The recent downturn and great recession in the real estate market has drastically impaired the value and performance of development projects across the country, including many of the geographic markets in which MKA operates. As a result, many of the Fund’s borrowers are facing market challenges that have affected their ability to repay MKA’s loans as originally structured. To maximize the performance of its loan portfolio, MKA has taken significant steps to increase its in-house loan monitoring, asset management and workout capabilities, including entering into a partnership with DEVCO, an established real estate developer and construction management company with a 25+ year track record of acquiring, managing, and developing real estate owned (REO) and development properties in MKA’s geographic markets. MKA closely and aggressively tracks the progress and performance of its projects. Site visits are typically made monthly by MKA and DEVCO Professionals to track progress, and senior lenders are contacted at least weekly so MKA can be involved in their decision making processes. Upon completion of a thorough assessment of each project and property, the Company moves to employ the following options to maximize its investment return:

• Work with the borrower to modify and/or restructure the existing loan
• Exercise its legal rights to the property under the trust deed
• Consider legal actions against the Personal Guarantors
• Negotiate with the Senior Lenders to make protective advances if the property value warrants

The Funds have historically made loans to small and mid-sized real estate developers in the Western United States. Because of its 20+ years of lending experience and close ties to the region’s real estate developers, MKA had historically received a steady stream of new lending opportunities.

In the past, MKA employed a dedicated outbound calling team to generate additional lending opportunities with real estate developers, and also periodically paid commissions to outside brokers for quality referrals. However, in today’s distressed real estate market, MKA has seen that the most compelling source of investment opportunities is from the FDIC and Senior Lenders holding impaired 1st trust deed loan portfolios. Notably, MKA has close relationships with over 20 of the most active lenders in the Western U.S., and is receiving a consistent flow of opportunities to purchase loans at discounts.

MKA has developed a reputation for creatively structuring loans to fit a particular situation or project. With in-house real estate development and construction capabilities and numerous project managers in each region, MKA believes it has an advantage in its ability to take on relatively more complex projects that require a greater degree of oversight than many of its competitors.

MKA began collaborating with DEVCO’s team in 2001 on real estate developments. In early 2008, MKA extended its relationship with DEVCO to enhance its development capabilities whereby DEVCO now acts as an in-house service provider on MKA’s projects. As such, DEVCO gives MKA unique capabilities and advantages over its competitors because it significantly expands MKA’s in-house resources for originating, underwriting, servicing and working out impaired loans. MKA believes that these advantages are amplified during difficult market environments such as today when real estate properties are more likely to be distressed and need to be closely examined and monitored to determine the best strategy for maximizing their potential return.

DEVCO’s capabilities add significant value in the following primary situations:

• Upon review of a potential investment, DEVCO is able to review and determine the economic prospects of the subject development quickly. DEVCO’s rapid response capability reduces the turnaround time on a loan’s underwriting, execution and funding, which provides an advantage against competitors that lack similar capabilities. In addition, the quality of the review has significantly greater credibility because DEVCO can leverage it is own development expertise and local market knowledge to analyze the critical factors of the project to determine whether it is likely to succeed or fail.
• DEVCO is able to analyze properties and reposition them as needed to attempt to maximize returns upon exit. While other lenders are restricted to financial and legal remedies when working out a troubled development, MKA can use DEVCO in a value-added manner to rezone, reposition, build out and/or lease and market a project to maximize its yield. With their collective local market experience and focus, MKA and DEVCO can initiate the critical improvements that seek to drive the highest value for the property. This partnership allows MKA to maximize its recoveries more effectively than its peers.
• DEVCO is able to assume the general contractor and construction management roles on a project through completion in circumstances when doing so is appropriate to maximize the return on MKA’s investment. DEVCO has deep knowledge and experience with subcontractors throughout its target markets, and can utilize those that it believes are most appropriate for each project.