E-Delivery

Annual report 2013 Risk Management A rigorous governance framework ensures the Fund is effectively and proactively managing risk from the date an investment is made until repayment proceeds are collected. Under the oversight of its independent lending review committee, every mortgage interest held by the Fund is underwritten, and recommended to it, by KV Capital Inc. Analysis and Valuation Graduated Approvals In underwriting each mortgage opportunity, KV Capital's experienced team of real estate based lending professionals employs a tailored, team based approach to evaluate the borrower, the value of the property pledged as security and the exits available to repay each loan. The Fund adheres to best practices corporate governance standards with both a majority independent Board of Directors and majority independent Lending Review Committee, each of which provide ongoing oversight of the Fund's operations and its investment portfolio. Each opportunity is assessed based on its specific merits, employing the professional judgment and experience of KV Capital's underwriting team. Typical due diligence includes: performing site visits, conducting background research on the borrower and the property, and completing a feasibility assessment of the project. The primary focus of underwriting is to develop comfort over the realizable value of the real property securing each mortgage in a foreclosure scenario. KV Capital Inc. approves every investment made by the Fund to ensure that the investment restrictions and compliance guidelines are met. Any investment proposed to be made by the Fund into a security that either exceeds 10% of assets, or that has a loan-to-value in excess of 70% is subject to a second rigorous review process and must be approved by the Fund's Lending Review Committee. A key component of the underwriting performed by KV Capital includes conducting third party verification of the information that is pertinent to each opportunity. Typical third party information collected during the underwriting process includes: credit checks, title searches, environmental assessments and an independent appraisal of the value of real property securing the mortgage. Asset Allocation Under the guidance of the Fund Manager, assets are allocated in accordance with the provisions of the Fund's operating policies to ensure the portfolio is well diversified based upon geographical, borrower, zoning, term, security position and loan-to-value criteria. The asset allocation model sets specific thresholds that ensure compliance on each investment. The Fund is focused on investing in mortgages that are secured on real property, require customized lending terms and have exit strategies to repay the financing within no more than two years. Typical projects financed include residential and commercial construction, equity take-outs of completed inventory and bridge financing positions. 8 Active Management KV Capital Inc. acts as the mortgage servicing entity for the Fund's investments. KV Capital Inc. provides regular monitoring of the mortgages that it underwrites, including collecting interest payments, performing ongoing site visits and engaging in regular communication with each borrower. KV Capital's active participation aides the borrowers in executing their exit strategy for the project, and protects the Fund's investment. As a result of the risk management process, to date the Fund has not experienced any loss of principal or accrued interest on any of its mortgage investments.

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