 
Deferred rent
 
(134,639
)
Utility deposits
 
(107,470
)
Tenant receivables
 
(4,913
)
Prepaid expenses
 
(91,884
)
Prepaid rent
 
430,565

Tenant deposits
 
99,157

Accounts payable and accrued expenses
 
416,435

Net cash provided by operating activities
 
923,357

Cash flows from investing activities:
 
 
Acquisition of real estate
 
(4,000,000
)
Additions to real estate
 
(496,194
)
Deferred leasing costs
 
(71,889
)
Establishment of debt service escrows and deposits
 
(2,837,075
)
Net cash flow used in investing activities
 
(7,405,158
)
Cash flow from financing activities:
 
 
Contributions from members
 
7,400,000

Payments made for financing costs
 
(320,689
)
Net cash flow provided by financing activities
 
7,079,311

Net increase in cash and cash at the end of the period
 
$
597,510

Supplemental disclosure of cash flow information:
 
 
Cash paid for interest
 
$
1,160,109
















68

Table of Contents

KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Consolidated Statement of Cash Flows (continued)
Period from April 9, 2012 (inception) through December 31, 2012

Supplemental disclosure of noncash investing activities:
 
 
Acquisition of real estate
 
 
Land
 
$
13,019,788

Building and improvements
 
32,794,704

In-place lease value
 
10,073,000

Above market leases
 
1,830,000

Below market leases
 
(595,000
)
Mortgage loan payable assumed
 
(53,122,492
)
 
 
$
4,000,000



See accompanying notes to consolidated financial statements.




69

Table of Contents
KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012

NOTE 1ORGANIZATION
KW Stadium Gateway Partners, LLC (the Company), a Delaware limited liability company, is 50% owned by KW Fund IV - Stadium Gateway, LLC (wholly owned by Kennedy Wilson Real Estate Fund IV, LP) and 50% owned by K-W Properties (Manager and wholly owned by Kennedy-Wilson, Inc.). The Company was formed upon the filing of the Articles of Formation with the Delaware Secretary of State on April 9, 2012. The term of the Company extends until the date that the Company is terminated pursuant to the terms defined in the Company's operating agreement.
The Company owns a 100% interest in KW Stadium Gateway, LLC, which was organized to invest in and fully own the property known as Stadium Gateway (the Property). The Property is an office building totaling approximately 273,000 rentable square feet, located in Anaheim, California.
Initial capital contributions to acquire the Property were $3,450,000 from KW Fund IV - Stadium Gateway, LLC and $3,450,000 from K-W Properties, for a total initial investment of $6,900,000. KW Fund IV-Stadium Gateway, LLC and K-W Properties have made additional capital contributions totaling $500,000.
The Manager may elect from time to time to distribute available cash to the Members in proportion to their percentage interests at the time of distribution. Profit and loss for each fiscal period shall be allocated among the members in proportion to their percentage interests.
The limited liability companies (LLC) will continue in existence until dissolved in accordance with the provisions of their operating agreement and are funded through the equity contributions of their members. As an LLC, except as may otherwise be provided under applicable law, no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual companies. The members are not obligated to restore capital deficits.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION—Rental revenue from tenants is recognized on a straight-line basis over the lease term when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the leased asset.
Tenant recoveries related to the reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, since the Company is generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier, and bears the associated credit risk.
USE OF ESTIMATES—The preparation of the accompanying financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and the reported amounts of income and expenses. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
CASH—Cash includes highly liquid investments purchased with original maturities of three months or less. Periodically, the Company maintains cash balances in various bank accounts in excess of federally insured limits. To date, no losses have been experienced related to such amounts. The Company places cash with quality financial institutions and does not believe there is a significant concentration of credit risk.
REAL ESTATE ASSETS—The fair value of real estate acquired was allocated to the acquired tangible assets, consisting primarily of land and buildings and improvements, and to the identified acquired intangible assets, which comprise in-place leases, above-market leases and below-market leases.
The fair value of real estate was determined by valuing the property as if it were vacant, which was then allocated to land and buildings and improvements, based on management's determination of the relative fair values of these assets. The value of the acquired in-place leases was determined by calculating the present value of the cash flows provided by the leases, net of related incremental expenses over the estimated lease-up period. 
Real estate assets are carried at depreciated cost. Depreciation on buildings and improvements has been provided for in the accompanying financial statements using the straight-line method based on estimated useful lives of 40 years for buildings and improvements. Maintenance and repairs are charged to expense as incurred, and costs of renewals or betterments are capitalized and depreciated at the appropriate rates.

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Table of Contents
KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012

IMPAIRMENT OF LONG-LIVED ASSETS—In accordance with accounting guidance for long-lived assets, the asset or asset group is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indications of impairment exist, the Company will evaluate the project by comparing the carrying amount of the asset or asset group to the estimated future undiscounted cash flows of the project. If impairment exists, an impairment loss will be recognized based on the amount by which the carrying amount exceeds the fair value of the asset or asset group. For the period ended December 31, 2012 there were no impairments recorded.
CONCENTRATION OF RISK—The Company's real estate is located in California. Adverse conditions in the sector or geographic location would likely result in a material decline in the value of the Company's investment.
DEFERRED FINANCING COSTS, NET—Financing costs incurred in obtaining long-term debt are capitalized and amortized over the term of the related debt on a straight-line basis.
INCOME TAXES—As a limited liability company, the members elected for the Company to be a pass-through entity for income tax purposes; therefore, the Company's taxable income or loss is allocated to members in accordance with their respective ownership, and no provision or liability for income taxes has been included in the financial statements.
Management has evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements in order to comply with the provisions of this guidance.
FAIR VALUE MEASUREMENTS—The Company follows the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. ASC Topic 820 defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date.
A three-level hierarchy was established for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The three hierarchy levels are defined as follows:
Level 1 - Valuations based on unadjusted quoted market prices in active markets for identical securities.
Level 2 - Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets and
quoted prices in markets that are not active.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and
involve management judgment.
For certain financial instruments, including cash, tenant receivables, escrows and deposits, prepaid expenses, accounts payable and accrued expenses, prepaid rent, and tenant deposits, recorded amounts approximate fair value due to the relatively short-term nature of these instruments.
Other than the accounting treatment for the assets and liabilities acquired upon acquisition of the Property, as described in notes 2 and 3, the Company has no assets or liabilities measured at fair value on a recurring or nonrecurring basis in the financial statements as of December 31, 2012.
NOTE 3MORTGAGES PAYABLE
Upon acquisition of the Property, the Company assumed a mortgage loan payable to a third-party financial institution, which is secured by the Property. The outstanding principal due for the mortgage totaled $52,000,000 as of December 31, 2012. The mortgage bears a fixed interest rate of 5.66%, matures on February 1, 2016 and requires monthly interest payments through maturity. Aggregate principal payments of $52,000,000 under the mortgage payable are due in 2016.
The Company recorded the mortgage at $53,122,492 upon assumption, representing the fair value of the obligation at that time. The fair value was estimated based on the quoted market prices for the same or similar issues for debt of the same remaining maturities. Based on its nature, the fair value of long-term debts was determined using Level 2 inputs, as defined in note 2(i). The fair value amount does not necessarily represent the amount that would be required to satisfy the debt obligation.
The difference between the carrying value of the debt and the fair value upon assumption is being amortized through maturity. The carrying value of the liability as of December 31, 2012 is $53,002,036.
NOTE 4MINIMUM FUTURE LEASE RENTALS
There are eight lease agreements in place with tenants to lease space at the Property. As of December 31, 2012, the minimum future cash rents receivable under non-cancellable operating leases in each of the next five years and thereafter are as follows:

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Table of Contents
KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012

2013
 
$
4,502,154

2014
 
3,595,143

2015
 
2,927,770

2016
 
2,865,719

2017
 
2,030,924

Thereafter
 
1,331,972

 
 
$
17,253,682

NOTE 5IN-PLACE LEASE VALUATION
The value of the acquired in-place leases, above-market lease asset, and below-market lease liability was $10,073,000, $1,830,000, and $595,000, respectively, at the date of acquisition.
The value of the net acquired in-place leases is amortized over 34 months, consistent with the remaining term of the in-place leases. For the year ended December 31, 2012, the amortization expense related to in-place leases was $1,629,483. Additionally, the net amortization expense in the amount of $199,752 associated with the above-market lease asset and the below-market lease liability is recorded as a component of rental revenues in the consolidated statement of operations.
As of December 31, 2012, the annual amortization expense of in place-leases, above-market leases and below-market leases for each of the next five years and thereafter are as follows:
 
 
IPLV
 
Above Market Leases
 
Below Market Leases
2013
 
$
3,555,176

 
$
645,882

 
$
(210,000
)
2014
 
3,555,176

 
645,882

 
(210,000
)
2015
 
1,333,165

 
242,266

 
(78,782
)
2016
 

 

 

2017
 

 

 

Thereafter
 

 

 

 
 
$
8,443,517

 
$
1,534,030

 
$
(498,782
)

NOTE 6TRANSACTIONS WITH THE AFFILIATES
Affiliates receive leasing commissions, a management fee, a construction management fee, reimbursements for certain billed management and administrative related costs.
Fees earned and reimbursements received by Kennedy-Wilson Holdings, Inc. and its affiliates were the following for the year ended December 31, 2012:
Management fees
 
$
104,101

Accounting fees
 
5,646

Salary reimbursement
 
5,733

Construction management
 
16,946

 
 
$
132,426

As of December 31, 2012, the outstanding balance due to affiliates was $14,245 and presented as accounts payable and accrued expenses in the consolidated balance sheet.
NOTE 7COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred

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Table of Contents
KW STADIUM GATEWAY PARTNERS, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012

in connection with loss contingencies are expensed as incurred. Currently, the Company does not have any material commitments or contingencies.
NOTE 8SUBSEQUENT EVENTS
In preparing these financials, the Company has evaluated events and transactions for potential recognition and disclosure through March 29, 2013, the date at which the financial statements were available to be issued, and determined there are no other items to disclose.



73

    



Report of Independent Registered Public Accountant
The Partners
KWF Real Estate Venture VI, L.P.:


Report on the Financial Statements
We have audited the accompanying consolidated balance sheets of KWF Real Estate Venture VI, L.P. and subsidiary (the Partnership) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), partners' capital, and cash flows for the year ended December 31, 2012 and the period from October 5, 2011 (inception) through December 31, 2011. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KWF Real Estate Venture VI, L.P. and subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the year ended December 31, 2012 and the period from October 5, 2011 (inception) through December 31, 2011 in accordance with U.S. generally accepted accounting principles.


/s/ KPMG LLP

Los Angeles, California
March 27, 2013


74

    

KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Consolidated Balance Sheets

 
 
December 31,
 
 
2012
 
2011
Assets:
 
 
 
 
Investment in loan pool participation (note 3)
 
$
137,119,342

 
$
344,831,165

Cash
 
83,442

 
343,538

Escrow Deposits
 
391,032

 
98,229

Total assets
 
$
137,593,816

 
$
345,272,932

Liabilities and Partners' Capital
 
 
 
 
Liabilities:
 
 
 
 
Accounts payable
 
$
7,920

 
$
1,086

Accrued interest payable
 
34,377

 
376,093

Note payable (note 4)
 
25,782,348

 
225,656,250

Total liabilities
 
25,824,645

 
226,033,429

Commitments and contingencies (note 5)
 
 
 
 
Partners' capital:
 
 
 
 
General Partner's capital
 
50,999,674

 
61,199,710

Limited Partners' capital
 
50,999,674

 
61,199,710

Accumulated surplus
 
8,621,978

 
511,098

Accumulated other comprehensive income (loss)
 
1,147,845

 
(3,671,015
)
Total partners' capital
 
111,769,171

 
119,239,503

Total liabilities and partners' capital
 
$
137,593,816

 
$
345,272,932

See accompanying notes to consolidated financial statements



75

    

KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Consolidated Statements of Operations and Comprehensive Income (Loss)

 
 
Year ended December 31,
 
Period from October 5 (inception) through December 31,
 
 
2012
 
2011
Revenues:
 
 
 
 
Participation interest income
 
$
19,782,000

 
$
3,660,000

Expenses:
 

 
 
Interest expense
 
11,444,083

 
3,147,666

Administrative costs
 
227,037

 
1,236

Total expenses
 
11,671,120

 
3,148,902

Net Income
 
8,110,880

 
511,098

Other comprehensive income - foreign currency translation gain (loss)
 
4,818,860

 
(3,671,015
)
Total comprehensive income (loss)
 
$
12,929,740

 
$
(3,159,917
)
See accompanying notes to consolidated financial statements



76

    

KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Consolidated Statement of Partners' Capital

 
 
General Partner
 
Limited Partners
 
Total
Balance at October 5, 2011 (inception)
 
$

 
$

 
$

Contributions
 
82,851,073

 
84,975,731

 
167,826,804

Distributions
 
(21,651,363
)
 
(23,776,021
)
 
(45,427,384
)
Net income
 
255,549

 
255,549

 
511,098

Foreign currency translation loss
 
(1,835,507
)
 
(1,835,508
)
 
(3,671,015
)
Balance at December 31, 2011
 
59,619,752

 
59,619,751

 
119,239,503

Distributions
 
(10,200,036
)
 
(10,200,036
)
 
(20,400,072
)
Net income
 
4,055,440

 
4,055,440

 
8,110,880

Foreign currency translation gain
 
2,409,430

 
2,409,430

 
4,818,860

Balance at December 31, 2012
 
$
55,884,586

 
$
55,884,585

 
$
111,769,171


See accompanying notes to consolidated financial statements



77

    

KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Consolidated Statements of Cash Flows

 
 
Year ended December 31,
 
Period from October 5 (inception) through December 31,
 
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
Net income
 
$
8,110,880

 
$
511,098

Adjustments to reconcile net income to net cash used in operating
     activities:
 
 
 
 
Change in accretion on participation interest
 
(19,782,000
)
 
(3,660,000
)
Changes in operating assets and liabilities:
 
 
 
 
Escrow deposits
 
(289,040
)
 
(99,780
)
Accrued interest payable
 
(341,716
)
 
376,093

Accounts payable
 
6,834

 
1,086

Net cash used in operating activities
 
(12,295,042
)
 
(2,871,503
)
Cash flows from investing activities:
 
 
 
 
Investment in participation interest
 

 
(445,692,311
)
Distributions from investment in participation interest
 
241,300,680

 
93,370,531

Net cash provided by (used in) investing activities
 
241,300,680

 
(352,321,780
)
Cash flows from financing activities:
 
 
 
 
Proceeds from note payable
 

 
323,713,708

Repayment of note payable
 
(209,241,405
)
 
(90,558,536
)
Contributions
 

 
167,826,804

Distributions
 
(20,400,072
)
 
(45,427,384
)
Net cash provided by (used in) financing activities
 
(229,641,477
)
 
355,554,592

Effect of currency exchange rates on cash
 
375,743

 
(17,771
)
Net increase (decrease) in cash
 
(260,096
)
 
343,538

Cash, beginning of period
 
343,538

 

Cash, end of period
 
$
83,442

 
$
343,538

Supplemental disclosure of noncash financing activity:
 
 
 
 
Cash paid for interest
 
$
11,841,850

 
$
2,771,835


See accompanying notes to consolidated financial statements



78

Table of Contents
KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2012 and 2011


NOTE 1ORGANIZATION
KWF Real Estate Venture VI, L.P., a Delaware limited partnership (the Partnership) was formed by and between KWF Manager VI, LLC, a Delaware limited liability company as general partner (the General Partner); and TIG Insurance Company, a California corporation, and Odyssey Reinsurance Corporation, a Connecticut corporation, as limited partners (the Limited Partners). The Partnership was formed upon the filing of the Certificate of Limited Partnership in the office of the Secretary of State of the State of Delaware on October 5, 2011. The term of the Partnership extends until the date all Partnership investments have been liquidated, the Partnership is dissolved, or at any time there are no Limited Partners.
The business of the Partnership shall be to acquire, hold, manage, and dispose of investments, with a focus on acquiring participation interests in the pool of loans, swaps, and other transactions held by or in favor of KW UK Loan Partners Limited, an Irish Section 110 Company (the 110 Company). Such investments shall be made through a wholly owned subsidiary of the Partnership, KW EU Loan Partners I, LLC, a Delaware limited liability company (the Partnership Subsidiary). Investments shall be made pursuant to the Amended and Restated Participation Agreement dated December 5, 2011 (Participation Agreement) by and among the 110 Company; Deutsche Bank AG, London Branch; JP Morgan Chase Bank, N.A.; the Partnership Subsidiary; Odyssey Reinsurance Company, a Connecticut corporation; KW Loan Partners V, LLC, a Delaware limited liability company; and Burlington Loan Management Limited, a limited liability company incorporated in the Republic of Ireland. This Participation Agreement replaced an earlier agreement dated as of October 21, 2011.
In the event that (i) the Partnership Subsidiary receives a future advance notice pursuant to the Participation Agreement, (ii) a buy/sell procedure is initiated pursuant to the Participation Agreement, or (iii) the General Partner makes a request for capital contributions to pay partnership expenses, then the General Partner shall notify the Limited Partners of such event, and the General and Limited Partners shall make payments of additional capital in immediately available funds within five (5) business days. However, the General Partner may not make a request for capital contributions from the Limited Partners to the extent that capital contributions made by the Limited Partners exceed $75,000,000 in the aggregate, unless the General Partner has obtained the prior written consent of the Limited Partners. Initial capital contributions made on October 14, 2011, the date of the Limited Partnership Agreement of KWF Real Estate Venture VI, LP, were $67,500,000 by KWF Manager VI, LLC, $36,500,000 by TIG Insurance Company, and $31,000,000 by Odyssey Reinsurance Corporation. The combined capital contributions net of distributions of the Limited Partners as of December 31, 2012 and 2011 were $50,999,674 and $61,199,710, respectively.
The Partnership invested in a 25% participation interest in loans held by the 110 Company.
Profit and loss for each fiscal period shall generally be allocated among the partners in a manner to cause their capital account balances to equal the amounts of distributions that would be made if the Partnership were dissolved, its assets sold for their respective carrying values, and its liabilities satisfied in accordance with their terms, and all remaining amounts distributed. Distributions shall be made on a pari passu basis to the General Partner and the Limited Partners in accordance with their respective percentage interests.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF CONSOLIDATION—The consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated in the consolidation.
INVESTMENT IN LOAN POOL PARTICIPATION—Participation interest income from the investment in the loan pool participation is recognized on a level yield basis under the provisions of Loans and Debt Securities Acquired with Deteriorated Credit Quality Accounting Standards Codification (ASC) Subtopic 310-30, where a level yield model is utilized to determine a yield rate which, based upon projected future cash flows, accretes interest income over the estimated holding period. When the future cash flows of a note cannot reasonably be estimated, cash payments are applied to the cost basis of the note until it is fully recovered before any interest income is recognized.
In accordance with this guidance, projected future cash flows to be received by the Partnership through the Partnership Subsidiary are accreted on a level yield basis using the investment made to capitalize KW EU Loan Partners I, LLC as the initial net investment amount. On a periodic basis, the Partnership will reevaluate the projected future cash flows to be received by the Partnership and make adjustments to the level yield accretion as necessary.


79

Table of Contents
KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2012 and 2011


OPERATING CURRENCY—The functional currency of the Partnership is the U.S. dollar. The functional currency of the 110 Company is the British pound sterling. The financial transactions related to the participation interests held by the 110 Company are translated into U.S. dollars by translating assets and liabilities at the closing exchange rate on the balance sheet date with translation adjustments reported directly in partners' capital and income statement items at average exchange rates during the year. Individually material income and expense transactions are translated using the closing exchange rate in effect on the date the transaction is recognized.
INCOME TAXES—As a limited partnership, the Partnership is a pass-through entity for income tax purposes; therefore, the Partnership's taxable income or loss is allocated to partners in accordance with their respective ownership, and no provision or liability for income taxes has been included in the consolidated financial statements.
Management has evaluated the Partnership's tax positions and concluded that the Partnership has taken no uncertain tax positions that require adjustment to the consolidated financial statements in order to comply with the provisions of ASC 740-10 Accounting for Income Taxes.
CASH—Periodically throughout the period from October 5, 2011 (inception) through December 31, 2012, balances in various bank accounts exceeded federally insured limits. To date, no losses have been experienced related to such amounts. The Partnership places cash with quality financial institutions and does not believe there is a significant concentration of credit risk.
ESCROW DEPOSITS—An escrow deposit account is maintained pursuant to the Second Amended and Restated Loan Agreement dated December 22, 2011 with CBRE Loan Servicing Limited as administrative agent (Loan Agreement) for the loan payable that is funded from remittances from the loan participation in excess of current debt service requirements until such time that this reserve reaches a balance equal to one quarterly period's debt service.
NOTE 3INVESTMENT IN LOAN POOL PARTICIPATION
During October 2011 (Tranche #1) and December 2011 (Tranche #2), the Partnership acquired a 25% participation interest in a pool of 24 loans from a European bank (the Pool). The loans were acquired for approximately £1.11 billion or $1.75 billion and had an unpaid principal balance of approximately £1.31 billion or $2.07 billion. The collateral upon inception was geographically located as follows: London, England (62%), the Midlands region of England (9%), Manchester, England (6%), the South East region of England (5%), and the North region (4%). The remaining 14% of the loans were located in other areas of England, Scotland, Wales, and Northern Ireland. The collateral was comprised of 39% office buildings, 26% retail properties, 25% multifamily properties, 9% industrial properties, and 1% land. On December 22, 2011, six of the loans were sold for £236,870,666 or $371,515,059 and the proceeds distributed to the participants. The Partnership's share of the proceeds from the sale was £59,217,667 or $92,878,765. During the year ended December 31, 2012, nine loans were fully resolved, resulting in total cash collections of £379,588,346 or $601,533,652. As of December 31, 2012, the Pool, which has a projected final resolution date of December 2014, has nine loans remaining with total projected recoveries of £454,832,027 or $734,690,173.
In accordance with the Participation Agreement, on each quarterly distribution date, available remittances from the loans in the loan pool are distributed as follows:
(a)Pro rata to the participants, an amount equal to the Loan Cash Flow Allocation described below until the Partnership Subsidiary has been distributed sufficient funds to meet its current obligations with respect to the interest, principal, and reserve requirements pursuant to the Loan Agreement described below;
(b)To pay base management fees and acquisition fees pursuant to the Asset Management Agreement described below
(c)To the reserve account to bring it to a targeted quarterly balance
(d)Pro rata to the participants until each participant has received aggregate payments to achieve the greater of a ten percent (10%) internal rate of return or one hundred fifteen percent (115%) of its Imputed Participation Amount, as defined in the participation agreement and was 26.6538% of its initial participation principal balance.
(e)Until such time as each participant has received a twenty percent (20%) internal rate of return, eighty percent (80%) pro rata to the participants, and twenty percent (20%) to the Asset Manager, Kennedy Wilson Ireland Limited, an affiliate of the General Partner, and
(f)Thereafter, seventy percent (70%) pro rata to the participants and thirty (30%) percent to the Asset Manager, Kennedy Wilson Ireland Limited, an affiliate of the General Partner
Pursuant to the Amended and Restated Asset Management Agreement dated December 5, 2011 by and among the 110 Company, the loan participants and Kennedy Wilson Ireland Limited (Asset Manager), an affiliate of the General Partner, the loan pool shall pay the Asset Manager a base management fee in an amount equal to 0.614% per annum of the Imputed Participation

80

Table of Contents
KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2012 and 2011


Amount, as defined in the participation agreement. This base management fee is paid quarterly from remittances from the loan portfolio to the extent that such remittances are sufficient, with any unpaid fees deferred until the next remittance date.
The loan pool shall was also required to pay the Asset Manager an acquisition fee of 1% of the cost of the participation interests acquired of which 50% is payable at the time of the acquisition, 25% is payable on the first remittance date following the first anniversary of the closing, and the remaining 25% is payable on the first remittance date following the full repayment of the Partnership Subsidiary's loan payable. These fees are paid by the loan pool and are not the responsibility of the Partnership or its subsidiary.
NOTE 4NOTE PAYABLE
In order to finance the loan pool participation investment, the Partnership Subsidiary entered into the Loan Agreement, which replaced an initial agreement dated October 21, 2011 with Deutsche Bank AG London Branch and a first amendment dated December 5, 2011 also with Deutsche Bank AG London Branch. The Partnership Subsidiary borrowed £159,993,968 or $255,078,384 to acquire Tranche #1 and £43,725,122 or $68,635,324 to acquire Tranche #2. On December 22, 2011, upon sale of the six loans in the portfolio, £57,691,620 or $90,483,538 was paid down on the loan, leaving a balance of £146,027,470 or $225,656,250 at December 31, 2011. During 2012, in accordance with quarterly distributions of remittances described below, the loan was paid down by £130,066,133 or $199,873,902, leaving a balance of £15,961,337 or $25,782,348 at December 31, 2012. The loan is collateralized by the Partnership Subsidiary's participation interest in the loan pool.
This loan bears interest at 6% to December 21, 2011 and thereafter to maturity at the sum of (a) the greater of (i) the three-month LIBOR for the British Pound Sterling or (ii) 1% plus a 5% spread. The initial maturity date is October 21, 2014, with two extension options available to October 21, 2015 and October 21, 2016 provided that the extended loan balance may not exceed the targeted amortization balance as described below.
On each quarter remittance distribution date, payments of the Loan Cash Flow Allocation are made as follows:
(a)To the administrative agent to cover its fees and any accrued and unpaid interest on the loan
(b)To pay outstanding principal on the loan equal to the greater of (i) the amount necessary to reduce the outstanding principal balance to the targeted amortization balance scheduled in the Loan Agreement, which schedules quarterly principal reductions beginning December 24, 2012 to reduce the outstanding loan balance to £43,808,241 or $67,696,875 as of December 22, 2015; (ii) ninety (90%) of the funds remaining after payment of amounts under clause (i) above; and (iii) one hundred thirty-five percent (135%) of the Allocated Loan Amount as defined in Schedule II of the Amended and Restated Loan Agreement for any Resolved Asset in the loan pool
(c)To the interest reserve until such time as the reserve account holds an amount equal to interest due for one quarterly period
Future principal payments on this loan are as follows as of December 31, 2012:

 
Total
2016
$
25,782,348

Thereafter

   Total
$
25,782,348

NOTE 5COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Currently, the Partnership does not have any material commitments or contingencies.




81

Table of Contents
KWF REAL ESTATE VENTURE VI, L.P.
(A Delaware Limited Partnership) AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2012 and 2011



NOTE 6SUBSEQUENT EVENTS        
Subsequent to December 31, 2012, the Partnership Subsidiary received distributions from the Pool of £17,410,775 or $26,317,455. On March 21, 2013, the Partnership Subsidiary paid off the loan, which had a balance of £15,961,337 or $25,782,348 at December 31, 2012.
In preparing these financial statements, the Partnership has evaluated events and transactions for potential recognition or disclosure through March 27, 2013.

82

    



Independent Auditors' Report

The Managing Members
KWI America Multifamily, LLC and KW SV Investment West Coast, LLC:
We have audited the accompanying combined balance sheet of KWI America Multifamily, LLC (a Delaware limited liability company) and subsidiaries and KW SV Investment West Coast, LLC (a Delaware limited liability company) as of December 31, 2011, and the related combined statements of operations, members' equity and cash flows for the year then ended. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audit.  
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of KWI America Multifamily, LLC and subsidiaries and KW SV Investment West Coast, LLC as of December 31, 2011, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying combined balance sheet of KWI America Multifamily, LLC and subsidiaries and KW SV Investment West Coast, LLC as of December 31, 2012 and the related statements of operations, members' equity and cash flows for the years ended December 31, 2012 and 2010, were not audited by us, and accordingly, we do not express an opinion on them.


/s/ KPMG LLP

Los Angeles, California
March 13, 2012


83

    

KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Combined Balance Sheets

 
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Real estate
 
 
 
 
Land
 
$
36,626,959

 
$
36,626,959

Buildings
 
109,880,877

 
109,880,877

Building improvements
 
1,624,142

 
886,104

Furniture and equipment
 
7,090

 
7,090

Total
 
148,139,068

 
$
147,401,030

Accumulated depreciation
 
(7,438,020
)
 
(4,383,630
)
Real estate, net
 
140,701,048

 
143,017,400

Cash
 
663,994

 
524,197

Investment in unconsolidated real estate joint ventures
 
215,458

 
1,455,948

Repair and replacement deposits held in escrow
 
66,648

 
5,876

Real estate taxes and insurance deposits held in escrow
 
1,190,593

 
1,153,386

Accounts receivable
 
37,442

 
54,298

Prepaid expenses and other assets
 
145,995

 
117,160

Total assets
 
$
143,021,178

 
$
146,328,265

Liabilities and members' equity
 
 
 
 
Liabilities
 
 
 
 
Mortgage loans payable
 
$
135,750,000

 
$
135,750,000

Accounts payable and accrued expenses
 
639,665

 
744,735

Security deposits and other liabilities
 
741,060

 
712,901

Total liabilities
 
137,130,725

 
137,207,636

Equity
 
 
 
 
Members' equity
 
5,890,453

 
9,120,629

Total liabilities and members' equity
 
$
143,021,178

 
$
146,328,265

See accompanying notes to the combined financial statements.




84

    

KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Combined Statements of Operations

 
 
Combined
 
Combined
 
Combined
 
KW SV Investment West Coast, LLC
 
Successor
 
Predecessor
 
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Period from June 26 to December 31,
 
Period from January 1 to June 25,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Rent
 
$
13,044,091

 
$
12,645,562

 
$
12,689,501

 
$

 
$
6,380,477

 
$
6,309,024

Other Income
 
1,196,413

 
1,121,312

 
1,180,277

 

 
577,548

 
602,729

Total revenue
 
14,240,504

 
13,766,874

 
13,869,778

 

 
6,958,025

 
6,911,753

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Property taxes
 
1,815,241

 
1,801,700

 
1,936,995

 

 
910,777

 
1,026,218

Utilities
 
843,518

 
795,273

 
826,062

 

 
476,891

 
349,171

Repairs & maintenance
 
986,800

 
956,658

 
973,968

 

 
494,446

 
479,522

Management fees
 
473,206

 
459,237

 
459,140

 

 
231,364

 
227,776

General & administrative
 
1,016,769

 
1,058,481

 
1,148,078

 

 
579,594

 
568,483

Insurance
 
316,881

 
243,669

 
230,619

 

 
119,902

 
110,717

Depreciation and amortization
 
3,054,390

 
2,948,110

 
3,983,070

 

 
1,435,520

 
2,547,550

Interest
 
7,710,586

 
7,689,518

 
7,689,518

 

 
3,860,979

 
3,828,539

Marketing and promotion
 
124,630

 
113,483

 
183,251

 

 
85,510

 
97,741

Bad debt expense
 
(13,169
)
 
(10,578
)
 
3,571

 

 
(3,349
)
 
6,920

Other property operating
    expenses
 
81,338

 
315,962

 
596,456

 

 
514,689

 
81,767

Total operating    expenses
 
16,410,190

 
16,371,513

 
18,030,728

 

 
8,706,323

 
9,324,405

Equity in income (loss)
    from investments in
    unconsolidated real
    estate joint ventures, net
 
227,882

 
977,198

 
(217,423
)
 
(217,423
)
 

 

Revaluation loss on change
    in ownership
 

 

 
(17,499,321
)
 

 

 
(17,499,321
)
Net loss
 
$
(1,941,804
)
 
$
(1,627,441
)
 
$
(21,877,694
)
 
$
(217,423
)
 
$
(1,748,298
)
 
$
(19,911,973
)
See accompanying notes to the combined financial statements.



85

    

KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Combined Statements of Members' Equity

 
 
KWI America Multifamily LLC and Subsidiaries
 
KW SV Investment West Coast, LLC
 
Total
Balance, January 1, 2010 (unaudited)
 
$
33,020,921

 
$

 
$
33,020,921

Contributions (unaudited)
 
312,772

 
2,523,172

 
2,835,944

Net loss (unaudited)
 
(19,911,973
)
 

 
(19,911,973
)
Balance, June 25, 2010 (unaudited)
 
13,421,720

 
2,523,172

 
15,944,892

Distributions (unaudited)
 
(1,130,000
)
 

 
(1,130,000
)
Net loss (unaudited)
 
(1,748,298
)
 
(217,423
)
 
(1,965,721
)
Balance, December 31, 2010 (unaudited)
 
10,543,422

 
2,305,749

 
12,849,171

Distributions
 
(274,102
)
 
(1,826,999
)
 
(2,101,101
)
Net income (loss)
 
(2,604,639
)
 
977,198

 
(1,627,441
)
Balance, December 31, 2011
 
7,664,681

 
1,455,948

 
9,120,629

Contributions (unaudited)
 
250,000

 

 
250,000

Distributions (unaudited)
 
(70,000
)
 
(1,468,372
)
 
(1,538,372
)
Net income (loss) (unaudited)
 
(2,169,686
)
 
227,882

 
(1,941,804
)
Balance, December 31, 2012 (unaudited)
 
$
5,674,995

 
$
215,458

 
$
5,890,453

See accompanying notes to the combined financial statements.


86

    

KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Combined Statements of Cash Flows
 
 
Combined
 
Combined
 
Combined
 
KW SV Investment West Coast, LLC
 
Successor
 
Predecessor
 
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Period from June 26 to December 31
 
Period from January 1 to June 25
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,941,804
)
 
$
(1,627,441
)
 
$
(21,877,694
)
 
$
(217,423
)
 
$
(1,748,298
)
 
$
(19,911,973
)
Adjustments to reconcile net loss to net
   cash provided by (used in) operating
   activities:
 
 
 
 
 
 
 
 
 
 
 
 
Revaluation loss on change in
   ownership
 

 

 
17,499,321

 

 

 
17,499,321

Depreciation and amortization
 
3,054,390

 
2,948,111

 
3,774,149

 

 
1,226,602

 
2,547,547

Equity in income from investments in
   unconsolidated real estate joint ventures
 
(227,882
)
 
(977,198
)
 
217,423

 
217,423

 

 

Change in assets and liabilities:
 
 
 
 
 

 
 
 
 
 
 
Real estate taxes and insurance reserves held
    in escrow
 
(37,207
)
 
278,880

 
(1,432,266
)
 

 
(398,567
)
 
(1,033,699
)
Accounts receivable
 
16,856

 
26,900

 
(21,162
)
 

 
(39,270
)
 
18,108

Prepaid expenses and other assets
 
(28,835
)
 
118,544

 
(171,169
)
 

 
(58,348
)
 
(112,821
)
Accounts payable and accrued expenses
 
(105,070
)
 
30

 
15,933

 

 
82,245

 
(66,312
)
Deferred revenue
 

 

 
(115,990
)
 

 
(109,750
)
 
(6,240
)
Security deposits and other liabilities
 
28,159

 
127,981

 
64,399

 

 
38,961

 
25,438

Net cash provided by (used in)
   operating activities
 
758,607

 
895,807

 
(2,047,056
)
 

 
(1,006,425
)
 
(1,040,631
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Additions to real estate
 
(738,038
)
 
(495,210
)
 
(869,188
)
 

 
(385,363
)
 
(483,825
)
Investments in unconsolidated real estate joint ventures
 

 

 
(2,523,172
)
 
(2,523,172
)
 

 

Distributions from investments in unconsolidated real
   estate joint ventures
 
1,468,372

 
1,826,999

 

 

 

 

Capital expenditure deposits held in escrow
 
(60,772
)
 
10,865

 
2,485,541

 

 
41,613

 
2,443,928

Net cash (used in) provided by investing activities
 
669,562

 
1,342,654

 
(906,819
)
 
(2,523,172
)
 
(343,750
)
 
1,960,103

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Contributions from members
 
250,000

 

 
2,835,944

 
2,523,172

 

 
312,772

Distributions to members
 
(1,538,372
)
 
(2,101,101
)
 
(1,130,000
)
 

 
(1,130,000
)
 

Net cash (used in) provided by financing activities
 
(1,288,372
)
 
(2,101,101
)
 
1,705,944

 
2,523,172

 
(1,130,000
)
 
312,772

Net increase (decrease) in cash
 
139,797

 
137,360

 
(1,247,931
)
 

 
(2,480,175
)
 
1,232,244

Cash at beginning of period
 
524,197

 
386,837

 
1,634,768

 

 
2,867,012

 
1,634,768

Cash at end of period
 
$
663,994

 
$
524,197

 
$
386,837

 
$

 
$
386,837

 
$
2,867,012

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest
 
$
7,710,586

 
$
7,689,518

 
$
7,689,518

 
$

 
$
3,860,979

 
$
3,828,539

Supplemental disclosure of noncash investing and financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Accrued additions to real estate included in accounts payable and accrued expenses
 
$

 
$
19,561

 
$
48,794

 
$

 
$
32,183

 
$
16,611

See accompanying notes to the combined financial statements.

87

Table of Contents
KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)


NOTE 1ORGANIZATION
KWI AMERICA MULTIFAMILY, LLC— KWI America Multifamily, LLC, a Delaware limited liability company (the Company), was formed on November 6, 2006. The Company is engaged in the acquisition, operation, improvement, and future disposition of an apartment portfolio consisting of two apartment buildings known as the City Heights Apartments and the Heights on West Campus Apartments (each a Property), (together the Properties).
The Company had two members: (1) KW America Multifamily Manager, LLC (KWAMM), a California limited liability company, and (2)  KW/WDC America Member, LLC (WDC) a Delaware limited liability company. KWAMM is the manager of the Company and is responsible for the day to day operations of the Company and was comprised of two members: (1) K-W Properties (KWP), a California corporation and (2) KW/WDC Portfolio Executives LLC (EXEC), a California limited liability company.
On June 25, 2010, KWP acquired 100% of the EXEC interests in the KWAMM. Simultaneously, the Company acquired 100% of the WDC member interest in the Properties and the WDC member withdrew from the Properties. This resulted in KWP being the sole member of the Company and the Company being the sole member of the Properties.
On June 25, 2010 Chadwick Reserve LLC, a Delaware limited liability company (Chadwick) was admitted to the Company as a member and joint manager.
KWP contributed capital in the amount of $6,845,077 (unaudited) on June 25, 2010 and has a 51% membership interest in the Company. Chadwick contributed capital in the amount of $6,576,643 (unaudited) and has a 49% membership interest in the Company. In accordance with the Company's amended and restated limited liability agreement, distributions are made to members in proportion to their capital contributions until those capital contributions have been reduced to zero, and in proportion to their percentage interest thereafter.
As a result of the ownership changes described above, push down accounting was applied to the transaction. Accordingly, the assets of the Company were revalued based on the restated equity at the time of the transaction.
Kennedy-Wilson Holdings, Inc. (KWH), an affiliate of KWP, has guaranteed certain exceptions to the nonrecourse liability of the mortgage loan.
The limited liability companies (LLCs) within the accompanying consolidated balance sheets will continue to operate until dissolved in accordance with the provisions of their operating agreements and are funded through the equity contributions of their members. As LLCs, except as may otherwise be provided under applicable law, no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual companies. The members are not obligated to resolve capital deficits.
KW SV INVESTMENT WEST COAST, LLC—KW SV Investment West Coast, LLC (KWSV), a Delaware limited liability company was formed on September 29, 2010, by and among KWP, KW SV Executives LLC, a California limited liability company, and RECP/UP SV, LP a Delaware limited partnership, (collectively the SV Members). The term of KWSV extends until the date KWSV is dissolved or liquidated by terms defined in its operating agreement.
SV Investment Group Partners, LLC, a Delaware limited liability company (the SV Property Owner) was formed for the purpose of acquiring, owning, and operating the condominium project known as Santee Village located at 738 S. Los Angeles Street, 746 S. Los Angeles Street and 743 Santee Street, Los Angeles, California. The sole member of the SV Property Owner is SV Investment Group Partners Manager, LLC, a Delaware limited liability company, whose two members are SV Investment West Coast Partners, LLC (SV West), a Delaware limited liability company and SV Investment East Coast Partners, LLC (SV East), a Delaware limited liability company. KWSV was organized to acquire and own a 100% membership interest in and act as the managing member of SV West. The initial capital contribution from the members was $2,523,172 (unaudited). Each member may be required to make additional capital contributions to satisfy funding requirements of SW West under the circumstances and at the time described in the SV Property Owner's operating agreement. Remedies are available to the contributing members in the event a member does not make an additional capital contribution as required, including adjustment of the initial percentage interests.
The limited liability company agreement requires that cash distributions be made to the members pari passu in proportion to their percentage interests at the time of the distribution.
Profit and loss for each fiscal period shall be allocated among the members in proportion to their respective percentage interests.
The limited liability companies (LLCs) within the accompanying consolidated financial statements will continue to operate until dissolved in accordance with the provisions of their operating agreements and are funded through the equity contributions

88

Table of Contents
KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)


of their members. As LLCs, except as may otherwise be provided under applicable law, no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual companies. The members are not obligated to resolve capital deficits.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of KWI America Multifamily, LLC and KW SV Investment West Coast, LLC have been presented on a combined basis because the entities are under common management. All intercompany transactions have been eliminated in combination.
PRINCIPLES OF COMBINATION —The combined financial statements include the consolidated accounts of the Company with its wholly owned subsidiaries and KW SV Investment West Coast, LLC. All significant intercompany items have been eliminated in the accompanying consolidated financial statements.
The Company indirectly owns its real estate through the following wholly owned subsidiaries:
KW/WDC WESTERMORELAND, LLC—KW/WDC Westmoreland, LLC (Westmoreland) was formed on February 21, 2007, with the Company as sole member. Westmoreland acquired the 687-unit multifamily apartment project known as the City Heights Apartments (City Heights) and other improvements located in Los Angeles, California.
KW/WDC WEST CAMPUS, LLC—KW/WDC West Campus (West Campus) was formed on March 28, 2007, with the Company as sole member. West Campus acquired the real property known as the Heights on West Campus Apartments, a 401-unit apartment complex located in Federal Way, Washington.
The Company shall be perpetual, unless otherwise terminated by terms defined in the Company's operating agreement.
REAL ESTATE —The City Heights property was acquired on February 22, 2007 for $121,671,007 (unaudited), including capitalized acquisition costs of $1,652,801 (unaudited).
The West Campus property was acquired on March 29, 2007 for $47,272,824 (unaudited), including capitalized acquisition costs of $754,618 (unaudited).
The fair value of real estate acquired was allocated to the acquired tangible assets, consisting primarily of land and building, and to the fair value of the identified acquired intangible assets, which comprise in-place lease value.
The fair value of real estate was determined by valuing the property as if it were vacant, which was then allocated to land and building, based on management's determination of the relative fair values of these assets. The fair value of the acquired in-place lease value was determined by calculating the present value of the cash flows provided by the leases, net of related incremental expenses over the estimated lease-up period.
Land, buildings, building improvements, and equipment are carried at cost. The buildings are depreciated over 39 years, building improvements are depreciated over 10 years, and equipment is depreciated over 5 years on a straight-line basis. The acquired in-place lease value is amortized over one year.
INVESTMENTS IN UNCONSOLIDATED REAL ESTATE JOINT VENTURES—In accordance with FASB ASC 323 Investment - Equity Method and Joint Ventures, unconsolidated equity method investments are initially recorded at cost and are subsequently adjusted for KWSV's share of the venture's earnings or losses and cash distributions. In accordance with the guidance, the allocation of profit and losses should be analyzed to determine how an increase or decrease in net assets of the SV Property Owner (determined in conformity with U.S. GAAP) will affect cash payments to the member over the life of the SV Property Owner and on its liquidation. Because certain property owner agreements contain preferences with regard to cash flows from operations, capital events and/or liquidation, KWSV reflects its share of profits and losses by determining the difference between its “claim on the Investee's book value” at the end and the beginning of the period. This claim is calculated based on the amount that KWSV would receive if the Investee were to liquidate all of its assets at recorded amounts determined in accordance with U.S. GAAP and distribute the resulting cash to creditors and investors in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value method.
On a periodic basis, KWSV shall assess whether there are any indicators that the value of its investment in unconsolidated joint venture may be impaired. An investment is impaired only if management's estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed other than temporary. As of December 31, 2012, no adjustments for impairment were made to the KWSV's investment in unconsolidated real estate joint venture.
IMPAIRMENT OF LONG LIVED ASSETS—Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Impairment of Long-

89

Table of Contents
KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)


Lived Assets ASC Subtopic 360-10. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
CASH—The Entities maintains their cash in federally insured banking institutions. The account balances at these institutions periodically exceed the Federal Deposit Insurance Corporation's (FDIC) insurance coverage and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. To mitigate this risk, the Entities place their cash with quality financial institutions.
REPAIR AND REPLACEMENT DEPOSITS AND REAL ESTATE TAXES AND INSURANCE HELD IN ESCROW—Deposits in escrow are typically funds held by a mortgage lender that are restricted in use for payment of real estate taxes, property insurance, and certain capital expenditures. Funds in tax and insurance escrows are used to pay real estate taxes and insurance premiums directly to the taxing authorities and insurance agencies, respectively. Funds in capital expenditure escrows are generally disbursed as reimbursement to the borrower upon submission of satisfactory evidence that the related capital expenditures are incurred as anticipated. These escrow deposits are refundable to the borrower upon repayment of the mortgage loan.
ACCOUNTS RECEIVABLE—Accounts receivable due from tenants are recorded at the contractual amount as determined by the lease agreements, and do not bear interest. The allowance for doubtful accounts is the Entities' best estimate of the amount of probable credit losses in the Entities' existing accounts receivable. The Entities determine the allowance based on historical experience and specific item identification, which is reviewed on a quarterly basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
DEFERRED FINANCING COSTS—Costs incurred in obtaining the mortgage loans are capitalized and amortized over the term of the mortgage loans on a straight-line basis, which approximates the effective-interest method. Amortization of the deferred financing costs were $0 (unaudited), $0, and $42,743 (unaudited) for the years ended December 31, 2012, 2011, and 2010, respectively, and is included in interest expense in the accompanying combined statements of operations.
INCOME TAXES—No provision has been made in the accompanying consolidated financial statements for federal or state income taxes, as any such taxes related to the revenues and expenses of the Entities are the responsibility of the members.
The Entities are required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, which could result in the Entities recording a tax liability that would reduce net assets. Based on their analysis, the Entities have determined that there are no tax benefits that would have a material impact on the Entities' financial position or results of operations.
USE OF ESTIMATES—The preparation of the accompanying combined financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenues and expenses. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
NOTE 3INVESTMENTS IN UNCONSOLIDATED REAL ESTATE JOINT VENTURES
During October 2010, KWSV, through its wholly owned subsidiary, SV West, acquired a 30% interest in SV Investment Group Partners Manager, LLC, which in turn owns 100% of SV Investment Group Partners, LLC, a single-purpose entity that invested in the condominium project located in Los Angeles, California, known as Santee Village. This real estate investment consisted of 167 condominium units and 18,694 square feet of retail space. The investment was financed by a loan payable to German American Capital Corporation in the principal amount of $26,500,000 (unaudited). The loan accrued interest at the greater of 7.0% or 6.0% above the one-month LIBOR and required monthly interest-only payments and principal payments made upon the closing of condominium units. In September 2011, the loan was fully paid from the net sales proceeds of condominium units sales. There are three retail spaces unsold as of December 31, 2012.

90

Table of Contents
KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)


The net carrying value of the KWSV's investment in this joint venture was $215,458 (unaudited), $1,455,948 and $2,305,749 (unaudited) as of December 31, 2012, 2011 and 2010, respectively.
The following presents summarized financial information of this unconsolidated real estate joint venture, SV Investment Group Partners, LLC, as of December 31, 2012, 2011, and 2010.
 
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
 
 
Assets
 
 
 
 
    Real estate held for sale
 
$
614,526

 
$
4,414,468

    Cash
 
109,240

 
84,732

    Accounts receivable
 
600

 
3,481

    Other assets
 
286

 
740,379

        Total assets
 
$
724,652

 
$
5,243,060

 
 
 
 
 
Liabilities
 
 
 
 
    Accounts payable and accrued expenses
 
$
6,458

 
$
389,902

        Total liabilities
 
6,458

 
389,902

Members equity
 
718,194

 
4,853,157

        Total liabilities and members equity
 
$
724,652

 
$
5,243,059

 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
 
 
(Unaudited)
Income
 
$
1,118,395

 
$
6,684,479

 
$
1,200

Expenses
 
376,450

 
1,750,568

 
282,449

Amortization
 

 
803,464

 
75,744

Interest and non operating items
 
(17,664
)
 
873,119

 
367,751

        Net income
 
759,609

 
3,257,328

 
(724,744
)
KWSV's equity in income (loss) from investment in unconsolidated real estate joint venture
 
$
227,882

 
$
977,198

 
$
(217,423
)
NOTE 4MORTGAGE LOANS PAYABLE
WESTERMORELAND (CITY HEIGHTS)—City Heights entered into a loan agreement, dated February 21, 2007 with Wachovia Bank, N.A., an affiliate of WDC, for the principal sum of $98,000,000 (unaudited). The note accrues interest at 5.65% per annum with interest-only payments on the 11th day of each month until the loan matures on March 11, 2017. Upon maturity, all remaining accrued interest and principal become due.
There is no prepayment permitted prior to January 11, 2017; however, if a prepayment is accepted by the lender then the borrower shall give a 60 to 90 days notice and provide replacement collateral in the form of direct noncallable fixed rate obligations of the United States of America or other noncallable fixed rate obligations other than U.S. Treasury obligations (acceptable to the lender) that provide for payments on the same (or similar) date in the same or similar payment amount.
The loan is secured by mortgage, deed of trust, and security instrument from borrower for the benefit of lender, covering the property.
WEST CAMPUS (HEIGHTS ON WEST CAMPUS)—West Campus entered into a loan agreement, dated March 29, 2007 with Bank of America N.A. for the principal sum of $37,750,000 (unaudited). The note accrues interest at a fixed rate of 5.423% per annum and requires interest-only payments monthly until the loan matures on April 1, 2017. Upon maturity all remaining accrued interest and principal become due.

91

Table of Contents
KWI AMERICA MULTIFAMILY LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company) AND KW SV INVESTMENT WEST COAST, LLC
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)


There is no prepayment permitted prior to February 1, 2017; however, if a prepayment is accepted by the lender then the borrower shall give a 60 to 90 days notice and provide replacement collateral in the form of direct noncallable fixed rate obligations of the United States of America or other noncallable fixed rate obligations other than U.S. Treasury obligations (acceptable to the lender) that provide for payments on the same (or similar) date in the same or similar payment amount.
The loan is secured by mortgage and loan documents for the benefit of lender, covering the property.
NOTE 5RELATED PARTY TRANSACTIONS
Each property entered into a management agreement with a third party, FPI Management, Inc. (FPI). In accordance with the management agreement, each Property pays a monthly fee of 4.00% (West Campus) and 3.00% (City Heights) of gross rental revenues as compensation for management services. Per the agreement, 2.25% (decreased from 2.5% in April 2011) and 2.25% is paid to FPI and 1.75% (increased from 1.5% in April 2011) and 0.75% is paid to KW Multi-Family Management Group, Ltd. (KWMF), which is an affiliate of KWAMM.
For the years ended December 31, 2012, 2011 and 2010 the Company incurred $152,470 (unaudited), $146,103 and $137,276 (unaudited) in property management fees, respectively, that were paid to KWMF.
Upon acquisition, the Company paid acquisition fees totaling $1,200,000 (unaudited) and $465,000 (unaudited), for City Heights and West Campus, respectively, to an affiliate of KWAMM. These amounts have been capitalized to the cost of each Property and are included in land and building in the accompanying consolidated balance sheet.
NOTE 6COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Currently, the Company and KWSV do not have any material commitments or contingencies.
The City Heights property contains asbestos that was installed when the property was built in the 1960s. If removed, the asbestos will require special treatment due to its hazardous nature. This establishes an obligation as the roperty owner will be required to remediate this at some point in the future. Remediation by management will only be required if they demolish the building or do substantial renovations that will involve removal of the asbestos.
NOTE 7SUBSEQUENT EVENTS
Management has evaluated all subsequent events through March 29, 2013 the date that the financial statements are available for issuance.


92

    




Independent Auditors' Report
The Members
KW Residential, LLC:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of KW Residential, LLC and subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), consolidated statements of members' equity and consolidated statements of cash flows for each of the years in the three year period then December 31, 2012, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KW Residential, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.


/s/ KPMG AZSA LLC
Tokyo, Japan
March 29, 2013




93

    

KW Residential, LLC and Subsidiaries
Consolidated Balance Sheets

 
 
December 31,
 
 
2012
 
2011
Assets
 
 
 
 
Rental property, net
 
$
567,639,706

 
$
627,316,328

Cash and cash equivalents
 
5,742,969

 
6,587,593

Restricted cash
 
21,288,537

 
22,449,178

Accounts receivable, net
 
754,353

 
804,844

Derivative asset
 
10,809,277

 

Other assets
 
7,317,288

 
18,062,892

Total assets
 
$
613,552,130

 
$
675,220,835

Liabilities and members' equity
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
6,504,314

 
$
6,387,375

Refundable tenant deposits
 
3,815,605

 
4,383,780

Debt and borrowings
 
316,422,361

 
343,170,004

Derivative liability
 

 
15,447,884

Income tax payable
 
323,156

 
340,216

Other liabilities
 
79,346

 
59,663

Total liabilities
 
327,144,782

 
369,788,922

Commitments and contingencies
 
 
 
 
Members' equity
 
 
 
 
Contributed capital
 
211,350,315

 
235,600,315

Accumulated surplus
 
8,807,330

 
6,326,450

Accumulated other comprehensive income
 
66,249,703

 
63,505,148

Total members' equity
 
286,407,348

 
305,431,913

Total liabilities and members' equity
 
$
613,552,130

 
$
675,220,835

The accompanying notes are an integral part of these consolidated financial statements.



94

    

KW Residential, LLC and Subsidiaries
Consolidated Statements of Operations

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
Rental income
 
$
39,013,177

 
$
37,770,902

 
$
34,515,674

Management fees
 

 

 
268,381

Total revenue
 
39,013,177

 
37,770,902

 
34,784,055

Operating Expenses
 
 
 
 
 
 
Property expenses
 
9,965,202

 
10,003,392

 
10,387,147

Compensation and related expenses
 
2,347,813

 
1,589,701

 
2,943,106

General and administrative expenses
 
2,618,677

 
3,177,994

 
2,316,137

Depreciation and amortization
 
12,790,455

 
11,604,181

 
11,115,370

Total operating expenses
 
27,722,147

 
26,375,268

 
26,761,760

Total operating income
 
11,291,030

 
11,395,634

 
8,022,295

Non-operating income (expense)
 
 
 
 
 
 
Interest expense
 
(9,765,638
)
 
(12,227,111
)
 
(12,234,711
)
Other
 
(46,373
)
 
296,636

 
368,594

Income (loss) before provision for income taxes
 
1,479,019

 
(534,841
)
 
(3,843,822
)
Provision (benefit) for income taxes
 
(1,001,861
)
 
623,973

 
801,559

Net income (loss)
 
2,480,880

 
(1,158,814
)
 
(4,645,381
)
Other comprehensive income (loss) net of tax
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
(23,512,606
)
 
14,792,637

 
35,077,117

Forward foreign currency gain (loss)
 
26,257,161

 
(8,838,828
)
 
(6,609,056
)
Total comprehensive income
 
$
5,225,435

 
$
4,794,995

 
$
23,822,680

The accompanying notes are an integral part of these consolidated financial statements.



95

    

KW Residential, LLC and Subsidiaries
Consolidated Statement of Members' Equity
For the Three Years Ended December 31, 2012

 
 
Contributed Capital
 
Accumulated Surplus (Deficit)
 
Accumulated Other Comprehensive Income
 
Total
Balance, January 1, 2010
 
$
233,616,132

 
$
12,130,645

 
$
29,083,278

 
$
274,830,055

Capital distributions
 
(8,614,978
)
 

 

 
(8,614,978
)
Foreign currency translation gain
 

 

 
35,077,117

 
35,077,117

Forward foreign currency loss
 

 

 
(6,609,056
)
 
(6,609,056
)
Net loss
 

 
(4,645,381
)
 

 
(4,645,381
)
Balance December 31, 2010
 
225,001,154

 
7,485,264

 
57,551,339

 
290,037,757

Capital contributions
 
34,200,000

 

 

 
34,200,000

Capital distributions
 
(23,600,839
)
 

 

 
(23,600,839
)
Foreign currency translation gain
 

 

 
14,792,637

 
14,792,637

Forward foreign currency loss
 

 

 
(8,838,828
)
 
(8,838,828
)
Net loss
 

 
(1,158,814
)
 

 
(1,158,814
)
Balance December 31, 2011
 
235,600,315

 
6,326,450

 
63,505,148

 
305,431,913

Capital distributions
 
(24,250,000
)
 

 

 
(24,250,000
)
Foreign currency translation loss
 

 

 
(23,512,606
)
 
(23,512,606
)
Forward foreign currency gain
 

 

 
26,257,161

 
26,257,161

Net income
 

 
2,480,880

 

 
2,480,880

Balance December 31, 2012
 
$
211,350,315

 
$
8,807,330

 
$
66,249,703

 
$
286,407,348

The accompanying notes are an integral part of these consolidated financial statements.


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KW Residential, LLC and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
2,480,880

 
$
(1,158,814
)
 
$
(4,645,381
)
Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
12,790,455

 
11,604,181

 
11,115,370

Amortization of loan related costs
 
2,543,982

 
3,803,447

 
4,308,948

Change in assets and liabilities:
 
 
 
 
 
 
Accounts receivable
 
11,729

 
50,071

 
336,953

Other assets
 
(2,435,802
)
 
2,675,216

 
(1,372,353
)
Accounts payable and accrued expenses
 
(44,203
)
 
(1,911,378
)
 
(1,079,238
)
Other liabilities
 
535,994

 
697,279

 
47,820

Net cash flow provided by operating activities
 
15,883,035

 
15,760,002

 
8,712,119

Cash flows from investing activities:
 
 
 
 
 
 
Payments for purchases of property and equipment
 
(833,477
)
 
(380,443
)
 
(423,673
)
Collateral receipts (payments) for derivative instruments
 
10,299,788

 
(9,150,000
)
 
(1,149,788
)
Net cash flow provided by (used in) investing activities
 
9,466,311

 
(9,530,443
)

(1,573,461
)
Cash flow from financing activities:
 
 
 
 
 
 
Proceeds from issuance of debt and borrowings
 
82,686,044

 
329,972,445

 

Repayment of debt
 
(83,131,247
)
 
(341,046,576
)
 
(9,506,436
)
Capital contributions
 

 
34,200,000

 

Capital distribution
 
(24,250,000
)
 
(23,600,839
)
 
(8,614,978
)
Loan related costs
 
(1,055,424
)
 
(5,038,041
)
 
(178,419
)
Net cash flow used in financing activities
 
(25,750,627
)
 
(5,513,011
)
 
(18,299,833
)
Effect of exchange rate changes on cash and cash equivalents
 
(443,343
)
 
654,234

 
1,886,758

Net increase (decrease) in cash and cash equivalents
 
(844,624
)
 
1,370,782

 
(9,274,417
)
Cash and cash equivalents, beginning of year
 
6,587,593

 
5,216,811

 
14,491,228

Cash and cash equivalents, end of year
 
$
5,742,969

 
$
6,587,593

 
$
5,216,811

Supplemental disclosure of cash paid for during the year:
 
 
 
 
 
 
Interest
 
$
8,429,143

 
$
8,505,481

 
$
8,021,813

Income tax
 
440,216

 
478,068

 
10,907

The accompanying notes are an integral part of these consolidated financial statements.



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KW Residential, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


NOTE 1ORGANIZATION
KW Residential, LLC, a Delaware limited liability company (the Company), was formed in August 2005 to acquire, operate, improve, and dispose of real estate assets. The Company was established with two members (1) Kennedy Wilson Overseas, Inc. and (2) Wachovia KW2, LLC. that held a 35% and 65% membership interest, respectively.  In September 2010, KWF Real Estate Venture I, LP acquired the 65% membership interest from Wachovia KW2, LLC. KWF Real Estate Venture I, LP is a Delaware registered limited partnership and is jointly owned by subsidiaries of Kennedy-Wilson Holdings, Inc. (10%) and Fairfax Financial Holdings Limited and affiliates (90%). The Company conducts its business through its Japanese subsidiaries, namely KW Investment Co. Ltd (“KWI”) and KIWI 1, KIWI 2, KIWI 3, KIWI 4, KIWI 5, KIWI 6 and KIWI 7 (the “KIWI Entities”). The Company's investments include a portfolio of multifamily real estate properties that are held through the KIWI Entities comprising approximately 2,400 units in 50 properties, located primarily in Tokyo and surrounding areas. The Company, through KWI, also provides real estate services in Japan, including asset management and brokerage services to its own portfolio as well as to institutional investors, developers, and financial institutions. 
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION-The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In addition, management evaluates the Company's relationships with other entities to identify whether they are variable interest entities and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements.
A certain subsidiary uses different fiscal year-end from the Company's fiscal year-end of December 31. Material differences in intercompany transactions and accounts arising from the use of the different fiscal year-ends are adjusted in consolidation.
REPORTING AND FUNCTIONAL CURRENCIES-The reporting and functional currency of the Company is the U.S. dollar. The functional currency of the Company's wholly owned subsidiaries is the Japanese yen. The financial statements of the subsidiaries are translated into U.S. dollars by translating assets and liabilities at the closing exchange rate on the balance sheet date with translation adjustments reported directly in members' equity and income statement items at average exchange rates during the year. Individually material income and expense transactions are translated using the closing exchange rate in effect on the date the transaction is recognized.
USE OF ESTIMATES-The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of rental property, valuation of derivative financial instruments, recoverability of deferred tax assets, income tax uncertainties and other contingencies.
REVENUE RECOGNITION-Rental income from residents is recognized on a straight-line basis over the noncancelable lease term, including any rent free months, which typically is two years. Although the rental agreements are cancelable, by tenant, on one-month notice, the rental agreements contain an early termination penalty such that the Company believes that continuation of the rental agreement appears, at inception, reasonably assured. Upfront payments received, such as “key money” are deferred and recognized over the expected lease period.
CASH AND CASH EQUIVALENTS-Cash and cash equivalents consist of cash and all highly liquid investments purchased with initial maturities of three months or less. The Company maintains cash balances in excess of governmentally insured limits of 10 million yen that is equivalent to $116,000 as of December 31, 2012. Cash and cash equivalents are placed with financial institutions that management believes are of high credit quality.
RESTRICTED CASH-Restricted cash consist of cash and cash equivalents that are restricted as to withdrawal or usage under the terms of certain contractual agreements, and therefore are not included in cash and cash equivalents for purposes of the consolidated balance sheets and statements of cash flows.
During the ordinary course of business, the KIWI Entities set up various trust accounts to manage their cash receipts and disbursements. As part of the trust agreements, these trusts are required to withhold the cash receipts and make the necessary disbursements before any surplus cash is made available to the KIWI Entities after a holding period of 3 months. In addition, these trusts also made disbursements to restricted cash accounts maintained with certain banks to meet the debt and borrowings obligations.

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Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010



As of December 31, 2012, these trusts held cash of $ 14,448,675 that are restricted and not available for the KIWI Entities' withdrawal or usage. These restricted cash will be available for their withdrawal or usage gradually over a period not exceeding three months. In addition, as of December 31, 2012, the restricted cash accounts maintained with certain banks had a balance of $6,839,862. Surpluses, if any, arising after meeting the debt and borrowings obligations will be made available for the KIWI Entities' withdrawal or usage.
ACCOUNTS RECEIVABLE-Accounts receivable due from tenants are recorded at the contractual amount as determined by the lease agreements with tenants and do not bear interest. The allowance for doubtful accounts is management's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. Management determines the allowance based on historical experience. Management reviews its allowance for doubtful accounts on a quarterly basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
RENTAL PROPERTY-Land, building and structures, and machinery and equipment are carried at cost. Major maintenance and improvements are capitalized and minor replacements, maintenance and repairs are charged to current operations in the periods incurred. Depreciation is computed on the straight-line method over the following estimated useful lives of the assets:
Buildings
 
31 to 46 years
Short-lived structures and others
 
2 to 19 years
Machinery and equipment
 
2 to 14 years
Management reviews the Company's rental property for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the rental property may not be recoverable. Recoverability of rental property to be held and used is measured by a comparison of the carrying amount of the rental property, or rental property group, to estimated undiscounted future cash flows expected to be generated by the rental property or rental property group. The determination of undiscounted future cash flows requires significant estimates made by management and considers the most likely expected course of action at the balance sheet date. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could affect the determination of whether impairment exists. If the carrying amount of the rental property or rental property group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value of the rental property or rental property group. Rental property to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or estimated fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale are presented separately in the appropriate asset and liability sections of the consolidated balance sheet.
During 2012, 2011 and 2010, management performed impairment analysis on several properties due to deemed triggering events. Based on management's analysis, including assumptions about the length of the holding period until disposed, the estimated selling price and the current projected operating performance of the properties, management has concluded that no impairment of rental property existed for the years ended December 31, 2012, 2011 and 2010.
INCOME TAXES-Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of December 31, 2012 and 2011, management of the Company believes there are no uncertain tax positions that would have a material impact on the Company's financial position or results of operations. Management of the Company does not expect material changes in uncertain tax positions within next twelve months. As of December 31, 2012, the tax years 2006 through 2012 remain open for potential tax examination. The interest and penalties of back taxes arising from tax examinations are recognized as income tax expense.
FAIR VALUE MEASUREMENTS-The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering

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KW Residential, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 - Unadjusted quoted prices in an active market for identical unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity's own assumptions about the assumption market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which provides additional disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3. This ASU also clarifies certain other existing disclosure requirements including level of desegregation and disclosures around inputs and valuation techniques. The provisions of the ASU are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. In the period of initial adoption, the reporting entity shall not be required to provide the disclosures required for any previous periods presented for comparative purposes. The Company adopted the provisions of the ASU in 2010, except for the requirements to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis, which were adopted in 2011. The adoption of ASU 2010-06 did not have a material effect on the Company's consolidated financial statements. See note 5 to the Consolidated Financial Statements.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES-The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in the item being hedged until the hedged item affects earnings.
For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. Management also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction effects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge.
In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.
For derivative instruments that are not designated as a hedging instrument, the Company records changes in fair value in statements of operations and comprehensive income in the period that they occur.
See note 5 to the Consolidated Financial Statements.
DEFERRED FINANCING COSTS-The Company recognizes debt issuance costs on the balance sheet as deferred charges included in other assets and amortizes the balance over the term of the related debt using the straight-line method which is substantially similar to the effective interest rate method. The Company classifies cash payments for debt issue costs as a financing activity in the consolidated statements of cash flows.

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KW Residential, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


CHANGE IN ACCOUNTING POLICY -The Company moved the fiscal year end of one subsidiary, KIWI 2 from September 30 to December 31 to align its closing date to the Group and improve the quality of the consolidated financial information, effective from the year ended December 31, 2012. This change was not material to the previously reported periods as well as the year ended December 31, 2012, therefore the Company has not adjusted those prior period consolidated financial statements. Accordingly, the results of the subsidiary for the fiscal period ended December 31, 2012 reflect 15 months' results.
RECENTLY ISSUED ACCOUNTING STANDARDS- In May 2011, the Financial Accounting Standards Board (''FASB'') issued Accounting Standards Update No. 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (''ASU 2011-4''). The amendments in this update result in additional fair value measurement and disclosure requirements within U.S. GAAP and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The adoption of ASU 2011-4 on January 1, 2012 did not have an impact on the Company's consolidated financial position or results of operations. The Company has disclosed in the notes to the consolidated financial statements whether the fair value measurements are Level 1, 2 or 3.
In June 2011, the FASB issued Accounting Standards Update No. 2011-5, Presentation of Comprehensive Income. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. In December 2011, the FASB deferred portions of this update in its issuance of Accounting Standards Update No. 2011-12. The Company has elected the two-statement approach and the required consolidated financial statements are presented herein.
CORRECTION OF IMMATERIAL ERRORS-The 2011 and 2010 consolidated financial statements have been restated to correct certain tax and income tax errors which were identified during the year ended December 31, 2012. As a result of these corrections certain immaterial prior period adjustments were recorded. The effect of these prior period adjustments on total consolidated assets and consolidated members' equity was a reduction of $206,055 as of December 31, 2011. The prior period adjustments had no effect on previously reported consolidated revenues and increased the consolidated net loss by $144,421 and $159,155 for the years ended December 31, 2011 and 2010, respectively. Consolidated comprehensive income was also reduced by $136,637 and $159,645 for the years ended December 31, 2011 and 2010, respectively.
NOTE 3EXTINGUISHMENT OF DEBT
The Company negotiated a discounted settlement of a note payable to Morgan Stanley due in August 2010 in the amount of $114,628,821. The debt extinguishment gains are included in non-operating income in the consolidated statements of operations and comprehensive income.
NOTE 4RENTAL PROPERTY
The composition of rental property consisted of the following as of December 31:
 
 
December 31,
 
 
2012
 
2011
Land
 
$
302,951,197

 
$
328,228,600

Buildings and structures
 
315,905,453

 
341,390,599

Machinery and equipment and other
 
5,093,365

 
5,393,335

Less accumulated depreciation
 
(56,310,309
)
 
(47,696,206
)
Rental property, net
 
$
567,639,706

 
$
627,316,328

 Depreciation and amortization expense for rental property for the years ended December 31, 2012, 2011 and 2010 were $12,789,085, $11,600,073 and $11,115,370, respectively.
NOTE 5FAIR VALUE MEASUREMENTS
The Company has financial instruments that are measured at fair value on a recurring basis. The carrying values of the Company's short-term items such as cash and cash equivalents, restricted cash, accounts receivable, other assets, accounts payable and accrued expenses, refundable tenant deposits and other liabilities approximate fair value. The fair value of the Company's

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Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


long-term debt is calculated based on the discount cash flows using risk rates currently available for debt with similar terms and remaining maturities.
The carrying amounts and related estimated fair values of long-term debt as of December 31, 2012 and 2011 as follows:
 
December 31,
 
2012
 
2011
 
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Debt and borrowing contract
$
316,422,361

 
$
320,381,100

 
$343,170,004
 
$345,145,872
The Company previously used interest rate cap instruments to manage fluctuations in interest rates and terminated all the contracts during fiscal year ended December 31, 2012. On September 3, 2010, in order to manage currency fluctuations between the Company's functional currency (U.S. dollar) and its wholly-owned subsidiaries' functional currency (Japanese yen), the Company entered into a forward foreign currency contract to hedge a portion of its net investment in its wholly owned subsidiaries. On April 22, 2011, the Company increased the hedge portion by entering into an additional forward foreign currency contract.
The Company's interest rate caps were valued based on the net present value of expected future cash flows as determined by the counter-party and the forward foreign currency contract is valued based on the difference between the contract rate and the forward rate at maturity of the yen applied to the notional value in yen discounted at a market rate for similar risks. The Company has determined that based on an evaluation of the significance of each of the inputs used to value these instruments that they are considered level 2 in their entirety.
The fair values of derivative instruments held as of December 31, 2012 and 2011:
 
Asset derivatives
 
2012
 
 
2011
 
B/S Location
 
Fair value
 
 
B/S Location
 
Fair value
Forward foreign exchange contract
Derivative assets
 
$
10,809,277

 
Interest rate contracts
Other assets
 
$181,050

 
Liability derivatives
 
2011
 
B/S Location
 
Fair value
Forward foreign exchange contract
Derivative liability
 
$15,447,884
As of December 31, 2012 the forward foreign exchange contract outstanding was:
Counterparty
Currency
Buy/Sell
Settlement Date
In Exchange For
Fair value
Unrealized Gain (Loss)
Deutsche Bank
15 billion yen
Sell
4/28/2014
$185.4 million
$
10,809,277

$
10,809,277

As of December 31, 2011 the forward foreign exchange contract outstanding was:
Counterparty
Currency
Buy/Sell
Settlement Date
In Exchange For
Fair value
Unrealized Gain (Loss)
Deutsche Bank
15 billion yen
Sell
4/28/2014
$185.4 million
$(15,447,884)
$(15,447,884)

The Company's gains (loss) of $10,809,277 and $(15,447,884) on the forward foreign currency contract is included in other comprehensive income (loss) in the accompanying consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2012 and 2011, respectively as the forward foreign currency contract qualifies as a hedging instrument designated in a hedging relationship under ASC Topic 815. The interest rate cap contracts do not qualify as designated hedging instruments under ASC Topic 815 and accordingly, for the gains (losses) on those interest rate cap contracts, the Company recognized

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Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


$ (178,433), $ 56,502 and $ (272,964) in other non-operating income (expense) in the accompanying consolidated statements of operations and comprehensive income for the years ended December 31, 2012, 2011 and 2010, respectively.

NOTE 6OTHER ASSETS
The composition of other assets consisted of the following as of December 31:
 
 
December 31,
 
 
2012
 
2011
Deposits for rented office
 
$
279,874

 
$
311,145

Consumption tax receivables
 

 
9,822

Deferred tax assets
 
1,439,287

 
76,697

Deferred loan costs
 
3,793,495

 
5,181,166

Derivative assets
 

 
181,050

Cash collateral placed for derivatives
 

 
10,299,788

Other
 
1,804,632

 
2,003,225

Total
 
$
7,317,288

 
$
18,062,893

NOTE 7DEBT AND BORROWINGS
Debt and borrowings were incurred in connection with refinancing of rental property currently in use, and includes the following as of December 31:
 
 
2012
 
2011
Secured bond representing obligations to banks, maturing serially from June 2012 to March 2017 with fixed interest rate of 2.18% per annum
 
$
3,810,567

 
$

Secured loan representing obligations to banks, maturing serially from June 2012 to March 2017 with fixed interest rate of 1.58% per annum
 
80,081,186

 

Secured bond representing obligations to banks, maturing serially from November 2009 to August 2014 with fixed interest rate of 3% per annum
 
3,898,129

 
4,984,564

Secured bond representing obligations to banks, maturing serially from August 2011 to December 2014 with interest rate of 3 months TIBOR (rate of 0.34% as of December 31, 2011) plus 2.49% per annum
 

 
82,654,182

Secured loan representing obligations to banks, maturing serially from April 2013 to March 2016 with fixed interest rate of 2.12% per annum
 
39,270,040

 
43,735,529

Secured loan representing obligations to banks, maturing serially from July 2011 to March 2016 with fixed interest rate of 2.24% per annum
 
57,692,308

 
65,153,074

Secured loan representing obligations to financial institution, due March 2016 on lump-sum payment with fixed interest rate of 9.82% per annum
 
2,310,002

 
2,572,678

Secured loan representing obligations to banks, maturing serially from April 2013 to March 2016 with fixed interest rate of 2.12% per annum
 
61,215,061

 
68,175,971

Secured loan representing obligations to banks, maturing serially from July 2013 to July 2016 with fixed interest rate of 1.70% per annum
 
58,905,059

 
65,603,293

Secured loan representing obligations to banks, maturing serially from April 2013 to March 2016 with fixed interest rate of 2.12% per annum
 
9,240,009

 
10,290,713

Total
 
$
316,422,361

 
$
343,170,004

 As of December 31, 2012, certain rental property, with a net book value of $564,121,281, was pledged as collateral for certain debt obligations.
     
The aggregate amounts of annual maturities of long-term debt as of December 31, 2012 are as follows:

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Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


Year ending December 31,
 
 
2013
 
$
7,078,193

2014
 
11,844,882

2015
 
8,524,254

2016
 
214,361,631

2017
 
74,613,401

Total
 
$
316,422,361

The debt and borrowing arrangements were entered into by certain of the Company's subsidiaries for the financing of rental property and include certain covenants which the respective subsidiaries are required to be in compliance. Key covenants included ensuring that the respective outstanding loans do not exceed a certain percentage (ranging from 70 percent to 85 percent) of the fair value of the respective rental properties (LTV). In addition, these subsidiaries are required to generate sufficient operating cash flows to meet its loan obligations. This is commonly referred to as debt service coverage ratios (DSCR) and the respective subsidiaries are required to maintain DSCR of at least 1.00 to 1.20 to be in compliance with the loan covenants.
The respective subsidiaries were in compliance with all applicable covenants as of December 31, 2012 and 2011.
NOTE 8INCOME TAXES
Provision (benefit) for income taxes for the years ended December 31, 2012, 2011 and 2010 consists of the following:
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
Income (loss) before provision for income taxes:
 
 
 
 
 
 
Domestic
 
$
(583,117
)
 
$
(154,375
)
 
$
327,026

Foreign
 
2,062,136

 
(380,466
)
 
(4,170,848
)
Total
 
$
1,479,019

 
$
(534,841
)
 
$
(3,843,822
)
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
Provision (benefit) for income taxes:
 
 
 
 
 
 
Current - Foreign
 
$
502,187

 
$
446,429

 
$
274,586

Deferred - Foreign
 
(1,504,048
)
 
177,544

 
526,973

Total
 
$
(1,001,861
)
 
$
623,973

 
$
801,559

Other than the income tax obligations in Japan as explained below, the Company has no other foreign tax obligations. For U.S. federal tax purposes, KW Residential, LLC is considered to be a pass-through entity and all applicable U.S. taxes are the responsibility of the members. In addition, most of KIWI Entities are exempt from Japanese income taxes based on a permitted structure under Japanese tax legislation. In order to keep the tax exempt status, KIWI Entities are required to distribute more than 90 per cent of the entity's taxable income in each fiscal period. KIWI Entities have an intention to keep the tax exemption status continuously.  Accordingly, the taxes recorded in these financial statements relate to the income taxes of certain Japanese subsidiaries applicable in Japan and Japanese withholding taxes in respect of distributions made by KIWI Entities to the Company. The Company recognizes deferred tax liabilities and corresponding deferred income tax expenses for Japanese withholding taxes to be charged to the distributions at each year end. Those deferred income taxes expenses are included in “Deferred - Foreign” in the table above.
The significant components of deferred tax assets and liabilities as of December 31 are as follows:


104

Table of Contents
KW Residential, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


 
 
December 31,
 
 
2012
 
2011
Deferred tax assets:
 
 
 
 
Tax loss carryforwards
 
$
1,323,105

 
$
1,821,928

Accrued enterprise taxes
 
3,343

 
19,282

Accrued expenses
 
26,780

 
31,914

Depreciation
 
538,701

 
614,986

Allowance for paid vacation
 
34,633

 
32,349

Key money
 
17,981

 
26,514

Other
 

 
4,557

Gross deferred tax assets
 
1,944,543

 
2,551,530

Less: Valuation allowance
 

 
(1,996,802
)
Total deferred tax assets
 
1,944,543

 
554,728

Deferred tax liabilities:
 
 
 
 
Rental property, net
 
(135,376
)
 
(144,704
)
Other assets
 
(177,341
)
 
(283,652
)
Withholding tax
 
(192,539
)
 
(49,675
)
Total deferred tax liabilities
 
(505,256
)
 
(478,031
)
Net deferred tax assets
 
$
1,439,287

 
$
76,697

Management had provided a valuation allowance against deferred tax assets of tax loss carryforward that is resulted from a loss making company in order to reduce tax assets to management's estimate of the amount more likely than not to be realized due to the uncertainty of the timing of realization. During 2012, the Company determined to release $ 1,944,768 of the valuation allowance. This is because the entity's operation turned to be profitable due to the facts that the entity succeeded to obtain favorable terms of its contracts, such as lower interest rate of its borrowings and the discount as to its asset management fee. Management believes it is more likely than not that the deferred tax asset will be realizable.
Income taxes in Japan applicable to the Company are imposed by the national, prefectural and municipal governments, and in the aggregate resulted in a normal effective statutory rate of 40.69% for the years ended December 31, 2012 , 2011 and 2010 .
In Japan, new laws related to corporate taxes were promulgated on December 2, 2011. In the aggregate, the effective statutory rate will be 38.01% for the fiscal years beginning on or after April 1, 2012. From the years beginning on or after April 1, 2015, the effective statutory rate will be further reduced to 35.64%.
As a result of the change in enacted tax rates, the net deferred tax assets decreased by $30,517 and the provision for income tax expense increased by $29,715 for the year ended December 31, 2011.
A reconciliation of the effective income tax rate reflected in the accompanying consolidated statements of operations to the combined normal effective statutory tax rate for the years ended December 31, 2012, 2011 and 2010 is as follows:
 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
Normal statutory tax (benefit) rate
 
(40.69
)%
 
(40.69
)%
 
(40.69
)%
Nondeductible expenses
 
25.15

 
43.56

 
7.99

Gains and losses on tax exempted entities
 
(7.58
)
 
29.35

 
38.35

Change in valuation allowances
 
(131.49
)
 
72.38

 
14.96

Withholding tax
 
13.02

 
9.29

 
1.32

Earnings taxed at different rate and effect of tax rate change
 
(8.33
)
 
5.56

 

Others, net
 
0.8

 
(2.79
)
 
(1.08
)
Effective income tax rate
 
67.74
 %
 
116.66
 %
 
20.85
 %

105

Table of Contents
KW Residential, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


As of December 31, 2012, the Company had tax loss carryforwards of $3,413,724. Such carryforwards, if not utilized, are scheduled to expire as follows:
2017
 
$
199,630

2018
 
1,651,339

2019
 
1,127,739

2020
 
435,016

Total
 
$
3,413,724

NOTE 9LEASE
The Company leases its headquarters and company residences under a cancelable operating contract with 180 days' notice. Rent expense was $295,723, $335,592 and $300,092 for the years ended December 31, 2012, 2011 and 2010, respectively. Aggregated monthly lease costs for 2012 were $24,644.
NOTE 10RELATED PARTY TRANSACTIONS
    In 2012, 2011 and 2010, Kennedy-Wilson Holdings, Inc. was paid $500,000, $751,503 and $599,161 for consultant services, respectively. For 2010, Kennedy-Wilson Holdings, Inc. was paid $221,590 for payroll services.
NOTE 11SUBSEQUENT EVENTS
      During January 2013, the Company settled its derivative asset that was used for hedging instruments. The book value of the settled derivative asset amounted to $10,809,277 as of December 31,2012 (note 5) and collected $17,431,312 from Deutsche Bank.
Management has evaluated all subsequent events through March 29, 2013, the date that the financial statements are available for issuance.

106

    



Independent Auditors' Report
The Partners
KW Property Fund III, L.P. and KW Property Fund III (QP-A), L.P.:

We have audited the accompanying combined statements of operations, partners' capital and cash flows of KW Property Fund III, L.P. and KW Property Fund III (QP-A), L.P. for the year ended December 31, 2010. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnerships' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows of KW Property Fund III, L.P. and KW Property Fund III (QP-A), L.P. for the year ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

The accompanying combined statement of financial condition of KW Property Fund III, L.P. and KW Property Fund III (QP-A), L.P., as of December 31, 2012 and 2011 including the combined schedule of investments, as of December 31, 2012 and 2011 and the related combined statements of operations, partners' capital and cash flows for each of the two-year period ended December 31, 2012, were not audited by us, and accordingly, we do not express an opinion on them.



/s/ KPMG LLP

Los Angeles, California
March 11, 2011

107

    

KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Combined Statements of Financial Condition

 
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
 
(Unaudited)
Assets
 
 
 
 
Investments at fair value (cost $96,557,828 (unaudited) in 2012 and
$105,952,148 (unaudited) in 2011)
 
$
127,346,319

 
$
135,821,252

Cash and cash equivalents
 
3,644,217

 
88,397

Due from limited partners
 
246,665

 
246,665

Accounts receivable
 
27,009

 
44,480

Prepaid expenses
 
349,688

 
440,343

Total assets
 
$
131,613,898

 
$
136,641,137

Liabilities and partners' capital
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
84,779

 
$

Due to General Partner
 
2,062,244

 
2,062,244

Total liabilities
 
2,147,023

 
2,062,244

Partners' capital
 
 
 
 
Limited partners
 
111,496,492

 
113,929,918

General Partner and Special Limited Partner
 
17,970,383

 
20,648,975

Total partners’ capital
 
129,466,875

 
134,578,893

Total liabilities and partners’ capital
 
$
131,613,898

 
$
136,641,137

See accompanying notes to combined financial statements.

108

Table of Contents

KW PROPERTY FUND III (QP-A), L.P.
Combined Statements of Investments
(Unaudited)
December 31, 2012
Ownership interest
 
Security description
 
Percentage of total investments
 
Cost
 
Fair value
 
 
Interests in real estate assets:
 
 
 
 
 
 
100.00
%
 
KW Pinole, LLC, a single-purpose entity holding a fee simple interest in a 147-unit multifamily project located in Pinole, California
 
4.73
%
 
$
5,900,269

 
$
6,021,346

100.00

 
KW Davis, LLC, a single-purpose entity holding a fee simple interest in a 240-unit multifamily project located in Davis, California
 
10.43

 
10,786,107

 
13,282,930

100.00

 
KW Napa, LLC, a single-purpose entity that held a fee simple interest in a 66-unit multifamily project located in Napa, California (The property was sold in December 2012, and the entity is in the process of winding down)
 
0.04

 
47,092

 
47,092

100.00

 
Plum Canyon Investments, LLC, a single-purpose entity initially holding a fee simple interest in 56 undeveloped lots located in Lancaster, California.
 
2.55

 
2,174,138

 
3,251,447

100.00

 
Cypress Pointe Investments, LLC, a single-purpose entity holding a fee simple interest in 163 undeveloped lots located in Victorville, California
 
3.13

 
4,020,673

 
3,987,166

100.00

 
KW Kiahuna, LLC, a single-purpose entity holding a fee simple interest in 6 finished homes and 63 undeveloped lots located on the island of Kauai in Hawaii
 
9.45

 
8,869,706

 
12,036,273

100.00

 
KW Federal Way, LLC, a single-purpose entity holding a fee simple interest in a 518-unit multifamily project located in Federal Way, Washington
 
10.89

 
4,332,092

 
13,872,362

50.00

 
KW Funds-303 North Glenoaks, LLC, a single-purpose entity holding a fee simple interest in a 10-story, 176,480-square-foot office building and adjacent 6-story garage located in Burbank, California
 
7.79

 
9,694,720

 
9,924,859

50.00

 
KW Funds-333 North Glenoaks, LLC, a single-purpose entity holding a fee simple interest in a 6-story, 86,703-square-foot office building located in Burbank, California
 
4.40

 
5,446,507

 
5,601,354

50.00

 
KW Funds-Burbank Executive, LLC, a single-purpose entity holding a fee simple interest in a 6-story, 63,899-square-foot office building located in Burbank, California
 
1.36

 
1,756,112

 
1,726,202

14.29

 
KW Funds-6100 Wilshire, LLC, a single-purpose entity holding a fee simple interest in a 16-story, 213,961-square-foot office building located in Beverly Hills, California
 
2.54

 
4,830,441

 
3,238,216

25.43

 
Bay Fund Opportunity, LLC, an entity holding interests in two single-purpose entities each holding fee simple interests in two multifamily condominium projects with 484 units located in Richmond, California
 
13.12

 
9,027,167

 
16,709,337

50.00

 
Fairways 340, LLC, a single-purpose entity holding a fee simple interest in a 209-unit multifamily project located in Walnut Creek, California
 
10.77

 
11,304,184

 
13,709,450

20.00

 
SJ Real Estate Partners, LLC, a single-purpose entity that held a fee simple interest in a 23-story residential tower with 213 units and 11,000 square feet of retail space located in San Jose, California (The property was sold in April 2012, and the entity is in the process of winding down).
 
0.01

 
14,461

 
14,461

20.00

 
KW Petaluma Investors, LLC, a single-purpose entity holding a fee simple interest in a 492-unit multifamily project located in Petaluma, California
 
5.31

 
4,656,331

 
6,757,806

32.00

 
KW Club Palisades, LLC, a single-purpose entity holding a fee simple interest in a 750-unit multifamily project located in Federal Way, Washington
 
8.96

 
8,202,170

 
11,410,475

 
 
Interests in notes:
 
 
 
 
 
 
45.08

 
KW Kona Investors, LLC, an entity holding a $25,000,000 junior participation in a loan secured by a resort in Kona, Hawaii. This interest was acquired for $19,699,998, earns interest at a rate of LIBOR + 1.50% and matures on May 9, 2013
 
4.52

 
5,495,658

 
5,755,543

 
 
Total investments
 
100.00
%
 
$
96,557,828

 
$
127,346,319

See accompanying notes to combined financial statements



109

Table of Contents

KW PROPERTY FUND III (QP-A), L.P.
Combined Statements of Investments
(Unaudited)
December 31, 2011
Ownership interest
 
Security description
 
Percentage of total investments
 
Cost
 
Fair value
 
 
Interests in real estate assets:
 
 
 
 
 
 
100.00
%
 
KW Pinole, LLC, a single-purpose entity holding a fee simple interest in a 147-unit multifamily project located in Pinole, California
 
5.38
%
 
$
5,750,269

 
$
7,305,925

100.00

 
KW Davis, LLC, a single-purpose entity holding a fee simple interest in a 240-unit multifamily project located in Davis, California
 
9.44

 
10,786,107

 
12,823,168

100.00

 
KW Napa, LLC, a single-purpose entity holding a fee simple interest in a 66-unit multifamily project located in Napa, California
 
3.02

 
2,566,053

 
4,103,420

100.00

 
Plum Canyon Investments, LLC, a single-purpose entity initially holding a fee simple interest in 56 undeveloped lots located in Lancaster, California.
 
2.28

 
2,076,265

 
3,100,162

100.00

 
Cypress Pointe Investments, LLC, a single-purpose entity holding a fee simple interest in 163 undeveloped lots located in Victorville, California
 
2.80

 
3,803,377

 
3,797,813

100.00

 
KW Kiahuna, LLC, a single-purpose entity holding a fee simple interest 63 undeveloped lots located on the island of Kauai in Hawaii
 
8.14

 
8,627,677

 
11,057,534

100.00

 
KW Federal Way, LLC, a single-purpose entity holding a fee simple interest in a 518-unit multifamily project located in Federal Way, Washington
 
12.34

 
4,332,092

 
16,759,466

50.00

 
KW Funds-303 North Glenoaks, LLC, a single-purpose entity holding a fee simple interest in a 10-story, 176,480-square-foot office building and adjacent 6-story garage located in Burbank, California
 
6.64

 
9,694,720

 
9,024,870

50.00

 
KW Funds-333 North Glenoaks, LLC, a single-purpose entity holding a fee simple interest in a 6-story, 86,703-square-foot office building located in Burbank, California
 
3.64

 
5,446,507

 
4,945,943

50.00

 
KW Funds-Burbank Executive, LLC, a single-purpose entity holding a fee simple interest in a 6-story, 63,899-square-foot office building located in Burbank, California
 
1.56

 
1,756,112

 
2,114,499

14.29

 
KW Funds-6100 Wilshire, LLC, a single-purpose entity holding a fee simple interest in a 16-story, 213,961-square-foot office building located in Beverly Hills, California
 
1.49

 
4,755,112

 
2,022,538

25.43

 
Bay Fund Opportunity, LLC, an entity holding interests in two single-purpose entities each holding fee simple interests in two multifamily condominium projects with 484 units located in Richmond, California
 
11.19

 
9,027,167

 
15,196,879

50.00

 
Fairways 340, LLC, a single-purpose entity holding a fee simple interest in a 209-unit multifamily project located in Walnut Creek, California
 
8.98

 
11,304,184

 
12,185,417

20.00

 
SJ Real Estate Partners, LLC, a single-purpose entity holding a fee simple interest in a 23-story residential tower with 213 units and 11,000 square feet of retail space located in San Jose, California
 
7.33

 
7,959,793

 
9,961,334

20.00

 
KW Petaluma Investors, LLC, a single-purpose entity holding a fee simple interest in a 492-unit multifamily project located in Petaluma, California
 
3.99

 
4,656,331

 
5,419,924

32.00

 
KW Club Palisades, LLC, a single-purpose entity holding a fee simple interest in a 750-unit multifamily project located in Federal Way, Washington
 
7.83

 
8,202,170

 
10,640,937

 
 
Interests in notes:
 
 
 
 
 
 
45.08

 
KW Kona Investors, LLC, an entity holding a $25,000,000 junior participation in a loan secured by a resort in Kona, Hawaii. This interest was acquired for $19,699,998, earns interest at a rate of LIBOR + 1.50% and matures on May 9, 2012
 
3.95

 
5,208,212

 
5,361,423

 
 
Total investments
 
100.00
%
 
$
105,952,148

 
$
135,821,252

See accompanying notes to combined financial statements

110

    

KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Combined Statements of Operations

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
Investment income:
 
 
 
 
 
 
Dividends
 
$
4,601,380

 
$
4,026,719

 
$
3,325,350

Interest
 
273,970

 
583,833

 
682,862

Total investment income
 
4,875,350

 
4,610,552

 
4,008,212

Expenses:
 
 
 
 
 
 
Management fees - related party
 
1,645,201

 
1,658,333

 
3,554,005

Legal fees
 

 

 
152,761

Other professional and administrative costs
 
574,917

 
409,258

 
335,975

Interest expense
 

 

 
193,229

Interest expense - related party
 

 

 
93,750

Total expenses
 
2,220,118

 
2,067,591

 
4,329,720

Net investment income (loss)
 
2,655,232

 
2,542,961

 
(321,508
)
Realized and unrealized gain on investments:
 
 
 
 
 
 
Net realized gain on investments
 
3,448,198

 

 

Net change in unrealized appreciation on investments
 
919,387

 
3,796,169

 
7,116,258

Net income
 
$
7,022,817

 
$
6,339,130

 
$
6,794,750

See accompanying notes to combined financial statements.


111

    

KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Combined Statements of Partners' Capital

 
 
General and special limited partner
 
KW Property Fund III, L.P. limited parters
 
KW Property Fund III (QP-A), L.P. limited parters
 
Total
Partners' capital, January1, 2010 (unaudited)
 
$
8,391,018

 
$
40,126,546

 
$
13,884,310

 
$
62,401,874

Capital contributions
 
8,550,382

 

 
56,513,045

 
65,063,427

Capital distributions
 

 
(4,043,818
)
 

 
(4,043,818
)
Net equalization
 

 
(6,628,385
)
 
6,628,385

 

Net income
 
3,235,949

 
965,705

 
2,593,096

 
6,794,750

Partners' capital, December 31, 2010
 
20,177,349

 
30,420,048

 
79,618,836

 
130,216,233

Capital contributions (unaudited)
 
673,483

 
1,632,930

 
4,384,718

 
6,691,131

Capital distributions (unaudited)
 
(1,035,510
)
 
(2,071,020
)
 
(5,561,071
)
 
(8,667,601
)
Net income (unaudited)
 
833,653

 
1,493,949

 
4,011,528

 
6,339,130

Partners' capital, December 31, 2011 (unaudited)
 
20,648,975

 
31,475,907

 
82,454,011

 
134,578,893

Capital contributions (unaudited)
 
532,665

 
1,597,985

 
4,290,887

 
6,421,537

Capital distributions (unaudited)
 
(2,567,546
)
 
(4,338,676
)
 
(11,650,150
)
 
(18,556,372
)
Net income (unaudited)
 
(643,711
)
 
2,080,365

 
5,586,163

 
7,022,817

Partners' capital, December 31, 2012 (unaudited)
 
$
17,970,383

 
$
30,815,581

 
$
80,680,911

 
$
129,466,875

See accompanying notes to combined financial statements.


112

    

KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Combined Statements of Cash Flows

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
 (Unaudited)
 
 (Unaudited)
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
7,022,817

 
$
6,339,130

 
$
6,794,750

Adjustments to reconcile net income to net cash used in operating
     activities:
 
 
 
 
 
 
Net realized gain on investments
 
(3,448,198
)
 

 

Net change in unrealized appreciation on investments
 
(919,387
)
 
(3,796,169
)
 
(7,116,258
)
Change in assets and liabilities:
 
 
 
 
 
 
Purchases of investments
 
(1,169,973
)
 
(24,313,709
)
 
(18,446,395
)
Purchases of investments - related party
 

 

 
(10,948,327
)
Acquisition fees - related party
 

 
(326,501
)
 
(412,487
)
Proceeds on sale of investments
 
14,012,491

 

 

Escrows and deposits
 

 
1,171,372

 
(1,171,372
)
Due from limited partners
 

 

 
(246,665
)
Accounts receivable
 
17,471

 
(17,471
)
 
(22,072
)
Prepaid expenses
 
90,655

 
36,387

 
(316,941
)
Interest payable
 

 

 
(2,449
)
Accounts payable and accrued expenses
 
84,779

 
(182,207
)
 
156,794

Due to General Partner
 

 
(457,757
)
 
1,712,795

Net cash flow provided by (used in) operating activities
 
15,690,655

 
(21,546,925
)
 
(30,018,627
)
Cash flow from financing activities:
 
 
 
 
 
 
Repayment of note payable
 

 

 
(8,000,000
)
Proceeds from short-term advances
 

 

 
3,375,000

Capital contributions
 
6,421,537

 
6,691,131

 
61,688,427

Capital distributions
 
(18,556,372
)
 
(8,667,601
)
 
(4,043,818
)
Net cash flow provided by (used in) financing activities
 
(12,134,835
)
 
(1,976,470
)
 
53,019,609

Net increase (decrease) in cash and cash equivalents
 
3,555,820

 
(23,523,395
)
 
23,000,982

Cash and cash equivalents, beginning of year
 
88,397

 
23,611,792

 
610,810

Cash and cash equivalents, end of year
 
$
3,644,217

 
$
88,397

 
$
23,611,792

Supplemental disclosure of cash paid for during the year:
 
 
 
 
 
 
Interest
 
$

 
$

 
$
289,428

Supplemental disclosure of non-cash financing activities:
 
 
 
 
 
 
Conversion of short-term advances to partners' capital
 
$

 
$

 
$
3,375,000

See accompanying notes to combined financial statements.

113

Table of Contents
KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010


NOTE 1ORGANIZATION
KW Property Fund III, L.P. (the L.P. Partnership), a Delaware limited partnership, commenced operations on December 19, 2007. KW Property Fund III (QP-A), L.P. (the QP-A Partnership), a Delaware limited partnership, commenced operations on February 5, 2009 as a separate legal entity from the L.P. Partnership with the sole purpose of coinvesting with the L.P. Partnership (collectively the “Partnerships” or the “Funds”). Upon admission of the limited partners to the QP-A Partnership, the capital accounts of all of the limited partners were equalized such that the limited partners of the QP-A Partnership would have been invested in the Partnerships since the inception of the L.P. Partnership. Together, the L.P. Partnership and QP-A Partnership are referred to as the Partnerships. The general partner of the L.P. Partnership and the QP-A Partnership is Kennedy Wilson Property Services III, L.P., a Delaware limited partnership (the General Partner), and the special limited partner of the L.P. Partnership and the QP-A Partnership is Kennedy Wilson Property Special Equity III, LLC, a Delaware limited liability company (the Special Limited Partner). The limited partnership agreements of the L.P. Partnership and the QP-A Partnership were amended on December 18, 2009 to extend the subscription period from December 19, 2009 to June 30, 2010. The limited partnership agreements of the Partnerships were amended again on July 28, 2010 to extend the subscription period from June 30, 2010 to August 16, 2010 with respect to the admission of certain prospective investors and to permit for corresponding increases in commitments of the General Partner and any limited partner that had previously agreed to increase its commitment at any subsequent closing.
The investment objective of the Partnerships is to acquire: office, multifamily, industrial, and retail properties, and investments in debt securities in the real estate market that the General Partner believes can be acquired at substantial discounts to both historical and replacement cost. These properties will generally be located in selected geographic markets on the west coast of the U.S., Hawaii, and Japan. Under the terms of the partnership agreements, the Partnerships shall continue until the eighth anniversary of the effective date of December 19, 2007 and may be extended (i) by the General Partner in its discretion for one additional two-year period, (ii) by the General Partner with the prior consent of the Advisory Board, for an additional two-year period, and (iii) by the General Partner with the prior consent of limited partners holding a majority of aggregate commitments for an additional one-year period.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Partnerships have been presented on a combined basis because the Partnerships are under common management and are jointly invested in each investment. All intercompany transactions are eliminated in combination. These combined financial statements should be read in conjunction with the partnership agreements.
USE OF ESTIMATES—The preparation of the accompanying combined financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and the reported amounts of revenues and expenses. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the combined financial statements in future periods.
CASH AND CASH EQUIVALENTS—The Partnerships consider their investment in a money market account to be a cash equivalent for purposes of the combined statements of cash flows.
The Partnerships maintain their cash in federally insured banking institutions. The account balances at these institutions periodically exceed the Federal Deposit Insurance Corporation's (FDIC) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC's insurance coverage. To mitigate this risk, the Partnerships place their cash with quality financial institutions and does not believe there is a significant concentration of credit risk.
FAIR VALUE MEASUREMENT—Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date.
A three-level hierarchy was established for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy level assigned to each investment in the partnerships is based on the assessment of the transparency and reliability of the inputs used in the valuation of such investment at the measurement date. The three hierarchy levels are defined as follows:


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KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010


Level 1 - Valuations based on unadjusted quoted market prices in active markets for identical securities.
Level 2 - Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets and quoted prices in markets that are not active.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.
The availability of valuation techniques and observable inputs can vary from investment to investment. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the investments existed. Accordingly, the degree of judgment exercised by the General Partner in determining fair value is greatest for investments classified as Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the General Partner's own assumptions are set to reflect those that market participants would use in valuing the asset or liability at the measurement date. The General Partner uses prices and inputs that it believes are current as of the measurement date.
VALUATION OF INVESTMENTS—The Partnerships' investments in real estate assets are stated at fair value using the income and market approaches. For the Limited Liability Companies (LLC) in which the Partnership has partial interest, the LLC's investments in real estate are also stated at fair value using the income and market approaches. The income approach requires the General Partner to estimate the projected operating cash flows of the real estate on an asset-by-asset basis, apply a capitalization rate to the reversion year's cash flows and discount the cash flows with a risk-adjusted rate for the respective holding periods. The market approach requires the General Partner to identify transactions for similar assets, if any, and apply asset specific adjustments for items such as location, physical condition and other pertinent factors which would impact fair value. The Partnerships' investments in notes are stated at fair value based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and the credit risk of the borrower to the current yield of similar fixed income securities.
The accuracy of estimating fair value for Level 3 investments cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active markets, and may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
The Partnerships' investments in real estate and real estate related assets and real estate related fixed income securities are accounted for on a closing-date basis.
CONCENTRATION OF RISK—Substantially all of the Partnerships' investments are concentrated in real estate related investments in California, Washington, and Hawaii. Adverse conditions in the sector or geographic locations would likely result in material declines in the value of the Partnerships' investments.
REVENUE RECOGNITION—Dividend income from investments in real estate and real estate related entities is recorded when a disbursement has been approved and declared from the underlying investments of the Partnerships. Undistributed earnings from real estate and real estate related entities are considered by the General Partner in estimating the fair value of these investments.
Interest income on interest in notes is recognized on the accrual basis in the period earned unless deemed doubtful of collection or the related security is in default.
INCOME TAXES—Neither the L.P. Partnership nor the QP-A Partnership is subject to federal or state income taxes, and accordingly, no provision for income taxes has been made in the accompanying combined financial statements. The partners are required to report their proportional share of income, gains, loss, credit, or deduction on their respective tax returns.
The Partnerships are required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, which could result in the Partnerships recording a tax liability that would reduce net

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KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010


assets. Based on their analysis, the Partnerships have determined that there are no tax benefits that would have a material impact on the Partnerships financial position or results of operations. The tax years 2007 (year of inception) through 2011 remain open to examination by the taxing jurisdictions to which the L.P. Partnership is subject. The tax years 2009 (inception) through 2011 are the earliest years open to examination by taxing jurisdictions to which the QP-A Partnership is subject.
NOTE 3FAIR VALUE OF INVESTMENTS
The following table (unaudited) presents the classification of the Partnerships' fair value measurements as of December 31, 2012:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments in real estate assets
 
$

 
$

 
$
121,590,776

 
$
121,590,776

Investments in notes
 

 

 
5,755,543

 
5,755,543

 
 
$

 
$

 
$
127,346,319

 
$
127,346,319

The following (unaudited) table presents changes in Level 3 investments for the year ended December 31, 2012:
 
 
January 1, 2012
 
Purchases
 
Sales
 
Realized gains or (losses)
 
Unrealized appreciation (depreciation)
 
Total
Investments in real estate assets
 
$
130,459,829

 
$
882,527

 
$
(14,012,491
)
 
$
3,448,198

 
$
812,713

 
$
121,590,776

Investments in notes
 
5,361,423

 
287,446

 

 

 
106,674

 
5,755,543

 
 
$
135,821,252

 
$
1,169,973

 
$
(14,012,491
)
 
$
3,448,198

 
$
919,387

 
$
127,346,319

The net change in unrealized appreciation on investments that use Level 3 inputs still held as of December 31, 2012 was $919,387 (unaudited).
The following table (unaudited) presents the classification of the Partnerships fair value measurements as of December 31, 2011:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments in real estate assets
 
$

 
$

 
$
130,459,829

 
$
130,459,829

Investments in notes
 

 

 
5,361,423

 
5,361,423

 
 
$

 
$

 
$
135,821,252

 
$
135,821,252


The following table (unaudited) presents changes in Level 3 investments for the year ended December 31, 2011:
 
 
January 1, 2011
 
Purchases (1)
 
Sales (1)
 
Realized gains or (losses)
 
Unrealized appreciation (depreciation)
 
Total
Investments in real estate assets
 
$
97,597,889

 
$
29,644,311

 
$

 
$

 
$
3,217,629

 
$
130,459,829

Investments in notes
 
9,786,984

 

 
(5,004,101
)
 

 
578,540

 
5,361,423

 
 
$
107,384,873

 
$
29,644,311

 
$
(5,004,101
)
 
$

 
$
3,796,169

 
$
135,821,252

—————
(1)    At December 31, 2010, the Funds had an investment in an entity holding a nonperforming loan, which was collateralized by a condominium complex. In March 2011, the investee foreclosed on the loan and took ownership of the real estate. At the time of the foreclosure, the Funds' investment in the loan was $5 million (unaudited), which was reclassified from investments in notes to investments in real estate assets during the period ended December 31, 2011.

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KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010


The net change in unrealized appreciation on investments that use Level 3 inputs still held as of December 31, 2011 was $3,796,169 (unaudited).
The following table presents the classification of the Partnerships' fair value measurements as of December 31, 2010:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Interests in real estate assets
 
$

 
$

 
$
97,597,889

 
$
97,597,889

Interests in notes
 

 

 
9,786,984

 
9,786,984

 
 
$

 
$

 
$
107,384,873

 
$
107,384,873

The following table presents changes in Level 3 investments for the year ended December 31, 2010:
 
 
January 1, 2010
 
Net Purchase or Sales
 
Realized Gains or Losses
 
Unrealized Appreciation or (Depreciation)
 
Net transfer in or out of Level 3
 
Total
Interests in real estate
  assets
 
$
66,118,818

 
$
23,686,406

 
$

 
$
7,792,665

 
$

 
$
97,597,889

Interests in notes
 
4,342,588

 
6,120,803

 

 
(676,407
)
 

 
9,786,984

 
 
$
70,461,406

 
$
29,807,209

 
$

 
$
7,116,258

 
$

 
$
107,384,873

The net change in unrealized appreciation on investments that use Level 3 inputs still held as of December 31, 2010 was $7,116,258.
Since inception, all investments have been classified as Level 3 investments and there have been no transfers between other levels of the hierarchy.
In estimating fair value of investments in real estate assets and notes, the Fund considers significant inputs such as capitalization and discount rates. The table (unaudited) below describes the range of inputs used as of December 31, 2012 and 2011:
 
 
Cap rate
 
Discount rate
 
 
Min
 
Max
 
Min
 
Max
Multifamily
 
5.25
%
 
7.00
%
 
7.50
%
 
8.75
%
Office
 
6.25

 
8.00

 
7.50

 
9.00

Land and Condo
 
N/A

 
N/A

 
8.00

 
12.00

Valuing real estate related assets and indebtedness, the Fund considers significant inputs such as the term of the debt, value of collateral, current loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used by the Fund for these types of investments range from 2.25% to 9.30% (unaudited).
The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision, cannot be substantiated by comparison to quotes prices in active markets, and may not be realized in a current sale of immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including cap rates, discounts rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
NOTE 4RELATED PARTY TRANSACTIONS
ACQUISITION OF INVESTMENTS—During 2010, the Partnerships acquired the following investments from related parties:
An ownership interest in Fairways 340, LLC was acquired from an affiliate of the General Partner and Special Limited Partner for $9,630,450.

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KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010


The remaining ownership interest in KW Federal Way, LLC was acquired from affiliates of the General Partner and Special Limited Partner for $1,317,877.
The acquisition of Cypress was financed in part by a note from the affiliate at the underlying investee company level and was repaid in full by the underlying investee company in 2010.
MANAGEMENT FEE AND REIMBURSEMENTS—The Partnerships shall pay the General Partner a management fee equal to 1.500% per annum of the aggregate commitments of the nonaffiliated partners of which 1.125% is for investment services and 0.375% is for placement fees paid by the General Partner. The Partnerships incurred $1,645,201 (unaudited), $1,658,333 (unaudited), and $3,554,005 of management fees for the years ended December 31, 2012, 2011, and 2010, respectively.
The management fee shall be reduced by any breakup fees, transaction fees, and monitoring fees received by the General Partner or an affiliate of the General Partner. The management fee will also be reduced, in any period, for any organizational expenses that the Partnerships pay in excess of $2 million. If the management fee reduction exceeds the management fee in any period, then any excess shall be carried forward to reduce management fees in future periods. There have been no reductions for the years ended December 31, 2012 (unaudited), 2011 (unaudited), and 2010.
During 2010, certain limited partners entered into separate letter agreements upon their admission to the Partnerships. The letter agreements stipulate that the limited partners shall not be required to make capital contributions for management fees that would be due for the period from inception of the Partnerships through the limited partners' admission until such time as the limited partners have received distributions related to investments made prior to their admission (including preferred return). The accrued and unpaid fees related to these arrangements totaled $1,559,074 (unaudited) as of December 31, 2012 and 2011 and are included in due to General Partner in the accompanying combined statements of financial condition.
In addition, the Partnership paid an affiliate of the General Partner and the Special Limited Partner reimbursements for administrative and accounting work in connection with the annual audits. These reimbursements were $20,000 (unaudited),$20,000 (unaudited) and $20,000 for the years ended December 31, 2012, December 31, 2011 and December 31, 2010, respectively.
ACQUISITION FEES—The Partnerships shall pay the General Partner an acquisition fee with respect to each investment equal to 1% of the nonaffiliated partners' percentage of the total acquisition cost of each investment on the closing of an acquisition. The Partnerships incurred total acquisition fees of $0 (unaudited), $0 (unaudited), and $412,487 during 2012, 2011, and 2010, respectively.
During 2011, certain limited partners entered into separate letter agreements upon their admission to the Partnerships. The letter agreements stipulate that the limited partners shall not be required to make capital contributions for acquisition fees incurred by the Partnerships prior to the limited partners' admission until such time as the limited partners have received distributions related to investments made prior to their admission (including preferred return). The fees related to these arrangements totaled $503,169 (unaudited) as of December 31, 2012 and December 31, 2011 and are included in due to General Partner in the accompanying combined statements of financial condition. The General Partner advanced $503,169 (unaudited) to the Partnerships in order to facilitate the equalization, which was required due to the admission of the new limited partners.
ORGANIZATION EXPENSE—The Partnerships shall reimburse the General Partner for up to $2 million of organizational expense incurred on behalf of the Partnerships. Organization expenses in excess of $2 million will reduce the management fee paid to the General Partner. The Partnerships have incurred organization expenses of $2,000,000 in years prior to 2011, and no reduction in the management fee paid to the General Partner has been required.
NOTE 5PARTNERS' CAPITAL
CONTRIBUTION—The total committed capital of the L.P. Partnership is $45,000,000 as of December 31, 2012 (unaudited), December 31, 2011 (unaudited) and December 31, 2010, of which 93.32% (unaudited), 88.59% (unaudited) and 83.46% has been called, respectively. The total committed capital of the QP-A Partnership is $80,555,556 as of December 31, 2012 (unaudited), December 31, 2011 (unaudited) and December 31, 2010, of which 94.16% (unaudited), 88.84% (unaudited), and 83.39% has been called, respectively.
The General Partner is authorized to call additional capital in its sole discretion when additional capital is required to acquire investments, provide working capital, establish reserves, or pay expenses, costs, losses, or liabilities of the Partnerships. No limited partner shall be required to make any additional capital contributions in excess of its capital commitment. Any portion of a limited partner's capital commitment that has not been called by the General Partner or committed for investment within five years from the date of the initial closing is released from further commitment to the Partnerships. Also, any portion of a limited partner's capital commitment that has been initially contributed but that has been distributed to the limited partner during the two-year period following the date of the initial closing is subject to recontribution during such two-year period.

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KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010



DISTRIBUTIONS—Distributions of net cash flow shall initially be made to the partners based on the percentage of their capital contribution to the total capital contributions. The initial amount apportioned to the limited partners shall be distributed to the limited partners and the Special Limited Partner as follows:
i.First, 100% to limited partners until the limited partners have received cumulative distributions equal to the sum of (i) limited partners aggregate investment contributions made with respect to realized investments and (ii) limited partners allocable share of limited partners cost contributions;
ii.Second, 100% to limited partners until the unpaid preferred return (9%) of limited partners is reduced to zero;
iii.Third, either (i) 100% to limited partners or (ii) 50% to the Special Limited Partner and 50% to limited partners, as the case may be, to the extent necessary so that the aggregate distributions to the Special Limited Partner with respect to limited partners equals 20% of the cumulative amount of distributions made to limited partners; and
iv.Thereafter, (i) 20% to the Special Limited Partner and (ii) 80% to limited partners.
The amounts distributed to the Special Limited Partner over the life of the Partnerships are subject to a giveback provision. Carried interest distributions to the Special Limited Partner that exceed 20% of distributions to the limited partners, excluding amounts distributed as return of contributions, are to be returned to the Partnerships and immediately distributed to the limited partners.
ALLOCATION OF PARTNERSHIP INCOME AND LOSSES—The allocation of Partnership income and loss will generally follow the allocation of distributions.
NOTE 6NOTE PAYABLE
On December 23, 2008, the Partnerships borrowed $11,000,000 (unaudited) from Pacific Western Bank in order to acquire interests in two entities owning multifamily real estate projects in advance of anticipated additional investor contributions. This note was initially due on June 30, 2009 and was extended to March 31, 2010 after making a principal payment of $3,000,000 (unaudited) on December 31, 2009. On April 20, 2010, a $3,000,000 principal payment was made and the loan was extended to November 30, 2010. Subsequent payments of $750,000 per month were made in May, June, and July of 2010, and a final principal payment in the amount of $2,750,000 was made in August 2010. The note payable accrued interest at 5% per annum and was a general obligation of the Partnerships.
NOTE 7FINANCIAL HIGHLIGHTS
The Internal Rate of Return (IRR) since inception of the limited partners of the L.P. Partnership, net of all fees and profit allocations to the Special Limited Partner, is 9.64% (unaudited), 10.80% (unaudited), and 15.66% from inception through December 31, 2012, 2011, and 2010, respectively.
The IRR since inception of the limited partner of the QP-A Partnership, net of all fees and profit allocations to the Special Limited Partner is 9.83% (unaudited) , 11.09% (unaudited), and 16.37% from inception through December 31, 2012, 2011, and 2010, respectively.
The IRR was computed based on the actual dates of the cash inflows (capital contributions), outflows (cash distributions), and the ending net assets at the end of the period (residual value) of the limited partners' capital accounts as of December 31, 2012.
The following details certain financial ratios of the Partnerships for the years ended December 31:

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KW PROPERTY FUND III, L.P. AND
KW PROPERTY FUND III (QP-A), L.P.
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited) and 2010


 
 
December 31,
 
 
2012
 
2011
 
2010
 
 
L.P. Partnership
 
QP-A Partnership
 
L.P. Partnership
 
QP-A Partnership
 
L.P. Partnership
 
QP-A Partnership
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
Ratio to average limited
     partners’ capital:
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income (loss)
 
3.34
 %
 
3.35
 %
 
2.37
 %
 
2.38
 %
 
(0.34
)%
 
(0.35
)%
Total expenses
 
2.79
 %
 
2.80
 %
 
1.93
 %
 
1.94
 %
 
4.51
 %
 
4.69
 %
Incentive allocation
 
(2.38
)%
 
(2.39
)%
 
(0.05
)%
 
(0.05
)%
 
1.77
 %
 
1.84
 %
Total expenses and incentive
     allocation
 
0.41
 %
 
0.41
 %
 
1.88
 %
 
1.89
 %
 
6.28
 %
 
6.53
 %
The net investment income and total expense ratios (including incentive allocation) are calculated for the limited partners taken as a whole. The computation of such ratios, based on the amount of net investment income, expenses, and incentive allocation assessed to an individual investor, may vary from these ratios based on the timing of capital transactions. The above ratios are computed based upon the weighted average limited partners' capital of the Partnerships as measured at the end of each monthly accounting period for the years ended December 31, 2012, 2011, and 2010.
NOTE 8SUBSEQUENT EVENTS
Management has evaluated all subsequent events through March 29, 2013 the date that the financial statements are available for issuance.


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Independent Auditors' Report
The Managing Members
KW/WDC Portfolio Member LLC and One Carlsbad:
We have audited the combined statements of operations, equity and cash flows of KW/ WDC Portfolio Member LLC (a Delaware limited liability company) and subsidiaries and One Carlsbad for the year ended December 31, 2010. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audit.  
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows of KW/WDC Portfolio Member LLC and subsidiaries and One Carlsbad for the year ended December 31, 2010 in conformity with U.S. generally accepted accounting principles.
The accompanying combined balance sheets of KW/WDC Portfolio Member LLC and subsidiaries and One Carlsbad, as of December 31, 2012 and 2011 and the related statements of operations, members' equity and cash flows for each of the two-year period ended December 31, 2012, were not audited by us, and accordingly, we do not express an opinion on them.
 
/s/ KPMG LLP

Los Angeles, California
March 10, 2011







121

    

KW/WDC Portfolio Member LLC and Subsidiaries
(A Delaware Limited Liability Company)
and One Carlsbad
Combined Balance Sheets

 
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
 
(Unaudited)
Assets
 
 
 
 
Real Estate
 
 
 
 
Land
 
$
20,334,052

 
$
27,186,788

Buildings
 
62,174,310

 
82,892,252

Building improvements
 
3,913,756

 
4,068,665

Furniture and equipment
 
39,857

 
17,995

Total
 
86,461,975

 
114,165,700

Accumulated depreciation
 
(7,118,236
)
 
(6,074,754
)
Real Estate, net
 
$
79,343,739

 
$
108,090,946

Cash
 
332,149

 
533,632

Repair and replacement reserves held in escrow
 
2,097,285

 
2,211,881

Real estate taxes and insurance reserves held in escrow
 
373,280

 
427,415

Deferred financing costs, net of accumulated amortization
     of $424,331 (unaudited) and $367,039 (unaudited), respectively
 
457,847

 
732,479

Deferred leasing costs, net of accumulated amortization
     of $661,610 (unaudited) and $596,226 (unaudited), respectively
 
175,777

 
176,660

Accounts receivable
 
70,668

 
73,286

Accrued rent
 
163,892

 
200,629

Prepaid expenses and other assets
 
109,238

 
369,613

Total assets
 
$
83,123,875

 
$
112,816,541

Liabilities and partners' capital
 
 
 
 
Liabilities
 
 
 
 
Mortgage loans payable
 
$
60,268,632

 
$
81,530,632

Accounts payable and accrued expenses
 
664,603

 
630,903

Security deposits and other liabilities
 
482,477

 
662,544

Total liabilities
 
61,415,712

 
82,824,079

Partners' capital
 
 
 
 
Equity
 
21,708,163

 
29,992,462

Total liabilities and partners’ capital
 
$
83,123,875

 
$
112,816,541

See accompanying notes to combined financial statements


122

    

KW/WDC Portfolio Member LLC and Subsidiaries
(A Delaware Limited Liability Company)
and One Carlsbad
Combined Statements of Operations

 
 
Combined
 
Combined
 
Combined
 
One Carlsbad
 
Successor
 
Predecessor
 
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Period from June 26 to December 31,
 
Period from January 1 to June 25,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Rent
 
$
9,040,565

 
$
11,376,758

 
$
11,960,906

 
$
1,626,181

 
$
5,123,097

 
$
5,211,628

Other income
 
911,442

 
1,063,564

 
974,450

 
36,827

 
491,096

 
446,527

Total revenue
 
9,952,007

 
12,440,322

 
12,935,356

 
1,663,008

 
5,614,193

 
5,658,155

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
Property taxes
 
1,014,411

 
1,229,763

 
1,220,748

 
183,579

 
398,238

 
638,931

Utilities
 
1,006,462

 
1,218,543

 
1,133,723

 
67,165

 
579,349

 
487,209

Association fees
 
14,294

 
14,447

 
16,054

 
16,054

 

 

Repairs and maintenance
 
1,048,852

 
1,140,712

 
1,151,873

 
225,935

 
480,259

 
445,679

Management fees paid to related party
 
385,275

 
482,414

 
496,681

 
46,871

 
225,095

 
224,715

Acquisition fees paid to related party
 

 

 
442,315

 

 
442,315

 

General and administrative
 
898,690

 
1,091,910

 
1,119,093

 
120,071

 
517,910

 
481,113

Insurance
 
296,054

 
310,985

 
280,219

 
27,740

 
122,204

 
130,275

Depreciation and amortization
 
2,148,141

 
2,606,297

 
4,461,879

 
688,460

 
2,128,829

 
1,644,590

Interest
 
3,303,720

 
3,739,116

 
5,889,287

 
631,690

 
2,359,754

 
2,897,843

Marketing and promotion
 
108,825

 
121,000

 
153,016

 
5,917

 
61,194

 
85,905

Bad debt expense
 
20,106

 
(27,946
)
 
6,235

 

 
2,983

 
3,252

Other property operating
expenses
 
200,861

 
307,579

 
245,546

 

 
133,199

 
112,347

Total operating expenses
 
10,445,691

 
12,234,820

 
16,616,669

 
2,013,482

 
7,451,328

 
7,151,859

Gain on sale of real estate
 
7,504,022

 

 

 

 

 

Gain on exiting of mortgage loans
 

 

 
9,091,522

 
3,500,000

 
5,591,522

 

Revaluation loss on change in
     ownership
 

 

 
(8,386,821
)
 

 

 
(8,386,821
)
Net income (loss)
 
$
7,010,338

 
$
205,502

 
$
(2,976,612
)
 
$
3,149,526

 
$
3,754,387

 
$
(9,880,525
)
See accompanying notes to combined financial statements


123

    

KW/WDC Portfolio Member LLC and Subsidiaries
(A Delaware Limited Liability Company)
and One Carlsbad
Combined Statements of Equity

 
 
KW/WDC Portfolio Member LLC
 
One Carlsbad
 
Total
Balance, January, 1 2010 (unaudited)
 
$
17,438,864

 
$
1,661,028

 
$
19,099,892

Contributions
 

 
3,900,000

 
3,900,000

Distributions
 
(2,531,306
)
 

 
(2,531,306
)
Net loss
 
(9,880,525
)
 

 
(9,880,525
)
Balance, June 25, 2010
 
5,027,033

 
5,561,028

 
10,588,061

Contributions
 
16,154,513

 

 
16,154,513

Distributions
 
(1,850,000
)
 

 
(1,850,000
)
Net loss
 
3,754,387

 
3,149,526

 
6,903,913

Balance, December 31, 2010
 
23,085,933

 
8,710,554

 
31,796,487

Contributions (unaudited)
 

 
212,500

 
212,500

Distributions (unaudited)
 
(2,134,527
)
 
(87,500
)
 
(2,222,027
)
Net income (loss) (unaudited)
 
736,861

 
(531,359
)
 
205,502

Balance, December 31, 2011 (unaudited)
 
21,688,267

 
8,304,195

 
29,992,462

Contributions (unaudited)
 

 
127,700

 
127,700

Distributions (unaudited)
 
(15,422,337
)
 

 
(15,422,337
)
Net income (loss) (unaudited)
 
7,655,156

 
(644,818
)
 
7,010,338

Balance, December 31, 2012 (unaudited)
 
$
13,921,086

 
$
7,787,077

 
$
21,708,163

See accompanying notes to combined financial statements


124

    

KW/WDC Portfolio Member LLC and Subsidiaries
(A Delaware Limited Liability Company)
and One Carlsbad
Combined Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
Combined
 
Combined
 
Combined
 
One Carlsbad
 
 
 
 
 
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Year ended December 31,
 
Period from June 26 to December 31,
 
Period from January 1 to June 25,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
7,010,338

 
$
205,502

 
$
(2,976,612
)
 
$
3,149,526

 
$
3,754,387

 
$
(9,880,525
)
Adjustments to reconcile net loss to
    net cash provided by (used in)
    operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of real estate
 
(7,504,022
)
 

 

 

 

 

Gain on exiting of mortgage loans
 

 

 
(9,091,522
)
 
(3,500,000
)
 
(5,591,522
)
 

Revaluation loss on change in
   ownership
 

 

 
8,386,821

 

 

 
8,386,821

Depreciation and amortization
 
2,205,433

 
2,606,297

 
4,485,763

 
712,344

 
2,128,829

 
1,644,590

Change in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate taxes and insurance
   reserves held in escrow
 
54,135

 
(40,342
)
 
159,803

 
(27,303
)
 
493,575

 
(306,469
)
Accounts receivable
 
2,618

 
(32,443
)
 
(32,240
)
 
(8,991
)
 
6,752

 
(30,001
)
Prepaid expenses and other assets
 
260,375

 
(80,462
)
 
(6,889
)
 
912

 
(161,391
)
 
153,590

Accrued rent
 
36,737

 
(99,140
)
 
(68,476
)
 
(68,476
)
 

 

Accounts payable and accrued
   expenses
 
33,700

 
(187,777
)
 
(79,649
)
 
85,948

 
(1,338,759
)
 
1,173,162

Security deposits and other
   liabilities
 
(180,067
)
 
(36,552
)
 
(2,948
)
 
(16,252
)
 
(26,285
)
 
39,589

Net cash provided by (used in) operating activities
 
1,919,247

 
2,335,083

 
774,051

 
327,708

 
(734,414
)
 
1,180,757

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Additions to real estate
 
(830,049
)
 
(2,470,403
)
 
(1,034,004
)
 
(171,000
)
 
(636,483
)
 
(226,521
)
Proceeds from sale of real estate
 
35,215,861

 

 

 

 

 

Deferred leasing costs
 
(64,501
)
 
(16,391
)
 
(183,378
)
 
(183,378
)
 

 

Capital expenditure from repair and
   replacement reserves held in escrow
 
114,596

 
1,148,393

 
(229,641
)
 
(2,559,952
)
 
17,514

 
2,312,797

Net cash provided by (used in) investing activities
 
34,435,907

 
(1,338,401
)
 
(1,447,023
)
 
(2,914,330
)
 
(618,969
)
 
2,086,276

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Payments of mortgage loans payable
 
(21,262,000
)
 
(13,093
)
 
(13,624,212
)
 
(1,167,734
)
 
(12,456,478
)
 

Deferred financing fees
 

 
(76,142
)
 
(706,762
)
 
(151,000
)
 
(555,762
)
 

Contributions from members
 
127,700

 
212,500

 
20,054,513

 
3,900,000

 
16,154,513

 

Distributions to members
 
(15,422,337
)
 
(2,222,027
)
 
(4,381,306
)
 

 
(1,850,000
)
 
(2,531,306
)
Net cash provided by (used in) financing activities
 
(36,556,637
)
 
(2,098,762
)
 
1,342,233

 
2,581,266

 
1,292,273

 
(2,531,306
)
Net change in cash
 
(201,483
)
 
(1,102,080
)
 
669,261

 
(5,356
)
 
(61,110
)
 
735,727

Cash at beginning of period
 
533,632

 
1,635,712

 
966,451

 
9,918

 
1,692,260

 
956,533

Cash at end of period
 
$
332,149

 
$
533,632

 
$
1,635,712

 
$
4,562

 
$
1,631,150

 
$
1,692,260

Supplemental disclosure of cash flow
   information:
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest
 
$
3,029,089

 
$
3,693,665

 
$
4,420,620

 
$

 
$

 
$

Supplemental disclosure of noncash
   investing and financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Accrued additions to real estate
   included in accounts payable and
   accrued expenses
 
$

 
$
9,150

 
$
65,780

 
$

 
$

 
$

See accompanying notes to combined financial statements

125

Table of Contents
KW/WDC PORTFOLIO MEMBER LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
and ONE CARLSBAD
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited), and 2010

NOTE 1ORGANIZATION
KW/WDC PORTFOLIO MEMBER, LLC—KW/WDC Portfolio Member LLC, a Delaware limited liability company (the Company) was formed on March 16, 2006. The Company had three members: (1) Kenedix GP, LLC (KDX), (2) K-W Properties (KWP), and (3) KW/WDC Portfolio Executives LLC (EXEC). The Company was organized to own an interest in KW/WDC Apartment Portfolio LLC.
The Company is the Developer Member of KW/WDC Apartment Portfolio LLC (the Portfolio), a Delaware limited liability company, which had two members: (1) the Company, and (2) Wachovia Development Corporation (WDC). The Portfolio is engaged in the acquisition, operation, improvement, and future disposition of an apartment portfolio consisting of four apartment buildings one of which was sold in December 2008.
On June 25, 2010 KWP acquired 100% of the KDX and EXEC interests in the Company. Simultaneously, the Company acquired 100% of the WDC Member interest in the Portfolio and the WDC member withdrew from the Portfolio. This resulted in KWP being the sole member of the Company and the Company being the sole member of the Portfolio.
On June 25, 2010 Arbor Bay Shorepark LLC, a Delaware limited liability company (Arbor) was admitted to the Company as a member and joint manager.
Each member of the Company contributed capital in the amount of $2,734,662 on June 25, 2010 and has a 50% membership interest in the Company. In accordance with the Company's amended and restated limited liability agreement, distributions are made to members in proportion to their capital contributions until those capital contributions has been reduced to zero, and in proportion to their percentage interest thereafter.
As a result of the ownership changes described above, push down accounting was applied to the transaction. Accordingly, the assets of the Company were revalued based on the restated equity at the time of the transaction.
Kennedy-Wilson Holdings, Inc. (KWH), an affiliate of KWP, has guaranteed certain exceptions to the nonrecourse liability of the mortgage loan.
ONE CARLSBAD—KWI Property Fund I, LP, a Delaware limited partnership (Fund I), acquired the property known as One Carlsbad (Carlsbad) on March 23, 2005 as a wholly owned subsidiary. Carlsbad consists of two suburban office buildings with surface parking located in Carlsbad, California. Kennedy-Wilson Property Services, Inc., a Delaware corporation and an affiliate of KWH, is the general partner of Fund I. Subsequently, on January 31, 2006, a 62.42% undivided interest in this property was sold to Sunrise Property Associates, LLC, a Delaware limited liability company, (Sunrise) and a Tenancy in Common Agreement was executed effective January 31, 2006.
Pursuant to this Tenancy in Common Agreement, neither a partnership nor a joint venture is formed and each tenant in common shall contribute, share and pay, in accordance with its respective tenant in common interest, all losses, burdens, duties, liabilities, costs and expenses incurred in connection with the property. Each tenant in common will, from time to time in proportion to its respective tenant in common interest, contribute monies which the tenants in common, in good faith, mutually agreed in writing to be reasonably required to maintain and operate the property. Allocations of income and expense and distributions are to each tenant in common in proportion to its respective interest. The Tenancy in Common Agreement remains in place until one tenant in common becomes the sole owner, the tenants in common agree to terminate the agreement, or the property is sold.
On September 30, 2010 KWP an affiliate of KWH acquired a 90% interest in Sunrise and thereby became the majority owner and manager of the 62.42% tenant in common.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of KW/WDC Portfolio Member LLC and One Carlsbad (the Entities) have been presented on a combined basis because the Entities are under common management. All intercompany transactions have been eliminated in combination.
PRINCIPLES OF COMBINATION AND CONSOLIDATION—The combined financial statements include the consolidated accounts of the Company with its wholly owned subsidiaries and One Carlsbad.
The Portfolio indirectly owns its real estate through the following wholly owned subsidiaries:
KW/WDC BEAVERTON, LLC-KW/WDC Beaverton LLC (Beaverton) was formed on March 17, 2006, with the Portfolio as the sole member. Beaverton acquired the real property known as the Villas at Arbor Creek Apartments, a 440-unit apartment

126

Table of Contents
KW/WDC PORTFOLIO MEMBER LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
and ONE CARLSBAD
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited), and 2010

complex located in Beaverton, Oregon. On April 16th, 2012 Beaverton was sold for $35,500,000 (unaudited). Net proceeds from the sale were $13,952,337 (unaudited) which were deposited with a third party accommodator for purpose of a 1031 exchange. The 1031 exchange did not materialize and all of the proceeds from the sale were sent to the Company's two members. The JV's basis in the asset was approximately $28,000,000 (unaudited). The JV realized and recognized $7,504,021 (unaudited) of gain from the sale. KW's share of the gain is half given its 50% ownership and straightforward cash distribution provisions.
KW/WDC SACRAMENTO, LLC-KW/WDC Sacramento LLC (Sacramento) was formed on March 16, 2006, with the Portfolio as sole member. Sacramento acquired the real property known as the Shorepark Apartments, a 393-unit apartment complex located in Sacramento, California.
KW/WDC VALLEJO, LLC-KW/WDC Vallejo LLC (Vallejo) was formed on March 16, 2006, with the Portfolio as sole member. Vallejo acquired the real property known, as the Bay Village Apartments, a 260-unit apartment complex located in Vallejo, California.
Each of the above entities shall exist until December 31, 2056, unless terminated sooner pursuant to the limited liability company agreement or by operation of law.
REAL ESTATE-The three apartment complexes, discussed above that were still owned at December 31, 2011, were all acquired in March 2006 for a combined acquisition cost of $117,986,938, including capitalized acquisition costs of $1,935,638. As a result of the push down accounting described in the transaction above, the fair value of the real estate and related intangible assets was adjusted to $93,465,482 at the time of the transaction on June 25, 2010.
The fair value of real estate acquired was allocated to the acquired tangible assets, consisting primarily of land and building, and to the fair value of the identified acquired intangible assets, which primarily comprised in-place leases valued at $1,213,871, which was fully amortized in 2010.
The fair value of real estate was determined by valuing the property as if it were vacant, which was then allocated to land and building, based on management's determination of the relative fair values of these assets. The fair value of the acquired in-place lease value was determined by calculating the present value of the cash flows provided by the leases, net of related incremental expenses over the estimated lease-up period.
Carlsbad was acquired on March 23, 2005 for $19,615,125, including capitalized acquisition costs of $240,125. The fair value of real estate acquired was allocated to the acquired tangible assets, consisting of land and building, and to the fair value of the identified acquired intangible assets, which comprised in-place and above and below market lease values.
Property is recorded at cost and is depreciated using the straight line method over the estimated useful lives of the assets as follows:
Building
 
39 years
Building improvements
 
10 - 39 years
Equipment
 
7 - 10 years
Tenant improvements
 
Lesser of useful life of the asset or
  lease
IMPAIRMENT OF LONG LIVED ASSETS-Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Impairment of Long-Lived Assets ASC Subtopic 360-10. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
CASH-The Entities maintains their cash in federally insured banking institutions. The account balances at these institutions periodically exceed the Federal Deposit Insurance Corporation's (FDIC) insurance coverage and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. To mitigate this risk, the Entities place their cash with quality financial institutions.

127

Table of Contents
KW/WDC PORTFOLIO MEMBER LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
and ONE CARLSBAD
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited), and 2010

REPAIR AND REPLACEMENT RESERVES AND REAL ESTATE TAXES AND INSURANCE HELD IN ESCROW-Deposits in escrow are typically funds held by a mortgage lender that are restricted in use for payment of real estate taxes, property insurance, and certain capital expenditures. Funds in tax and insurance escrows are used to pay real estate taxes and insurance premiums directly to the taxing authorities and insurance agencies, respectively. Funds in capital expenditure escrows are generally disbursed as reimbursement to the borrower upon submission of satisfactory evidence that the related capital expenditures are incurred as anticipated. These escrow deposits are refundable to the borrower upon repayment of the mortgage loan.
ACCOUNTS RECEIVABLE-Accounts receivable due from tenants are recorded at the contractual amount as determined by the lease agreements, and do not bear interest. The allowance for doubtful accounts is the Entities' best estimate of the amount of probable credit losses in the Entities' existing accounts receivable. The Entities determine the allowance based on historical experience and specific item identification, which is reviewed on a quarterly basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
DEFERRED FINANCING AND LEASING COSTS-Costs incurred in obtaining the mortgage loans are capitalized and amortized over the term of the mortgage loans on a straight-line basis, which approximates the effective-interest method. Amortization of the deferred financing costs were $234,071 (unaudited), $112,941 (unaudited) and $18,713 for the years ended December 31, 2012, 2011, and 2010, respectively, and is included in interest expense in the accompanying combined statements of operations. Costs incurred in securing leases are capitalized as deferred leasing costs and amortized over the life of the related lease.
INCOME TAXES-No provision has been made in the accompanying consolidated financial statements for federal or state income taxes, as any such taxes related to the revenues and expenses of the Entities are the responsibility of the members/partners.
The Entities are required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement, which could result in the Entities recording a tax liability that would reduce net assets. Based on their analysis, the Entities have determined that there are no tax benefits that would have a material impact on the Entities' financial position or results of operations. The tax years 2006 through 2010 remain open to examination by the taxing jurisdictions to which the Entities are subject.
REVENUE RECOGNITION-Residential leases are for one year or less and revenue is recognized as earned. The lease amount for residential leases is fixed over the term of the lease and as such earned revenue approximates straight line revenue.
Office leases are typically entered into for a period of 5 years. Rental revenue related to office properties is recognized on the straight-line basis over the terms of the leases.
USE OF ESTIMATES-The preparation of the accompanying combined financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenues and expenses. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
NOTE 3MORTGAGE LOANS PAYABLE
SACRAMENTO-On June 1, 2006, Sacramento refinanced their mortgage loan with Wachovia for a total amount of $38,800,000 (the Sacramento Loan). The Sacramento Loan accrued interest at a fixed rate of 6.30% and required monthly interest-only payments until the loan was settled at a discount on September 29, 2010. At the time of the settlement, the loan had an outstanding balance of $41,067,860 including principal and accrued interest. The loan was settled for $34,000,000 in cash,$1,476,338 in retained escrow funds resulting on a gain of $5,591,522. This gain is included in the gain on exiting of mortgage loans in the accompanying combined statement of operations.
On September 29, 2010, the Sacramento Loan was refinanced with a Fannie Mae $28,790,000 10-year loan. The Fannie Mae Sacramento Loan accrues interest at a fixed rate of 4.39% and requires monthly interest-only payments until May 1, 2013, at which time, principal and interest payments of $143,999 are due on a monthly basis until maturity. The loan matures on October 1, 2020 at which point all accrued and unpaid interest along with the principal amount outstanding, shall be due. The Fannie Mae Loan may be prepaid in whole, but not in part, with no prepayment premium any time after the last calendar day of the 4th month prior to the month in which the maturity date occurs (the open period). If any prepayment occurs prior to the open period but after

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Table of Contents
KW/WDC PORTFOLIO MEMBER LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
and ONE CARLSBAD
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited), and 2010

the Yield Maintenance Period End Date, which is 114 months from October 1, 2010, the prepayment premium is 1.00% of the amount of principal being prepaid. If the prepayment occurs prior to the Yield Maintenance Period End Date, the lender is to be paid a prepayment fee calculated as the greater of either (A) 1.00% of the principal amount being prepaid or (B) the present value of a series of payments equal to the payment differential over the remaining life of the loan that will allow the lender to attain a certain minimum yield maintenance premium as defined in the promissory note. The Fannie Mae Loan is secured by a first deed of trust and assignment of leases and rents of the Sacramento Property.
Due to the difference between the amounts of the discounted payoff of the Sacramento Loan and the new Fannie Mae loan, the partnership contributed additional equity of $5,867,089 in 2010.
VALLEJO-On June 1, 2006, Vallejo refinanced their mortgage loan with Wachovia for a total amount of $24,500,000 (unaudited) (the Vallejo Loan).The Loan accrued interest at a fixed rate of 6.30% and required monthly interest-only payments until the loan was settled on September 29, 2010.
On September 29, 2010, the Vallejo Loan with a principal balance of $24,500,000 was refinanced with a Fannie Mae $21,100,000 10-year loan. The Fannie Mae Vallejo Loan accrues interest at a fixed rate of 4.39% and requires monthly interest-only payments until May 1, 2013, at which time, principal and interest payments of $105,536 are due on a monthly basis until maturity. The loan matures on October 1, 2020 at which point all accrued and unpaid interest along with the principal amount outstanding, shall be due. The Fannie Mae Loan may be prepaid in whole, but not in part, with no prepayment premium any time after the last calendar day of the 4th month prior to the month in which the maturity date occurs (the open period). If any prepayment occurs prior to the open period but after the Yield Maintenance Period End Date, which is 114 months from October 1, 2010, the prepayment premium is 1% of the amount of principal being prepaid. If the prepayment occurs prior to the Yield Maintenance Period End Date, the lender is to be paid a prepayment fee calculated as the greater of either (A) 1.00% of the principal amount being prepaid or (B) the present value of a series of payments equal to the payment differential over the remaining life of the loan that will allow the lender to attain a certain minimum yield maintenance premium as defined in the promissory note. The Fannie Mae Loan is secured by a first deed of trust and assignment of leases and rents of the Vallejo Property.
Due to the difference between the amounts of the original Vallejo Loan and the new Fannie Mae loan, the members contributed additional equity of $3,993,252.
ONE CARLSBAD-Carlsbad entered into a loan agreement dated March 23, 2005 with Wachovia Bank, N. A. (Wachovia) for the principal sum of $15,400,000. The note accrued interest at 5.35%, with interest only payments through May 11, 2008, and principal and interest payments of $85,995 thereafter until maturity on April 11, 2010.
Pursuant to an agreement with Wachovia, interest and escrow requirements were paid as due from the maturity date until September 30, 2010 when a loan modification agreement was executed between the tenants in common and Wachovia. On September 30, 2010, a loan modification agreement was executed between the tenants in common and Wachovia. Pursuant to this loan modification, the loan was paid down by $1,000,000, and bears interest at 5% with interest only payments due until the extended maturity date of April 11, 2015 at which time all unpaid principal and interest shall be due. The loan modification further provided that the outstanding principal balance was reduced by $3,500,000. This gain is included in the gain on exiting of mortgage loans in the accompanying combined statement of operations.

Future combined principal payments (unaudited) on the mortgage notes payable are as follows for the years ended December 31:
Year
 
 Total
2013
 
$
1,371,281

2014
 
2,071,987

2015
 
2,078,807

2016
 
2,099,743

2017
 
2,119,175

Thereafter
 
38,349,007

Total
 
$
48,090,000

NOTE 4RELATED PARTY TRANSACTIONS

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Table of Contents
KW/WDC PORTFOLIO MEMBER LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
and ONE CARLSBAD
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited), and 2010

Commencing October 1, 2006, each Property entered into a management agreement with a third party, FPI Management, Inc. (FPI). In accordance with the management agreement, each Property pays a monthly fee of 4.0% of gross rental revenues as compensation for management services. Per the agreement, 2.25% (decreased from 2.5% in April 2011) and 2.25% is paid to FPI and 1.75% (increased from 1.5% in April 2011) and 0.75% is paid to KW Multi-Family Management Group, Ltd. (KWMF), which is an affiliate of KWP.
Commencing August 15, 2007, Beaverton entered into a management agreement with a third party, HSC Real Estate, Inc. (HSCREI) that replaced the agreement with FPI. In accordance with the management agreement, Beaverton pays a monthly fee of 4% of collected income as compensation for management services. Per the agreement, 3% is paid to HSCREI and 1% is paid to KWMF, which is an affiliate of KWP.
The Portfolio incurred $145,301 (unaudited), $163,236 (unaudited) and $150,406 in property management fees during the years ended December 31, 2012, 2011, and 2010, respectively, that were paid to KWP.
One Carlsbad entered into a management agreement with KWP. In accordance with the management agreement, KWP receives the greater of 3% per annum of the gross rentals of the property or $4,000 per month as a management fee, a construction supervision fees of 4% of costs incurred, and certain reimbursements. A separate listing agreement provides for leasing commissions pursuant to a schedule in line with industry standards.
Fees earned by KWP or KWP affiliates are as follows for the years ended December 31, 2012, 2011, and 2010:

 
 
Year ended December 31,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
(Unaudited)
 
 
Acquisition fees
 
$

 
$

 
$
442,315

Property management fees
 
35,310

 
31,755

 
46,871

Accounting fees
 
6,000

 
6,000

 
3,503

Leasing commissions
 

 

 
10,276

Construction supervision fees
 
7,188

 

 
4,563

Maintenance fees
 

 

 
1,500

Total
 
$
48,498

 
$
37,755

 
$
509,028

The construction supervision fees and leasing fees are capitalized to tenant improvements and deferred leasing costs, respectively.
NOTE 5LEASE ARRANGEMENTS
The following is a schedule of future minimum rents to be received under noncancelable operating leases for One Carlsbad as of December 31, 2012 (unaudited):
 
 
 
2013
 
$
868,031

2014
 
728,093

2015
 
600,232

2016
 
221,764

2017
 
203,472

Thereafter
 
67,087

Total
 
$
2,688,679

Contractual rents are normally increased over the term of the lease. Depending on local market factors, increases may be structured as a fixed percentage increase for each year of the lease or as an increase based on the Consumer Price Index. Also, concessions in the form of free rent may sometimes be provided. Such determinable changes in contractual rents are recognized on a straight line basis over the life of the lease.

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Table of Contents
KW/WDC PORTFOLIO MEMBER LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
and ONE CARLSBAD
Notes to Combined Financial Statements
December 31, 2012 (Unaudited), 2011 (Unaudited), and 2010

In addition to base rent, most tenants are assessed monthly for their proportionate share of estimated net increases in property operating costs and real property taxes. Such expense reimbursements are typically amounts in excess of the tenant's share of expenses attributable to a base year stipulated in the lease.
Leases related to the multifamily investments do not exceed twelve months.
NOTE 6SUBSEQUENT EVENTS
Management has evaluated all subsequent events through March 29, 2013 the date that the financial statements are available for issuance.


131

    




Independent Auditors' Report
The Members
SJ Real Estate Investors, LLC and subsidiaries:

We have audited the accompanying consolidated balance sheet of SJ Real Estate Investors, LLC (a Delaware limited liability company) and subsidiaries (the Company) as of December 31, 2011, and the related consolidated statements of operations, members' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SJ Real Estate Investors, LLC and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated balance sheet of SJ Real Estate Investors, LLC and subsidiaries as of December 31, 2012, and the related consolidated statements of operations, members' equity and cash flows for the year ended December 31, 2012 and for period October 27, 2010 (inception) through December 31, 2010 were not audited by us, and accordingly, we do not express an opinion on them.

/s/ KPMG LLP

Dallas, Texas
March 9, 2012


132

    

SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Consolidated Balance Sheets

 
 
December 31,
 
 
2012
 
2011
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Real estate
 
 
 
 
Land
 
$

 
$
10,835,200

Buildings and improvements
 

 
99,960,855

Furniture and equipment
 

 
1,244,134

Total
 

 
112,040,189

Accumulated depreciation
 

 
(1,999,540
)
Total real estate, net
 

 
110,040,649

Cash
 
48,529

 
329,194

Deposits in escrow
 
43,775

 
1,118,046

Note receivable
 

 

Deferred financing costs, net
 

 
498,194

Accounts receivable, net
 

 
7,754

Prepaid expenses and other assets
 

 
174,595

Total assets
 
$
92,304

 
$
112,168,432

Liabilities and members' equity
 
 
 
 
Liabilities
 
 
 
 
Mortgage loan payable
 
$

 
$
67,000,000

Accounts payable and accrued expenses
 
20,000

 
384,693

Security deposits and other liabilities
 

 
593,268

Total liabilities
 
20,000

 
67,977,961

Commitments and contingencies
 
 
 
 
Members' equity
 
72,304

 
44,190,471

Total liabilities and members' equity
 
$
92,304

 
$
112,168,432

The accompanying notes are an integral part of these consolidated financial statements.



133

    

SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Consolidated Statements of Operations

 
 
December 31,
 
From October 27 (inception) through December 31,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
 
 
(Unaudited)
Revenue
 
 
 
 
 
 
Rental income
 
$
1,758,975

 
$
1,678,068

 
$

Other income
 
136,166

 
130,329

 

Total revenue
 
1,895,141

 
1,808,397

 

Expenses
 
 
 
 
 
 
Real estate taxes
 
378,033

 
888,929

 

Property operations
 
281,923

 
729,732

 

Management fees
 
61,534

 
79,000

 

General and administrative
 
264,340

 
639,317

 
50,497

Depreciation
 
697,760

 
1,999,540

 

Interest
 
2,014,217

 
5,873,745

 
1,054,400

Other
 
221,114

 
173,324

 

Total expenses
 
3,918,921

 
10,383,587

 
1,104,897

Gain on foreclosure
 
7,580,613

 
15,385,558

 

Net income (loss)
 
$
5,556,833

 
$
6,810,368

 
$
(1,104,897
)
The accompanying notes are an integral part of these consolidated financial statements.



134

    

SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Consolidated Statements of Members' Equity

 
 
Members' equity
Balance, January 1, 2010 (unaudited)
 
$

Contributions (unaudited)
 
29,000,000

Net loss (unaudited)
 
(1,104,897
)
Balance, December 31, 2010 (unaudited)
 
27,895,103

Contributions
 
9,485,000

Net income
 
6,810,368

Balance, December 31, 2011
 
44,190,471

Contributions (unaudited)
 
500,000

Distributions (unaudited)
 
(50,175,000
)
Net income (unaudited)
 
5,556,833

Balance at December 31, 2012 (unaudited)
 
$
72,304

The accompanying notes are an integral part of these consolidated financial statements.



135

    

SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Consolidated Statements of Cash Flows
 
 
Year ended December 31,
 
From October 27 (inception) through December 31,
 
 
2012
 
2011
 
2010
 
 
(Unaudited)
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
5,556,833

 
$
6,810,368

 
$
(1,104,897
)
Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
 
 
 
 
 
 
Gain on foreclosure
 
(7,580,613
)
 
(15,385,558
)
 

Loss on revaluation of mortgage loans
 

 

 

Depreciation
 
697,760

 
1,999,540

 

Bad debt expense
 

 
500

 

Amortization of deferred financing costs
 
529,050

 
597,960

 
99,650

Change in assets and liabilities:
 
 
 
 
 
 
Real estate taxes and insurance reserves held in escrow
 

 

 

Accounts receivable
 
7,754

 
(8,254
)
 

Prepaid expenses and other assets
 
174,595

 
(174,595
)
 

Accounts payable and accrued expenses
 
(364,693
)
 
(509,267
)
 
893,960

Security deposits and other liabilities
 
(593,268
)
 
593,268

 

Net cash flow provided by (used in) operating activities
 
(1,572,582
)
 
(6,076,038
)
 
(111,287
)
Cash flows from investing activities:
 
 
 
 
 
 
Additions to real estate
 

 
(5,761,446
)
 

Net proceeds from sale of property
 
116,923,501

 

 

Additions to note receivable
 

 

 
(90,893,185
)
Deferred leasing costs
 
(30,855
)
 

 

Deposits in escrow
 
1,074,271

 
(261,188
)
 
(856,858
)
Net cash flow provided by (used in) investing activities
 
117,966,917

 
(6,022,634
)
 
(91,750,043
)
Cash flow from financing activities:
 
 
 
 
 
 
Borrowings under mortgage loan payable
 

 

 
67,000,000

Payments of mortgage loan payable
 
(67,000,000
)
 

 

Deferred financing costs
 

 

 
(1,195,804
)
Contributions from members
 
500,000

 
9,485,000

 
29,000,000

Distributions to members
 
(50,175,000
)
 

 

Net cash flow (used in) provided by financing activities
 
(116,675,000
)
 
9,485,000

 
94,804,196

Net (decrease) increase in cash
 
(280,665
)
 
(2,613,672
)
 
2,942,866

Cash at beginning of period
 
329,194

 
2,942,866

 

Cash at end of period
 
$
48,529

 
$
329,194

 
$
2,942,866

Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 
$
1,889,028

 
$
5,391,174

 
$
435,500

Supplemental disclosure of noncash investing and financing activities:
 
 
 
 
During the year ended December 31, 2011, Notes Receivable of $90,893,185 were exchanged for property with fair value of $108,712,000 via foreclosure.
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents
SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)

NOTE 1ORGANIZATION
SJ Real Estate Investors, LLC, a Delaware limited liability company (the Company) was formed on October 27, 2010 (inception). The primary purpose of the Company is to invest in SJ Real Estate Manager, LLC, a Delaware limited liability company and wholly owned subsidiary, which in turn shall invest in SJ Real Estate Partners, LLC, a Delaware limited liability company (SJ Real Estate Partners), with improvements located theron, at 360 South Market Street, San Jose, California as 360 Residences (the Property). The Company obtained a bridge loan in an amount equal to $67,000,000 from German America Capital Corporation (the Loan), bearing interest at LIBOR plus varying spreads, with monthly interest-only payments due until maturity November 5, 2012 and purchased a promissory note in the principal amount of $124,232,587 (the Property Note), as well as related loan and security documents. The Property consists of 213 condominium units and 11,000 square feet of street level retail space.
The Company has four members: (1) K-W Properties, a California corporation (KWP), (2) KWF Real Estate Venture II, L.P., a Delaware limited partnership, (3) LF 360 Market LLC, a Delaware limited liability company, and (4) KW Funds - San Jose 1, LLC, a Delaware limited liability company (the Members).
The Members' Percentage Interests, as defined, in the Company at December 31, 2012 were as follows:
 
 
(Unaudited)
Member
 
Percentage Interest
KWP
 
15%
KWF Real Estate Venture II, L.P.
 
50%
LF 360 Market LLC
 
15%
KW Funds - San Jose 1, LLC
 
20%
Total
 
100%
The limited liability companies (LLCs) within the accompanying consolidated financial statements will continue in existence until dissolved in accordance with the provisions of their operating agreements and are funded through the equity contributions of their members. As LLCs, except as may otherwise be provided under applicable law, no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual companies. The members are not obligated to restore capital deficits.
Profits and losses are allocated to the members in such a manner that, the capital account of each member shall equal the amount which would have been distributed to such member pursuant to a hypothetical liquidation.
The limited liability company agreement requires that distribution of cash be made to the members in proportion to the unreturned capital contribution until each Member's unreturned capital contributions have been reduced to zero. Thereafter, cash distributions are made to the Members in proportion to their percentage interests.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-The consolidated financial statements include the accounts of the Company and its subsidiaries for which the Company has a majority voting or controlling financial interest. All significant intercompany items have been eliminated in the accompanying consolidated financial statements. The Company has no involvement with variable interest entities.
REAL ESTATE-On March 25, 2011, SJ Real Estate Partners, LLC foreclosed on the note receivable resulting in the ownership of the underlying real estate that had been used as collateral for the loan. The investee has no further recourse against the borrower. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310-30-40-40-2, Loans and Debt Securities Acquired with Deteriorated Credit Quality, when a loan reverts to real estate, it should be recorded at fair value, and a gain or loss recorded on the conversion date when there is a difference between the book value of the loan and the fair value of the collateral. Using a discounted cash flow model, management determined that the fair value of the real estate at March 28, 2011 was $108,712,000. After costs to foreclose were considered, a gain of $15,385,558 was recorded for the real estate.
The fair value of real estate acquired was allocated to the acquired tangible assets, consisting primarily of land and building. Since the building was vacant at the time of foreclosure, no value was given to intangible assets.


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Table of Contents
SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)


The following supplemental information summarizes the fair value of the assets acquired by the Company:
Real estate Assets
 
 
    Land
 
$
10,835,200

    Buildings and improvements
 
97,516,800

    Furniture and equipment
 
360,000


Property is depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements
 
10-39 years
Furniture and equipment
 
7-10 years
CASH —The Company maintains cash in federally insured banking institutions. The account balances at these institutions periodically exceed the Federal Deposit Insurance Corporation's (FDIC) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. To mitigate this risk, the Company places cash with quality financial institutions. The Company had no cash equivalents as of December 31, 2012 or 2011.
DEPOSITS IN ESCROW—Deposits in escrow are typically funds held by a mortgage lender that are restricted in use for payment of real estate taxes, property insurance, and certain capital expenditures. Funds in tax and insurance escrows are used to pay real estate taxes and insurance premiums directly to the taxing authorities and insurance agencies, respectively. Funds in capital expenditure escrows are generally disbursed as reimbursement to the borrower upon submission of satisfactory evidence that the related capital expenditures are incurred as anticipated. These escrow deposits are refundable to the borrower upon repayment of the mortgage loan.
ACCOUNTS RECEIVABLE—Accounts receivable due from tenants are recorded at the contractual amount as determined by the lease agreements, and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical experience and specific item identification, which is reviewed on a quarterly basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recognized $2,270 (unaudited) and $500 related to bad debt expense during 2012 and 2011, respectively, which is included in general and administrative expense on the consolidated statements of operations.
INCOME TAXES—No provision has been made in the accompanying consolidated financial statements for federal or state income taxes, as any such taxes related to the revenues and expenses of the Company are the responsibility of the members.
The Company is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement, which could result in the Company recording a tax liability that would reduce net assets. Based on their analysis, the Company determined that there are no tax benefits that would have a material impact on the Company's financial position or results of operations. The tax year 2010 remains open to examination by the taxing jurisdictions to which the entities are subject.
REVENUE RECOGNITION—Residential leases are for one year or less and revenue is recognized as earned. The lease amount for residential leases is fixed over the term of the lease and as such earned revenue approximates straight-line revenue.
SALE OF REAL ESTATE—Sales of real estate are recognized at the close of escrow when title to the real property passes to the buyer and there is no continuing involvement in the real property. The Company follows the requirements for profit recognition as set forth by the Sale of Real Estate ASC Subtopic 360-20. On April 16, 2012, the Property was sold for a gross sales price of $118,000,000 (unaudited) to an unrelated third party for a $7,580,613 gain (unaudited). Upon consummation of the sale, the Loan was repaid in full.
USE OF ESTIMATES—The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenues and expenses. As future events and their effects cannot be determined with precision, actual results could differ significantly from

138

Table of Contents
SJ REAL ESTATE INVESTORS, LLC AND SUBSIDIARIES
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2012 (Unaudited), 2011 and 2010 (Unaudited)

these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
NOTE 3RELATED PARTIES
Commencing April 15, 2011, the Company has a management agreement with a third party, FPI Management, Inc. (FPI). In accordance with the management agreement, the Company pays a monthly fee of 3% of collected rent as compensation for managing the property. Per the agreement, 2.0% is paid to FPI and 1.0% is paid to KW Multifamily Management Group, LLC (KWMF), which is an affiliate of KWP. In any event, the management fee will be no less than $6,000 per month to FPI and $3,000 per month to KWMF.
For the year ended December 31, 2012, the Company incurred $20,406 (unaudited), in property management fees which were paid to KWMF.
NOTE 4COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Currently, the Company does not have any material commitments or contingencies.
NOTE 5SUBSEQUENT EVENTS
The Company evaluated subsequent events through March 29, 2013, the date these financial statements were available for issuance.


139