CF2 is backed by a diversified portfolio of short-term real estate loans across six states: Arizona, Colorado, Texas, Tennessee, Georgia, and North Carolina. Your investment is not tied to a single loan or a single market share. Each investor is diversified across the entire portfolio.

The underlying collateral consists almost exclusively of first-lien loans secured by real property, with conservative underwriting standards and portfolio-level loan-to-value metrics typically in the mid-60% range. This diversification across geography, asset type, and borrower base is a key component of our capital preservation strategy.

CF2 operates with a 5% servicing fee and a 20% profit participation fee, calculated monthly on gross revenue. Importantly, investor distributions are paid net of these fees — the yield reported each month reflects what investors actually receive.

Our compensation structure aligns with performance and is designed to support disciplined underwriting, asset management, and long-term portfolio stability.

Capital Fund I (CF1) is the operating company that originates and services loans. All of our employees are employed by CF1, and this entity pays all the overhead to run the business and manage the fund.

Capital Fund II (CF2) is the variable return equity investment vehicle that provides the capital for the loan portfolio originated by CF1.

CF Investors Debt Fund (CFDF) is a separate debt vehicle offering a fixed return (currently SOFR + 275bps), secured by pledged collateral equal to at least 150% of invested capital.

CF2 investors participate in portfolio performance, while CFDF investors receive a fixed, contractual return backed by over-collateralized loans.

We temporarily paused new capital to protect investor returns.

In 2025, capital inflows outpaced loan demand due to slower real estate transaction volume. Accepting additional capital without sufficient deployment opportunities would dilute yields.

Our objective is to maintain portfolio efficiency and keep leverage within our targeted 35–40% range. This disciplined capital management reflects our fiduciary responsibility to existing investors.

We plan to reopen CF2 once loan demand and market conditions support efficient deployment.

Because capital discipline matters more than capital growth.

Accepting additional capital without sufficient loan demand would:

• Reduce leverage efficiency
• Increase cash drag
• Dilute yield

We paused capital raising to protect existing investors — not because of liquidity stress.

We will reopen when deployment conditions justify it.

On the surface, reducing leverage may seem beneficial. However, moderate, disciplined leverage enhances investor returns through positive arbitrage.

For example:

• Portfolio blended rate/yield: ~11%
• Cost of capital on facilities: ~7.5%
• Net spread: ~3.5%

Maintaining 35–40% leverage allows us to generate incremental yield for CF2 investors without materially increasing portfolio risk.

Eliminating leverage entirely would reduce return efficiency and yields to investors. Our approach balances yield optimization with capital preservation.

Three primary factors have impacted yields:

1. Increased Competition – The private lending space has seen substantial capital inflows since 2018, compressing borrower rates.
2. Higher Cost of Capital – Our facility costs increased from ~5% (2020–2022) ~8.5% (2023-2025) before recent rate cuts.
3. Slower Real Estate Transactions – Higher mortgage rates extended hold times, increased defaults and REOs, and slowed capital recycling. The defaults and REOs create a drag on CF2 yields.

Defaults are primarily tied to the current real estate market conditions, elevated mortgage rates, and longer resale timelines.

When properties sit longer:

• Borrowers incur higher carrying costs
• Liquidity pressure increases
• Some projects exceed original timelines

Since mid-2024, our default rate has averaged ~5.8%, compared to a historical average near 4%. Industry feedback suggests many private lenders are experiencing 8–10% default rates in the current cycle.

We expect defaults to fluctuate while rates remain elevated but believe we are positioned conservatively relative to peers.

Loans in default are classified as NPLs. If unresolved, they proceed through foreclosure and become REO (real estate owned) if they do not sell to a 3rd Party bidder/buyer at the foreclosure auction.

Historically:

• The majority of defaulted borrowers cure and bring loans current or pay the loan off before the property is sentto foreclosure auction.
• If foreclosure occurs and the property doesn’t sell at the foreclosure auction, we evaluate each propertyindividually.

Options include:

• Selling as-is
• Improving and selling
• Renting if economics justify

Asset management decisions are made property-by-property with a focus on capital recovery and loss mitigation.

We maintain a Loan Loss Reserve (LLR) based on portfolio-level exposure to defaulted loans and REO assets —not individual loans.

When a property is sold:

• Gains increase monthly distributable income
• Losses are absorbed by the LLR

This framework smooths volatility and allows us to manage risk proactively.

As of the beginning of the month, we have 78 REOs.

Turnover varies based on:

• Property condition
• Legal timing (BK or TRO delays)
• Tenant occupancy
• Strategic decision to improve before sale

Our default legal markets are non-judicial states, which accelerates foreclosure timelines and protects recovery speed.

Our general intent is to monetize REOs as efficiently as possible while maximizing value.