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
)

















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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 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