FAIR VALUE MEASUREMENTS

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of March 31, 2014:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Marketable securities	$	8.5	$	—		$	—	$	8.5
Unconsolidated investments	—		—			82.0		82.0
Currency forward contract	—		(11.2		)	—		(11.2		)
Total	$	8.5	$	(11.2	)	$	82.0	$	79.3

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of December 31, 2013:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Marketable securities	$	4.0	$	—		$	—	$	4.0
Unconsolidated investments	—		—			81.1		81.1
Currency forward contract	—		(9.6		)	—		(9.6		)
Total	$	4.0	$	(9.6	)	$	81.1	$	75.5

Investments in joint ventures

Kennedy Wilson records its investments in KW Property Fund III, L.P., Kennedy Wilson Real Estate Fund IV, L.P., and SG KW Venture I, LLC (the "Funds") based upon the net assets that would be allocated to its interests in the Funds assuming the Funds were to liquidate their investments at fair value as of the reporting date. Kennedy Wilson’s investment balance in the Funds was $34.5 million and $33.5 million at March 31, 2014 and December 31, 2013, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of March 31, 2014, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $5.4 million.

Kennedy Wilson elected to use the fair value option ("FV Option") for two unconsolidated investment entities to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. Kennedy Wilson's investment balance in the FV Option investments was $47.5 million and $47.6 million at March 31, 2014 and December 31, 2013, respectively, which are included in unconsolidated investments in the accompanying balance sheets.

The following table summarizes our investments in unconsolidated investments held at fair value by type:



(Dollars in millions)	March 31, 2014		December 31, 2013
Funds	$	34.5	$	33.5
FV Option	47.5		47.6
Total	$	82.0	$	81.1

The following table presents changes in Level 3 investments for the three months ended March 31, 2014 and 2013:



	Three Months Ended March 31,
(Dollars in millions)	2014			2013
Beginning balance	$	81.1		$	68.4
Unrealized and realized gains	—			—
Unrealized and realized losses	—			—
Contributions	1.3			0.2
Distributions	(0.4		)	(0.2		)
Ending balance	$	82.0		$	68.4

The change in unrealized and realized gains and losses is included in income from unconsolidated investments in the accompanying statements of operations.

There was no material change in unrealized gains and losses on Level 3 investments during the three months ended March 31, 2014 and 2013 for investments still held as of March 31, 2014.

In estimating fair value of real estate held by the Funds and the two FV Option investments, Kennedy Wilson considers significant unobservable inputs such as capitalization and discount rates. The table below describes the range of unobservable inputs for real estate assets:



	Estimated Rates Used for
	Capitalization Rates	Discount Rates
Office	6.00% - 7.50%	7.00% - 9.75%
Retail	6.00% - 10.00%	9.00% - 12.00%
Hotel	6.50%	8.00%
Multifamily	5.75% - 6.75%	7.50% - 9.00%
Loan	n/a	1.75% - 12.00%
Land and condominium units	n/a	8.00% - 12.00%

In valuing real estate, related assets and indebtedness, Kennedy Wilson considers significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used by Kennedy Wilson for these types of investments range from 1.75% to 12.00%.

The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision and cannot be substantiated by comparison to quoted prices in active markets. As such, estimated fair value 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 cap rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.

Currency forward contracts

Kennedy Wilson has currency forward contracts to manage its exposure to currency fluctuations between its functional currency (U.S. dollars) and the functional currency (euros and GBP) of certain of its wholly-owned subsidiaries. To accomplish this objective, Kennedy Wilson hedged these exposures by entering into currency forward contracts to partially hedge Kennedy Wilson's exposure to its net investment in certain foreign operations caused by currency fluctuations. The currency forward contracts are valued based on the difference between the contract rate and the forward rate at maturity of the foreign currency applied to the notional value in that foreign currency discounted at a market rate for similar risks. Although Kennedy Wilson has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the counterparty risk adjustments associated with the derivative utilize Level 3 inputs. However, as of March 31, 2014, Kennedy Wilson assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its derivative positions and determined that the counterparty valuation adjustments are not significant to the overall valuation of its derivative. As a result, Kennedy Wilson has determined that its derivative valuation in its entirety be classified in Level 2 of the fair value hierarchy.

Changes in fair value are recorded in other comprehensive income in the accompanying consolidated statements of comprehensive income (loss) as the portion of the currency forward contract used to hedge currency exposure of its certain wholly owned subsidiaries qualifies as a net investment hedge under ASC Topic 815. The fair value of the derivative instruments held as of March 31, 2014 are included in accrued expenses and other liabilities on the balance sheet. See note 12 for a complete discussion on other comprehensive income including currency forward contracts and foreign currency translations.

The table below details the currency forward contracts Kennedy Wilson had as of March 31, 2014:



(Dollars in millions)								Change in Unrealized Gains (Losses)
Currency	Notional Amount	Trade Date	Settlement Date	Exchange Rate	Fair Value			Three Months Ended March 31, 2014
Euro	€129.3	5/31/2012 - 3/18/2014	8/12/2014 - 12/19/2016	1.2400 - 1.3925	$	(6.9	)	$	0.1
GBP	£95.5	8/23/2013 - 2/25/2014	8/28/2014 - 2/27/2019	1.5479 - 1.6371	(4.3		)	(1.7		)
Total					$	(11.2	)	$	(1.6	)

In order to manage currency fluctuations between the Company's functional currency (U.S. dollar) and the functional currency of KWR's functional currency (Japanese yen), the Company entered into forward foreign currency contracts to hedge a portion of its net investment in KWR. During the three months ended March 31, 2014, the Company recognized $0.8 million gross unrealized losses related to these hedges.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable including related party receivables, accounts payable, accrued expenses and other liabilities, accrued salaries and benefits, and deferred and accrued income taxes approximate fair value due to their short-term maturities. The carrying value of notes receivable (excluding related party notes receivable as they are presumed not to be an arm’s length transaction) approximates fair value as the terms are similar to loans with similar characteristics available in the market.

The Company accounts for its debt liabilities at face value plus net unamortized debt premiums and any fair value adjustments as part of business combinations. The fair value as of March 31, 2014 and December 31, 2013 for the senior notes payable, borrowings under lines of credit, investment debt and junior subordinated debentures were estimated to be approximately $1,662.8 million and $878.2 million, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $1,628.3 million and $850.8 million at March 31, 2014 and December 31, 2013, respectively.