Along with the opportunities that senior housing investments provide, KMF is clear about the risks inherent within the senior housing industry.

THERE ARE SIX FUNDAMENTAL RISKS IN SENIOR HOUSING INVESTMENT:

1. Broad Expertise from Both Real Estate and Operational Perspective
Investment in senior housing requires an all-inclusive knowledge of both housing and operational services comprised of hospitality and care. Investment advisors must have the expertise to evaluate the "business" of senior housing from a broad real estate and operational perspective. Advisors must personally know the operating managers in the field and how to evaluate them.

2. Surplus Capital
The extraordinary investment opportunities in senior housing brought a surplus of undisciplined capital to the market during the last decade, causing oversupply in the assisted living segment in markets with ill-conceived product and designs. Well-conceived product types in viable markets have performed extremely well and maintain strong fundamentals. However, knowledge of consumer and sophisticated market research methodologies is critical to success.

3. Barriers to Entry
Barriers to entry present a double-edged sword. When barriers are present in local markets, it is difficult to get a new facility developed, while at the same time insulating existing facilities from competition. KMF seeks local markets that possess strong barriers to entry to ensure competitive market advantage, since most of our investment activity will be the acquisition of existing properties.

4. Regulatory Changes
Regulatory changes ranging from accounting practices to new state regulations have affected higher care segments of the senior housing industry during the last decade. Intimate involvement with industry policy makers allows KMF to keep abreast of regulatory changes early, allowing for proactive business planning adjustments.

5. Operating Liability
The professional liability exposure of senior care operators is inherent in the servicing of aging seniors. KMF investment strategies mitigate those risks by seeking investments with operators that have sophisticated risk management systems in place and/or by utilizing sale-leaseback structures. In addition, the senior apartments and independent sections have little, if any, core element, reducing this exposure significantly.

6. Diversification
Like all real estate segments, diversification across markets and operators is necessary for success. Some advisors have forgotten this lesson in senior housing.