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					Independent Expert’s Report
                      July 2010
Pacific First Mortgage Fund

     Independent Expert’s Report


                   27 July 2010
Financial Services Guide
This Financial Services Guide is issued in relation to an independent expert’s report (“Report“) prepared
by PKF Corporate Advisory (East Coast) Pty Limited (ABN 70 050 038 170) (“PKFCA“) at the request of
the independent directors (“Directors“) of Trilogy Funds Management Ltd (“Trilogy”) in relation to the
proposal being put to the unitholders of the Pacific First Mortgage Fund (“the Fund”) (“the Proposal”).
Engagement
PKFCA has been engaged by the Directors to prepare the Report expressing our opinion as to whether
the Proposal is fair and reasonable and in the best interests of the Fund’s unitholders as a whole. It is
intended that the Report will accompany an Explanatory Memorandum being forwarded to the Fund’s
unitholders by the Directors.
Financial Services Guide
PKFCA holds an Australian Financial Services Licence (License No: 247420) (“Licence”). As a result of
our Report being provided to you PKFCA are required to issue to you, as a retail client, a Financial
Services Guide (“FSG“). The FSG includes information on the use of general financial product advice
and is issued so as to comply with our obligations as holder of an Australian Financial Services Licence.
Financial services PKFCA is licensed to provide
The Licence authorises PKFCA to provide reports for the purposes of acting for and on behalf of clients in
relation to proposed or actual mergers, acquisitions, takeovers, corporate restructures or share issues, to
carry on a financial services business to provide general financial product advice for securities and certain
derivatives (limited to old law securities, options contracts and warrants) to retail and wholesale clients.
PKFCA provides financial product advice by virtue of an engagement to issue the Report in connection
with the issue of securities of another person.
Our Report includes a description of the circumstances of our engagement and identifies the party who
has engaged us. You have not engaged us directly but will be provided with a copy of our Report (as a
retail client) because of your connection with the matters on which our Report has been issued.
Our Report is provided on our own behalf as an Australian Financial Services Licensee authorised to
provide the financial product advice contained in the Report.
General financial product advice
Our Report provides general financial product advice only, and does not provide personal financial
product advice, because it has been prepared without taking into account your particular personal
circumstances or objectives (either financial or otherwise), your financial position or your needs.
Some individuals may place a different emphasis on various aspects of potential investments.
An individual’s decision in relation to the Proposal described in the Document may be influenced by their
particular circumstances and, therefore, individuals should seek independent advice.
Benefits that PKFCA may receive
PKFCA has charged fees for providing our Report. The basis on which our fees will be determined has
been agreed with, and our fees will be paid by, the person who engaged us to provide the Report. Our
fees have been agreed on either a fixed fee or time cost basis. Our fee for this Report is disclosed in
Section 9.
Remuneration or other benefits received by our employees
All our employees receive a salary. Employees may be eligible for bonuses based on overall productivity
and contribution to the operation of PKFCA or related entities but any bonuses are not directly connected
with any assignment and in particular are not directly related to the engagement for which our Report was
provided.
Referrals
PKFCA does not pay commissions or provide any other benefits to any parties or person for referring
customers to us in connection with the reports that PKFCA is licensed to provide.




Pacific First Mortgage Fund - Independent Expert’s Report                                                  2
Associations and relationships
PKFCA is the licensed corporate advisory arm of PKF (East Coast Practice), Chartered Accountants and
Business Advisers. The directors of PKFCA may also be partners in PKF New South Wales, Chartered
Accountants and Business Advisers.
PKF (East Coast Practice), Chartered Accountants and Business Advisers is comprised of a number of
related entities that provide audit, accounting, tax and financial advisory services to a wide range of
clients.
PKFCA’s contact details are as set out on our letterhead.
Complaints resolution

As the holder of an Australian Financial Services Licence, we are required to have a system for handling
complaints from persons to whom we provide financial product advice. All complaints must be in writing,
addressed to The Complaints Officer, PKF Corporate Advisory (East Coast) Pty Limited, Level 10, 1
Margaret Street, Sydney NSW 2000.

On receipt of a written complaint we will record the complaint, acknowledge receipt of the complaint and
seek to resolve the complaint as soon as practical. If we cannot reach a satisfactory resolution, you can
raise your concerns with the Financial Ombudsman Service Limited (“FOS”). FOS is an independent
body established to provide advice and assistance in helping resolve complaints relating to the financial
services industry. PKFCA is a member of FOS. FOS may be contacted directly via the details set out
below.

Financial Ombudsman Service Limited
GPO Box 3
Melbourne VIC 3001

Toll free:         1300 78 08 08
Email:             info@fos.org.au




Pacific First Mortgage Fund - Independent Expert’s Report                                              3
27 July 2010



The Independent Non-Executive Directors
Trilogy Funds Management Ltd
as Responsible Entity for
Pacific First Mortgage Fund
Level 10, Brisbane Club Tower
241 Adelaide Street
BRISBANE QLD 4000


Dear Directors

INDEPENDENT EXPERT’S REPORT IN RELATION TO THE PROPOSAL FOR PACIFIC
FIRST MORTGAGE FUND

INTRODUCTION

Trilogy Funds Management Ltd (“Trilogy” or “responsible entity”), in conjunction with Balmain Trilogy
Investment Management Pty Ltd (“Balmain Trilogy” or “the manager”) as fund manager, are putting a
proposal to Unitholders of the Pacific First Mortgage Fund (“the Fund” or “PFMF”) in relation to the new
strategy of the Fund (“the Proposal”). The independent non-executive directors of Trilogy (“the
Directors”) intend to put the Proposal to the Unitholders under Resolutions 1 and 2. We have not been
asked to consider Resolution 3, which deals with an amendment to the Responsible entity’s fee. This
further Resolution was requested by certain Fund Unitholders on July 15, 2010.

The Directors have requested PKF Corporate Advisory (East Coast) Pty Limited (“PKFCA”) to prepare an
independent expert’s report (“Report” or “IER”), in relation to the Proposal.

OVERVIEW OF THE PROPOSAL

The Proposal involves the following key elements:
1.           a new strategy, summarised as follows:
             a.      orderly realisation of assets and selective asset development ;
             b.      reduction in Trilogy’s fee from 1.5% to 1.0%, plus the payment of a performance fee;
             c.      allocation of potential litigation proceeds amongst Unitholders based on their current holding
                       regardless of whether they redeem their interest in PFMF;
             d.      introduction of a hardship policy; and
             e.      implementation of a staged redemption program;
2.           a choice of two options for the redemption program:
             a.      Option 1 - Current Value Redemption Facility (“CVRF”) - would implement a strategy
                     whereby $295 million will have been paid to Unitholders as redemptions by October 2012.
                     These redemptions would all be paid out at the current value of PFMF Units (the prevailing
                     audited net asset position of the Fund); or




Tel: 61 2 9251 4100 | Fax: 61 2 9240 9821 | www.pkf.com.au
PKF Corporate Advisory (East Coast) Pty Limited | Australian Financial Services Licence 247420 | ABN 70 050 038 170
Level 10, 1 Margaret Street | Sydney | New South Wales 2000 | Australia
DX 10173 | Sydney Stock Exchange | New South Wales


The PKF East Coast Practice is a member of the PKF International Limited network of legally independen t member firms. The PKF East Coast Practice is also a member of the
PKF Australia Limited national network of legally independent firms each trading as PKF. PKF East Coast Practice has offices in NSW, Victoria and Brisbane. PKF East Coast
Practice does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
         b.    Option 2 - Issue Price Redemption Facility (“IPRF”) – this will comprise the same level of
               redemptions but at $1.00 per Unit. The value of redeeming Unitholders’ remaining Units will
               then be decreased, to ensure that other Unitholders who did not redeem will be treated
               equitably.

SUMMARY AND CONCLUSIONS

Overall Conclusions

The Proposal is fair and reasonable and in the best interests of Unitholders, when taken as a whole.

We further conclude that as part of Resolution 1, the proposed new responsible entity’s fee is fair and
reasonable to Unitholders.

In addition, we have also considered the two options regarding redemption calculation, being the CVRF
or IPRF, including the level of choice that the CVRF offers. Clearly, many of the advantages highlighted
in our Report rely on the CVRF being in place. Accordingly, we consider that the CVRF is the preferable
option, under Resolution Two.

“Fairness” Assessment

Assuming that the Proposal is approved each Unitholder will:
•        continue to hold the same percentage ownership interest in PFMF and in its underlying assets
         immediately post Proposal; and
•        be entitled to the same voting rights and the commercial value. Accordingly, there will be no
         change in each Unitholders’ interest in PFMF.

Based on the above we believe that, overall, the Proposal is fair to Unitholders when taken as a whole.

In relation to the base fee component of the new responsible entity’s fee under the Proposal we have
compared the old and new fee to fourteen other retail mortgage funds in the Australian market. We
conclude that the proposed reduction in base fee from 1.5% to 1.0% of gross assets will reduce PFMF’s
base fee from being among the highest in the sector, to a lower more appropriate level. We have
considered the “performance fee” component of the new responsible entity’s fee within the
“reasonableness” assessment below.

“Reasonableness” Assessment

New Strategy (Resolution One)

In effect, the Proposal results in a change of capital redemption policy. We have considered
reasonableness having regard to three separate categories of Unitholders, given the differing needs of
individual Unitholders.

Staged Redemption and Selective Asset Development

We have assessed the following advantages of staged redemptions and asset development:
•        the projected cash flows indicate that Unitholders should be able to recover a significant amount
         of their remaining investment;
•        the manager is given the ability to actively “work out” certain assets before sale, to increase the
         end value for Unitholders:
•        it allows for regular capital redemptions not currently available to Unitholders;
•        the process of realising certain assets will allow the manager to reduce exposure in certain
         markets (by geography and asset class) while largely avoiding “fire sales”; and
•        by exiting PFMF, Unitholders mitigate exposure arising from previous related party transactions.



Pacific First Mortgage Fund - Independent Expert’s Report                                                 5
The assessed disadvantages of staged redemptions and asset development include:
•        in order to effect the payment of staged redemptions, there may be an unintended consequence
         of assets being sold for less than fair value;
•        Additional Redemptions are subject to “timing risk” which is outside the control of the manager;
•        the Proposal could potentially trigger early repayment of the loan to the financier; and
•        Longer Term Unitholders would be exposed to potential risks in property development which are
         outside of the control of the manager and may impact on future returns.

Trilogy’s Proposed New Fees

We concluded that the amended fees structure is fair (i.e. a reduction from 1.5% to 1.0%).

We have also assessed the following advantages in relation to the performance fee:
•        its key calculation metrics are comparable to other mechanisms used in the market place;
•        it relies on increased unit value being paid to Unitholders in cash;
•        it further aligns Trilogy with Unitholders’ objectives given the altered circumstances of PFMF; and
•        for the responsible entity to gain via higher fees, Unitholders also need to enjoy significant gains
         in value.

The assessed disadvantages of the performance fee are:
•        the fees could be potentially significantly higher should PFMF exceed expectations;
•        the use of the RBA rate is a potentially inappropriate benchmark on which to calculate the
         performance criteria;
•        the impact of the performance fee is likely to be met more by the Longer Term Unitholders; and
•        the performance fees would capture part of the proceeds from future litigation.

Litigation Unit Split and Hardship Policy

The assessed advantage of the litigation unit split is that it allows all Unitholders including the Fast
Redemption Unitholders to retain their rights in receiving proceeds from any successful litigation. This
compares to the existing position where a Unitholder who divests their Units ceases to have any
entitlement to future legal proceeds.

Prima-facie, the assessed disadvantage of the litigation unit split is that associated legal costs may place
stress on the future cash flows of PFMF. However, Trilogy has entered into a litigation funding
agreement with IMF (Australia) Pty Ltd. Under the agreement, the liability of the Fund for legal costs and
adverse cost orders is now removed, as the liability is borne solely by IMF.

The Proposal also fairly deals with those Unitholders who are in severe financial need. Limits on the
amount of redemptions available in these cases also ensures that the position of other Unitholders is
equitably considered.

Redemption Program Options – (Resolution Two)

We have assessed that the CVRF is the preferred choice as it has the following advantages:
•        should certain Unitholders not take up their redemption entitlements over the next two years then
         it is possible that Fast Redemption Unitholders may be able to redeem all of their remaining
         investment over that time;
•        for certain Unitholders (Longer Term Unitholders), it offers them the choice of receiving a portion
         of redemptions available and at the same time, allowing Trilogy to realise assets at potentially
         higher prices, as compared to having to redeem all of their investment at the current value; and
•        for the Longer Term Unitholders, it allows them to take advantage of future upside in the Martha
         Cove Development and also protects their interests from ‘fire sale’ of the assets.


Pacific First Mortgage Fund - Independent Expert’s Report                                                   6
Taxation

Redemption of Ordinary Units under the CVRF will probably trigger a capital loss for Unitholders which
can be offset against other capital gains, or carried forward to future years.

Under the CVRF, it is possible Unitholders will incur capital losses on the redemption of their Ordinary
Units earlier than under the IPRF.

An outline of the possible Capital Gains Tax (“CGT”) implications for an Australian resident Ordinary
Unitholder who holds their Units on capital account and participates in the proposed redemption of Units
program is set out in Section 8.5 and Appendix 4 of this Report.

Other Considerations

We have also considered a number of alternative options namely, wind-up and a takeover offer. From
our analysis, we believe that a wind-up would most likely result in a lower value to that under the
Proposal and as a consequence, it is our opinion that the Proposal is a superior mechanism in which all
Unitholders could realise value.

We have also considered the potential impact of a takeover and whilst there is presently no offer to
Unitholders, it is unlikely that the Proposal will adversely affect any potential takeover.

Having considered all of the above, our opinion is that there are sufficient advantages under the Proposal
to outweigh its disadvantages and accordingly the Proposal is reasonable to Unitholders, when taken as
a whole.

“Best Interests” Assessment

The Proposal including the CVRF option under Resolution Two, allows sufficient flexibility for each
Unitholder to tailor their own strategy for redemptions to best fit their individual needs. Notwithstanding
the many different needs and priorities of Unitholders, the Proposal provides an outcome that is equitable
to all Unitholders while taking into account those differing needs.

We therefore are of the opinion that the Proposal is in the best interests of Unitholders when taken as a
whole.

We recommend that each Unitholder seeks his/her own independent professional financial advice in
relation to the Proposal.

OTHER MATTERS

This Executive Summary should be read in conjunction with the following Report that sets out in full the
purpose, scope, basis of evaluation, limitations, analysis and our findings.

PKFCA holds an Australian Financial Services Licence which authorises us to provide reports for the
purposes of acting for and on behalf of clients in relation to proposed mergers, acquisitions, takeovers,
corporate and trust restructures, or share issues. A financial services guide is attached at the front of this
Executive Summary.

Our opinion is in respect of Unitholders when taken as a whole. The Proposal offers significant choices
for Unitholders in relation to actions they can take in managing their investment in the Fund. This Report
is general financial product advice only and PKFCA has not considered the objectives, financial situation
or needs of individual Unitholders, or taken into account the effect of the Proposal on the particular
circumstances of individual Unitholders. Individual Unitholders may be influenced by their particular
circumstances and place a different emphasis on various aspects of the Proposal from that adopted in
this Report. Accordingly, individual Unitholders may reach different conclusions as to whether or not the
Proposal is fair and reasonable and “in their best interests” given their individual circumstances.




Pacific First Mortgage Fund - Independent Expert’s Report                                                  7
Before acting in relation to the Proposal, Unitholders should consider the appropriateness of the advice in
this Report having regard to their own objectives, financial situation, risk profile, liquidity preference or
need and tax position. Unitholders are advised to read the Explanatory Memorandum issued by the
Directors in full and seek their own independent advice.

Current conditions in the mortgage fund lending market for property and property developments are
particularly volatile with access to debt or equity funding still very limited following the Global Financial
Crisis (“GFC”). Such conditions can change significantly over relatively short periods of time and such
changes may result in our opinion becoming outdated and in need of revision. PKFCA reserves the right
to revise any opinion in light of material information existing at the date of this Report that subsequently
becomes known to PKFCA.



Yours faithfully




Ed Psaltis
Director




Pacific First Mortgage Fund - Independent Expert’s Report                                                 8
TABLE OF CONTENTS
1   OVERVIEW OF PROPOSAL ............................................................................................................................... 10
        1.1    RESOLUTION 1 – NEW STRATEGY ..................................................................................................... 10
        1.2    RESOLUTION 2 – REDEMPTION PROGRAM .......................................................................................... 10
        1.3    RESOLUTION 3 ................................................................................................................................ 11
2   PURPOSE, SCOPE, BASIS OF EVALUATION AND LIMITATIONS ................................................................. 12
        2.1    PURPOSE AND SCOPE ...................................................................................................................... 12
        2.2    BASIS OF EVALUATION ..................................................................................................................... 12
        2.3    LIMITATIONS AND RELIANCE ON INFORMATION .................................................................................... 13
        2.4    INDEMNITY ...................................................................................................................................... 14
3   PROFILE OF PFMF ............................................................................................................................................. 15
        3.1   OVERVIEW ...................................................................................................................................... 15
        3.2   MANAGEMENT FEE HISTORY ............................................................................................................ 16
        3.3   KEY MANAGEMENT .......................................................................................................................... 17
        3.4   CAPITAL STRUCTURE ....................................................................................................................... 19
        3.5   HISTORICAL STATEMENTS OF FINANCIAL PERFORMANCE ..................................................................... 19
        3.6   HISTORICAL STATEMENTS OF FINANCIAL POSITION ............................................................................. 21
        3.7   DEBT STRUCTURE ........................................................................................................................... 22
        3.8   AUSTRALIAN SECURITIES INVESTMENTS COMMISSION – ACTION TAKEN IN THE SECTOR .......................... 23
        3.9   RG 45: PFMF’S DISCLOSURE .......................................................................................................... 24
4   ECONOMIC AND SECTOR SPECIFIC OVERVIEW ........................................................................................... 26
        4.1   ECONOMIC OVERVIEW ..................................................................................................................... 26
        4.2   INDUSTRY OVERVIEW ....................................................................................................................... 27
5   CASH FLOW FORECAST MODEL REVIEW...................................................................................................... 31
         5.1   OVERVIEW ...................................................................................................................................... 31
         5.2   REVIEW .......................................................................................................................................... 31
         5.3   CONCLUSION REGARDING FORECAST CASH FLOWS............................................................................ 37
6   KEY CONSIDERATIONS .................................................................................................................................... 38
         6.1   DIFFERING NEEDS OF UNITHOLDERS ................................................................................................. 38
         6.2   KEY CONSIDERATIONS IN UNITHOLDERS’ DECISION............................................................................. 38
         6.3   OTHER CONSIDERATIONS ................................................................................................................. 49
7   FAIRNESS ASSESSMENT ................................................................................................................................. 52
        7.1    APPROACH ..................................................................................................................................... 52
        7.2    OVERALL PROPOSAL ....................................................................................................................... 52
        7.3    BASE FEE COMPONENT OF MANAGEMENT FEE ................................................................................... 53
8   EVALUATION ...................................................................................................................................................... 57
        8.1    ADVANTAGES OF PROPOSAL ............................................................................................................. 57
        8.2    DISADVANTAGES OF PROPOSAL ........................................................................................................ 62
        8.3    RESOLUTION TWO, CHOICE BETWEEN CVRF AND IPRF ..................................................................... 66
        8.4    ALTERNATIVES ................................................................................................................................ 67
        8.5    TAXATION IMPLICATIONS .................................................................................................................. 71
        8.6    OVERALL CONCLUSIONS ................................................................................................................... 73
9   QUALIFICATIONS, DECLARATIONS AND CONSENTS................................................................................... 74
       9.1            QUALIFICATIONS .............................................................................................................................. 74
       9.2            INDEPENDENCE ............................................................................................................................... 74
       9.3            DISCLAIMER .................................................................................................................................... 75
APPENDIX 1          GLOSSARY....................................................................................................................................... 76
APPENDIX 2          COMPARISON OF DETAILED DISCLOSURES FOR PFMF UNDER ASIC RG 45 ......................... 77
APPENDIX 3          MANAGEMENT FEES CHARGED BY RETAIL MORTGAGE FUNDS ............................................ 80
APPENDIX 4          CAPITAL GAINS TAX CONSEQUENCES FOR THE NEW REDEMPTION FACILITY
                    AND LITIGATION UNITS .................................................................................................................. 87




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                           9
1        OVERVIEW OF PROPOSAL

         The Proposal is being put to Unitholders under Resolutions 1 and 2 as described in the Notice of
         Meeting and Explanatory Memorandum. These resolutions would give effect to changes in the
         Fund’s Constitution to facilitate the New Strategy and related selection by Unitholders of either
         the Current Value or Issue Price Redemption Facility.

         Set out below is a summary of the resolutions proposed in the Notice of Meeting and Explanatory
         Memorandum:

1.1      Resolution 1 – New Strategy

         Balmain Trilogy proposes an orderly realisation of the assets to facilitate the Unitholders’ in
         recovering their investment in the Fund, anticipate taking up to four years to complete.

         As part of this proposed development, Balmain Trilogy has set out the following key
         implementation strategies:
         •         Orderly realisation of the assets including development – the Funds Assets will be
                   recovered in various methods, either sold “as is”, under “make good” development and/or
                   to be developed in order to realise an up-lift in value of those assets. The development
                   assets total approximately $186 million or 37% of the gross assets of the Fund.
                   Essentially, this resolution will change the Fund from a ‘passive’ investment strategy to an
                   ‘active’ investment strategy;
         •         Implementation of an amended fee structure – with the proposed change from a
                   ‘passive’ investment strategy to an ‘active’ investment strategy, Balmain Trilogy considers
                   it appropriate to change the fee structure to be similar to that of an ‘active’ investment
                   strategy, aligning the responsible entity’s rewards to the Fund’s performance as follows:
                   −         fixed management fees will be reduced from 1.5% per annum of the gross asset
                             value of the Fund to 1.0% per annum of the gross asset value of the Fund; and
                   −         performance fees proposed to be established equivalent to 20% of the total return
                             to Unitholders in excess of the indexed value of the Fund.
                   The position currently in place is that management fees are paid directly from the Fund to
                   Trilogy as responsible entity.        Trilogy pays Balmain Trilogy under a separate
                   management agreement from its own funds. Any amendment to the fee structure under
                   the new strategy will result in an amendment to this fee paid to Trilogy;
         •         Allocation of litigation proceeds – litigation undertaken to recover Fund’s losses from
                   various parties will be allocated in a manner to ensure all Unitholders are entitled to
                   receive the same share of successful litigation proceeds when they occur regardless of
                   whether the Unitholders have transferred or redeemed the ordinary Units;
         •         Hardship redemption policy – hardship redemptions will be available to Unitholders
                   under specific circumstances of severe financial hardship and some specific
                   compassionate grounds up to a maximum of $20,000 per annum subject to Australian
                   Securities and Investment Commission approval; and
         •         Redemption program – implementation of a structured redemption program to
                   recommence redeeming of the investments made by Unitholders under the Fund which
                   had been frozen since 2008.

1.2      Resolution 2 – Redemption Program

         Resolution 2 is conditional upon the approval of Resolution 1 by the Unitholders. If Resolution 1
         is approved, Unitholders have the option to select either the Current Value Redemption Facility or
         the Issue Price Redemption Facility in connection with the redemption program.

         Below are the details of the Resolution 2:


Pacific First Mortgage Fund - Independent Expert’s Report                                                   10
         •         Current Value Redemption Facility (Option 1) – the Current Value Redemption Facility
                   comprises fixed redemption and additional redemption components as follows:
                   −         Fixed redemptions – bi-annual fixed payments of $35 million to Unitholders
                             anticipated to commence from October 2010, subject to liquidity;
                   −         Additional redemptions – determined based on availability of excess funds,
                             both calculated on the basis of Current Value defined below.
                   −         Redemption price at Current Value – Current value is defined as “The Current
                             Value of a Unit is calculated according to the fair value of a Unit as at the time of
                             the redemption. It is essentially the prevailing net asset value of the Fund divided
                             by the number of Units on issue. The net asset value is determined by Balmain
                             Trilogy in accordance with the Constitution, the Corporations Act and applicable
                             accounting standards (as supported by independent valuation advice from
                             registered valuers and adopted in the accounts following a full review by the
                             Fund's auditor). Then an amount reflective of the transaction costs which are
                             anticipated to be incurred in selling the Assets of the Fund and winding up the
                             Fund is deducted from the Current Value per Unit to reach the redemption price.”
                   OR
         •         Issue Price Redemption Facility (Option 2) – redemption under this option will only
                   allow Unitholders to redeem their investments at $1.00 per Unit. If this option is selected,
                   the first redemption of $35 million is anticipated to commence from October 2010 subject
                   to liquidity. Unitholders will redeem part of their Units for $1.00 each and the value of the
                   other part will decrease. Unitholders will participate in Unit price redemption on a pro rata
                   basis and will have the same proportion of their current Unitholding redeemed as every
                   other Unitholder. All Unitholders will be required to participate in the Issue Price
                   Redemption Facility.

1.3      Resolution 3

         We note that a further Resolution 3 which proposes a change in the responsible entity’s fees, is
         being put to Unitholders. The terms of our engagement exclude any consideration of this
         additional Resolution. We have therefore not compared Resolution 3 to the Proposal under
         Resolutions 1 and 2.




Pacific First Mortgage Fund - Independent Expert’s Report                                                     11
2        PURPOSE, SCOPE, BASIS OF EVALUATION AND LIMITATIONS

2.1      Purpose and Scope

         The Proposal is being put to Unitholders by the Directors with the aim of equitably satisfying the
         varying needs of those Unitholders, given the current financial position of the Fund. The
         Directors are not obliged to issue an independent expert’s report under the Corporations Act 2001
         (“the Act”), the Fund’s Constitution, or any Australian Securities and Investments Commission
         (“ASIC”) requirements.

         However, as responsible entity of the Fund, Trilogy is required to act in the best interests of all
         Unitholders, in exercising its powers and carrying out its duties. To assist the Directors in
         carrying out their duties, they have requested that PKFCA prepare a Report expressing our
         opinion as to whether or not the Proposal is fair and reasonable and in the best interests of
         Unitholders, when taken as a whole.

         Whilst the IER is not subject to the requirements of the Act, in complying with our Australian
         Financial Services Licence, we have had regard to the following in completing the Report:
         •         ASIC Regulatory Guide 111 “Context of Expert’s Reports” (“RG 111”); and
         •         ASIC Regulatory Guide 112 “Independence of Experts” (“RG 112”).

2.2      Basis of Evaluation

         The Act does not define the expressions “fair and reasonable” or “in the best interests”. However,
         guidance is provided by RG 111 which establishes guidelines in respect of an IER commissioned
         when a scheme is used to affect a takeover offer. Under such circumstances the independent
         expert is directed to opine as to whether or not the scheme is “fair and reasonable. If such
         opinion is provided, the expert would also be able to conclude that the scheme is “in the best
         interests” of Unitholders (RG 111.16 and RG 111.17).

         However, the Proposal at hand is not in the nature of a scheme offering a fixed consideration to
         Unitholders in return for their units and there will be no change in control of those units.
         Therefore, the usual “fairness” valuation comparison of the amount offered versus target’s value
         does not apply in this case.

         Based on the above, we have considered whether the Proposal is in the best interests of
         Unitholders when taken as a whole by assessing the matters detailed below.

2.2.1 Fairness

         Whilst fairness is not a compelling factor in assessing whether or not this Proposal is in the best
         interests of Unitholders, we have considered the following aspects:
         •         in respect of the component of the overall Proposal dealing with a change in the
                   responsible entity’s management fees, a comparison of the current management fee
                   structure of the Fund and the proposed management fee structure from a Unitholder’s
                   viewpoint. We will also compare the proposed management fee to fees charged in other
                   similar mortgage funds; and
         •         whether there is any change in the proportionate underlying ownership, voting rights and
                   commercial interests of Unitholders as a whole, when considering their investment in the
                   Fund both pre and immediately post Proposal.




Pacific First Mortgage Fund - Independent Expert’s Report                                               12
2.2.2 Reasonableness
         •         We note that RG 111.11, ASIC states that, if an offer is “fair”, it must also be
                   “reasonable”. However, this applies specifically to takeover bids where control of the
                   entity is changing hands. In the case of the Proposal at hand, there is neither a takeover
                   bid nor change of control being contemplated. Accordingly, the “qualitative” analysis
                   embodied in reasonableness is particularly important for this Proposal.
         •         In assessing reasonableness we have considered the advantages and disadvantages of
                   accepting the Proposal, as they affect Unitholders as a whole, including:
                   −         the taxation implications of the Proposal;
                   −         the currently illiquidity of units in the Fund and how the Proposal will affect
                             liquidity;
                   −         the ability of Trilogy to generate cash flow sufficient to fund the proposed
                             redemptions; and
                   −         the effect of Trilogy’s potential entitlement to a performance fee on Unitholder’s
                             interests.
         •         We have also considered other alternatives to the Proposal, including wind up and the
                   possibility of another offer or proposal emerging for Unitholders.

2.2.3 Best Interests
         •         We have assessed whether the Proposal is in the best interests of Unitholders taken as a
                   whole by considering whether there are sufficient reasons to vote in favour of the
                   Proposal. This overall opinion will consider all factors included in both the fairness and
                   reasonableness assessments above.
         •         As the Proposal offers considerable choice to Unitholders and individual circumstances
                   and goals of Unitholders will differ greatly, this Report does not deal with the individual
                   Unitholder needs. Accordingly, our opinion is tailored to the body of Unitholders.

2.3      Limitations and Reliance on Information

         The Report is to accompany the Explanatory Memorandum to be provided by the Directors to the
         Unitholders. Apart from the Report, PKFCA is not responsible for the contents of the Explanatory
         Memorandum or any other document.

         The Report has been prepared to assist the Directors in making their recommendation to the
         Unitholders and to assist the Unitholders in their consideration of whether or not to approve the
         Proposal. PKFCA acknowledges that its Report may also be lodged by the Directors with
         Regulatory and Statutory bodies and will be circulated to Unitholders together with the
         documentation relating to the Proposal.

         The Report is prepared solely for the above purpose and accordingly PKFCA disclaims any
         responsibility from reliance on its Report in regard to its use for any other purpose. Except in
         accordance with the stated purpose, no extract, quote or copy of our report, in whole or in part,
         should be reproduced without the prior written consent of PKFCA, as to the form and context in
         which it may appear.

         PKFCA’s procedures, in the preparation of the Report involved the analysis of financial
         information and accounting records. This does not include verification work nor constitute an
         audit or review in accordance with Australian Auditing and Assurance Standards. Consequently,
         this does not enable us to obtain assurance that we would become aware of all significant
         matters that might be indentified in an audit or review. Accordingly, we will not express an audit
         or review opinion.




Pacific First Mortgage Fund - Independent Expert’s Report                                                  13
         Further, it is not PKFCA’s role to undertake, and PKFCA did not undertake, any commercial,
         technical, financial, legal, taxation or other due diligence, other similar investigative activities or
         property valuations in respect of the Fund. PKFCA understands that the Directors have been
         advised by legal, accounting and other appropriate advisors in relation to such matters, as
         necessary. PKFCA provides no warranty or guarantee as to the existence, extent, adequacy,
         effectiveness and/ or completeness of any due diligence or other similar investigative activities by
         the Directors or their advisors.

         The cash flow forecasts provided to us by Balmain Trilogy are based on assumptions about
         events and circumstances that have not yet occurred. Accordingly, PKFCA cannot provide any
         assurance that these forecasts will be representative of results that will actually be achieved.
         PKFCA disclaims all liability in respect of these cash flow forecasts.

         With respect to taxation implications for Unitholders, it is recommended that individual Unitholders
         should obtain their own taxation advice in respect of the Proposal, tailored to their own particular
         circumstances. Furthermore, the advice provided in this Report does not constitute legal or
         taxation advice to the Unitholders or any other party.

         PKFCA understands that the accounting information provided to PKFCA was prepared in
         accordance with generally accepted accounting principles and prepared in a manner consistent
         with the methods of accounting used by the Fund in previous accounting periods.

         In forming our opinion, we made the following assumptions:
         •         that matters such as title to all relevant assets, compliance with laws and regulations and
                   contracts in place are in good standing, and will remain so, and that there are no material
                   legal proceedings, other than as publicly disclosed;
         •         information sent out in relation to the Proposal to Unitholders, or lodged with any statutory
                   body is complete, accurate and fairly presented in all material respects;
         •         all publically available information relied on by PKFCA is accurate, complete and not
                   misleading;
         •         if the Proposal is implemented, that it will be implemented in accordance with its stated
                   terms; and
         •         the legal mechanisms to implement the Proposal are correct and effective at law,
                   including all changes to the Fund’s Constitution that are required to implement the
                   Proposal in full.

2.4      Indemnity
         Under the terms of PKFCA’s engagement, Trilogy has agreed to indemnify the partners, directors
         and staff (as appropriate) of PKFCA and PKF East Coast Practice and their associated entities
         against any claim, liability, loss or expense, costs or damage, arising out of reliance on any
         information or documentation provided by the Directors which is false, misleading or omits any
         material particulars, or arising from failure to supply relevant information.




Pacific First Mortgage Fund - Independent Expert’s Report                                                   14
3        PROFILE OF PFMF

3.1      Overview

         PFMF formerly known as the City Pacific First Mortgage Fund is an unlisted registered managed
         investment scheme under the Act and domiciled in Australia. The PFMF was constituted on 23
         June 1998 and will terminate on 23 June 2078 unless terminated earlier in accordance with the
         Fund’s Constitution.

         PFMF’s investment strategy is to invest in a portfolio of loans secured predominantly by
         registered first mortgages over real property in Australia. The corporate structure of the Fund,
         Trilogy and Balmain Trilogy is as follows:
         Figure 1
                                                            Corporate Structure



                                                      Investment Management Agreement
                    Balmain Trilogy                                                           Trilogy
                    (Fund Manager)                                                      (Responsible Entity)




                                                             Pacific First
                                                            Mortgage Fund



             Source: Management


         Balmain Trilogy, the investment manager of the Fund, is a specialist manager of mortgage and
         property fund assets which is 50% owned by Balmain NB Corporation Limited.

         A summary of Balmain NB Corporation Limited’s operations is as follows:
         •         Australia’s largest non-bank provider of commercial mortgage finance providing access to
                   both bank and institutional balance sheets;
         •         in recent years the Balmain group’s funds management activities in the commercial
                   mortgage space have grown to over $800 million in commercial mortgage funds on behalf
                   of 50,000 investors; and
         •         The Balmain group has over $8 billion in loans under management, operating in eight
                   offices in Australasia.

         Trilogy, the responsible entity of the Fund, has specialist skills and experience in administering
         and investing in property and income funds and servicing fund investors. Trilogy was formed in
         2004 to provide property related products to the retail and wholesale investment markets in
         Australia. Trilogy is also the responsible entity for a number of other mortgage investment and
         property trusts.

         We note that prior to the appointment of Trilogy, City Pacific Limited, in liquidation (“CPL”) was
         the former responsible entity (and fund manager) of the Fund and were duly removed on 7 July
         2009. PFMF unitholders voted to remove CPL for a number of reasons including:
         •         the lack of any meaningful information in relation to the Fund and its assets being
                   provided to unitholders;
         •         a raft of related party transactions undertaken by CPL;


Pacific First Mortgage Fund - Independent Expert’s Report                                                      15
         •         apparently excessive fees being charged by CPL;
         •         apparent inability of CPL to recover loans; and
         •         the current freeze on both distributions and redemptions to unitholders.

         A meeting with unitholders was held on 25 June 2009, to vote on a resolution to remove CPL as
         responsible entity of PFMF and to replace CPL with Trilogy. The resolution was carried in favour
         by the majority of unitholders. However, CPL applied to the Federal Court for an injunction on the
         grounds the resolutions did not comply with the Act. On 7 July 2009, Trilogy was listed on the
         ASIC register as responsible entity for the Fund, subject to the injunction. On 20 July 2009, the
         Federal Court ruled in favour of Trilogy and set aside the injunction. Pursuant to the Act, Trilogy
         was appointed responsible entity of the Fund on 7 July 2009.

         In addition to the above, we note that:
         •         distributions to Unitholders were suspended by CPL (the former responsible entity) in July
                   2008 and remain suspended.
         •         on 13 October 2008, CPL resolved that PFMF was a non-liquid registered managed
                   investment scheme in accordance with PFMF’s Constitution and the Act. As a non-liquid
                   registered management investment scheme, existing redemption requests were
                   extinguished and the process for future redemptions now operates in accordance with the
                   following:
                   −         the Fund will attempt to make periodic redemption offers to all unitholders at
                             times when there are sufficient funds available to do so. The new responsible
                             entity (Trilogy) will determine the amount that constitutes “sufficient funds” for a
                             redemption offer to be made and does not expect to make redemption offers
                             where less than 10% of total unitholders’ funds are available for each redemption
                             offer;
                   −         redemption offers will be made in writing to all unitholders and will specify the
                             amount of funds available for that redemption offer. Unitholders wishing to
                             redeem will be required to respond to the redemption offer stating the amount
                             they wish to redeem; and
                   −         in the event there is an oversubscription to the redemption offer (i.e. the amount
                             of the redemption requests exceeds the amount of the redemption offer), the
                             redemptions will be paid on a pro-rata basis to all unitholders who have submitted
                             a redemption request.
         •         on 6 August 2009, Trilogy amended the Fund’s Constitution to reduce the management
                   fee from an effective 3.0% p.a. to 1.5% p.a. of the total gross asset value of the Fund.
                   This fee reduction has been applied to the Fund from 7 July 2009.

3.2      Management Fee History

         The effective 3% p.a. fee that did apply under the previous responsible entity was in itself a
         reduced fee from that originally charged by CPL. On 25 May 2009, CPL effectively halved their
         management fee down to approximately 3% of gross assets.

         The original historical fee charged by CPL and the new lower fee they implemented just prior to
         being removed by Unitholders, as well as a further fee reduction post CPL, are detailed as
         follows:
         •         Original CPL management fee (as allowed under the Fund’s Constitution)
                   −         5% p.a. of gross assets of PFMF; and
                   −         3% p.a. of gross income of PFMF.
         •         Reduced fee under CPL on 25 May 2009



Pacific First Mortgage Fund - Independent Expert’s Report                                                    16
                     −           2.5% p.a. of gross assets of PFMF; and
                     −           1.5% p.a. of gross income of PFMF.
                     In combination this equated to at least 3% p.a. of gross assets, which was half the
                     original fee above.
         •           Reduced fee under Balmain Trilogy on 6 August 2009
                     −           1.5% p.a. of gross assets of PFMF;
                     −           expense recoveries up to 0.12% p.a. of gross assets.
                     This equates to 1.62% p.a. of gross assets of PFMF.

3.3      Key Management

         The directors of Trilogy (the responsible entity) are as follows:
         Table 1: Trilogy Directors
                          Name                     Position                              Background

             Robert Willcocks              Independent Chairman    Mr Willcocks is the non-executive independent Chairman
                                                                   of the Trilogy board. He is a former partner with
                                                                   Mallesons Stephen Jaques and, since 1994, a corporate
                                                                   adviser. He has represented clients on a range of
                                                                   assignments including private equity, fundraising,
                                                                   mergers and acquisitions, contractual negotiations and
                                                                   special projects. Mr Willcocks is a former member of the
                                                                   Council of Bond University. In the late 1990s he was
                                                                   appointed by the Australian Government to be a member
                                                                   of the Australian International Legal Advisory Committee
                                                                   for the term of its program. Mr Willcocks is currently a
                                                                   Non-Executive Director of CBH Resources Limited (ASX
                                                                   listed), APAC Resources Limited (Hong Kong listed),
                                                                   ARC Exploration Limited (ASX listed) and an Alternate
                                                                   Director of Mt Gibson Iron Limited (ASX listed).
             Rodger Bacon                  Deputy Chairman /       Prior to joining Trilogy, Mr Bacon was with the
                                           Chairman of the         Schroder Merchant Banking Group for 15 years during
                                           Executive Committee     which time he had experience in all aspects of funds
                                                                   management.
                                                                   Mr Bacon also previously held the post of Executive
                                                                   Director of Challenger International Limited.
                                                                   Mr Bacon was recently been appointed to the Board of
                                                                   Financial Services Institute of Australasia (“Finsia”).
                                                                   Mr Bacon is also a Director in Balmain Trilogy.
             Phillip Ryan                  Managing Director       Mr Ryan was a founding director in 1998 of the funds
                                                                   management entity which evolved into Trilogy.
                                                                   Mr Ryan has been a solicitor for over 20 years and was
                                                                   a partner in a Brisbane law firm for 19 years. He has
                                                                   experience in the areas of commercial and corporate
                                                                   law.
                                                                   Mr Ryan is also Fellow of Finsia and has qualifications
                                                                   in mortgage lending and financial services (through
                                                                   Finsia).
                                                                   Mr Ryan sits on a number of committees including the
                                                                   Compliance Committee, the Investment Committee, the
                                                                   Lending Committee and the Treasury Committee. .
             John Barry                    Executive Director      Mr Barry previously held the post of Executive Director
                                                                   of Challenger International Limited, during which time
                                                                   he was involved in all aspects of the group as it
                                                                   expanded through the acquisition and management of
                                                                   a broad range of financial investment and service
                                                                   businesses ranging from investment products, equity
                                                                   funds management, mortgage trusts, financial
                                                                   planning, annuities both long and short, master trusts
                                                                   and corporate superannuation.
                                                                   In addition to working at Challenger International
                                                                   Limited, Mr Barry was previously a Director of
                                                                   Rothschild Australia Limited and has previously worked



Pacific First Mortgage Fund - Independent Expert’s Report                                                               17
                      Name                         Position                             Background
                                                                 in Morgan Grenfell Australia and Coopers & Lybrand
                                                                 (now known as PricewaterhouseCoopers).
                                                                 Mr Barry is also an Executive Director of Balmain
                                                                 Trilogy.
           Trevor Gibson                  Executive Director     Mr Gibson is currently an Executive Director of Trilogy
                                                                 as well as the Director of Distribution for Trilogy. Mr
                                                                 Gibson has over 20 years’ experience in the financial
                                                                 services profession, following on from an earlier career
                                                                 in engineering.
                                                                 He has experience in financial planning, investment
                                                                 research, administration and marketing and has
                                                                 previously held state manager roles in several national
                                                                 and international fund management groups.
           Rohan Butcher                  Non-Executive          Mr Butcher is a non-executive Director of Trilogy.
                                          Independent Director   Rohan brings more than 19 years’ experience to the
                                                                 Board in the construction and property industry in a
                                                                 number of roles including Quantity Surveying,
                                                                 Estimating, Project Administration, Development
                                                                 Management, Planning and Project Management for
                                                                 both construction and development activities. Rohan
                                                                 has specialist expertise in the area of design
                                                                 management, cost planning and control together with
                                                                 project management, construction and planning. He
                                                                 has been involved in a number of major projects within
                                                                 the residential, retail and commercial property sectors,
                                                                 while undertaking a variety of senior appointments with
                                                                 major public and private companies. Rohan is also an
                                                                 independent member of the Lending Committee.
           Nigel Chamier                  Non-Executive          Mr Chamier is a non-executive independent Director of
                                          Independent Director   Trilogy and Chairman of NAC Investments (Qld) Pty
                                                                 Ltd. Nigel is also a Director of Scimitar Marine Pty Ltd
                                                                 and is the Honorary Consul for Sweden. He was
                                                                 elected President of the Queensland Division of the
                                                                 Property Council of Australia from 1985 to 1986 and
                                                                 was awarded a Medal in the Order of Australia for
                                                                 services to real estate and the property industry in
                                                                 1994. In June 2008, Nigel was also awarded the Royal
                                                                 Order of the Polar Star for Services to Sweden. Nigel
                                                                 was with Jones Lang LaSalle from 1972 to 1992, as
                                                                 joint Managing Director in Queensland and a proprietor
                                                                 of the firm in the Pacific region. In 2001, he retired
                                                                 after serving for nine years as Chairman of the Office of
                                                                 Economic Development for the City of Brisbane
                                                                 Limited. Nigel was also previously a Director of the
                                                                 City of Brisbane Airport Corporation.

           Source: Management




Pacific First Mortgage Fund - Independent Expert’s Report                                                               18
         The key management personnel of Balmain Trilogy (the fund manager) are as follows:
         Table 2: Key Management Personnel
                        Name                          Position                              Background

           Michael Holm                   Executive Director          Mr Holm has more than 30 years' experience in
                                                                      commercial property financing. He has also served as
                                                                      chairman and board member in Balmain NB’s fund
                                                                      management, capital markets and loan servicing
                                                                      businesses.
           Andrew Griffin                 Executive Director, Joint   Mr Griffin has been involved in the property and finance
                                          CEO                         markets for more than 20 years. He has worked with
                                                                      market leaders such as Robert Whyte, Kerry Packer
                                                                      and John Singleton.
                                                                      Mr Griffin has a background in financial and legal which
                                                                      enables him to structure and complete corporate
                                                                      mergers and acquisitions and real estate transactions.
           Rodger Bacon                   Executive Director, Joint
                                                                      Also a director of Trilogy – see above for background.
                                          CEO
           John Barry                     Executive Director          Also a director of Trilogy – see above for background.

           Source: Management



3.4      Capital Structure

         The capital structure of the Fund as at 16 April 2010 is set out below:
         Table 3: Capital Structure
                                                                                                        16 April 2010

           Total Units on Issue                                                                                    887,040,412
           Top 20 Unitholders – Units                                                                                82,255,650
           Top 20 Unitholders - % of Units on Issue                                                                        9.3%

           Source:   Management



3.5      Historical Statements of Financial Performance

         A summary of the Fund’s audited income statements for the year ended 30 June 2008
         (“FY2008”), for the year ended 30 June 2009 (“FY2009”) and for the 6 months ended 31
         December 2009 (“HY2010”) is set out below:




Pacific First Mortgage Fund - Independent Expert’s Report                                                                      19
          Table 4: PFMF Statement of Financial Performance



                                                                            FY2008          FY2009         HY2010
                                                                            Audited         Audited        Audited
                                                                              $               $              $


             Revenue
             Interest income - cash and cash equivalents                              -               -        149,209
             Interest revenue - mortgage loans                              134,638,486      94,104,408     22,675,168
             Other                                                              627,414         210,921         39,213
             Total revenue                                                  135,265,900      94,315,329     22,863,590


             Expenses
             Impairment losses                                              (53,019,625)   (463,522,568)   (26,047,335)
             Other expenses                                                        (882)     (1,916,171)      (750,013)
             Responsible entity management fees                             (29,994,895)    (25,121,420)    (4,505,648)
             Total expenses                                                 (83,015,402)   (490,560,159)   (31,302,996)


             Profit/(loss) from operating activities before finance
             costs                                                           52,250,498    (396,244,830)    (8,439,406)

             Finance costs
             Borrowing costs                                                (19,161,229)    (11,532,997)    (3,554,296)
             Distributions to Unitholders                                   (86,108,894)               -              -
             Total finance costs                                           (105,270,123)    (11,532,997)    (3,554,296)


             Net profit/(loss)                                              (53,019,625)   (407,777,827)   (11,993,702)

             Basic earnings/(loss) per unit (cents)                               (5.41)         (45.97)         (1.35)
             Weighted average number of units                               980,258,612     887,021,900    887,040,412

             Source: Annual Reports and Half Yearly Financial Statements


         Based on the above, we note that:
         •           total revenue has generally decreased due to an increasing number of non performing
                     loans leading to lower levels of interest received; and
         •           a significant impairment loss of $463.5 million was recorded in FY2009 (FY2008: $53.0
                     million). The impairment loss of $463.5 million mainly comprises impairments of interest
                     receivable of $79.1 million (2008: $19.7 million) and impairments of mortgage loans of
                     $384.4 million (2008: $33.3 million). The main reason for these impairments were due to
                     the significant decline in the estimated value of properties held by the Fund as first or
                     second mortgage security for loans, partly as a result of the GFC which impacted the
                     Australian property market in general. The lending practices of the previous responsible
                     entity have also been questioned. Such practices have further contributed to the large
                     impairment in assets within PFMF;
         •           responsible entity management fees relates to the fees paid to the former and current
                     responsible entity for managing the Fund. The reduction in Management fees is mainly
                     due to the change in fee structure by Trilogy. As noted in Section 3.1, on 6 August 2009,
                     Trilogy amended the Fund’s Constitution to reduce the management fee from an effective
                     3% p.a. to 1.5% p.a. of the total gross asset value of the Fund. This fee reduction has
                     been applied to the Fund from 7 July 2009. Such lower fees and the decrease in gross
                     asset value of the Fund pursuant to the impairment loss of $463.5 million has resulted in
                     the large fall in management fees over the six months to 31 December 2009; and


Pacific First Mortgage Fund - Independent Expert’s Report                                                          20
         •            no distributions were made to Unitholders in FY2009 and HY2010. We note that
                      distributions to Unitholders were suspended by the CPL (former responsible entity) in July
                      2008.

3.6      Historical Statements of Financial Position

         A summary of the Fund’s audited balance sheets as at 30 June 2008, 30 June 2009 and 31
         December 2009 is set out below:
         Table 5: Statement of Financial Position
                                                                              FY2008        FY2009        HY2010
                                                                              Audited       Audited       Audited
                                                                                $             $             $


             Assets
             Cash and cash equivalents                                          3,961,606     9,281,433    17,832,615
             Receivables                                                       30,751,491     4,121,530    21,638,147
             Mortgage loans                                                   935,022,005   507,659,928   460,161,047
             Total assets                                                     969,735,102   521,062,891   499,631,809

             Liabilities
             Payables                                                           1,648,757     3,785,175     2,476,828
             Distributions payable                                             11,272,499             -             -
             Interest bearing loans                                           129,550,099    91,034,756    82,905,723
             Total liabilities (excluding net assets attributable to
             unitholders)                                                     142,471,355    94,819,931    85,382,551


             Net assets attributable to Unitholders- liability                827,263,747   426,242,960   414,249,258


             Total liabilities                                                969,735,102   521,062,891   499,631,809


             Number of units on issue                                         880,283,372   887,040,412   887,040,412
             Net Tangible Assets Per Unit ($)                                        0.94          0.48          0.47
             Net Tangible Assets                                              827,263,747   426,242,960   414,249,258
             Total Interest Bearing Liabilities                               129,550,099    91,034,756    82,905,723
             Debt Ratio (times)1                                                     0.13          0.17          0.17

          Source: Annual Reports and Half Yearly Financial Statements
          Notes:
          1. Debt ratio = Total interest bearing liabilities / Total assets


         Based on the above, we note that:
         •            receivables mainly consists of interest receivable from mortgage loans;
         •            the decrease in mortgage loans of $427.4 million in FY2009 was mainly due to the write-
                      downs made on selected mortgage loans;
         •            in assessing whether interest receivable and mortgage loans may be impaired, the Fund
                      gave consideration to the following matters:
                      −          valuations of security properties completed by registered valuers;
                      −          appraisals from real estate agents;
                      −          actual sale prices realised on completed projects;
                      −          recent offers to purchase security properties arising out of marketing campaigns;
                      −          current and forecast market conditions;



Pacific First Mortgage Fund - Independent Expert’s Report                                                           21
                      −        status of individual loans; and
                      −        estimated time to realise mortgage loans and interest receivable.
         •            interest bearing loans relate to a loan provided by CBA and drawn-down as at the
                      respective balance sheet dates. Further details of this facility are provided below in
                      Section 3.7.

3.7      Debt Structure

         The following table provides details of the Fund’s outstanding debt facilities:
         Table 6: Debt Facilities

                                         Balance as                                                             LVR as at
                                            at 31   Balance as                                                     31
                                Facility December at 31 May                                        LVR          December   LVR as at
                   Facility      Limit      2009       2010               Rate       Maturity    Covenant         2009    31 May 2010
                                 ($'mil)       ($'mil)     ($'mil)       (% p.a.)                  (%)            (%)            (%)
                                                                     1           2                          3            3               3


                                                                                       30 June
             CBA                      83.2          82.9        30.0 BBR + 3.5            2010           30             20             6.9


             Source: Management / CBA Facility Agreement
             Notes:
             1. As at 31 May 2010 the balance of this CBA facility had been reduced via further sale of assets to $30 million.
             2. BBR – Bank Bill Rate.
             3. LVR – Loan to value ratio. Calculated as Total Debt Drawn / Funds Under Management.


         In relation to the above, we note that:
         •            the CBA facility is secured by a fixed and floating charge over the assets of the Fund,
                      providing CBA with first priority over the Fund assets;
         •            the average variable interest rate was 7.25% p.a. as at 31 December 2009 (30 June
                      2009: 8.96%);
         •            the Fund is to ensure that the LVR does not exceed 30% of the aggregate of Funds
                      Under Management (“Financial Undertaking”). If at any time the Fund is in breach of the
                      Financial Undertaking, it may within a period of 20 business days repay or prepay part of
                      the principal outstanding by such amount as is necessary to remedy the breach. No event
                      of default shall occur if the Fund remedies the breach;
         •            the Directors signed a deed dated 23 December 2009 (amending the CBA facility
                      agreement) to extend the current finance facility to 30 June 2010. The key terms of the
                      agreement are as follows:
                      −        Upon the disposal of an asset of the Fund:
                               (i)           100% of the net proceeds received by the Fund at settlement from the
                                             sale of the Pacific Beach development must be repaid to CBA. This sale
                                             was successfully completed on 29 March 2010 and all proceeds repaid to
                                             CBA as required; and
                               (ii)          75% of the net proceeds from assets realised on or after 1 January 2010
                                             must be repaid to CBA while the balance of the facility is greater than $30
                                             million.
                      −        The balance of the facility is required to be reduced to $30 million by 30 June
                               2010.
         •            there will be an annual review by CBA on or about 30 June 2010 and on or about 30 June
                      in each year thereafter. Trilogy has informed us that CBA has temporarily extended the
                      facility to 31 July 2010.


Pacific First Mortgage Fund - Independent Expert’s Report                                                                         22
3.8      Australian Securities Investments Commission – Action taken in the Sector

         Following several high profile cases of mortgage funds (and debenture issues) failing, both pre
         and post the GFC, ASIC has taken a close interest in the Sector. Their investigations resulted in
         the issuing of the important Regulatory Guide 45 “Mortgage Schemes – improving disclosure for
         retail investors” (“RG 45”). Issued in September 2008, RG 45 sets out ASIC’s benchmarks for
         improved disclosure to retail investors to help them understand and assess these schemes, while
         attempting to maintain the flexibility of the public fundraising process.

         RG 45 centres on the policy of disclosing key information or if not, then explaining why such key
         information hasn’t been disclosed. All mortgage schemes are now required to comply with RG
         45, with updated disclosure at least every six months from November 2008. The requirements
         apply to all mortgage schemes, being a managed investment scheme that has or that is likely to
         have at least 50% of its non-cash assets invested in mortgage loans (i.e. loans secured by a
         mortgage over real property) and/or listed mortgage schemes.

         The following table from RG 45 summarises the eight main risk areas from ASIC’s viewpoint.
         The eight “Benchmarks” are minimum disclosure requirements necessary to bring these risks to
         the attention of investors in mortgage schemes:
         Table 7: Benchmarks for unlisted mortgage schemes in which retail investors invest


                                                              Benchmark 1 addresses the scheme’s ability to satisfy
           1. Liquidity (pooled mortgage schemes only)
                                                              withdrawal requests and other operational commitments.
           2. Scheme borrowing                                Benchmark 2 addresses the scheme’s policy on borrowing.
           3. Portfolio diversification (pooled mortgage      Benchmark 3 addresses the scheme’s lending practices and
           schemes only)                                      portfolio risk.
                                                              Benchmark 4 addresses the risks associated with related party
           4. Related party transactions
                                                              lending, investments and transactions.
                                                              Benchmarks 5 and 6 address the scheme’s property- related
           5. Valuation policy
                                                              lending and valuation practices.
           6. Lending principles – loan-to-valuation ratios   As above.
                                                              Benchmark 7 addresses the transparency of the scheme’s
           7. Distribution practices
                                                              distribution practices.
                                                              Benchmark 8 addresses the transparency of the responsible
           8. Withdrawal arrangements
                                                              entity’s approach to withdrawals of investments.

           Source: ASIC RG 45




Pacific First Mortgage Fund - Independent Expert’s Report                                                                 23
3.9      RG 45: PFMF’s Disclosure

         Section 4 addressed ASIC’s RG 45, which all mortgage funds need to comply with. We detail
         hereunder key information that Balmain Trilogy have provided in accordance with the
         requirements of RG 45, over the last two disclosing dates for PFMF.
         Table 8: Benchmark Disclosure
                                                                                                    RG 45 Disclosures as at
                                                                                                                 30 November
                                         Benchmark Disclosure                                    31 March 2010
                                                                                                                     2009

           Benchmark 1: Liquidity
           Proportion of cash to total assets:                                                       $50.1m            $7.8m
           Percentage of total assets:                                                               10.02%             1.5%


           Benchmark 2: Fund Borrowing
           Loan outstanding with CBA                                                                 $77.7 m          $83.3m
           The finance facility was amended on 23 December 2009. Key terms:
           •    balance of loan to be reduced to $30m by 30 June 2010
           •    facility is annually reviewable provided CBA remains comfortable with
                performance of the fund
           Balmain Trilogy has reported that PFMF has the cash flow ability to reduce the
           loan balance to $30m by 30 June 2010 and to repay the balance of this loan
           should CBA require this. (As at 9 April 2010 the balance had been reduced
           $39.8m)


           Benchmark 3: Portfolio Diversification
           Financial derivates used by PFMF?                                                             No               No
           At both dates the only non-loan asset in the balance sheet of PFMF was cash.
           The PDS for PFMF was withdrawn on 6 March 2008.
           Investment into other unlisted mortgage schemes                                               No               No
           Total number of mortgage loans                                                                43               45
           Total number with 1st ranking mortgage                                                        35               38
           Total number with 2nd ranking mortgage                                                         7                   6
           Total number with both 1st and 2nd ranking mortgage.
                                                                                                          1                   1
           (Refer Appendix 2 for additional detail.)


           Benchmark 4: Related Party Transactions
           There are no related party loans to any entity associated with Trilogy or Balmain
           Trilogy.
           However, the previous responsible entity did enter into related party loans, with
           such loans totalling 28.12% of the total loan portfolio (as 11 June 2009). All such
           related party loans continue to be in place.


           Benchmark 5: Valuation Policy
           Valuations are completed on both “as is” and “as if complete” basis, in
           accordance with ASIC RG 45.
           Number of loans worth more than 5% of the total fund assets                                    5                   3
           Details of loan over 5% of total fund value (all loans at impaired value)                 $74.4m           $82.4m
                                                                                                    (16.53%)         (16.5%)
                                                                                                     $52.4m           $51.2m
                                                                                                    (11.63%)         (9.97%)
                                                                                                    $27.18m           $41.3m
                                                                                                     (6.04%)         (8.04%)
                                                                                                    $25.35m




Pacific First Mortgage Fund - Independent Expert’s Report                                                                     24
                                                                                             RG 45 Disclosures as at
                                                                                                            30 November
                                         Benchmark Disclosure                             31 March 2010
                                                                                                                2009
                                                                                              (5.63%)
                                                                                             $24.54m
                                                                                              (5.45%)


           Benchmark 6: Lending Principles (LVR’s)
           RG 45 requires that the following LVR limits are in place on all loans:
           •    Development Property; 70% LVR on “is if complete” valuation
           •    All other cases; 80% LVR on latest market value (“as is” valuation).
           This requirement is not met as on both dates, most loans were in default and
           with significantly higher LVR’s than allowed.


           Benchmark 7: Distribution Practices
           No distributions being paid                                                            N/A             N/A


           Benchmark 8: Withdrawal Arrangements
           At present no redemption or withdrawal from PFMF is possible                           N/A             N/A

           Source: PKF Analysis / Balmain Trilogy disclosures to market regarding RG 45
           Note:   Further information on PFMF’s performance against these benchmarks is provided in Appendix 2




Pacific First Mortgage Fund - Independent Expert’s Report                                                              25
4        ECONOMIC AND SECTOR SPECIFIC OVERVIEW

4.1      Economic Overview

4.1.1 Australia

         At its meeting on 4 May 2010, the Reserve Bank of Australia (“RBA”) raised the cash rate by a
         further 25 basis points to 4.50%, compared to a low of 3% in September 2009. The RBA has
         since decided to leave the cash rate unchanged at 4.5%, on 6 July 2010. In a statement made by
         the RBA Governor, Mr Glenn Stevens, reasons for the earlier interest rate increases were
         provided, as follows:
         •         the global economy is growing, with global Gross Domestic Product (“GDP”) expected to
                   increase in 2010 and 2011;
         •         global financial markets are functioning much better than they were in early 2009 due to
                   support from governments and central banks, whose support needs to be slowly wound
                   back (although the European debt crisis has reversed this trend, at least in the short
                   term);
         •         the rate of unemployment has peaked at a much lower level than earlier expected, with
                   labour market data and a range of business surveys suggesting that growth in the
                   economy may have already been at or close to trend for a few months; and
         •         lenders are starting to become more willing to lend to some borrowers, with investment in
                   the resources sector strong, with credit for housing expanding at a solid pace and
                   dwelling prices rising significantly over the past year.
         The following key Australian economic indicators are addressed below:
         •         Commodities - commodities crashed in 2009 as the global economy contracted.
                   However as the economy is starting to recover, there is an expectation that prices will
                   recover significantly in 2010 with a strong rally expected to continue in 2011;
         •         Labour Market - in February 2010, employment levels were significantly better than
                   market expectations for the fifth successive month. In January 2010 over 50,000 jobs
                   were created with the unemployment rate dropping to 5.3% in February 2010, the lowest
                   rate in one year;
         •         Trade Balance – the trade deficit is expected to oscillate around the $2 billion level over
                   the course of the following year. There is expected to be a contest between higher export
                   volumes and commodity prices on one hand, and a corresponding growth in imports via
                   firmer domestic consumption and rising business investments on the other;
         •         Housing Finance – owner occupied finance fell 5.5% in December 2009 after a 6.1%
                   drop in November and a 2.9% fall in October 2009. This drop was expected as the
                   effects of the first home buyer’s stimulus diminished, however even as first home buyers
                   exited the market, investor finance rose for the third consecutive month.
         The Australian economy is expected to grow by 2.5% in financial year (“FY”) 2009/10, 3.3% in
         FY2010/11 and 3.3% in FY2011/12 fuelled by a near-term surge in private sector demand and a
         shift of the risk profile to an upside. Inflationary pressures are expected to emerge which will
         necessitate a continuation of tightening monetary policy.

4.1.2 Global

         In the first quarter of 2010 the key driver of the sustainability of the global recovery was the
         broadening out of the stimulus-induced rise in consumer spending and the inventory-induced
         growth in manufacturing. The effects of this spending became visible on many fronts leading to a
         belief that the somewhat mild recovery in developed economies is solidifying although still not at
         a pace to quickly recoup losses during the GFC. In the first quarter of 2010 financial markets did



Pacific First Mortgage Fund - Independent Expert’s Report                                                 26
         decline amid sovereign debt concerns; however consumer spending did not contract after
         declining stimulus spending and business confidence continued to rise.

         At March 2010, The Bank of New York Mellon expected a sustained global economic recovery
         with global GDP to reach 4% in both 2010 and 2011 brought on by the effects of world
         macroeconomic stimulus. The strongest performing developed economies in 2010 and 2011 will
         be those which:
         •         place economic growth as its highest priority relative to other objectives;
         •         are without any underlying debt issues; and
         •         enjoy rising productivity in the workforce due to improved technology and business
                   practices.

4.1.3 Conclusion on Economic Prospects

         Based on the above, economic conditions particularly in Australia highlight that the recessionary
         pressures have eased. However, a general consensus remains that ongoing improvements,
         globally are to be slow and protracted, particularly with falls in markets globally over the last two
         months due to European credit fears.

         The impact of economic conditions on the industry relevant to PFMF is reviewed in greater detail
         in the following sections.

4.2      Industry Overview
         The position of PFMF is impacted by changes to the primary sector, being the mortgage fund
         sector as well as changes impacting the underlying sector being that of residential property
         operators and developers in Australia.

4.2.1 Mortgage Fund Sector
         The retail mortgage fund sector has been severely affected by the GFC, via problems originating
         in the US debt markets. Assets Under Management (“AUM”) has fallen dramatically from $30.9
         billion (at its height) to $17.2 billion, a fall of 44%, in excess of the 10% experienced by other
         property funds management asset classes in Australia. Amongst all the types of mortgage
         schemes, pooled mortgage funds like PFMF decreased the most, falling by 46%. The contribution
         of the mortgage fund sector to total property funds in Australia has been declining steadily in the
         past 5 years. Reaching a peak of 11% in 2004, it has since reduced to 5%.

         Notwithstanding the above, there is the potential for growth as new structures are adopted and
         returns improve. The senior-ranking mortgage debentures recently issued by Brookfield Multiplex
         represent one example where investors can gain senior secured exposure to very high-quality
         assets (A-grade office leased to Commonwealth of Australia until 2022 at 325bpts over bank bill
         rates). It is expected that similar structures will be adopted for fund managers seeking alternative
         markets for refinancing senior debt while credit spreads remain wide. Nonetheless, the risk/return
         trade-off is an important driver for decision making along with the reputation of the managers and
         risk profiles associated with the underlying investments.

         Further, Balmain NB Corporation Limited, a 50% shareholder of Balmain Trilogy, has recently re-
         opened two mortgage trusts, as follows:
         •         Balmain Mortgage Trust (formerly the Mariner Mortgage Trust); and
         •         Balmain Aqua Fund (formerly the Mirvac Aqua Mortgage Fund).

         Trilogy is also the responsible entity for a number of mortgage and property trusts. In particular, it
         is responsible entity and manager for the Trilogy First Mortgage Income Trust and the Trilogy
         Wholesale First Mortgage Income Trust.


Pacific First Mortgage Fund - Independent Expert’s Report                                                  27
         Set out below is a list of the top 10 Mortgage Fund Managers ranked by total assets:
         Table 9: Mortgage Fund Managers
                                  Fund Manager                            2008             2009          Total          % of Total
                                                                         Ranking          Ranking       Assets          Industry
                                                                                                         2009              2009
                                                                                                         ($mil)


           Challenger Financial Services Group                                   1               1         3,520              21%
           CFS Global Asset Management (Group Ranking)                           2               2         1,885              11%
           Perpetual Investments Management Limited                              3               3         1,844              11%
           Sandhurst Trustees Limited                                            5               4         1,636               9%
           LaTrobe Capital & Mortgage Corporation Limited                        6               5         1,553               9%
           ING Management Limited (Group Ranking)                                8               6         1,029               6%
           Banksia Financial Group                                             10+               7           805               5%
           Tasmanian Perpetual Trustees Limited                                10+               8           772               4%
           Mirvac Funds Management Limited (Group Ranking)1                    10+               9           613               4%
           Equititrust Limited                                                 10+              10           425               2%
           Sub-total                                                                                      14,082              82%
           Others (includes LM First Mortgage Fund, Balmain Funds,
           Trilogy First Mortgage Income Trust and PFMF)                                                      3,168           18%
           Total Assets                                                                                   17,250             100%


           Source: Australian Property Funds Industry Survey 2009, Property Industry Research
           Note 1: Includes Mirvac Aqua Mortgage Fund which is now known as Balmain Aqua Fund.


         The mortgage fund sector is very concentrated with the top 10 fund managers accounting for
         approximately 82% of the total industry based on total assets.

         Set out below is a summary of mortgage property schemes by fund types:
         Table 10: Summary of Mortgage Schemes by Fund Types and Sub-Sector
                          Fund Manager                      Number of       Number of           Number of             Total Assets
                                                            Properties       Funds              Investors                ($mil)



           Mortgage Schemes
           Mortgage Fund Pooled (MFP)                           127                  44              98,548               12,535
           Mortgage Scheme Select (MSS)                          58                  23              14,266                2,131
           Mortgage Scheme Debentures (MSD)                          -                8              30,828                1,393
           Mortgage Backed Other (MBO)                               -               3                3,055                 526
           Mezzanine Debt (MZD)                                      -               11                868                  665

           Total Assets                                         185                  89             147,565               17,250


           Source: Australian Property Funds Industry Survey 2009, Property Industry Research


         Pooled Mortgage funds are the largest type of mortgage scheme by number of properties,
         number of funds, number of investors and total assets. PFMF operates within this mortgage fund
         classification.

4.2.2 Residential Property Sub-Sector

         Australia’s housing market remained relatively strong in 2008-2009 compared with the rest of the
         world. In the second half of 2008-2009, all capital cities in Australia registered growth in home
         values.


Pacific First Mortgage Fund - Independent Expert’s Report                                                                     28
         The national median home prices in Australia rose by 10% in the first 10 months of 2009 buoyed
         by low interest rates, the first home owners boost, tightening underlying fundamentals, an
         improvement in the Australian economic outlook and vastly improved market sentiment. The
         relaxation of foreign investment rules in 2009 has also resulted in a marked rise in homes
         purchased by wealthy overseas investors which has added to price gains.

         However, building activity will continue to be constrained by excessive developer levies, rising
         regulatory costs (energy/water/fire ratings), limited access to finance, resistance to medium and
         high density infill, inadequate transport infrastructure, skilled labour shortages and rising interest
         rates.

         The government’s endorsement of a population growth strategy would see Australia’s population
         expand to 35 million by 2049 which would present considerable challenges to the housing
         industry, the Government and the broader society. Without a concerted public policy effort to
         address the issues listed above, the shortage of housing could be intractable.

         The key implication of this is that the housing market will remain undersupplied for many years,
         which will place further upward pressure on both rents and house prices. In combination with
         rising interest rates, this will drive a structural deterioration in affordability (both purchase and
         rental) beyond anything we have ever seen. Hence, housing availability and affordability look set
         to be major social and political issues in the decade ahead.

         Demand Determinants

         Demand determinants of the residential property sector are as follows:
         •         relative cost of home ownership versus renting;
         •         the level of interest rates set by RBA. Low interest rates tend to promote home
                   purchases. On the other hand, large falls in interest rates can contribute to rises in
                   housing prices;
         •         the level and growth of household disposable incomes. Households with higher income
                   are more likely to own or be purchasing a house;
         •         the level of unemployment. Generally, during times of high unemployment it is harder for
                   people to secure funding to purchase a house. The availability of public and community
                   housing can also affect demand;
         •         the level of government assistance to home owners. Government assistance in the form
                   of grants and stamp duty reductions act as incentives for people to purchase new homes;
                   and
         •         the level of population growth. Population growth is affected by overseas net migration,
                   natural population growth, and interstate and intrastate migration.

         PFMF has most of its underlying property exposure in Queensland and Victoria, so we have
         reviewed these regions further.

         Queensland Residential Property Market

         The Queensland economy was hit hard during the GFC, with growth in 2009 of less than 1% or
         approximately half that of the country’s growth. However, due to the states exposure to emerging
         economies, specifically through its mining and resources sector, the Queensland economy is
         forecast to grow by an average of 4.4% per annum from 2010 to 2014. This growth is anticipated
         to lead to stronger employment figures, albeit offset by the strong population growth, with both
         factors boding well for the Queensland residential property market.




Pacific First Mortgage Fund - Independent Expert’s Report                                                  29
         Housing starts are anticipated to pick up in coming years, brought on by the aforementioned
         strengthening in economic fundamentals and population growth. Housing starts are expected to
         rebound strongly in 2010 and again to a lesser extent in 2011, recovering the 2009 year’s sharp
         fall of 27.5%.

         Despite the evidence of a recovery, Brisbane’s residential vacancy rates have steadily risen. In
         December 2009 the city’s vacancy rate had reached 3.8%. This was the second highest of all
         capital cities according to the Real Estate Institute of Australia, and was considerably in excess of
         other major cities. For instance Sydney had just 1.3%, while Melbourne had a 1.6% vacancy rate.
         This trend has impacted Brisbane’s housing prices, with prices forecast to lag the national
         housing price growth rate. Moreover, the reduction of the first home owners grant, as well as
         interest rate hikes by RBA has had a notable impact to the state’s activity in recent months. Such
         impact has been amplified on the Gold Coast region where PFMF has heavy exposure.

         Victorian Residential Property Market

         The Victorian economy has seen growth move from being significantly above the country’s
         average in 2007, fall below it in 2009. However, over the course of 2010 to 2014, Victoria is
         expected to grow at an average rate of 3.4% per annum, which is above the historical average
         growth rate for that state of 2.8% for 2005 to 2009. We note that these growth rates are on par
         with the Australian average for both respective periods. In addition, the Victorian State Budget
         highlighted that a further 100,000 jobs were created in the twelve month period to March 2010,
         the highest of any state and almost half of all the jobs created nationally. These conditions are
         expected to bode well for the state’s residential property market.

         Victoria’s developer charges were considerably less than other states. As a result, land has been
         more affordable on the outskirts of Melbourne, and has induced stronger recorded housing starts
         compared to other states, at a time of national difficulty. This has allowed the state to keep up
         with underlying housing demand, despite the strong population growth levels the state has been
         recording.    Despite the strong housing starts, evidence from various residential real estate
         agents suggest that they are still looking for additional stock, and are unable to meet purchaser
         demand.

4.2.3 Conclusion on Sector

         The retail investor mortgage fund sector has suffered more than most from the fallout of the GFC.
         Liquidity issues have again plagued the sector as increased demand for redemption in tough
         economic times has shown that mortgage funds are really not as liquid as marketed. The
         freezing of numerous funds to redemptions and at times, distributions, has heavily impacted on
         the reputation of mortgage funds as a low risk semi liquid investment opportunity. It will be some
         time before retail investor’s return to this sector.

         Against the above constrained outlook the residential property sector has survived the GFC and
         now faces a reasonably optimistic future with demand for residential property outweighing supply.
         Availability of land is one major constraint on the supply side, a factor that should assist PFMF in
         maximising its returns from its current impaired position for most of its loans.




Pacific First Mortgage Fund - Independent Expert’s Report                                                 30
5        CASH FLOW FORECAST MODEL REVIEW

5.1      Overview

         In order to evaluate repayment of the redemptions strategy, we have been provided a detailed
         cash flow forecast model (“the Model”) from Balmain Trilogy which contemplates a maximum
         cash payout to Unitholders of $295 million at regular intervals over the period to 30 September
         2012. This maximum possible amount of $295 million represents approximately 70% of PFMF’s
         net assets at 31 December 2009, paid out in cash to Unitholders over a two year period.

5.2      Review

         We have set out below an extract from the Model which indicates the proposed timing of cash
         redemptions payable by PFMF to Unitholders, assuming maximum entitlements taken by
         Unitholders. The Model assumes that the Current Value Redemption Facility process is
         implemented, however similar cash outflows via redemption will occur under the Issue Price
         Redemption Facility. This is because both alternatives for Unitholders contemplate total
         redemptions of $295 million, up to October 2012.

         It is Balmain Trilogy’s intention to pay Fixed Redemptions on or around September/October and
         March/April each year. However, this is subject to sufficient liquidity within the Fund and this
         timing may change. Equally, the timing of payment of the Additional Redemption is also at
         Balmain Trilogy’s discretion. The timing and quantum of redemptions as forecast in Table 11
         below may therefore alter.




Pacific First Mortgage Fund - Independent Expert’s Report                                            31
Table 11: Forecast pattern of expected capital redemptions payable by PFMF to the Unitholders under the Proposal

              REDEMPTIONS                      Jan-10       Feb-10       Mar-10       Apr-10       May-10   Jun-10       Jul-10   Aug-10     Sep-10       Oct-10       Nov-10   Dec-10       Total

 Fixed Six Monthly Redemption ($000's)                  -            -            -            -        -            -        -          -            -   35,000            -            -    35,000
 Additional Redemption ($000's)                         -            -            -            -        -            -        -          -            -            -        -    35,000       35,000
 TOTAL REDEMPTIONS                                      -            -            -            -        -            -        -          -            -   35,000            -    35,000       70,000



              REDEMPTIONS                      Jan-11       Feb-11       Mar-11       Apr-11       May-11   Jun-11       Jul-11   Aug-11     Sep-11       Oct-11       Nov-11   Dec-11       Total

 Fixed Six Monthly Redemption ($000's)                  -            -            -   35,000            -            -        -          -            -   35,000            -            -    70,000
 Additional Redemption ($000's)                         -            -            -            -        -    35,000           -          -            -            -        -    25,000       60,000
 TOTAL REDEMPTIONS                                      -            -            -   35,000            -    35,000           -          -            -   35,000            -    25,000      130,000



              REDEMPTIONS                      Jan-12       Feb-12       Mar-12       Apr-12       May-12   Jun-12       Jul-12   Aug-12     Sep-12       Oct-12       Nov-12   Dec-12       Total

 Fixed Six Monthly Redemption ($000's)                  -            -            -   35,000            -            -        -          -            -   35,000            -            -    70,000
 Additional Redemption ($000's)                         -            -            -            -        -    25,000           -          -            -            -        -            -    25,000
 TOTAL REDEMPTIONS                                      -            -            -   35,000            -    25,000           -          -            -   35,000            -            -    95,000


                                                                                                                                  Fixed Six Monthly Redemption ($000's)                      175,000
                                                                                                                                  Additional Redemption ($000's)                             120,000
 Source: Management Cash Flow Forecast Model
Notes:
1. The above assumes that the Current Value Redemption Facility is implemented, as opposed to the Issue Price Redemption Facility.
2. This is a forecast cash flow model only, which is subject to change. This model was provided to PKFCA from Balmain Trilogy in June 2010 at the time of preparing our Report.




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                            32
         PKFCA has completed the below analysis of Balmain Trilogy’s Model and its underlying
         assumptions, to assess the likelihood of payment of redemptions under the Proposal being met.

         PKFCA has been provided with the Model that was prepared specifically for the purposes of
         matching cash inflows arising from realisation of asset recoveries, and outflows for the payment
         of redemptions. PKFCA has assumed that any prospective financial information provided by
         Balmain Trilogy has been prepared fairly and honestly based on the information available to
         management at the time and within the practical constraints and limitations of such prospective
         financial information. We have assumed that the prospective financial information does not
         reflect any material bias, either positive or negative. The achievability of the prospective financial
         information and cash flow is not warranted or guaranteed by Balmain Trilogy nor Balmain, Trilogy
         or PKFCA.

         Prospective financial information is dependent on the outcome of many assumptions, some of
         which are outside the control of the Balmain Trilogy. Assumptions relating to prospective
         financial information can be reasonable at the time of their preparation, but can change materially
         over a relatively short time.

         In our consideration of the prospective financial information we have had regard to the ASIC
         Regulatory Guide 170 “Prospective Financial Information” (“RG 170”). PKFCA notes that RG 170
         relates to the use of prospective financial information in disclosure documents and Product
         Disclosure Statements.

         The Model contains assumptions which are largely hypothetical (as defined in RG 170).
         Accordingly, in line with the guidance expressed in RG 170 there are insufficient grounds for
         disclosing specific details of PFMF’s prospective financial information. For this reason, we have
         not included a detailed disclosure of any prospective financial information within the Model, in this
         Report. Further, the information in the Model is considered by Balmain Trilogy to be
         commercially sensitive and its publication may weaken PFMF’s commercial position in dealing
         with third parties in respect of the assets.

         Balmain Trilogy has provided the following key assumptions to realising the loan assets and
         payments of redemptions in the Model:
         •         loan recoveries and related expenses for the remaining 36 loan assets at the date of this
                   Report, for which we note the following:
                   −         6 loan assets have been assumed to be recovered prior to 30 June 2010,
                   −         1 loan asset is a performing loan (that is, paying interest payments in a timely
                             manner);
                   −         2 loan assets where the underlying properties are held by PFMF as mortgagee in
                             possession. Both properties were auctioned on or before June 2010, with one
                             successfully sold;
                   −         remaining 27 loan assets are to be recovered progressively between June 2010
                             to September 2014;
         •         redemptions as follows:
                   −         total fixed redemptions up to October 2012 amount to $175 million;
                   −         total Additional Redemptions up to October 2012 amount to $120 million
                             (although the manager notes that this may change);
         •         Fixed Redemptions are expected to take place half-yearly (a total of 5 instalments of $35
                   million each) with the first redemption intended in September/October 2010;




Pacific First Mortgage Fund - Independent Expert’s Report                                                   33
         •           Additional Redemptions are also expected to take place half-yearly (subject to liquidity).
                     The first 2 Additional Redemptions are estimated at $35 million each and remaining 2
                     Additional Redemptions are estimated at $25 million each (total of 4 instalments). The
                     first Additional Redemption is forecast to occur in December 2010; and
         •           Both Fixed and Additional Redemptions are subject to liquidity of the Fund so actual
                     timing may change.

         We note that our analysis of the Model and its underlying assumptions has not included any of
         the following:
         •           site visitations;
         •           assessment of the quality and condition of the properties for development or sale;
         •           assessment of demand in the respective locations;
         •           detailed investigations to verify the advisors’ (builders, agents and valuers) credibility;
         •           appointment of expert property valuers to value the properties underlying the loan assets;
                     and
         •           appointment of sales agents to review the possible timing of the sale of properties in
                     various states.

         Our analysis has had regard to the following areas:
         •           understanding the background and status of each loan asset;
         •           high level review of valuation reports, agents’ proposals/advice, builders’
                     proposals/advice, contracts, selling price listings and other supporting documents and
                     market evidence to verify if the cash inflow/outflows in the Model have been
                     over/understated;
         •           high level review of the status of construction of properties that are subject to
                     construction/development and whether timing of related costs can be met;
         •           high level review of the status of properties that require Development Approval (“DA”)
                     from local Government and whether the related timing of realisation of sale is reasonable;
         •           high level review of the status of loan recoveries from borrowers where properties have
                     not been repossessed and whether timing of realisation of the loan can be met;
         •           analysis of the impact that cash outflows in relation to the construction process will have
                     on the Model and the funding of these cash outflows; and
         •           understanding Balmain Trilogy’s contingency plans, if there were delayed realisations of
                     cash and/or unrecoverable cashflow, for still meeting the Fixed and Additional
                     Redemptions.

         We have analysed each loan asset and categorised them into four categories, being those that
         had been recovered already and, for those that haven’t, three risks bands, being low, moderate
         and high (“Realisation Risk”). The table below explains our analyses in categorising the loan
         assets. We note that due to the market sensitive information held in relation to the properties and
         borrowers, we are obliged not to provide names or loan specific details.
         Table 12: Risks Bands Analysis
             Realisation Risk Bands                     Rationale for placing the loan asset into the risk category

             Recovered (6 loans)            Short term recoveries where monies have been recovered prior to May 2010 or
                                            should be recovered by June 2010.


             Low risk (9 loans)             •    In certain cases where there had been offers in place, however Balmain Trilogy
                                                 is of the opinion that the fair market price is higher than those offers and has
                                                 held off selling the property until a higher offer is available, in order to maximise
                                                 the value to be obtained from the property.



Pacific First Mortgage Fund - Independent Expert’s Report                                                                         34
            Realisation Risk Bands                     Rationale for placing the loan asset into the risk category
                                            •    Other cases considered low risk include properties with proposed realisation
                                                 amounts in the Model at significantly lower levels than the value/price evidence
                                                 provided.
                                            •    Recoveries where cash flows are supported by contracts entered into by PFMF
                                                 or the appointed receiver and manager. However, there is some risk around
                                                 timing as settlement is conditional upon the approval of Strata Plans to meet the
                                                 expected timeframe of the cash flow provided.
                                            •    Recent sales have occurred and timing of sales expected in the Model are
                                                 tracking well, with minimal units left for sale.
           Moderate risk (16 loans)         •    Recoveries where cash flows are stated to be lower than value/price evidence.
                                                 However, timing uncertainty is a more significant risk.
                                            •    Recoveries where cash flows are stated to be lower than value/price evidence.
                                                 However, timing uncertainty arises as to whether a planned auction will draw
                                                 sufficient demand and obtain best offer for the value of the properties.
                                            •    Recoveries where cash flows are stated to be lower than value/price evidence.
                                                 However, timing uncertainty arises due to DA approval first being obtained.
                                            •    Recoveries where cash flows are stated as per selling price marketed.
                                                 However, timing uncertainty arises given uncertainty regarding, whether there is
                                                 sufficient demand to ensure sales of units are in line with the timeframe
                                                 forecast.
                                            •    Recoveries where borrowers have committed to repay by a specific date.
                                                 However, uncertainty arises should the borrower default on the expected
                                                 repayment dates with more time than needed to realise the security.
                                            •    Recoveries where cash flows are stated to be lower than value/price evidence.
                                                 However, the subject property is in a saturated market location. Therefore,
                                                 there may be insufficient demand to ensure timing of sales can be met.


           Higher risk (5 loans)            •    Recoveries related to the longer term assets with further upside potential from
                                                 strategic development plans to be undertaken subject to Unitholders’ approval.
                                                 Although cash flows are stated to be lower than value/price evidence, timing
                                                 uncertainty is a greater risk as the expected timeframe to realise recoveries
                                                 commences sometime after December 2010 and development plans, if
                                                 undertaken, can be relatively fluid and subject to varying degrees of change.

                                            •    Balmain Trilogy also has strategic development plans for a major site. The area
                                                 has yet to receive the benefit of completed amenities (including
                                                 commercial/retail centres) and much of the area is undeveloped. The
                                                 recoveries that would affect the Model in the period up to September 2012
                                                 (being the last redemption payment) are expected to be derived from easily
                                                 identifiable and saleable lots or properties in the area that Balmain Trilogy
                                                 perceives to have less impact to the development of the whole site. In addition,
                                                 Balmain Trilogy believes that the sale of these completed houses, marina
                                                 berths, vacant lots and/or apartments can be realised reasonably in the current
                                                 market without further discounting their value.

                                            •    However, the realisation of these assets has been deferred until 2011/2012 as
                                                 a buffer to meet the expected fixed redemptions in that period. The remaining
                                                 value of this major site is then to be realised from these loan assets as part of
                                                 the strategic plan which are expected to generate cash inflows sometime from
                                                 2013 onwards, so these cash inflows fall outside the 2 year redemption period
                                                 this is central to the Proposal.

                                            •    The above loan assets are categorised as higher risk due to need to finalise
                                                 and quantify certain aspects of the development strategy and timing of the
                                                 particular development. Some of the sales from easily identifiable and saleable
                                                 lots are in progress whilst others are expected to be undertaken later with
                                                 minimal marketing currently underway. The longer term plans for development
                                                 and sale are subject to greater risk and market uncertainty.


           Source: PKFCA analysis




Pacific First Mortgage Fund - Independent Expert’s Report                                                                     35
         Factors highlighted during our view and categorisation into the above risk bands include:
         •         7 properties that require DA approval with corresponding uncertainty around the timing of
                   achieving the cash inflows within the expected timeframe;
         •         3 properties require further significant construction during the period up September 2012
                   which again creates uncertainty around the timing of achieving the cash inflows within the
                   expected timeframe;
         •         where construction is required, the funding of the construction costs are to be sourced
                   from the sale of other loan assets. Therefore, these cash flow projections and realisation
                   of other loan assets are inter-dependent;
         •         timing risk is an issue in most of the recoveries, however, the use of conservative sales
                   realisations partly minimises this timing risk somewhat; and
         •         there are assets in the portfolio where a “fire sale” would provide immediate cashflow to
                   meet redemptions if needed. However, Balmain Trilogy is of the opinion that there is
                   potential upside to these assets and accordingly will hold these assets to maximise value.

         Further, should CBA terminate their loan agreement on or around 30 June 2010, approximately
         $18 million in additional cash would be needed in this case to retain planned redemptions in
         December 2010, based on the manager’s forecast. This would place greater pressure on selling
         assets quickly in order to meet the planned redemption program.

         After understanding the risks of the mortgage loan assets, we have undertaken some sensitivity
         analysis on the Model by identifying major cash flows that if delayed or do not take place, will
         have a material impact on the planned redemptions. We have also considered several loan
         assets on a sample basis and noted that the redemptions were not materially affected by single
         asset non-performance with the following exception:
         •         there is an expected cash inflow of approximately $16.9 million from repayment by a
                   borrower in December 2010. If this borrower defaults in December 2010, there is a risk
                   of PFMF not meeting the first Additional Redemption planned in December 2010. The
                   mitigating risk factor is that the facility is secured over a property worth more than the
                   loan recovery. Balmain Trilogy had advised that if PFMF repossessed the property, it
                   should take 3 months from December 2010 to give legal notice and sell the property in
                   order to raise at least $17 million. However, this assumes that the PFMF does not take
                   any action until December 2010 to recover its loans.
                   Balmain Trilogy advises that the outstanding loan will be actively monitored (with
                   reminders and notices) to ensure that the borrower will repay by December 2010.
                   However, the December 2009 forecast Additional Redemption payments may be deferred
                   in the event that this borrower defaults.




Pacific First Mortgage Fund - Independent Expert’s Report                                                36
5.3      Conclusion Regarding Forecast Cash Flows

         Having regard to the above analysis, PKFCA has not become aware of any matters that may in
         combination preclude Balmain Trilogy from making the fixed portion of redemptions it has
         forecast, over the period to October 2012 totalling $175 million. However, the timing and/or
         quantum of the voluntary component of redemptions (the Additional Redemptions) totalling $120
         million may be deferred and or reduced, as the Proposal allows. In our view, the greater risk here
         of not meeting the manager’s cash flow forecasts and therefore planned redemptions lies in
         timing deferral, as opposed to not being able to recover realisation amounts included in the
         Model.

         The above analysis assumes that the Current Value Redemption Facility is implemented.
         However, similar considerations and risk apply should the Issue Price Redemption Facility be
         used, as both allow for the same total amount of redemption of $295 million over the period to
         October 2012.




Pacific First Mortgage Fund - Independent Expert’s Report                                              37
6        KEY CONSIDERATIONS

6.1      Differing Needs of Unitholders

         The scope of our engagement requires us to consider the interests of Unitholders as a whole. As
         noted previously, we have had regard to particular circumstances that may impact some
         Unitholders more than others. We detail below some issues that may be driving the needs of
         Unitholders in PFMF at present:
         •         Certain Unitholders may now require the return of their remaining investment as quickly
                   as possible. Their financial circumstances may be such that an early return of capital is
                   of prime importance even if at a significant discount to original investment (“Fast
                   Redemption Unitholders”).
         •         Other Unitholders place a greater importance on receipt of regular cash payments from
                   PFMF, which originally were being paid in the form of income distributions, at the rate of
                   8.2% to 9.95% of their funds invested, per annum (“Regular Receipt Unitholders”).
         •         Still other groups of Unitholders’ financial position may give them the flexibility of being
                   able to leave their investment within PFMF in an attempt to recover more of their original
                   investment. By not redeeming all (or any) of their investment these investors have the
                   opportunity to benefit from a higher value per unit that may result in the “work out” of
                   various underlying distressed assets, and from recovery of the property markets post
                   GFC (“Longer Term Unitholders”).
         •         It is possible that a proportion of Unitholders would be more comfortable with a
                   combination of all three options above. These Unitholders may find a partial recovery of
                   some of their investment now an attractive alternative while at the same time leaving
                   some of the investment in PFMF to benefit from any increase in value of units over time.

         Our views and conclusions in this Report have necessarily taken all of the above into
         account notwithstanding the fact that these strategies may be in direct conflict. The
         “interests of the Unitholders as a whole” in these circumstances in our view, means a
         range of solutions offering enough choice to Unitholders to ensure that, on balance, all of
         the above alternatives are given due weighting under the Proposal.

6.2      Key Considerations in Unitholders’ Decision

6.2.1 Ability to pay proposed redemptions

         The Proposal contemplates payment of regular redemptions to Unitholders over the two years to
         October 2012. Crucial to this commitment is the ability of Balmain Trilogy to sell property assets
         underlying the various mortgage loan assets. Such sale of assets must occur at net recoveries
         high enough to satisfy planned redemptions and within a timeframe to September 2012 that
         facilitates regular cash payouts to Unitholders over this period, not at the end of the period.

         Based on our review of the Model set out in Section 4 above, nothing has come to our attention
         which has led us to believe PFMF will not be able to meet the proposed Fixed Redemptions.

6.2.2 Reasonableness of Proposed Performance Fee

         In Section 7.3 we have compared the current and proposed base fees for Balmain Trilogy to other
         mortgage funds in the market. We found that the proposed new base fee of 1% of gross assets
         would be at the low end of comparable funds. However, the proposed performance fee is also
         relevant and requires separate consideration. The following is relevant when assessing the
         performance fee under the Proposal:




Pacific First Mortgage Fund - Independent Expert’s Report                                                  38
         Breakeven for Balmain Trilogy

         Balmain Trilogy has included in their cash flow forecast Model, an analysis of how far the market
         value per unit in PFMF would need to increase by, before any performance fee payable would
         return them to the fee position they are currently receiving (i.e. breakeven analysis).

         The following graph highlights both the saving Unitholders gain via a lower base fee proposed, as
         well as the point at which this saving is eradicated due to the performance fee (i.e. the
         responsible entity’s breakeven analysis):
         Figure 2




             Source: Management Cash Flow Forecast



         The above graph indicates that Balmain Trilogy needs to increase the value of units in the Fund
         from the current value of 47 cents up to 53 cents per unit (by December 2012) to return to a
         position where they break-even with the current management fee they are charging. This
         analysis is indicative only and may change depending on assumptions used. We detail
         hereunder the key assumptions underlying the 6 cents per unit increase in value for management
         fee breakeven.
         •          Net asset value of PFMF assumed to be $415 million at 1 July 2010 (i.e. post 30 June
                    2010 valuations).
         •          The Fixed and Additional Redemptions forecast by the manager (and disclosed in
                    Section 6.2.1) are all taken up in full and are paid out in full in accordance with the timing
                    of payments forecast.
         •          A total of $295 million in redemptions are paid out by October 2012.
         •          The index factor, being the Reserve Bank cash rate, remains at 4.5% over the period
                    forecast.

         We also note that there are further costs incurred by Trilogy that are reimbursable from the Fund.
         These will further reduce the Fund’s net assets and increase the 6 cent increase in value needed
         under the assumptions above, before the responsible entity breaks even. However, in the
         interests of simplicity these have not been factored in.

         Risk of No Cap in Fee

         We note that in relation to the performance fee Proposal, there is no cap to total fees payable.
         Should the manager achieve very large increases in value for Unitholders then the responsible
         entity’s 20% portion of that upside (post indexation) may also be significant.




Pacific First Mortgage Fund - Independent Expert’s Report                                                     39
         Although there are no performance fees in comparable mortgage trusts, the listed Real Estate
         Investment Trust (“REIT”) sector does include several examples of caps on performance fees that
         can be charged. Equally, there are listed REITs with performance fees that do not contain an
         upside cap. In some instances, the cap on performance fees in the listed REIT sector is in fact
         purely a carry forward mechanism for performance fees. Such REITs cannot earn more than a
         set level in any one year. However, outperformance not taken into account in any one year is
         carried forward and included in the performance fee calculation of the following year or years.

         Hurdle and Quantum of Performance Fee

         Balmain Trilogy will receive a performance fee (at 20%) of any returns to Unitholders over the
         indexed value of the fund. The indexation factor will be the Reserve Bank of Australia’s (“RBA”)
         cash rate. The indexation “uplift” will commence from 1 July 2010 at the current rate of 4.5% p.a.
         Indexation will occur on a monthly basis using the prevailing RBA cash rate at the
         commencement of each new month.

         As above, the current RBA cash rate is 4.5%. We have selected four listed REITs where a
         performance fee is payable and highlighted the indexation (or increases) in performance over the
         relevant benchmark needed before the performance fee is payable:
         Table 13:
                                  Listed REIT                                            Method of Fee Calculation

           Example 1                                                     Two Tier Performance Fee: 1
                                                                         i. fee is 5% of market outperformance up to 2% above
           Charter Hall Retail Trust
                                                                         the benchmark
                                                                         ii. fee is 20% of market outperformance once the 2%
           Charter Hall Office Trust
                                                                         level above benchmark has been reached


           Example 2                                                     Two Tier Performance Fee: 1
                                                                         i. fee is 5% of gross assets up to 1% above the
           CFS Retail Trust
                                                                         benchmark
                                                                         ii. fee is 15% of gross assets once the 1% level above
           Commonwealth Office Property Fund
                                                                         benchmark has been reached


                                                                         Single Tier Performance Fee: 2
                                                                         Fee is 20% of outperformance once the 4.5% level
           PFMF
                                                                         above benchmark has been reached.

           Source: Annual Reports of listed REITs, and Management
           Notes:
           1. In the case of listed REITs, the benchmark is taken as on ASX Property Accumulation Index that is relevant to the
              particular REIT.
           2. In the case of PFMF, as there is no actively priced market to use, the benchmark is the net asset value of the fund
              (and its units) as at 30 June 2010.


         While listed REITs are not in the same sector as PFMF, they operate in the property investment
         sector with not dissimilar attributes to the properties underlying the mortgage loans within PFMF,
         so are still relevant.

         The listed REITs above all measure “total return” performance, being income (distribution) return
         and capital appreciation combined, compared to the selected benchmarks. PFMF’s performance
         fee is also based on total returns, as interest income received (if any) and appreciation in
         mortgage loans above their current impaired values are both effectively taken into account.




Pacific First Mortgage Fund - Independent Expert’s Report                                                                         40
         From the above it can be seen that PFMFs method of calculation contains similar mechanisms to
         listed REIT performance fees. Both PFMF and two listed REITs (example 1 above) use 20% of
         total return as the basis for the performance fee. The majority of that 20% becomes applicable
         when the REITs outperform their benchmark by 2%. For PFMF that outperformance on its
         selected benchmark needs to be (currently) 4.5%.

         The other two listed REITs selected (example 2 above) have a lower point at which the fee is
         increased, being at 1% outperformance (rather than 2%). These two REITs also have a lower
         maximum fee of 15% (rather than 20%) once the relevant hurdle is met. However, it is important
         to note that such 15% fee is based on gross assets of those REITs, which will be higher than the
         “market capitalisation” concept that is used to determine size of the fee in example 1.

         The higher hurdle in place for PFMF (4.5% versus 1% or 2%) can be in part explained by the fact
         that the listed REIT benchmark moves with the broader ASX market each year, so takes up any
         upside (or downside) in the sector generally. In contrast, PFMFs benchmark value being set at
         30 June 2010 does not then reflect any recovery, (or further deterioration) in the property markets
         generally, post 30 June 2010.

         Other Funds’ ability to increase fees

         While no other retail mortgage fund currently includes a performance fee in their management fee
         calculation, many are not charging the maximum amounts they are entitled to charge.

         In Section 7.3, we noted that nine of fourteen comparable mortgage funds selected by PKFCA
         can charge higher fees than current levels. Should all eight charge the maximum allowed under
         their respective constitutions, the average fee, as a percentage of gross assets, would be 2.5%
         across those nine mortgage funds. This rate is significantly above both the current and proposed
         fees for PFMF (including recoveries) of 1.62% and 1.12% respectively.

         The fund managers of these nine comparable mortgage funds can increase fees whether or not
         the performance of the fund improves (though they are bound to act in the best interests of their
         unitholders). In contrast, the performance fee proposed by PFMF is only payable should
         quantifiable outperformance over PFMFs current net assets position occur.

         Fee based on realised value for Unitholders

         We also note that the performance fee is not subject to independent valuations over the next two
         years plus, where the timing of those valuations and methods of valuing may impact on the extent
         of the performance fees. These potentially inequitable influences are avoided in the proposed
         management fee, as it is based only on actual cash returns received by PFMF on realising
         assets.

         Timing of payment of fee

         The first 50% of any performance fees cannot be paid to Balmain Trilogy until Unitholders have
         received 75% of the indexed value of the Fund. The other 50% then is not payable to the
         manager until Unitholders have received the other 25% of that indexed value. This means that
         Unitholders will receive the majority of cash return in their hands prior to the performance fee
         being payable to Balmain Trilogy. However, this timing of fee payment is based on the indexed
         value, not the final total value that is returned to Unitholders. This is best illustrated by way of an
         example:




Pacific First Mortgage Fund - Independent Expert’s Report                                                   41
         Table 14:
                                                                                        Value Per Unit
                                                                                              $

             Assume net value stays as is, at 30 June 2010                                               0.47
             Indexation at 4.5% to 30 June 2011                                                          0.49
             Assumed actual net asset value achieved by the manager (at 30 June 2011)                    0.55

             Source: PKF Analysis


         In the above case, payment of the performance fee would occur at the following points:
         •           50% of performance fee (being 20% x 6 cents per unit x number of units outstanding)
                     payable once Unitholders have received 36.8 cents per unit (on remaining units not
                     redeemed);
         •           balance of performance fee above, payable once Unitholders receive 49 cents per unit;
                     and
         •           the last 6 cents per unit of value due to Unitholders is payable after all the performance
                     fees due to Balmain Trilogy have been paid to them.

         Based on the above example, the entire performance fee due to the manager is paid before the
         final 6 cents per unit of value is paid to Unitholders (the final 6 cents per unit due to Unitholders
         would also then be decreased by one fifth, being the manager’s entitlement). Consequently, in
         this example, while the last component of Unitholder distribution is not paid before the managers’
         fee is paid, 91% of the total amount due is paid to Unitholders, prior to the manager receiving the
         final half of their performance fee. Such timing of payment is considered a reasonable outcome
         for Unitholders, providing a level of assurance for them, regarding order of payment.

         Valuation Procedure at 30 June 2010 in Calculating any Performance Fee

         An important consideration for Unitholders is that the value of the Fund’s net assets at 30 June
         2010 is determined pursuant to a robust independent valuation process. The extent of any
         performance fee that Trilogy may earn is based on this 30 June 2010 value (or a “floor” of $415
         million), as a starting point. The risk for Unitholders is that the Fund is valued at a level below its
         true market value at 30 June 2010. Should this occur, then the increase in value attributable to
         activities of the manager post 30 June 2010 may be overstated, with any performance fee
         payable correspondingly overstated.

         Market value of PFMF will be determined using a net tangible asset valuation, assuming that
         PFMF will continue to operate as a going concern. Net tangible assets will be determined in
         accordance with the Australian equivalents of International Financial Reporting Standards
         (“AIFRS”). This is not a departure from the ongoing approach to valuing PFMF’s net tangible
         assets. Both the annual financial statements for the year ended 30 June 2009 and six monthly
         financial statements to 31 December 2009 were prepared in accordance with AIFRS. The
         financial statements for the year ended 30 June 2009 were audited by KPMG. The financial
         statements for the year ending 30 June 2010, from which the performance of PFMF gong forward
         will be measured, will be audited by KPMG.

         Under AIFRS, PFMF will have its assets measured at fair value at 30 June 2010. This will
         include all of PFMF’s mortgage loans, whether in default or not. This fair value will not be
         determined by either the directors or management of Balmain Trilogy. Rather, individual fair
         values of each mortgage loan will be assessed as the fair value of the property assets underlying
         each loan. Either recognised “top tier” independent property valuing firms will be engaged, or if
         not, there is recent market evidence of sale price for assets and or vendors have exchanged
         contracts, which support current pricing of the assets.




Pacific First Mortgage Fund - Independent Expert’s Report                                                   42
         We have asked Balmain Trilogy to provide a schedule documenting the valuation process at 30
         June 2010. This includes the names of independent valuing firms to be used if applicable, the
         number of properties to be valued and methods of valuation.

         This schedule is provided below:
         Table 15: Schedule documenting valuation process at 30 June 2010
                                                                            Impaired Value
                                                                                            Loan
                                                                             as at 31 Dec                     Valuation Method
                                                                                           Assets
                                                                                 2009
                                                                                                                    As If       Both
                                                                                                         As Is
                                                                                   $           (No.)              Complete      (No.)
                                                                                                         (No.)
                                                                                                                     (No.)

          Independent external valuations as at 30 June 2010:


          Three reputable top tier valuing firms have been engaged to        330,519,072         17        15            1          1
          value the majority of assets:


          No external valuation required as at 30 June 2010;
          Alternatives:


          - Subject to settlement deed                                        13,381,019          1
          - Comparable sales evidence of like properties (“Orderly Sale”)     44,004,958          4


          - Awaiting settlement of vendors exchanged sale pre 30 June
                                                                              11,317,086          1
          2010
          - Performing loan – full recovery expected. Thus value is loan
                                                                                         -        1
          balance – No impairment 1
          - Subject to development agreement                                  19,430,798          1
          - Property being sold in June                                         5,255,924         1


          - Loan (impairment value) recovered/to be recovered prior to
                                                                              56,076,300         15
          June 2010
          Sub-total                                                          149,465,085         24


          Grand Total                                                        479,984,156         41

           Source: Balmain Trilogy – summarised by PKFCA
           Note 1: Impaired value as at 31 December 2009 was $nil as this is a new loan, made pursuant to a transaction which
                   took place on 29 March 2010.
           Note 2: Number of loan assets listed in Section 6.2.1, amounting to 36 loan assets, differs to that as noted in the table
                   above (41 loan assets) due to the reclassification of 5 loan assets. These 5 loan assets have been excluded in
                   Section 6.2.1 as the cashflows from the properties were established to be nil (post 30 June 2010).


         Although subject to change depending on the market and PFMFs cash flow needs, the manager
         has informed us that there are currently only three loans where they intend completing significant
         further development, in order to increase the sale value. Further loans may or may not be subject
         to development of underlying assets however such a development strategy is less crucial for
         those loans.

         On a combined basis, the impaired value of these three loans as at 31 December 2009 was
         $103.7 million. This represents 22% of total loan assets at 31 December 2009. All three
         impaired loans will be subject to an independent property valuation of underlying properties, to be
         completed by a reputable independent property valuer in each case. This valuation firm is being
         instructed to value these properties on an “as is” basis, rather than “as if complete”. Balmain
         Trilogy has informed PKFCA that the “as if complete” methodology cannot be used in these cases
         as the exact form of development is still to be determined. The market dynamics surrounding the


Pacific First Mortgage Fund - Independent Expert’s Report                                                                      43
         three sites is very fluid at present and it may be some time before development plans are
         finalised and further construction commenced. “As if complete” valuations for these three loans
         would need to take into account market risk, build risk, building cost, and the time needed to
         produce a product that would be sold down in periods of up to 4 years from now.

         These valuations would also take into account the time value of money, as required under AIFRS,
         meaning future cash flows would be discounted back to present value. While it may be too early
         to complete a robust, “as if complete” valuation on these underlying properties, such valuations
         would differ from the “as is” methodology to be used by the independent valuer. An “as if
         complete” valuation could be higher or lower than the value to be determined at 30 June 2010,
         however, we are unable to quantify the extent of this upside or downside risk for Unitholders.
         Notwithstanding this uncertainty regarding these loans, we agree with Balmain Trilogy that it is
         too early for these properties to be valued on an “as if complete” basis.

         Based on the process that Balmain Trilogy has committed to for 30 June 2010 valuation, we are
         of the view that a reasonable level of assurance should be provided that asset values of PFMF
         will not be materially understated at 30 June 2010.

         The process to be completed as described by the manager should provide a valuation base for
         performance fee calculations that is supportable and robust.

         Protection for Unitholders from a Fall in Base Value in Calculating any Performance Fee

         The Proposal includes a further “safety net” for Unitholders, regarding the starting point in asset
         value to be used in calculating Performance Fees. This is the requirement that, should the value
         of net assets at 30 June 2010 result in a fall in value below $415 million, as determined for PFMF
         net assets at 31 December 2009, then the manager is required to use $415 million as the starting
         point when calculating any Performance Fees.

         It is possible that 30 June 2010 valuations when completed may derive a net asset value higher
         than $415 million. This would work in Unitholders’ favour in any Performance Fee calculation.
         However, Unitholders are protected from any fall in value below $415 million for performance fee
         calculation purposes.

6.2.3 Borrowing from CBA
         The CBA currently has the ability to restrict any and all payments to Unitholders, therefore their
         position going forward is very important to the implementation of the Proposal, should it be
         approved by Unitholders.

         In July 2009, the balance outstanding with CBA was $98.3 million. Through asset sales this
         balance was reduced to $39.8 million as at 9 April 2010. As detailed in Section 3.7, Trilogy has
         signed an agreement with CBA dated 23 December 2009 which among other things extended the
         current finance facility to 30 June 2010. An important condition in this agreement is that the
         balance of the loan outstanding is reduced to $30 million by 30 June 2010.

         As at 27 May 2010, the CBA balance had been reduced to $35 million. On 28 May 2010,
         Balmain Trilogy authorised a further payment of $5 million out of further proceeds from sale of
         underlying property assets. This payment has now reduced the CBA facility down to $30 million
         as required by 30 June 2010, under the banking facility.




Pacific First Mortgage Fund - Independent Expert’s Report                                               44
         We can also report that Balmain Trilogy has provided PKFCA with documentation supporting
         compliance with other important conditions of the CBA facility. Proceeds from the sale of
         property assets have been first paid to CBA in accordance with the relevant percentages
         required, up to and including the fund payment needed to reduce the loan outstanding to CBA to
         $30 million.

         CBA has granted a temporary extension of the facility until 31 July 2010, given the current
         Proposal at hand. While there are no guarantees in the current tight debt market in the property
         sector, the manager is hopeful that the loan will move from “non performing” to “performing” from
         CBA’s viewpoint. As at the date of this Report, the manager intends negotiating a position where,
         post 30 June 2010, payments can be made to Unitholders as anticipated under the Proposal, with
         CBA’s full consent, with the loan of $30 million continuing.

         The manager’s cash flow forecast post 30 June 2011 indicates that, should there be a need to
         repay CBA in full and extinguish the facility, then such an option is possible. However, full
         repayment of the remaining $30 million to CBA within six months of 30 June 2010, as required
         under the CBA banking facility, would have the following effect on forecast cash flows in the
         Model and in particular, the timing of the Additional Redemption option forming part of the
         Proposal.

         The Additional Redemption planned in December 2010 of up to $35 million would need to be
         reduced, as an early repayment of the CBA loan (in June 2010 or during the six months thereafter
         as would be required) would not allow sufficient funding for this December cash outflow to
         Unitholders. Based on the managers’ cash flow forecasts (all else being equal), the planned $35
         million maximum Additional Redemption in December 2010 would need to be reduced to a
         maximum payout of $17 million. A similar negative impact would occur around December 2010
         on the amount of redemptions available under the Issue Price Redemption Facility.

         It is important to note that any change in the managers’ cash flow forecast would directly impact
         the above guidance on reduced redemptions.

6.2.4 Need to Redeem at Market Value, not at Original Investment under CVRF
         Units in PFMF are currently valued at 47 cents per unit as opposed to their original value of $1
         per unit. To accommodate a loss in unit value such as this but still allow redemptions, retail
         mortgage funds normally either allow a $1 redemption price with the ability to cancel units for nil
         value so as to keep remaining units at the $1 value, or have a Current Value Redemption Facility
         (“CVRF”) based on net asset value of the fund.

         PFMF’s current Constitution has a $1 redemption provision but then does not include the ability to
         cancel units. Due to this anomaly, there can be no redemption of units in PFMF at present
         without leaving remaining Unitholders at a material disadvantage in terms of dilution in the value
         of their units.

         The Proposal therefore contemplates amending the constitution of PFMF to allow a CVRF
         redemption mechanism. Such a change is necessary to treat all Unitholders equitably, whether
         they choose to take up the Fixed and Additional Redemption proposals, or choose to forgo some
         or all of these redemption offers. The Proposal will not be possible in practice without such a
         change to the Constitution, unless the Issue Price Redemption Facility is instead used.




Pacific First Mortgage Fund - Independent Expert’s Report                                               45
         Unitholders can elect to implement the Issue Price Redemption Facility rather than the CVRF. In
         this case all Unitholders would still be treated equally as all redemptions would be applied in the
         same proportions to all Unitholders, at $1 per unit. However, this then gives individual
         Unitholders no choice or discretion in taking up or foregoing redemptions based on their own
         individual preference.

         This may not be the better outcome for both Fast Redemption and Longer Term Unitholders.
         These unitholders will seek to speed up or slow down their redemptions, but would be unable to
         under the Issue Price Redemption Facility.

6.2.5 Other Interests in Martha Cove, Victoria
         PFMF holds assets in Martha Cove totalling an impaired value of $149 million as at 31 December
         2009. The size of the Martha Cove project means it has greater influence over outcomes for
         PFMF, for all Unitholders. The diagram below depicts the four main holders of parcels of land
         within the total development.




Pacific First Mortgage Fund - Independent Expert’s Report                                               46
Figure 3
                                                            Martha Cove Map




 Source: PFMF




Pacific First Mortgage Fund - Independent Expert’s Report                     47
         As the chart indicates, Martha Cove currently has four major land holders as follows:
         •         Eureka Funds Management Ltd (“Eureka”);
         •         CBA as mortgagee in possession (receiver appointed);
         •         Westpac as mortgagee in possession (receiver appointed); and
         •         PFMF, being asset security for mortgage loans.

         There is no cross security or cross collateral among these four holders so no single significant
         land holder can force another to sell or assume control of any of the other three land holders’
         assets. This means that PFMF cannot be directly controlled or instructed by either the banks, or
         Eureka, in how to develop or dispose of PFMF’s assets.

         However, should any of the other significant land holders implement a strategy for quick disposal
         regardless of reductions in price this would cause, then flooding of the market with product would
         affect PFMF. In this situation, it is probable that the value of PFMF’s Martha Cove assets would
         fall and that fall may be significant. To date there has been no such aggressive disposal strategy
         from any of the four significant land holders. Assets have been selling at reasonable prices, but
         this risk still remains for PFMF, particularly in relation to the Martha Cove assets held by the two
         banks as mortgagee in possession.

         It is also relevant to note that Westpac holds parcels of land that have additional strategic value to
         PFMF land holdings. The ability of PFMF to develop and maximise its assets will be influenced
         by actions Westpac takes on its adjacent land. This connection means that it would be preferable
         for PFMF Unitholders, for Westpac’s receivers and Balmain Trilogy to work together in
         maximising the combined value of their land. There is no guarantee at this time that this will
         happen.

         In summary, unlike most assets within PFMF, its holdings in Martha Cove are particularly
         dependent on the actions of other independent land holders. While this dependency is
         commercial in nature rather than legal, it still has the ability to either increase or reduce the value
         of PFMF’s holdings in Martha Cove.

6.2.6 Litigation Against the Former Responsible Entity impacting PFMF

         There are four separate matters involving litigation against CPL as the former responsible entity
         of PFMF. The current responsible entity, Trilogy and PFMF have been included in some of these
         claims from various PFMF borrowers. The contingent liability for costs associated with this
         litigation is approximately $1.4 million.

         Legal advice to Balmain Trilogy and PFMF provides an opinion that no liability will accrue to
         either as a result of this litigation, though the legal process continues.

6.2.7 Litigation to be Instigated by Trilogy on behalf of Unitholders

         Trilogy has informed us that they intend to commence legal action against various parties
         associated with PFMF. Due to confidentiality constraints, we are unable to provide further detail
         of the potential defendants or the legal basis of such litigation.

         However, it is possible that such litigation may prove successful and given the targets to this
         litigation, may result in further material recovery of value for Unitholders. We note that the
         litigation is also being funded by IMF and as such, PFMF is not responsible for the meeting of the
         costs of the litigation.

         While Balmain Trilogy has received legal advice supporting that legal action is warranted and
         indeed commercially viable, the legal process to be entered into may take several years to
         conclude. Therefore, Unitholders may receive further significant recovery from such litigation but


Pacific First Mortgage Fund - Independent Expert’s Report                                                    48
         the timing of such recovery needs to be assessed as a medium to long term proposition for
         Unitholders.

6.2.8 Proposed Hardship Redemption Policy

         Trilogy is in the process of seeking approval from ASIC to allow withdrawals from PFMF on the
         basis of hardship. Should this approval be granted, the Hardship Redemption Policy (“HRP”) of
         PFMF would operate as follows:
         •         The HRP would only be open to Unitholders who are unable to pay reasonable and
                   immediate living expenses; and
         •         The HRP would also consider redemptions on compassionate grounds such as medical
                   costs in life threatening situations, funeral expenses, and prevention of a Unitholder’s
                   family home being sold by a mortgage lender.

         To qualify for HRP relief, a Unitholder will need to have been in receipt of Commonwealth income
         support payments for at least twelve weeks. Further, a letter from either Centrelink or the
         Department of Veteran Affairs will be required confirming certain objective tests have been met.
         Trilogy also has the right to decide under a subjective test, whether in the circumstances, a
         Unitholder is unable to meet his/her own immediate and essential living expenses.

         Assuming all tests are met, the Unitholder may receive up to $20,000 in redemptions per annum.
         There are also restrictions over the timing of such HRP payments through the year.

6.3      Other Considerations

6.3.1 Lack of Geographic Diversification
         At the time of the change in fund manager, PFMF was concentrated in two main areas within
         Australia. The Gold Coast region in Queensland, made up 56% of the total mortgage loan book
         for the Fund. Further, 32% was concentrated within the Martha Cove development, on the
         Mornington Peninsula south of Melbourne. These percentages had moved slightly at 31 March
         2010, being 55% and 33% respectively.

         Such concentration on specific areas can work well when these areas exhibit growth and
         increasing pricing of real estate. However, the lack of diversification can be particularly damaging
         in an economic downturn such as the three years Australia (and the world) has just experienced.
         Concentration in specific areas means that, should these areas underperform on expectations
         then the negative effect on the Fund is amplified. This has been the case for PFMF.

6.3.2 Reliance on Residential

         The majority of PFMF’s mortgage loan assets depend on the residential property sector. As at 31
         March 2010, this sector accounted for 43% of the total portfolio, with vacant land also making up
         a further 48%, the majority of which has residential use. Again, this concentration in one property
         sector leaves the Fund particularly susceptible to a downturn in that sector. While residential is
         property is generally considered to be in recovery mode at present, it has come out of a difficult
         two years since early in calendar year 2008, mainly due to the GFC.

         However, the upside here is that PFMF has a strong weighting to a sector which is now starting to
         prosper, with heavy demand and limited supply in housing creating upward pressure on house
         prices. This trend should assist the manager in its efforts to “work out” properties underlying the
         mortgage loans and achieve greater recoveries on sale under the terms of the Proposal.




Pacific First Mortgage Fund - Independent Expert’s Report                                                49
6.3.3 Related Party Loans

         ASIC in their Regulatory Guideline 45, highlighted loans from mortgage funds to parties related to
         the fund manager as an area of increased risk. Failures in this sector had often been linked to
         such loans where the risk of loans being made at non-commercial non-arms length terms is
         greater.

         There are currently no related party loans to any entity associated with Balmain Trilogy or with
         Trilogy however, the previous fund manager (CPL) did approve significant levels of mortgage
         loans to related parties. As at 7 July 2009, at the time of the change in fund manager to Balmain
         Trilogy, PFMF had entered into mortgage loans with parties related to CPL to the extent of
         28.12% of the total loan portfolio. These loans continue to be among those most impaired and
         indeed are loans that either have or may involve litigation.

         The details of mortgage loan entities related to the former manager, CPL are as follows:
         Table 16:
                  As at 31 December 2009                    CPL Ownership Interest      Loan Balance Prior to Impairment
                                                                      %                       Losses ($ millions)

           Loan to a CPL Related Party
           Marina Cove Pty Ltd1                                                    30                              129
           Lake View Estates Pty Ltd1                                              15                               52
           SP Marinas Pty Ltd1                                                     50                               19
                                    1
           Sunrise Waters Unit Trust                                               50                               24
           Grande Pacific Syndicate 11                                             50                               55
           Grande Pacific Syndicate 21                                             50                               25
                                                                                                                   304


           Total impairment losses recorded in respect of the above mortgage
           loans including write off of related interest receivable in the loans
           Year ended 30 June 2008                                                                                <5>
           Year ended 30 June 2009                                                                              <114>
           Year ended 31 December 2009                                                                           <14>
                                                                                                                <133>


           Impaired value of loans to related parties of CPL as at 31 December
                                                                                                                   171
           2009



           Source: Management Financial Statements and advice
           Note 1: Receiver and manager appointed


         The increased risk that the above loans were not set at commercial arms length terms may
         impact on the ability of the current manager to recover the full (though now impaired) value of
         these loans.




Pacific First Mortgage Fund - Independent Expert’s Report                                                             50
6.3.4 Interest Income Risk Margin Originally Low

         The majority of loans lent from PFMF to various then related and unrelated property developers
         were set at an average interest rate of 9% per annum. Notwithstanding the effect that the GFC
         has had on the property market, it appears that such a rate did not fully factor in the true extent of
         risk in some of the underlying property developments.

         This under assessment of risk would have influenced the loan covenants negotiated such as
         interest cover and LVR’s, allowing potentially generous terms for the borrower in this regard.
         These loans and their terms and interest rate risk margins have now all been set and cannot be
         altered. Balmain Trilogy needs to now deal with these historically set terms and conditions.
         However, Unitholders need to be mindful of the apparent mismatch of loan pricing to actual risk.
         The mismatch has had and will continue to have a material effect on value that can be recovered
         through the underlying assets. This is one reason why the net asset value of the Fund has been
         impaired to the extent it already has.




Pacific First Mortgage Fund - Independent Expert’s Report                                                  51
7        FAIRNESS ASSESSMENT

7.1      Approach

         As detailed in Section 2, the Proposal at hand does not involve a scheme or takeover offer to
         Unitholders. There is no fixed offer to Unitholders involving consideration in cash or scrip within
         the Proposal so the Proposal doesn’t involve a change of control, or an assessment of value of
         offer versus value of units.

         Given the above we have considered the overall fairness assessment of the Proposal by
         assessing whether, pre versus immediately post the Proposal, the following will change:
         •         Will there be any change in proportionate (%) underlying ownership interest of any
                   Unitholder?
         •         Will the voting rights of any Unitholder change when compared to their rights under the
                   existing Constitution?
         •         Will the commercial interest in the Fund change for any Unitholder?

         If the answer to all of the above is no, then we consider that the Proposal is “fair” to Unitholders,
         when taken as a whole.

         Our approach to assessing the question of fairness does not involve any valuation methodology
         as such. The nature of the Proposal does not require us to value units in PFMF. Rather, our
         assessment highlights any changes to the three areas above before, compared to immediately
         after, the Proposal. We have considered the advantages and disadvantages of the overall
         Proposal in the “reasonableness” sections of this Report.

         Also, in our fairness assessment we have addressed the proposed change in the base fee
         component of Trilogy’s management fee. This involves a comparison between the current base
         fee and the proposed new base fee, as well as a comparison of both these fee levels to
         management fees charged by other mortgage funds in the sector. Again, we have considered
         the advantages and disadvantages of the performance fee component of the proposed PFMF
         management fee, in the “reasonableness” sections of this Report.

7.2      Overall Proposal
         If the Proposal is accepted, each Unitholder will continue to hold the same percentage ownership
         interest in PFMF and in its underlying net assets and contingent assets (potential proceeds from
         litigation). Each Unitholder will also be entitled to the same voting rights under the Constitution,
         immediately post Proposal, as they currently have.

         Further the commercial value of each Unitholders’ interest in PFMF does not change immediately
         post Proposal compared to that Unitholders are entitled to now. The assets of the Fund are to be
         valued at 30 June 2010 (post Proposal) and the net asset per unit valuation may change from
         what it currently is. However, this valuation adjustment is part of the normal operations of PFMF.

         Importantly, regardless of whether the value of units goes up or down once 30 June 2010
         property valuations are completed, the relativity of value among Unitholders won’t change,
         immediately post Proposal. Such periodic valuation updates would occur whether or not the
         Proposal is implemented.

         Based on the above, we believe that overall the Proposal, is fair to Unitholders when taken as a
         whole.




Pacific First Mortgage Fund - Independent Expert’s Report                                                 52
         The above assesses any changes to Unitholders’ rights, ownership interests and commercial
         value immediately post Proposal, should it be implemented. We have considered the impact of
         the Proposal on Unitholders as a whole if its terms are implemented over the short to medium
         term future, in the “reasonableness” sections of this Report.

7.3      Base Fee Component of Management Fee

         To assess the level of base fee proposed we have compared PFMF’s current and proposed base
         fee to other management fees currently charged in rival retail mortgage funds in the industry.
         Due to the normally more passive nature of managing a mortgage loan portfolio, no other
         mortgage fund includes a performance fee component in its overall fees. Trilogy is putting
         forward the combined base fee / performance fee structure due to the fact that, if the Proposal is
         implemented, the nature of the manager’s role becomes one of actively developing and selling
         property assets rather than managing a “passive” loan book. (We consider the reasonableness
         of such performance fee in Section 6).

         The analysis in this Section therefore only considers the “base fee” management fees, both for
         PFMF and for the other comparable mortgage funds in the sector. The fact that PFMF is in a
         position where it is more akin to a property trust, with development needs is assessed within the
         performance fee analysis.

         In almost all cases, retail mortgage funds charge a base management fee as well as an expense
         recovery charge. We have combined these two charges to derive a total management fee
         charged in each case, to ensure we are comparing “like with like”. In the following analysis we
         have divided the mortgage fund sector up into three sub categories:
         •           Small mortgage funds: Net Assets below $500m
         •           Medium mortgage funds: Net Assets between $500m and $1 billion
         •           Large mortgage funds: Net Assets in excess of $1 billion

         The table below provides a summary of the average management fee charged across fourteen
         rival mortgage funds, compared to PFMF’s base management fee, both pre and post Proposal.
         Full details of each comparable retail mortgage fund selected are provided in Appendix 3 to this
         Report.
         Table 17: Comparable Mortgage Funds
                                              Management Fee1              Expense Recovery1                    Total1
                     Fund Size
                                                      p.a.                          p.a.                         p.a.

             Small Funds – Average                           1.00%                         0.30%                         1.30%
             Medium Funds-Average                            1.26%                         0.03%                         1.29%
             Large Funds-Average                             1.19%                         0.07%                         1.26%
             PFMF Base Fee:
                      Pre                                     1.5%                         0.12%                         1.62%
                      Post                                    1.0%                         0.12%                         1.12%




             Source: PKFCA Analysis, Mortgage Fund PDS’ websites and financial statements
             Note:   1. All fees are expressed as a percentage of gross assets. Where the relevant mortgage fund uses a different
                     method of calculating fees we have recalculated to arrive at an implied gross assets percentage, based on
                     management fees charged and gross assets in the latest available audited financial statements of each fund.


         We note that PFMF currently fits into the upper end of the “small” range of funds, so small to
         medium mortgage funds are considered most relevant for comparison purposes.



Pacific First Mortgage Fund - Independent Expert’s Report                                                                    53
         As PFMF currently has net assets of $414 million and as such, falls at the high end of the “Small
         Fund” range above, and at the low end of the “Medium Fund” range. Accordingly, the average
         fees charged of 1.30% and 1.29% are more relevant, when considering PFMF’s base
         management fee and expense recoveries.

         The bar chart below expands on the above summary table, by providing a graphic representation
         of all fourteen comparable mortgage funds, as well as base fees and recoveries for PFMF both
         pre and post Proposal:




Pacific First Mortgage Fund - Independent Expert’s Report                                             54
         Figure 4
                                                                                                                Retail Mortgage Fund Management Fees


                                  2.50%


                                                                                                                                                                                                                                                      1.96%
                                  2.00%                                                                                                                                                                                                  1.88%

                                                                                                                                                                                                              1.58%         1.62%

                                  1.50%                                                                                                                                                          1.43%
                                                                                                                                                                          1.33%     1.37%
                                                                                                                                                        1.29%
                                                                                                1.15%       1.17%        1.17%           1.21%
                                                                       1.12%       1.13%
                                                          0.95%
                                  1.00%




              % of Gross Assets
                                             0.55%
                                  0.50%



                                  0.00%
                                              Stacks      Equity   Pacific First Tasmanian     Sandhurst Tasmanian Macarthurcook Tasmanian       Perpetual              Mayne     Challenger    Equititrust Mirvac AQUA Pacific First  LM First     Wellington
                                             Managed     Mortgage Mortgage Fund Perpetual Long   Select   Perpetual Mortgage Fund Perpetual       Monthly            Investments   Howard      Income Fund High Income Mortgage Fund Mortgage Fund Premium
                                           Investments Income Fund (Proposed) Term Fund Mortgage Fund Fixed Term                     Select    Income Fund             Limited - Mortgage Fund                 Fund      (Current)                 Income Fund
                                           Limited - The                                                    Fund                 Mortgage Fund                         Northern
                                          Mortgage Fund                                                                                                               Investment
                                                                                                                                                                      Trust Fund

                                                                                                                                 Total Fee Charged as % of Gross Assets

           Source: Management. PKFCA Research and Analysis




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                                                                                55
         In taking all evidence of comparable total management fees charged into account, we can
         conclude that the proposed change in base fee will reduce PFMF’s base fee from being among
         the highest, to one of the lowest in the retail mortgage funds sector. This favourable reduction for
         Unitholders needs to be considered in conjunction with potential performance fees that may
         become payable under the Proposal.

         The performance fee proposed is considered in Section 6.2.2. However, it is worth noting that at
         least nine of the fourteen comparable funds are not currently charging the maximum amount they
         are entitled to under their relevant constitutions. This is no doubt due to the poor performance of
         the mortgage fund sector over the last few years, influencing managers to reduce their fees.

         If and when conditions improve, these nine funds may see their management fee expense
         increase as fund managers exercise their rights to increase their fee levels again. Such potential
         upside for these managers is considered akin to the performance fee being proposed by Balmain
         Trilogy.

         Should all nine fund manager’s increase their fees to the maximum allowable then the new
         average fund management fee (including recoveries) would increase to 2.5% p.a. of gross assets
         for these nine comparable mortgage funds, well above current levels.




Pacific First Mortgage Fund - Independent Expert’s Report                                                 56
8        EVALUATION

         As set out in Sections 2.2 and 6.1, we have considered the Proposal as a whole to all categories
         of Unitholders. In addition, we have not attempted to assess the advantages or disadvantages of
         each aspect of the Proposal individually.

         Below are the advantages and disadvantages of the Proposal.

8.1      Advantages of Proposal

8.1.1 Staged Redemptions and Selective Asset Development

         Reasonable Assurance of Planned Redemptions

         Balmain Trilogy’s cash flow forecast Model provides a reasonable level of support that the Fixed
         Redemptions and planned Additional Redemptions should be met. This is particularly an
         advantage for Fast Redemption Unitholders.

         Assuming all Unitholders take up all entitlements to these redemptions, by 30 September 2012,
         Fast Redemption Unitholders should be able to recover approximately 70% of their remaining
         investment. It is quite possible that Longer Term Unitholders will not take up their redemption
         entitlements under the Proposal. Depending on the extent of Unitholders who don’t redeem, it
         may be possible for Fast Redemption Unitholders to recover their entire remaining investment
         over the two year period, under an orderly sale of underlying assets. Though there is no
         guarantee by Balmain Trilogy or PKFCA that the Model will be achieved.

         Replacement of Former Income Distribution Pattern

         Regular Receipt Unitholders are those who, due to their own personal circumstances, were (and
         are) particularly reliant on receiving regular cash distributions throughout the year. These
         Unitholders were receiving a distribution of between 9% and 9.95% per annum from PFMF when
         the Fund was open and performing. The Fixed and Additional Redemption pattern proposed
         should be attractive to this class of Unitholder as it, in effect, replaces the former distribution
         pattern Unitholder’s enjoyed on their investment.

         Based on Unitholders’ original investment, the Fixed Redemption plan will provide them with a
         capital distribution (redemption) equivalent to 7% per annum on their investment in the years
         ending 30 June 2011 and 2012. The Additional Redemption plan (assuming achievable) then
         provides a further 7% per annum on original investment in the year ending 30 June 2011. In the
         year ending 30 June 2012 this reduces to 5% for Additional Redemptions.

         The table below summaries this analysis:
         Table 18: Cash Distributions
                                                                                       Proposed Capital Return1
              Forecast Year         Previous Income Return1
                                                                          Fixed                Additional                Total

           30 June 2011                            9 to 9.95%                     7%                    7%                       14%
           30 June 2012                            9 to 9.95%                     7%                    5%                       12%

           Source: PKFCA Analysis
           Note 1: All percentages are based on a Unitholder’s original investment ($1 per unit) not their current value per unit (of
                   $0.47).




Pacific First Mortgage Fund - Independent Expert’s Report                                                                         57
         It is important to note that the Fixed and Additional Redemptions are not income distributions.
         Rather, they are a return on capital which, unlike income distributions, erode the value of a
         Unitholder’s investment remaining in PFMF. However, on a purely cash receipt basis, these
         capital returns above can fill the void left when income distributions were frozen.

         By selectively accepting or not taking up the Additional Redemptions planned, Unitholders will
         receive a similar annual cash return as they enjoyed before all distributions were frozen (9% to
         9.95%).

         This advantage, particularly for Regular Receipt Unitholders needs to be considered in light of the
         lower level of assurance that the Additional Redemptions plan will proceed under the quantum
         and timing proposed. This remains dependent of Balmain Trilogy achieving its cash flow
         forecasts in the Model, over the two years to 30 September 2012.

         Possible Partial Redemption

         There is probably a fourth class of Unitholders who are motivated by all three categories that
         were discussed in Section 6.1. For these Unitholders, the Proposal offers them the advantage of
         taking only partial redemption of capital while leaving a significant portion of their remaining
         capital within PFMF for potential future upside.

         Manager has Flexibility to Avoid “Fire Sale” of Assets

         Under the Proposal, Balmain Trilogy does not have to offer any Additional Redemption or can
         reduce the quantum available for those distributions. This should assist the manager in avoiding
         a distressed “fire sale” of assets in order to meet Additional Redemptions. Rather than sell, at
         any price, the manager can if needed amend their stated intentions for the Additional Redemption
         component of the Proposal.

         This is beneficial to those Longer Term Unitholders whose prime concern would be further
         erosion in Fund value via “forced” sale, rather than holding assets and developing and disposing
         in a more orderly fashion.

         Current Value Redemption Facility (“CVRF”) Benefit

         The CVRF if implemented will protect the interests particularly of Longer Term Unitholders. In
         frozen managed funds such as PFMF there is a chance that the last Unitholders remaining in the
         Fund are left with lower values due to inequitable redemptions paid earlier to other Unitholders
         who were able to exit the Fund. Longer Term Unitholders would now be protected from such a
         position, as other Unitholders can only redeem at current market value, (currently $0.47 and to be
         independently reassessed as at 30 June 2010). The CVRF is therefore fundamental to the
         successful operation of the Proposal, avoiding loss in value for Longer Term Unitholders.

         This CVRF advantage is further considered in Section 8.3.

         Exiting Risks in Lack of Geographic Diversification

         PFMF has concentrated investments in two specific regions with in Australia, being the
         Mornington Peninsular and the Gold Coast. This lack of diversification is one of the reasons
         behind the Fund’s poor performance to date. Both Fast Redemption and Regular Redemption
         Unitholders are able to wind down their investment in the Fund and therefore reduce their risk of
         being overly exposed to specific regions.




Pacific First Mortgage Fund - Independent Expert’s Report                                               58
         Exiting Risks in Lack of Property Diversification

         Similar to the above, PFMF relies heavily on the performance of the residential property
         development market for its success. This lack of property sub-sector diversification is again
         negatively affecting PFMF at present.

         Both Fast Redemption and Regular Receipt Unitholders can manage down their exposure to this
         risk by taking up their various redemption entitlements under the Proposal.

         Exiting Exposure Associated with Related Party Transactions

         The previous Fund manager CPL, entered into significant transactions with parties related to the
         CPL group. The terms of such loans and the extent of due diligence completed before PFMF
         was committed to those loans is open to question. Any non-commercial non-arm’s length terms
         and conditions within such loans will only increase the risk of recovery of maximum possible
         value from the underlying properties. Both Fast Redemption Unitholders and Regular Receipt
         Unitholders will be able to reduce their exposure to this increased recovery risk by exiting PFMF
         via the options available in the Proposal.

         Ability to Actively “Work Out” Certain Assets to Increase Value

         Altering the Constitution is seen as a benefit especially to the Longer Term Unitholders. These
         Unitholders may believe that greater value can be created than the current $0.47 per Unit, via
         selective property development. Such a strategy is presently not specifically made possible
         under the current Constitution. The ability of the manager to develop properties does also come
         with robust controls around what they can do.

         Potential Upside in Martha Cove Development

         The left hand side of the map in Section 6.2.5 above displays a large tract of undeveloped land at
         Martha Cove, controlled by PFMF. Taking a longer term view it is possible that this further land
         could be developed along similar lines to the balance of Martha Cove. Development approvals
         would be needed along with significant investment in order to develop such a large area of
         additional land.

         The above should not be factored into any short to medium term outlook. However, taking a
         longer term view, it is possible that this further land may generate significant value if appropriately
         developed. Even if PFMF was to sell this asset prior to ultimate development, that resale value
         may increase as the opportunities relating to this further land become apparent to potential
         buyers/developers.

         Mitigating this advantage is that there are three other unrelated parties who control portions of the
         Martha Cove development. These parties may have different aspirations to PFMF. However
         Balmain Trilogy is going to have to work with one or more of these parties in order to maximise
         value for all concerned.

8.1.2 Responsible Entity’s Proposed New Fees

         Lower Base Fee than Competitors and Responsible Entity’s Interests Aligned to Unitholders

         The fairness assessment (in Section 7.3) indicated that the proposed new lower base fee moves
         PFMF’s base fee to one of the lowest among its retail mortgage fund peers. The performance fee
         component would increase the incentive that the manager has in maximising value on realisation
         of underlying property as opposed to realising quickly, at any cost.




Pacific First Mortgage Fund - Independent Expert’s Report                                                   59
         To get back to the existing management fee quantum, Balmain Trilogy would need to increase
         PFMF’s unit value by at least $0.06 per unit (subject to the key assumptions set out in Section
         6.2.2). This increase in value just to “breakeven” on the manager’s current position assists in
         aligning the interests of Balmain Trilogy with that of Unitholders, in particular, with Longer Term
         Unitholders.

         Key Performance Fee Parameters are Consistent with Precedents Already in the Market

         The outperformance hurdle that needs to be met before any performance fee is payable (RBA
         cash rate, currently 4.5%) is consistent with or slightly above hurdles in place for other
         performance fee mechanisms in the REIT market.

         In addition, the calculation of the performance fee based on 20% of outperformance is
         comparable to other performance fee mechanisms used. Other examples have a two tiered
         approach to calculating performance fees however in these cases the “top rate” of 20% is
         triggered at a lower level of outperformance compared to that proposed for PFMF.

         “Safety Net” in Place for Performance Fee Calculation

         The base point for calculating any performance fee will be the current net asset value of the Fund
         at 30 June 2010. However, should this fall below the 30 December 2009 value being $415
         million, then that $415 million net asset base value will instead be used.

         This protects Unitholders from overstatement of any performance fees payable to the responsible
         entity, via a lower starting point in unit value.

         Deferral of Payment of Performance Fee

         The proposed performance fee mechanism for PFMF ensures that the majority of any increased
         value is actually paid in cash (via redemptions) to Unitholders before the responsible entity’s
         performance fee is fully paid. From a practical viewpoint, this will defer any payment of
         performance fees until late in the asset development process that the manager intends
         implementing.

         This is an advantage particularly for Fast Redemption Unitholders who will potentially have
         redeemed the majority of their remaining investment prior to payment from PFMF funds of any
         performance fee. However, all Unitholders should benefit from the deferred nature of the
         performance fee.

         Rival Funds Have the Ability to Increase Fees

         Nine of the fourteen mortgage funds included in Figure 4, had lowered their base fees due to
         underperformance or because distributions and redemptions from their managed fund had been
         frozen.     These rival managers do have the discretion of increasing their fees, to levels
         significantly above the 1% base fee proposed by Balmain Trilogy.

         Such scope to increase fees is akin to a “reserve performance fee”, for these rivals to PFMF.
         However, in PFMF’s case, the performance fee mechanism requires Balmain Trilogy to actually
         increase value for Unitholders under a quantifiable calculation. We see this as a preferable
         position for all PFMF Unitholders, compared to other funds in the market.




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         Performance Fee Based on Actual Realisation, not Progressive Unrealised Asset Valuation

         The performance fee calculation takes actual realised value into account, not independent
         property valuations which by their nature consider unrealised value. Actual realised value is used
         as Unitholders need to be paid for realised value of assets before the responsible entity receives
         any performance fee. This means as well that the responsible entity receives the majority of its
         fee from realised cash positions, not from unrealised asset value increases, paid out from the
         general funds available to PFMF. This “cash certainty”, as opposed to valuation of unrealised
         increases, is seen as a beneficial safeguard to all Unitholders under the Proposal.

         Overall Equity

         The total management fee may increase from its current levels should Balmain Trilogy increase
         the value of net assets in the fund, on sale. That increase may be significant however in this
         case Unitholders would be receiving significantly higher returns than they face currently, based
         on a net asset value per unit of $0.47.

         Further, should Balmain Trilogy not be able to achieve an increase in net asset value above 4.5%
         per annum then the responsible entity’s fee will have been reduced by 33.3%, to the benefit of all
         Unitholders.

8.1.3 Litigation Unit Split and Hardship Redemption Policy

         Potential for Significant Upside from Planned Litigation

         Any legal action may lead to further returns to Unitholders should it prove successful in Court or
         lead to settlements out of Court.

         The contingent asset being any amount received from litigation could materially disadvantage any
         Unitholder who wishes to redeem units from PFMF prior to any successful legal outcome. Fast
         Redemption Unitholders in particular would be forgoing this contingent asset as up to 70%
         (possibly more) of their unitholding will have been redeemed and units cancelled over the period
         to October 2012, while successful litigation outcomes probably won’t be realised until after this
         period.

         For all Unitholders, the ability to split their units (and receive Litigation Recovery Entitlement
         Units) so retaining their current entitlement to any litigation proceeds is important. This is
         particularly relevant for Fast Redemption Unitholders, but will ensure an equitable outcome for
         any Unitholder who redeems under either the Fixed Redemption or Additional Redemption
         processes. The litigation unit split allows choice for Unitholders without diminishing their current
         right to this contingent asset.

         We note that pria facie, there would be substantial costs associated with the litigation. However,
         in the present case, a litigation funder, IMF is involved and as such, there is no material cost to
         PFMF.

         Those in Severe Financial Hardship will be able to Access Faster Redemptions

         The Fast Redemption Unitholders should benefit from this policy, should their circumstances be
         severe enough to warrant such special treatment. Where both the objective and subjective tests
         for applicability are passed, the aim of a HRP is to release up to $20,000 p.a. per Unitholder from
         frozen funds, to relevant Unitholders as soon as possible.

         While the tests for the HRP are onerous, those Unitholders in critical need should be able to
         access part (or all) of their remaining investment faster than would be the case under the Fixed
         and Additional Redemption processes in the Proposal.



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         Unitholders are Protected from Significant Redemptions being Paid to Certain Unitholders in
         Priority, or on More Favourable Terms

         The tests required to qualify under the HRP are strict and the annual amount for Unitholders who
         do qualify is limited to $20,000 p.a. Accordingly, any redemptions actually paid under the HRP
         should not significantly adversely affect the Regular Receipt Unitholders or, particularly, the
         Longer Term Unitholders.

         Further, redemptions under the HRP will be paid in a manner such that remaining Unitholders will
         not have their investments diluted when HRP payments are made, as such payments will be
         based on current unit value of the Fund.

8.2      Disadvantages of Proposal

8.2.1 Staged Redemptions and Selective Asset Development

         Immediate Sale of Assets at the Expense of Long Term Value

         The proposed Fixed and Additional Redemptions, assuming the manager’s cash flow forecasts
         are met, will involve the sale of approximately 70% of the Fund’s net assets (at 31 December
         2009). The effect of this sale process could be that values in assets are foregone in order to
         meet redemptions.

         A two (2) year period is being factored into the Proposal with staggered sales throughout that
         time. This should assist in minimising any distressed or forced selling. However, assets may still
         be sold for less value than if they were held for the longer term until their development.

         The above potential short fall in funding for redemptions may be resolved by a quick sale at a
         lower value, for certain specific assets. The manager has earmarked a number of assets where a
         fast redemption of cash could be completed but without extracting what the manager believes is
         full value for those identified assets.

         Such a fast sale below full value may assist in maintaining the planned redemptions for Fast
         Redemption and Regular Receipt Unitholders, but it is seen as a disadvantage for those in the
         Longer Term Unitholder category. Such Unitholders would be selling at a time when the specific
         property markets in which PFMF operates are still in recovery mode. A preferable strategy for the
         Longer Term Unitholders would be to hold all assets until markets in general have recovered
         further and the supply/demand mismatch that is developing in the residential property market
         starts to work in favour of the vendor of properties.

         Risk of Additional Redemption being Deferred or Reduced

         A proportion of the cash inflows needed to pay for planned Additional Redemptions is subject to
         “timing risk”. This risk includes matters that are outside of the control of Balmain Trilogy such as
         Development Application approvals and Strata Plan approvals. Should these or other events
         take longer than forecast then there is a risk that the manager will either have to reduce the level
         of funding made available for the planned Additional Redemptions, or defer timing of those
         redemptions. This risk is particularly relevant to those in the Fast Redemption Unitholder
         category.

         Higher Risk Cash Flows Forecast

         We have assessed five (5) properties within the manager’s cash flow forecasts which carry a
         higher risk of cash realisation within their forecast time frame. Due to the interrelationship of cash
         flows from the various property sales, should these five property sales not be realised as planned,
         there may be a flow on effect to other properties, which rely on funding from ongoing sales of
         other properties.



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         The combination of these five properties underperforming in terms of cash realisation and their
         interrelationship with other cash flows, in combination may materially decrease cash available.
         This in turn could jeopardise the full payment of the planned Additional Redemptions. Fast
         Redemption Unitholders particularly will be at a disadvantage should this occur.

         Potential for CBA to Terminate Loan at 30 June 2010

         Notwithstanding that Balmain Trilogy has successfully reduced the balance of the loan from CBA
         to $30 million as required there is a possibility that CBA may still exercise their right to terminate
         and request immediate repayment. The manager has stated that PFMF is now in a position to be
         able to pay out CBA fully if needed. Such outflow of funds would however place greater strain on
         the cash flow forecast Model and possibly lead to a “quick sale” at depressed pricing, of certain
         assets in order to maintain the planned Additional Redemptions.

         More Emphasis on Property Development with its Inherent Risks

         The Proposal imposes constraints on how much and on what type of property development the
         manager can enter into. Only improvements to existing assets will be allowed and any
         development must be in accordance with that originally proposed. Importantly, the current
         Constitution is silent on the manager’s powers regarding property development of underlying loan
         security, so the Proposal will clarify this issue. However, the fact remains that the Proposal will
         allow greater scope in the area, where returns may be greater but where there is also greater
         risk.

         Longer Term Unitholders may see the necessity of selective development to try to increase value.
         However, such higher recovery comes at a greater risk, not just in the manager’s performance
         but also market factors related to property development outside of the control of the manager.

         Longer Term Unitholders also need to be comfortable with Balmain Trilogy’s ability to complete
         the property developments it has selected to continue with. Such activity is outside of PFMF’s
         originally intended core business of first mortgage property lending.

         Mitigating this risk factor for Longer Term Unitholders is the experience and track record of key
         personnel within the manager in property development, summarised hereunder.

         Andrew Griffin, Raymond Fazzolari, Murry Orford and Bill Davis all have extensive leadership
         level experience in property projects, spanning 80 years in property development and
         construction, including the following:
         •         Andrew Griffin:
                   −         current CEO of Balmain NB Corporation Ltd;
                   −         previous executive level positions held at Trafalgar Properties Limited and
                             Manboom Pty Limited; and
                   −         key projects:
                                   Oasis Apartments – a residential development of 156 apartments with total
                                   sales of $50 million;
                                   Maestri Tower – an $18.5 million Sydney CBD development; and
                                   Bondi Icebergs – redevelopment of prominent property into a mixed use
                                   public facility.
         •         Raymond Fazzolari:
                   −         Investment Committee in the Charter Hall Property Group’s property development
                             funds, including the Charter Hall Cove Plus Industrial Fund ($750 million in
                             development assets) and the Charter Hall Cove Plus Office Fund ($1.250 billion
                             in development assets);



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                   −         Senior roles in the development of property company St Hilliers Pty Limited’s
                             commercial, industrial and retail development assets; and
                   −         Finance Director and Managing Director roles within the Leda Holdings Group of
                             Companies.
         •         Murry Orford:
                   −         14 years experience at executive level at Marsim;
                   −         key projects:
                                   Twin Creeks, Luddenham – subdivision of rural residential lots and
                                   development of an international golf course, clubhouse and resort centre;
                                   Paradise Point, Gold Coast – subdivision of blue-chip land holding. A $400
                                   million development with the site taking up to 400 dwellings; and
                                   Centennial, North Randwick – a premium quality residential development
                                   adjacent to the Centennial park at Randwick.
         •         Bill Davis:
                   −         current Head of Credit at Balmain NB Corporation Ltd;
                   −         40 years experience in banking and finance, including executive level positions at
                             ING, Mercantile Mutual and Citibank; and
                   −         such experience includes credit roles and delinquent loan management.




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8.2.2 Responsible Entity’s Proposed New Fees

         The Responsible Entity’s Fee Could Significantly Increase

         The proposed performance fee could see the responsible entity’s overall fee increase significantly
         should the PFMF net asset value, on realisation, significantly outperform the benchmark value to
         be set at 30 June 2010.

         In this event, the higher responsible entity’s fee will impact (reduce) the total realised value from
         asset sales being returned to Unitholders. Although Longer Term Unitholders would also benefit
         from this outperformance, the effect of the performance fee on their final return of capital will
         reduce the total quantum of that cash return.

         Vagaries of the Residential Property Market Impacting the Level of Performance Fee

         We have considered the reasonableness of proposed performance fees in Section 6.2.2 above
         where, Trilogy will receive a performance fee (at 20%) of any returns to Unitholders over the
         indexed value of the fund. The indexation factor will be the RBA cash rate. The indexation
         “uplift” will commence from 1 July 2010 at the current rate of 4.5% p.a. Indexation will occur on a
         monthly basis using the prevailing RBA cash rate at the commencement of each new month.

         The RBA cash rate is the hurdle to use as the benchmark over which Trilogy must outperform,
         before they start accruing any performance fee. However, unlike listed fund management
         vehicles where the hurdle can be reset against an active market, Units in PFMF do not have the
         benefit of an active trading market to compare to. This means that the base “fair value” at 30
         June 2010 once set, cannot be readjusted apart from the nominal increase applied via the RBA
         cash rate.

         In our view, the use of the RBA cash rate is potentially at a complete disconnect with other
         indices that are most likely more comparable to the business of PFMF, for example, it is likely that
         the residential property market index would a more appropriate basis in which to assess the
         performance of PFMF. Accordingly, there is higher possibility that Trilogy will outperform the
         RBA cash rate resulting in high level of fees being paid by PFMF.

         The impact of the performance fee is likely to be met by the Longer Term Unitholders

         As discussed, the timing of the performance fee is such that it is not triggered until increase in net
         asset value is achieved. This means that the Fast Redemption Unitholders will possibly have
         redeemed most of their investment prior to performance fees becoming payable. Accordingly, the
         performance fees may have to be absorbed by Longer Term Unitholders.

         The performance fees will capture part of the proceeds from successful litigation

         Should the litigation against various parties be successful, the responsible entity will receive a
         portion of these proceeds via their performance fee structure. The calculation of the performance
         fee will include 20% of any cash proceeds from litigation payable to Unitholders. As such,
         Unitholders will receive 80% of any cash payout from this litigation, not 100% of these proceeds.

         Payment of Performance Fee before Final Component of Asset Value Gain is Paid to
         Unitholders

         The stages of payment of any performance fee are such that all the indexed fair value needs to
         have been paid to Unitholders before the performance fee is totally paid to the responsible entity.
         However, while only a relatively small component of total net assets realised, the final cash
         payment to Unitholders of the value accretion over and above the indexed net asset value would
         not be paid until after the responsible entity is paid their entire performance fee.



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         The last component of distribution will only be a small portion of the total capital returns that
         Unitholders may receive but all Unitholders will rank after the responsible entity in receiving this
         final portion. This is seen as a disadvantage for Unitholders.

8.2.3 Litigation Unit Split and Hardship Redemption Policy

         Further Strain Placed on Cash Flow Forecasts as the Hardship Redemption Policy is
         Implemented

         One of the crucial elements of the Proposal is the ability of the manager to generate sufficient
         cash flows on a timely basis to allow for Fixed and proposed Additional Redemptions to proceed
         as planned. The details of the Hardship Redemption Policy are yet to be finalised however the
         whole aim of such a policy will be to return capital to those in severe financial hardship on a
         priority basis to other Unitholders.

         Should the cash outflows associated with this Policy be material, then there will be further strain
         placed on cash inflows needed to meet the planned Additional Redemptions under the Proposal.
         This may affect both the timing and quantum of the planned Additional Redemptions at December
         2010, as the bulk of the applications under the Hardship Redemption Policy should be received
         soon after it is implemented.

         This is seen as a greater risk to the ability of Unitholders to redeem and hence a disadvantage for
         Fast Redemption Unitholders and to a lesser extent, Regular Receipt Unitholders. This risk for
         these categories of Unitholders is however mitigated by the following:
         •         Balmain Trilogy intends applying strict guidelines and tests that need to be passed before
                   any Unitholder can obtain redemption under the proposed Hardship Redemption Policy;
                   and
         •         ASIC will need to review and approve the Policy before it can be implemented. This
                   independent Government body will provide an important check which should balance the
                   needs of those Unitholders most in need with an equitable outcome for all Unitholders.

8.3      Resolution Two, Choice between CVRF and IPRF

         Under the Proposal, Unitholders are given a choice of two options in undertaking redemptions.
         These options are the:
         •         Current Value Redemption Facility; or
         •         Issue Price Redemption Facility.
         Throughout our analysis of advantages and disadvantages we have emphasised the level of
         choice that the CVRF process provides Unitholders with differing goals and personal financial
         circumstances. We see this as an important advantage within the Proposal.
         The Proposal also gives Unitholders the ability to vote for the IPRF process in pricing
         redemptions. Such an alternative would negate many of the benefits inherent in the overall
         Proposal. In our view, the IPRF process ignores the fact that Fast Redemption, Regular Receipt
         and Longer Term Unitholders all place different emphasis on either speeding up or slowing down
         their redemption levels. Under the IPRF all Unitholders must participate in all redemptions
         planned over the next two years. This means that no Unitholder has any discretion to tailor
         participation in redemptions to fit their own view, on longer term upside in developing assets
         versus shorter term need for cash triggering realisation at a lower value (currently 47 cents per
         unit). For this reason, our view is that the CVRF process for redemptions is preferable to the
         IPRF process when considering Unitholders as a whole.
         From a tax viewpoint, the CVRF is also preferable as it should trigger a capital loss (available for
         offset against other capital gains) earlier than would be the case under the IPRF option (refer to
         Section 8.5).



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8.4      Alternatives

         Should Unitholders vote against the Proposal, PFMF will continue in its current form with Balmain
         Trilogy as fund manager and Trilogy as responsible entity.

         Below are the options to Unitholders should they vote against the Proposal.

8.4.1 Section 601NC-Winding up

         Section 601NC of the Act sets out the following legislative requirements for the windup of a
         registered scheme:

         601NC (1) – Winding up

         If the responsible entity of a registered scheme considers that the purpose of the scheme:
         •         has been accomplished; or
         •         cannot be accomplished;
         it may, in accordance with this section, take steps to wind up the scheme.

         601NC (2) – Notice

         The responsible entity must give to the members of the scheme and to ASIC a notice in writing:
         •         explaining the proposal to wind up the scheme, including explaining how the scheme’s
                   purpose has been accomplished or why that purpose cannot be accomplished;
         •         informing the members of their rights to take action under Division 1 of Part 2G4 for the
                   calling of a members’ meeting to consider the proposed winding up of the scheme and to
                   vote on any extraordinary resolution members propose about the winding up of the
                   scheme; and
         •         informing the members that the responsible entity is permitted to wind up the scheme
                   unless a meeting is called to consider the proposed winding up of the scheme within 28
                   days of the responsible entity giving notice to the members.

         601NC (3) – No meeting called

         If no meeting is called within that 28 days to consider the proposed winding up, the responsible
         entity may wind up the scheme.”

         Under Section 601NC, Trilogy would be required to give to the unit holders of PFMF and to ASIC
         a notice in writing;
         •         explaining the proposal to wind up PFMF as well as covering the reasons that PFMF
                   cannot continue to accomplish the stated purpose of the Fund;
         •         informing the Unitholders of their rights to take action, i.e. calling of a Unitholders’
                   meeting to consider the proposed winding up and to vote on any extraordinary resolution
                   Unitholders propose in relation to the winding up of PFMF; and
         •         informing the Unitholders that Trilogy is permitted to wind up PFMF unless a meeting is
                   called to consider the proposed winding up of the scheme within 28 days of Trilogy giving
                   notice to the Unitholders.

         If no meeting is called within 28 days to consider the proposed winding up, Trilogy may then
         proceed to wind up PFMF.




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         Winding up – Mechanisms

         The Act envisages that winding up of a registered scheme will be ordinarily carried out by the
         responsible entity.

         In circumstances where it is deemed that the responsible entity may not be the appropriate party
         to conduct the winding up of PFMF, there may be an independent supervisor appointed, such as
         a registered Liquidator, to ensure that Trilogy wound up PFMF in accordance with the
         Constitution and any court orders if applicable. If the winding up of PFMF is relatively
         uncomplicated supervision may not be required. However, in practice, a Receiver is appointed in
         these circumstances.

         We note that winding up can be pursued via the court under Section 601ND if the Court thinks it
         is just and equitable to make the order. If PFMF is being wound up an application to the court
         under Section 601NF can be made to have a person (supervisor) appointed to take responsibility
         for ensuring PFMF is wound up in accordance with constitution and any court orders.

         Considerations in winding up – Commercial

         Timing and the timeframe

         The timing as well as the time frame for the wind up may impact on the return to the Unitholders,
         due to the reasons set out below:
         •         the state of the market and economy at the time;
         •         the longer the wind up process would take the higher would be the wind up costs, e.g. the
                   administrative costs during the wind up process i.e., the voluntary administrators
                   fees/liquidators fees; and
         •         in general, in the case of immediate sale, the realised values for the mortgage assets
                   may be substantially discounted to their respective books values, especially when those
                   book values as based on the higher, “as if complete” valuation method.

         Costs

         The costs of wind up may include:
         •         voluntary administrators fees/liquidators fees depending on the mechanism chosen;
         •         auctioneer/business broker fees, if engaged;
         •         asset valuation fees, if required;
         •         staff redundancies;
         •         future rental or other costs if covered by contract/(s), if any; and
         •         operating costs until the wind up process is completed.




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         Taxation implications

         The following taxation matters would need to be considered as they may impact on the return to
         the Unitholders:
         •         tax considerations of winding up PFMF;
         •         tax implications of any distributions;
         •         application of the CGT provisions; and
         •         tax treatment of costs of winding up.

         The above list is not meant to cover all the tax implications of a wind up. Trilogy and the
         Unitholders would require specific taxation advice in relation to a wind up of PFMF, should this
         option be pursued.

         Legal implications

         The following legal matters would also need to be considered:
         •         choice of the mechanism for the wind up, i.e.;
                   −         via appointment of a voluntary administrator; or
                   −         via appointment of a liquidator;
         •         any existing contracts and agreements;
         •         any pending claims or litigation including the ability to continue with litigation against other
                   parties for the benefit of Unitholders; and
         •         satisfaction of PFMF’s existing debt and liabilities (including contingent liabilities, if any).

         The above list is not meant to cover all the legal implications of a wind up. Trilogy would need to
         get legal advice in relation to a wind up of PFMF, should this option be pursued.

         Considerations in winding up - Value

         The wind up of PFMF may involve an immediate return of surplus cash together with an
         accelerated realisation of the current PFMF mortgage assets. However, the returns for the
         Unitholders under a wind up option may be impacted by the following factors:
         •         the timing of the wind up;
         •         the market and economic conditions at the time of wind up;
         •         discounts (in general, substantial discounts in the case of an immediate sale) to the
                   current PFMF mortgage asset values; and
         •         the administrative costs associated with the wind up process. If the wind up process is
                   stretched over a longer period, costs of the wind up could be high, particularly in complex
                   cases such as PFMF.

         The wind up will deny the Unitholders any potential upside from management of the current
         mortgage assets to maximise the returns from those assets, i.e. work-out of those current
         mortgage assets over their respective development lives. In other words, all assets would be
         sold based on the lower, “as is” valuations, rather than the higher “as if complete” valuations that
         are currently applied to some of PFMF’s mortgage loans.

         The wind up will make immediate cash available to the unit holders albeit, after possibly
         substantial discounts to the book values.

         If PFMF is wound up and the assets sold, the Unitholders will receive the value of their Scheme
         assets from the proceeds of enforced sales. To manage mortgage assets and maximise their



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         sale value in an attempt to achieve greater return for Unitholders would require considerable
         expenditure and fall outside of a “wind up” scenario.

         Conclusion regarding Wind Up

         Unitholders who have a need for immediate receipt of cash from PFMF may consider this to be a
         viable option. However, we are required to consider Unitholders’ interests as a whole.

         Under the Proposal, Unitholders who wish to maximise their redemptions should be able to
         extract the majority of their investment from the Fund over the reasonably short term period of
         approximately two years with regular cash receipts throughout that period.

         Importantly, the redemption process under the Proposal allows for assets to be sold at higher
         values than may be the case under a wind up scenario. Unitholders may be able to receive their
         total remaining capital entitlement from PFMF sooner, under a Section 601NC wind up, but it is
         highly likely that the value per unit they receive will be significantly lower than the 47 cents per
         unit they are currently valued at.

8.4.2 Possibility of a Takeover Offer (or Liquidity Option)

         The manager has informed Unitholders that they are actively seeking a further liquidity option in
         the form of a cash offer to all Unitholders, providing an immediate payout.

         At the date of this Report we are not aware of any firm offer from another party to acquire units in
         PFMF. However, should such an offer eventuate, the following is relevant to Unitholders in
         relation to the Proposal at hand:

         Further choice for Unitholders

         A takeover offer would present Unitholders with a further choice not currently included in the
         Proposal. Under the Proposal, Fast Redemption Unitholders can accelerate their recovery of
         remaining capital value in PFMF. However, this still does not provide an “immediate” cash payout
         for those Unitholders.

         A takeover offer, if it includes 100% cash consideration, will provide that immediate payout
         alternative that may be particularly attractive to some Fast Redemption Unitholders.

         Probable discount to Current Value

         It is probable that any takeover offer would be priced at a discount to the current net asset value
         of PFMF of 47 cents per unit. That discount may well be significant, recognising the risk that the
         offering party is taking on in acquiring the assets and liabilities of PFMF in their current position.

         All Unitholders would need to assess the merits of being able to fully exit PFMF in the short term,
         against the likely further discount in Unit value they would be accepting under this scenario.

         Fast Redemption Unitholders may accept the further reduction in the value of their investment for
         the benefit of immediate liquidity. Longer Term Unitholders on the other hand may reject any
         offer as being too low.

         Importance of Conditions attached to any Takeover Offer

         Should a takeover offer eventuate, Unitholders will need to be aware of the implications of
         conditions underlying such an offer. Takeover offers are normally dependent on the offeror
         acquiring at least a set percentage of total units in the target. This level of control can be set at
         100%, though it is possible that an offer may include a condition that a level of acceptance either
         above or below 50% is required before the offer can proceed.



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         If a takeover offer for PFMF Units required 100% acceptance, then it would only proceed if all
         Unitholders accept. It is possible that some Longer Term Unitholders would not accept and in
         this case the offer would fail. Conversely, the more likely scenario is that a lower threshold
         condition for acceptance would attach to an offer. Under these circumstances the acquiring party
         may accumulate enough Units in PFMF to gain 50% or greater control. In this position, the
         offeror would have the ability to influence the future direction of PFMF including replacement of
         the current responsible entity, or implementing a different strategy for PFMF to that contemplated
         under the Proposal at hand.

         A takeover offer that includes a condition that less than 50% acceptance is required would mean
         that Unitholders who choose not to accept such an offer should not see any change to the day to
         day operation of PFMF. They will remain a Unitholder along with a new larger institutional
         Unitholder (the offeror) which would have influence over PFMFs operations, but not control.

         Summary regarding possible Takeover Offer

         As no firm offer has arisen at the date of this Report, we are not in a position to provide further
         analysis in this regard. However, all Unitholders would be able to either accept or reject any such
         takeover offer depending on their view of the price under the offer and their personal financial
         circumstances and risk appetite even if the Proposal is accepted. Should a takeover offer arise,
         we recommend that each Unitholder seek their own independent professional advice tailored to
         their own circumstances, on whether to accept or reject such an offer.

8.5      Taxation Implications
         Set out below is an outline of the possible Capital Gains Tax (“CGT”) implications for an
         Australian resident individual Unitholder who does hold their Units in PFMF as a capital
         investment and the Unitholder participates in one of the following Ordinary Unit redemption
         proposal:-

         1.    Current Value Redemption Facility; or

         2.    Issue Price Redemption Facility.

         The possible CGT implications for the allocation of litigation proceeds through the Perpetual
         Recovery Right Units (“Litigation Units”) are also briefly considered in this Statement.

         Further details in relation to the CGT implications of the Ordinary Unit redemption proposals and
         Litigation Units are set out in Appendix 4 to this Report.

8.5.1 Current Value Redemption Facility - If You Participate in the CVRF
         •         If you participate in the CVRF, redemption of your Ordinary Units should result in a capital
                   loss for CGT purposes because the reduced cost base of your Ordinary Units should
                   exceed the proposed redemption proceeds based on the net asset value of the PFMF at
                   the relevant time of redemption.
         •         For example, a Unitholder who receives redemption capital proceeds in the amount of 47
                   cents per Ordinary Unit based on the net asset value of the PFMF at the date of
                   redemption, will incur an estimated capital loss in the amount of 53 cents per Ordinary
                   Unit because the redemption proceeds will be less than the original issue price paid by
                   the Unitholder and less than CGT reduced cost base in the amount of $1.00 per Ordinary
                   Unit.
         •         Capital losses can only be applied to reduce gross capital gains derived by you and
                   subject to the general CGT integrity measures.




Pacific First Mortgage Fund - Independent Expert’s Report                                                  71
8.5.2 If You Choose Not to Participate in the CVRF

         If you do not participate in the CVRF and you continue to hold your Ordinary Units in the PFMF
         as a CGT asset, there should be no CGT consequences to you during the redemption program.

8.5.3 Issue Price Redemption Facility
         •         If the IPRF is implemented, the initial redemption of your Ordinary Units may not result in
                   any material capital gain or capital loss because the cost base of your Ordinary Units will
                   be approximately equal to the fixed redemption price of $1.00 per Ordinary Unit.
         •         For example, original Unitholders who subscribed for and were issued with Ordinary Units
                   in the PFMF for $1.00 per Ordinary Unit, will not make a capital gain or capital loss on the
                   redemption of their Ordinary Units where the fixed capital proceeds for redemption are in
                   the amount of $1.00 per Ordinary Unit and equal to the CGT cost base in the amount of
                   $1.00 per Ordinary Unit.
         •         Unitholders can expect to incur a capital loss on the redemption of their remaining parcel
                   of Ordinary Units sometime in the future and upon a winding up of the PFMF.

8.5.4 Litigation Units

         The broad proposal is to proportionally split each Ordinary Unit into two fixed separate units held
         in the PFMF – one (1) new Ordinary Unit with the same proportional fixed entitlements to vote
         and receive income or capital distributions from the PFMF, and one (1) new Litigation Unit.

         Litigation Units are expected to entitle the Unitholder to a proportional share in any financial
         proceeds (after recovery of legal and related costs) from the proposed litigation recovery action.

         The detail for the legal mechanism to split the existing Ordinary Units is to be provided by Trilogy
         in the near future. Subject to the legal detail of the unit splitting process, the expected CGT
         implications for the split of each existing Ordinary Unit may include the following features:-
         •         A CGT event should be not be triggered as a result of the unit splitting process.
         •         Cost base or reduced cost base of the new Ordinary Unit should not change from the
                   cost base or reduced cost base of the original Ordinary Unit immediately before and after
                   the splitting process.
         •         Litigation Units are expected to have a negligible CGT cost base or reduced cost base
                   after the split due to the uncertainty associated with the legal recovery action and
                   Ordinary Unitholders are not required to provide any monetary consideration or other
                   valuable property for the acquisition of Litigation Units.
         •         Capital proceeds for the redemption of the Litigation Units may result in the derivation of
                   a gross capital gain and subject to your particular circumstances the gross capital gain
                   can be reduced by your capital losses.

         For example, if you participate in the CVRF, any capital loss incurred on the redemption of your
         Ordinary Units may be carry forward and subject to the CGT loss integrity rules, available for
         offset to reduce any capital gain you may derive in the future from a distribution of net income of
         the Fund that consists of a net capital gain, or the capital loss from the redemption of your
         Ordinary Units may be available for offset to reduce any capital gain you may derive from the
         redemption of the Litigation Units.

8.5.5 Need for Unitholder Specific Advice

         Unitholders should consult their taxation advisor in relation to the above matters as the comments
         set out above are limited to a particular set of circumstances that may not be applicable to each
         Unitholder’s circumstances.



Pacific First Mortgage Fund - Independent Expert’s Report                                                  72
8.6      Overall conclusions

         In Section 7 we concluded that the Proposal was fair to Unitholders, when taken as a whole.

         In Section 8 we reviewed the reasonableness considerations across all limbs of the Proposal
         taking into account the differing needs of all Unitholders. Alternatives to the Proposal and
         taxation implications were also considered. Taking into account all matters in Section 8, we
         conclude that, on balance, the Proposal is reasonable to Unitholders, when taken as a whole.

         Our opinion is that there are sufficient advantages in our reasonableness assessment to vote in
         favour of the Proposal, notwithstanding offsetting disadvantages of the Proposal.

         Our view is that the Proposal (under the CVRF process) allows enough flexibility for each
         Unitholder to tailor their strategy to best fit their individual needs. Each Unitholder will be able to
         balance their cash flow requirements, against their risk appetite for future property sector
         recovery and appreciation in value.

         We therefore also conclude that the Proposal is in the best interests of Unitholders, when
         taken as a whole.

         As the Proposal offers considerable choice to Unitholders and individual circumstances and goals
         of Unitholders differ greatly, we cannot and do not provide an opinion tailored to individual
         Unitholder needs.      We recommend that each Unitholder seeks their own independent
         professional financial advice that takes into account their individual circumstances.




Pacific First Mortgage Fund - Independent Expert’s Report                                                   73
9        QUALIFICATIONS, DECLARATIONS AND CONSENTS

9.1      Qualifications

         PKFCA is the licensed corporate advisory arm of PKF East Coast Practice, Chartered
         Accountants and Business Advisers. PKFCA provides advice in relation to all aspects of
         valuations and has extensive experience in the valuation of corporate entities and provision of
         expert’s reports.

         Mr Ed Psaltis B.Comm, CA is a Director of PKFCA. Mr Psaltis is also a Partner of PKF East
         Coast. Mr Psaltis has been actively involved in the preparation and review of this Report. Mr
         Psaltis has over 25 years experience in a number of specialist corporate advisory activities
         including company and trust valuations, listed and unlisted capital raisings, due diligence
         investigations, completion of independent expert reports, preparation of information memoranda
         and other corporate investigations. For the past fifteen years Mr Psaltis has specialised in
         transaction advisory services specifically within the listed REIT market. Accordingly, Mr Psaltis is
         considered to have the appropriate experience and professional qualifications to provide the
         advice offered.

9.2      Independence
         PKFCA is not aware of any matter or circumstance that would preclude it from preparing this
         Report on the grounds of independence either under regulatory or professional requirements. In
         particular, we have had regard to the provisions of applicable pronouncements and other
         guidance statements relating to professional independence issued by Australian professional
         accounting bodies and ASIC.

         PKFCA considers itself to be independent in terms of RG 112 Independence of experts, issued
         by ASIC. Neither PKFCA, nor its owner practice, PKF East Coast Partnership, has acted in any
         capacity for Trilogy, Balmain Trilogy or PFMF (or their associates) with regard to any matter in the
         past, other than as detailed below.

         PKF East Coast Partnership (“PKF”) has or is acting as Receiver and Manager for Balmain
         Trilogy (as fund manager of PFMF) on five of the forty three mortgage loans that PFMF had in
         place at 31 March 2010. The impaired value of these five mortgage loans was $87.4 million
         compared to the impaired value of total assets of PFMF, at $500.0 million (as at 31 December
         2009, audited financial statements).

         PKF was appointed separately as receiver and manager on the above five matters between 11
         December 2009 and 12 May 2010. PKF will receive fees for professional services rendered
         based on time costs incurred at the practice’s normal hourly rates. None of these fees are
         contingent on the outcome of the receiverships nor on the outcome of this Proposal.

         Under the terms of PKF’s engagement on these five matters, PKF is not required to carry out
         valuations of any asset within PFMF, nor is it required to complete any audit or assurance
         services for PFMF. PKF is acting under instructions from Balmain Trilogy on these matters and is
         not involved in strategic decisions for the Fund as a whole.

         PKF has also completed a Taxation Statement included in the EM for this Proposal and will
         receive a fee of $15,000 plus Goods and Services Tax for this engagement. The Taxation
         Statement sets out the tax implications of the Proposal for Unitholders under current legislation.
         PKF was not involved in tax planning relevant to the Proposal nor in the formulation of the terms
         of the Proposal.




Pacific First Mortgage Fund - Independent Expert’s Report                                                74
         Further, PKFCA was not involved in advising on, negotiating, setting, or otherwise acting in any
         capacity for Trilogy or Balmain Trilogy in relation to the Proposal. Further, PKFCA has not held
         and, at the date of this Report, does not hold any shareholding in, or other relationship with,
         Trilogy, Balmain Trilogy or PFMF (or their associates) that could be regarded as capable of
         affecting its ability to provide an unbiased opinion in relation to the Proposal

         PKFCA will receive a fee of $180,000, plus Goods and Services Tax for the preparation of this
         Report. PKFCA will not receive any fee contingent upon the outcome of the Proposal, and
         accordingly, does not have any pecuniary or other interests that could reasonably be regarded as
         being capable of affecting its ability to give an unbiased opinion in relation to the Proposal.

         Two drafts of this Report were provided to the independent Directors and their advisors for review
         of factual accuracy. Certain changes were made to the Report as a result of the circulation of the
         draft Report.     However, no changes were made to the methodology, conclusions, or
         recommendations made to the Non-Associated Unitholders as a result of issuing the draft Report.

9.3      Disclaimer

         This report has been prepared at the request of the Directors and was not prepared for any
         purpose other than that stated in this report. This report has been prepared for the sole benefit of
         the Directors and Unitholders. Accordingly, this report and the information contained herein may
         not be relied upon by anyone other than the Directors and Unitholders without the written consent
         of PKFCA. PKFCA accepts no responsibility to any person other than the Directors and
         Unitholders in relation to this Report.

         The statements and opinions contained in this report are given in good faith and are based upon
         PKFCA’s consideration and assessment of information provided by the Directors, executives and
         management of all the entities.




Pacific First Mortgage Fund - Independent Expert’s Report                                                75
APPENDIX 1               GLOSSARY
Table 19: Glossary of Terms used in this Report
               Acronym                                                               Definition

 the Act                                 Corporations Act 2001
 ASIC                                    Australian Securities and Investments Commission
 AUM                                     Assets Under Management
 Balmain Trilogy                         Balmain Trilogy Investment Management Pty Ltd
 CGT                                     Capital gains tax
 CPL                                     City Pacific Limited
 CVRF                                    Current Value Redemption Facility
 Directors                               Independent Directors of Trilogy
 Fast Redemption Unitholders             Certain Unitholders who require the return of their remaining investment as quickly as
                                         possible
 Financial Undertaking                   30% of Funds Under Management
 FINSIA                                  Financial Services Institute of Australia
 the Fund                                Pacific First Mortgage Fund
 FY                                      Financial year
 FY2008                                  the year ended 30 June 2008
 FY2009                                  the year ended 30 June 2009
 GDP                                     Gross Domestic Product
 HRP                                     Hardship Redemption Policy
 HY2010                                  the 6 months ended 31 December 2009
 IER                                     independent expert’s report
 IMF                                     IMF (Australia) Ltd
 Longer Term Unitholders                 Groups of Unitholders where their financial position that may give them the flexibility of
                                         being able to leave their investment in PFMF in an attempt to recover more of their
                                         original investment
 the Manager                             Balmain Trilogy Investment Management Pty Ltd
 the Model                               the detailed cash flow forecast model provided to PKFCA from Balmain Trilogy
 PKF                                     PKF East Coast Partnership
 PKFCA                                   PKF Corporate Advisory (East Coast) Pty Limited
 PFMF                                    Pacific First Mortgage Fund
 RBA                                     Reserve Bank of Australia
 Regular Receipt Unitholders             Unitholders who place a greater importance on receipt of regular cash payments from
                                         PFMF
 Realisation Risk                        PKFCA analysis of each loan asset and categorisation into four categories, namely
                                         those loans recovered already (pre 30 June 2010) and low, moderate and higher risk
 REIT                                    the listed Real Estate Investment Trust sector
 Report                                  independent expert’s report
 RG 45                                   ASIC Regulatory Guide 45 “Mortgage Schemes – improving disclosure for retail
                                         investors
 RG 111                                  ASIC Regulatory Guide 111 “Context of Expert’s Reports”
 RG 112                                  ASIC Regulatory Guide 112 “Independence of Experts”
 RG170                                   Regulatory Guide 170 “Prospective Financial Information”
 Trilogy                                 Trilogy Funds Management Ltd

 Source: PKFCA




Pacific First Mortgage Fund - Independent Expert’s Report                                                                        76
APPENDIX 2              COMPARISON OF DETAILED DISCLOSURES FOR PFMF UNDER ASIC RG 45

Table 20:
                                                                            As at 30 November 2009                                         As at 31 March 2010
 Class of Activity                                            Value $      Value %           No.          % of No.          Value $      Value %           No.          % of No.

 Commercial                                                 39,992,987           7.8               4            8.9       40,542,604          9.0                4            9.3
 Industrial                                                  3,913,130           0.8               1            2.2        1,785,952          0.4                1            2.3
 Residential                                            245,167,147             47.7               22          48.9      192,791,457         42.8                21          48.9
 Vacant Land                                            224,253,558             43.7               18          40.0      215,058,571         47.8                17          39.5
 Total                                                  513,326,822            100.0               45         100.0      450,178,584        100.0                43         100.0


 Geographic Region                                            Value $      Value %           No.          % of No.          Value $      Value %           No.          % of No.

 NSW                                                        14,983,477           2.9               2            4.4       14,102,667          3.1                1            2.3
 QLD                                                    285,820,408             55.7               28          62.2      245,817,706         54.6                28          65.1
 VIC – Martha Cove                                      162,503,074             31.7               11          24.5      149,848,295         33.3                11          25.6
 VIC – Other                                                50,019,863           9.7               4            8.9       40,409,917          9.0                3            7.0
 Total                                                  513,326,822            100.0               45         100.0      450,178,585        100.0                43         100.0


                                                                                                        % of Portfolio                                                % of Portfolio
 Loans in Default of Arrears                                             No. of Loans   Loan Value $                                   No. of Loans   Loan Value $
                                                                                                         (by value)                                                    (by value)

 Mortgagee in possession                                                         15     135,355,503            26.5                            13     112,769,496            27.0
 Other Loans in default or interest/maturity arrears                             28     374,680,247            73.5                            23     305,011,418            73.0
 Total                                                                           43     510,035,750           100.0                            36     417,780,914           100.0


 Nature of the Security for Loans                                                       Loan Value $    No. of Loans                                  Loan Value $    No. of Loans

 1st Ranking Mortgage                                                                   449,980,963              38                                   416,797,684              35
 2nd Ranking Mortgage                                                                    60,093,537               6                                    30,005,848               7
 1st & 2nd Ranking Mortgage                                                               3,252,322               1                                     3,375,052               1
 Total                                                                                  513,326,822              45                                   450,178,584              43




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                            77
                                                               As at 30 November 2009                          As at 31 March 2010
                                                                                           % of Loan                                      % of Loan
 Largest Borrower and the largest 10 borrowers                             Loan Value $                                   Loan Value $
                                                                                           Portfolio                                      Portfolio

 Top 10 Borrowers                                                          332,127,004           64.7                     297,210,837           66.0
 Largest Borrower                                                           82,403,832           16.1                      74,396,747           16.5


 Undrawn Loan Commitments                                                     Value $      No. Loans                         Value $      No. Loans

 Undrawn loan commitments                                                    4,575,339              2                       2,826,238              4


                                                                                          % of Portfolio                                 % of Portfolio
 Maturity Profile of All Loans                              No. of Loans   Loan Value $                    No. of Loans   Loan Value $
                                                                                           (by value)                                     (by value)

 Past due                                                           40     421,008,675           82.0              34     338,011,284           75.1
 < 3 months                                                          1       6,623,242            1.3               2      79,769,630           17.7
 > 3 months and < 1 year                                             2      74,041,661           14.4               2      15,541,445            3.5
 1-2 years                                                           1      11,614,494            2.3               4      16,818,822            3.7
 > 3 years                                                           1          38,749            0.0               1         37,403             0.0
 Total                                                              45     513,326,821          100.0              43     450,178,584          100.0


                                                                                          % of Portfolio                                 % of Portfolio
 LVR for Loans in Percentage Ranges                         No. of Loans   Loan Value $                    No. of Loans   Loan Value $
                                                                                           (by value)                                     (by value)

 Less than 50%                                                       1          38,749            0.0               2      12,203,796            2.7
 Loans between 51%-60% of security value                              -            Nil            0.0               3      33,464,366            7.4
 Loans between 61%-70% of security value                             4      47,576,748            9.3               4      60,171,393           13.4
 Loans between 71%-80% of security value                             6      53,139,928           10.4               9     133,744,390           29.7
 Loans between 81%-90% of security value                            14     212,997,725           41.5              11     164,098,426           36.5
 Loans between 91%-100% of security value                           13     183,991,550           35.8               7      30,586,563            6.8
 Loans greater 100%                                                  1      15,517,977            3.0               1       3,271,188            0.7
 No Security Value                                                   6          64,144            0.0               6      12,638,462            2.8
 Total                                                              45     513,326,821          100.0              43     450,181,584          100.0




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                              78
                                                                     As at 30 November 2009                      As at 31 March 2010
 Interest Rates on Loans in Percentage
                                                                                 Loan Value $     No. of Loans              Loan Value $     No. of Loans
 Ranges

 0.0%                                                                                         -            -                             -            -
 9.0% - 9.9%                                                                     513,326,821              45               450,178,584               43
 10.0% - 10.9%                                                                                -            -                             -            -
 11.0% - 11.9%                                                                                -            -                             -            -
 12% - 12%                                                                                    -            -                             -            -
 Total                                                                           513,326,821              45               450,178,584               43


 Loans where interest has been capitalised                                          Value $        No. Loans                   Value $        No. Loans

 Interest has been capitalised                                                   513,290,183              45               450,178,584               43



 Source: PKF Analysis / Balmain Trilogy disclosures to market regarding RG 45




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                   79
APPENDIX 3             MANAGEMENT FEES CHARGED BY RETAIL MORTGAGE FUNDS
Table 21:
               Fund Name                       Total        Management      Expense     Comments on Management           Management                                  FUM            Latest
                                                            Fee (Fixed)    recoveries    Cost / Management Fees             Fee                                                   AR/Monthly
                                                                                                                                                                                  report date
                                            (Based on        (Based on     (Based on                                     (Maximum              Maximum            Net assets
                                              GAV)             GAV)          GAV)                                         allowed)             Amount           attributable to
                                                                                                                                                                 Unitholders
                                             (% p.a.)         (% p.a.)      (% p.a.)                                       (% p.a.)                                 ($'mil)
 Pacific First Mortgage Fund                    1.12%              1.00%        0.12%                              n/a                n/a                 n/a            414.2    Half-year
                                                                                                                                                                                  ended 31
                                                                                                                                                                                  December
                                                                                                                                                                                  2009


 RETAIL FUNDS
 Small (FUM <$500 mil)
 LM First Mortgage Fund                        1.881%            1.803%       0.078%    2.3% p.a. (management fee) +          4.311%        The funds'                   494.48   Annual
                                                                                        0.10% p.a. (fund expenses)                          constitutions                         Report 30
                                                                                        i.e. net assets.                                    allows the                            June 2009
                                                                                                                                            Management
                                                                                        Manager's Management Fee                            Fee of up to
                                                                                        is accrued daily and is                             5.5% p.a. of the
                                                                                        currently paid monthly by                           net assets of the
                                                                                        being deducted from the                             Fund.
                                                                                        assets of the Fund. Expenses
                                                                                        of the Fund will be payable
                                                                                        from the income or the capital
                                                                                        of the Fund, either monthly or
                                                                                        as the expenses are incurred.
 Tasmanian Perpetual Fixed Term Fund           1.170%            1.025%       0.145%    1.025% p.a. (issuer fee) +                    n/d   The fund’s                   363.82   Annual
 (Note 1)                                                                               0.145% p.a. (expense                                constitution                          Report 30
                                                                                        recoveries) of gross assets.                        allows for the                        June 2009
                                                                                                                                            charging of a fee
                                                                                        Calculated daily and paid                           or a higher fee
                                                                                        monthly in arrears from Fund                        than those
                                                                                        income. The amount of this                          currently
                                                                                        fee may be negotiated for                           charged.
                                                                                        institutional or wholesale
                                                                                        investors.                                          No disclosure of
                                                                                                                                            the maximum
                                                                                                                                            fee.




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                     80
               Fund Name                       Total        Management     Expense     Comments on Management             Management                                  FUM            Latest
                                                            Fee (Fixed)   recoveries    Cost / Management Fees               Fee                                                   AR/Monthly
                                                                                                                                                                                   report date
                                            (Based on        (Based on    (Based on                                       (Maximum              Maximum            Net assets
                                              GAV)             GAV)         GAV)                                           allowed)             Amount           attributable to
                                                                                                                                                                  Unitholders
                                             (% p.a.)         (% p.a.)     (% p.a.)                                         (% p.a.)                                 ($'mil)
 Wellington Premium Income Fund                1.963%            0.981%      0.981%    1.0% p.a. (management fee) +                    n/d                n/d            265.14    Interim
                                                                                       1.0% p.a. (expense                                                                          Financial
                                                                                       recoveries) of the net asset                                                                Report 31
                                                                                       value of the Fund.                                                                          Dec 2009



 Equititrust Income Fund                       1.425%            0.650%      0.775%    0.65% p.a. (management fee)             1.650%        Entitled to                  246.52   Annual
                                                                                       of the gross asset value of the                       receive a                             Report 30
                                                                                       Fund and 1.0% p.a. (expense                           management fee                        June 2009
                                                                                       recoveries) of the net assets of                      up to 1.65% p.a.
                                                                                       the Fund                                              of the gross
                                                                                                                                             asset value of
                                                                                                                                             the Fund and be
                                                                                                                                             reimbursed for
                                                                                                                                             its expenses
                                                                                                                                             (currently 1.0%
                                                                                                                                             p.a.) of the net
                                                                                                                                             assets of the
                                                                                                                                             Fund.
 Tasmanian Perpetual Long Term Fund            1.130%            1.025%      0.105%    1.025% p.a. (issuer fee) +                      n/d   The fund’s                   241.27   Annual
 (Note 1)                                                                              0.105% p.a. (expense                                  constitutions                         Report 30
                                                                                       recoveries) on gross assets.                          allow for the                         June 2009
                                                                                                                                             charging of a fee
                                                                                       Calculated daily and paid                             or a higher fee
                                                                                       monthly in arrears from Fund                          than those
                                                                                       income. The amount of this                            currently
                                                                                       fee may be negotiated for                             charged.
                                                                                       institutional or wholesale
                                                                                       investors.                                            No disclosure of
                                                                                                                                             the maximum
                                                                                                                                             fee.
 Mayne Investments Limited - Northern          1.326%            0.997%      0.329%    1% p.a. of the net assets of            1.100%        Mayne cannot               230.79     Fund
 Investment Trust Fund                                                                 the Trust and expenses are                            increase the                          Performance
                                                                                       estimated at an amount equal                          management fee                        as at 31
                                                                                       to 0.33% p.a. of the net assets                       beyond 1.1% of                        August 2009
                                                                                       of the Trust.                                         the total assets
                                                                                                                                             of the Trust
                                                                                                                                             without the
                                                                                                                                             approval of


Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                      81
               Fund Name                       Total        Management     Expense     Comments on Management            Management                             FUM            Latest
                                                            Fee (Fixed)   recoveries    Cost / Management Fees              Fee                                              AR/Monthly
                                                                                                                                                                             report date
                                            (Based on        (Based on    (Based on                                      (Maximum         Maximum            Net assets
                                              GAV)             GAV)         GAV)                                          allowed)        Amount           attributable to
                                                                                                                                                            Unitholders
                                             (% p.a.)         (% p.a.)     (% p.a.)                                        (% p.a.)                            ($'mil)
                                                                                                                                       unitholders. The
                                                                                                                                       level of
                                                                                                                                       expenses is an
                                                                                                                                       estimate and
                                                                                                                                       can change.


 Stacks Managed Investments Limited -          0.550%            0.550%      0.000%    0.55044% (inclusive of GST)            5.504%   5.5044%                    145.63     The
 The Mortgage Fund (Note 1, 2 & 3)                                                     p.a. of the Mortgage Fund                       (inclusive of                         Mortgage
                                                                                       value.                                          GST) p.a. of                          Fund
                                                                                                                                       gross asset                           Audited
                                                                                                                                       value of The                          Accounts 30
                                                                                                                                       Mortgage Fund.                        June 2009
 Macarthurcook Mortgage Fund (ordinary         1.174%            0.965%      0.209%    Investment management fee:             1.989%   Investment                 136.19     Half-year
 units)                                                                                up to 0.97% p.a. of the net                     management                            ended 31
                                                                                       asset value of the Fund.                        fee: up to 2%                         December
                                                                                       Ongoing expenses: estimated                     p.a. of the net                       2009
                                                                                       to be 0.21% of the net asset                    asset value of
                                                                                       value of the Fund.                              the Fund.

 Mirvac AQUA High Income Fund                  1.580%            1.290%      0.290%    The ongoing management                 2.200%   The fund’s                 133.82     Fund
                                                                                       cost will be 13.325% of                         constitution                          Performance
                                                                                       distributions of the Fund plus                  allows either                         as at 31
                                                                                       an additional cost to reflect                   2.2% of the                           December
                                                                                       expenses recovered from the                     value of the                          2009
                                                                                       funds and pools. This equates                   relevant Fund's
                                                                                       to 1.29% p.a. of the Fund                       assets or 16.5%
                                                                                       assets (i.e. gross assets.)                     of Distributions.
                                                                                       However, as management
                                                                                       costs are a function of the
                                                                                       funds distributions, the actual
                                                                                       costs may vary depending on
                                                                                       the performance of the fund.




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                              82
               Fund Name                       Total        Management     Expense     Comments on Management            Management                                  FUM             Latest
                                                            Fee (Fixed)   recoveries    Cost / Management Fees              Fee                                                    AR/Monthly
                                                                                                                                                                                   report date
                                            (Based on        (Based on    (Based on                                      (Maximum              Maximum            Net assets
                                              GAV)             GAV)         GAV)                                          allowed)             Amount           attributable to
                                                                                                                                                                 Unitholders
                                             (% p.a.)         (% p.a.)     (% p.a.)                                        (% p.a.)                                 ($'mil)
 Equity Mortgage Income Fund                   0.947%            0.706%      0.241%    The responsible entity fees                    n/d                 n/d           81.12      Fund report
                                                                                       (including responsible entity                                                               as at 31
                                                                                       and investment manager fees)                                                                March 2010
                                                                                       and estimated expense
                                                                                       recoveries (including
                                                                                       custodian fees, administration
                                                                                       and other expenses) are
                                                                                       calculated and accrued daily
                                                                                       based on the NAV of the
                                                                                       Fund. The accrued fees are
                                                                                       paid in arrears by deduction
                                                                                       from the Fund assets at the
                                                                                       end of each month.
 Tasmanian Perpetual Select Mortgage           1.205%            1.025%      0.180%    1.025% (issuer fee) + 0.18%            2.000%        The fund’s                     79.74   Annual
 Fund (Note 1)                                                                         (expenses recoveries) p.a. on                        constitution                           Report 30
                                                                                       gross assets.                                        allows for up to                       June 2009
                                                                                                                                            2.0%, issuer fee.
                                                                                       Calculated daily and paid
                                                                                       monthly from the Fund.

 Small Fund Average                            1.305%            1.002%      0.303%

 Small Fund Average (Rounded)                   1.30%             1.00%        0.30%


 Medium (FUM between $500mil - $1
 bil)
 Perpetual Monthly Income Fund                 1.292%            1.262%      0.030%    1.27% p.a. (management fee)            1.270%        Management                   545.6     Annual
                                                                                       + 0.03% p.a. (expense                                fee, up to 1.27%                       Report 30
                                                                                       recoveries) of the net asset                         p.a. of the gross                      June 2009
                                                                                       value of the Fund respectively.                      asset value. The
                                                                                                                                            Fund has
                                                                                       The management costs are                             currently chosen
                                                                                       calculated daily and paid                            to charge 1.27%
                                                                                       monthly. They are expressed                          p.a. of the net
                                                                                       as a % of the value of the                           asset value of
                                                                                       Fund.                                                the Fund.

                                                                                       The management costs are



Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                        83
               Fund Name                       Total        Management      Expense     Comments on Management            Management                             FUM            Latest
                                                            Fee (Fixed)    recoveries    Cost / Management Fees              Fee                                              AR/Monthly
                                                                                                                                                                              report date
                                            (Based on        (Based on     (Based on                                      (Maximum         Maximum            Net assets
                                              GAV)             GAV)          GAV)                                          allowed)        Amount           attributable to
                                                                                                                                                             Unitholders
                                             (% p.a.)         (% p.a.)      (% p.a.)                                        (% p.a.)                            ($'mil)
                                                                                        deducted directly from the
                                                                                        Fund's assets.




 Medium Fund Average                           1.292%            1.262%       0.030%

 Medium Fund Average (Rounded)                  1.29%              1.26%        0.03%


 Large (FUM >$1 bil)
 Challenger Howard Mortgage Fund               1.367%            1.367%       0.000%    Management costs include the           1.400%   Management                 2,352.7    Fund report
 (Note 3)                                                                               management fee expressed                        fee, up to 1.40%                      as at 28
                                                                                        as a % of the net assets of the                 p.a. of the gross                     February
                                                                                        Fund. This amount does not                      asset value.                          2010
                                                                                        include any abnormal
                                                                                        expenses. The management
                                                                                        fee is deducted from the
                                                                                        Fund's income, accrued daily
                                                                                        and is paid monthly in arrears.




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                   84
               Fund Name                       Total        Management     Expense     Comments on Management            Management                            FUM            Latest
                                                            Fee (Fixed)   recoveries    Cost / Management Fees              Fee                                             AR/Monthly
                                                                                                                                                                            report date
                                            (Based on        (Based on    (Based on                                      (Maximum         Maximum           Net assets
                                              GAV)             GAV)         GAV)                                          allowed)        Amount          attributable to
                                                                                                                                                           Unitholders
                                             (% p.a.)         (% p.a.)     (% p.a.)                                        (% p.a.)                           ($'mil)
 Sandhurst Select Mortgage Fund                1.154%            1.005%      0.149%    1.01% p.a. (management fee)            1.005%   Management               1,185.21    Annual
                                                                                       + 0.15% p.a. (expense                           fee, up to 1% of                     Report 30
                                                                                       recoveries) of the net asset                    capital sums                         Sept 2009
                                                                                       value of the Fund respectively.                 invested plus
                                                                                                                                       GST (which is
                                                                                       The investment management                       currently the
                                                                                       fees is payable out of the                      equivalent of
                                                                                       income of the Fund, calculated                  1.01% of the
                                                                                       daily on the net asset value of                 average net
                                                                                       the Fund and paid monthly.                      asset value of
                                                                                                                                       the Fund).
                                                                                                                                       The constitution
                                                                                                                                       does not specify
                                                                                                                                       a maximum
                                                                                                                                       amount that can
                                                                                                                                       be charged in
                                                                                                                                       relation to
                                                                                                                                       expense
                                                                                                                                       recoveries.
 Large Fund Average                            1.260%            1.186%      0.075%

 Large Fund Average (Rounded)                   1.26%             1.19%        0.07%


 Total Retail Fund Average                      1.30%             1.05%        0.25%



 Notes:




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                               85
               Fund Name                        Total       Management         Expense        Comments on Management            Management                                  FUM             Latest
                                                            Fee (Fixed)       recoveries       Cost / Management Fees              Fee                                                    AR/Monthly
                                                                                                                                                                                          report date
                                             (Based on       (Based on        (Based on                                          (Maximum            Maximum             Net assets
                                               GAV)            GAV)             GAV)                                              allowed)           Amount            attributable to
                                                                                                                                                                        Unitholders
                                              (% p.a.)        (% p.a.)          (% p.a.)                                           (% p.a.)                                ($'mil)
 N/D: not disclosed
 1. No disclosure on whether management cost, management fees and expense are calculated based on gross assets or net assets. We have assumed that these costs are calculated based on
 gross assets based on evidence at hand.
 2. Stacks Managed Investments Limited - The Mortgage Fund - There is no mention of why the fund charges 0.550% for management fees as opposed to a possible 5.5044% (calculated based on
 gross assets of the fund)
 3. No disclosure on expense recoveries. We have assumed that expense recoveries is nil.
 4. Highlighted in yellow is the implied gross asset percentage fee (recalculated based on gross asset value per the latest financial statements), as the percentage of fees disclosed was not based on
 gross assets.




Pacific First Mortgage Fund - Independent Expert’s Report                                                                                                                                             86
Appendix 4             CAPITAL GAINS TAX CONSEQUENCES for the NEW REDEMPTION
                       FACILITY and LITIGATION UNITS

Set out below are further details for the CGT consequences of the New Redemption Facility and the
proposed issue of Litigation Units as set out in the Taxation Statement of this Report.

The CGT consequences for the New Redemption Facility are premised on a number of fundamental
assumptions agreed with Trilogy and their legal adviser. Any changes to our understanding of the
background facts or assumptions may change the expected taxation outcomes as set out in the Taxation
Statement and this Appendix.

Assumptions

The fundamental assumptions that underpin the likely CGT consequences set out in the Taxation
Statement and this Appendix include the following matters:
•        The typical Unitholder in the PFMF continues to hold all of their Ordinary Units from the date of
         issue of the Ordinary Units in the PFMF.
•        The terms and conditions of the New Strategy will not change from the terms and conditions set
         out in the Explanatory Memorandum of 15 July 2010.
•        The typical Unitholder is an Australian resident for income tax purposes at the time of acquisition
         and redemption of the Ordinary Units in the PFMF.
•        Ordinary Units are held as an income producing investment on capital account and fall within the
         definition of CGT asset.
•        All interests held by Ordinary Unitholders in the PFMF carry the same rights and are of the same
         class of units before the proposed unit splitting process.
•        All Ordinary Unitholders are absolutely entitled and hold the same proportional fixed beneficial
         interest in the trust fund of the PFMF before and after the proposed unit splitting process.
•        Cash proceeds for the redemption of any Units will not include any tax deferred or other tax
         concession components that may otherwise reduce the CGT cost base of the Redeemed Units.
•        Cash proceeds for the redemption of Ordinary Units will be sourced solely from the capital
         account of the PFMF and not sourced from the net income of the PFMF because the PFMF will
         not have tax law net income for the relevant year of income the Ordinary Units are redeemed.
         This is because the PFMF has carry forward tax losses as at 30 June 2010 and is expected to
         continue in a tax loss position for the foreseeable future.
•        Payments for the redemption of the Ordinary Units will be debited solely to the Unitholders
         contributed equity account of the PFMF.
•        Ordinary Units redeemed under the CVRF will result in a capital loss for the Unitholder based on
         the net asset value of the trust fund for the relevant dates of redemption.
•        If the IPRF is implemented, all Unitholders will have their Ordinary Units proportionally redeemed
         at the fixed redemption amount of $1.00 per Ordinary Unit and until such time as the PFMF is
         ultimately wound up.

Unless otherwise stated, all references to legislation in this Appendix are references to the Income Tax
Assessment Act 1997.

General Income Tax Consequences

Unitholders who have their Ordinary Units redeemed by Trilogy at fixed redemption dates may have
different income tax outcomes depending on the character of their Ordinary Units held in the PFMF. For
example,
•        Unitholders who hold their Ordinary Units on capital account should generally be subject to the
         CGT regime; or



Pacific First Mortgage Fund - Independent Expert’s Report                                               87
•        Ordinary Units held on revenue account as trading stock or other revenue assets other than
         trading stock will be subject to the ordinary income tax provisions and CGT provisions; and
•        If the Ordinary Units were held as trading stock, any capital loss incurred by the Unitholder is
         disregarded for CGT purposes under section 118-25; or
•        Unitholders who are entitled to a net income tax loss (ie Ordinary Units were held as a revenue
         asset other than trading stock) will have their reduced cost base further reduced by the amount of
         the net income tax loss under the CGT anti overlap provisions of section 110-55(9).

Summary of CGT Consequences

1. Redemption Facility

a)   If you elect for either redemption proposal to apply to your Ordinary Units

         −         You should have a CGT event for each Ordinary Unit that is redeemed by Trilogy at the
                   relevant date of redemption.
         −         Any proprietary or equitable interests conferred by the Ordinary Units are extinguished at
                   the time of redemption thereby triggering CGT event C2 for Ordinary Unitholders.
         −         Capital proceeds received for the redemption of your Ordinary Units is a capital receipt in
                   your hands provided PFMF does not have any tax law net income for the relevant year of
                   income when your Ordinary Units are redeemed.
         −         Redemption payments should not be a distribution of net income from the PFMF and
                   should not be treated as assessable income in your hands.
         −         Any gross capital loss incurred from the redemption of your Ordinary Units should be
                   determined by deducting the redemption proceeds from the CGT reduced cost base of
                   your Ordinary Units.
         −         Redemption of your Ordinary Units under the CVRF should result in a capital loss
                   incurred by you because your reduced cost base will be greater than the capital
                   redemption proceeds and based on the audited net asset value of the PFMF at the
                   relevant date of redemption.
         −         The capital loss you incur on the redemption of your Ordinary Units can be applied
                   against any gross capital gain you derive during the same or subsequent year of income
                   that your Ordinary Units are redeemed.

b)   If either redemption proposal does not apply
         −         There should be no immediate CGT implications for you because there is no CGT event
                   that applies to your Ordinary Units.
         −         Subject to the CGT cost base integrity rules, the reduced cost base for your Ordinary
                   Units should not be adjusted as a result of the redemption of other Ordinary Units under
                   the CVRF.

2. Additional Redemption Facility

A parallel CGT analysis should follow as set out in Item 1(a) above.


3. Litigation Units

•        Splitting of the original Ordinary Units into two fixed units should not of itself result in a CGT event
         provided you remain the beneficial owner of the new Ordinary Unit and the new Litigation Unit,
         and you hold both New Units in the same proportion to the original Ordinary Units with the same
         fixed entitlements in the PFMF as previously held through the original Ordinary Units (refer
         section 112-25 and Taxation Determination TD 2000/10 in the context of splitting shares).


Pacific First Mortgage Fund - Independent Expert’s Report                                                    88
•        The CGT cost base of the Litigation Units should be calculated by working out each element of
         the cost base of the original Ordinary Units at the time of the split and apportioning that original
         cost base in a reasonable way between the New Units.
•        Subject to the terms of the legal process to split the original Ordinary Units, the Litigation Units
         may have a negligible current market value at the time of the split and consequentially a
         negligible CGT cost base. This is a reasonable assumption to make because the Litigation Units
         would entitle the Unitholder to a proportionate share of any monetary proceeds from the proposed
         litigation recovery action. However, any expected financial return from the proposed litigation
         action may be uncertain at the date of splitting the original Ordinary Units.
•        If the original Ordinary Units are split and sometime later the Litigation Units are redeemed, the
         CGT consequences will depend on the character of the litigation proceeds used to redeem the
         Litigation Units. As a general proposition, the expectation is a capital gain will be derived by the
         Unitholder upon redemption of the Litigation Units.
•        If there is a proportionate distribution of net income to the holders of the Litigation Units, the
         general income tax provisions may apply to the Unitholder.

You should seek independent taxation advice on the preceding matters at the relevant time.

4. Other Tax Matters

Set out below are brief observations in relation to other income tax matters for your reference.
•        The cost base of your Ordinary Units may be affected if there is a “value shift” between the Units
         held in the PFMF. As a general proposition, there should be no consequences for the cost base
         or reduced cost base of your Ordinary Units under the direct or indirect value shifting rules
         provided:-
         −         capital proceeds for the redemption of your Ordinary Units are based on the prevailing
                   current market price of the Ordinary Units (eg Unitholders adopt the CVRF), and
         −         at that time there is no entity, either alone or with Trilogy, that controls the PFMF for value
                   shifting purposes, or
         −         at that time there is no entity, either alone or with Trilogy, that satisfies the ultimate
                   controller test and / or the common ownership nexus test.
•        Other matters set out in the New Strategy including the orderly realisation of Assets, amended
         fee structure for Trilogy and the hardship redemption policy should not have any immediate
         consequence on the cost base or reduced cost base of your Units held in the PFMF.
•        Recent reforms announced by the Federal Government for the income tax regime for Managed
         Investment Trusts that apply from 1 July 2011 may have taxation consequences for the
         determination of net income of the PFMF and consequentially you. These developments are
         beyond the scope of this Report.

Capital Gains Tax

CGT is the tax you pay on certain capital gains you make. You may make a capital gain or capital loss as
a result of a CGT event (refer section 102-20).

The most common CGT event (CGT event A1) happens if you dispose of an asset, for example if you sell
your Ordinary Unit to another person.

A managed fund like the PFMF is a fixed unit trust and the Ordinary Units held in the PFMF are an
intangible CGT asset (refer to the definition of “CGT asset” under section 108-5).

The terms of either Redemption Proposal will mean your Ordinary Units are redeemed and subsequently
extinguished by Trilogy in its capacity as the Responsible Entity of the PFMF. This means the Ordinary
Units are not acquired by Trilogy and therefore CGT event A1 does not apply because there is no change
in the beneficial ownership of the Ordinary Units from you to another person.


Pacific First Mortgage Fund - Independent Expert’s Report                                                     89
CGT event C2 (section 104-25) should apply to Unitholders when their Ordinary Units are redeemed
(refer Taxation Determination TD 40).

The redemption proceeds for CGT purposes in respect of the redemption of each Ordinary Unit will be
determined pursuant to section 116-20. Unitholders will make a capital gain or capital loss where the
capital proceeds for the redemption of your Ordinary Units is different to the cost base (if there is a capital
gain) or reduced cost base (if there is a capital loss) of your Redeemed Units.

Participating Unitholders in the CVRF can expect to incur a capital loss on redemption of their Ordinary
Units at the relevant date of redemption. For example, a Unitholder who acquired their Ordinary Units for
$1.00 per Unit and elects to participate in the CVRF and the redemption proceeds are 47 cents per
Ordinary Unit, can expect to incur an estimated capital loss of 53 cents per Ordinary Unit (refer
subsection 104-25(3)). This CGT position may not necessarily be the case for all Ordinary Unitholders eg
Unitholders who sold or otherwise disposed of their Ordinary Units to another person.

Reduced Cost Base

The reduced cost base of your Ordinary Units is relevant to the determination of any capital loss on the
redemption of your Ordinary Units. Your reduced cost base may consist of five elements and does not
include indexation of those elements (refer subsection 110-55(1)).

The five elements of the reduced cost base are:-

1.   First element is the acquisition costs made up of money paid by you, or required to be paid by you,
     and any other valuable property provided by you to acquire the original Ordinary Units.

2.   Second element is the incidental costs you incurred in the acquisition or redemption of your Ordinary
     Units including fees you paid to a broker or financial adviser. Brokerage fees and GST you paid can
     be included in the second element, provided you could not claim a deduction or offset for such costs.

3.   Third element consists of assessable balancing adjustments. We understand this element should not
     be applicable to your Units.

4.   Fourth element is any capital expenditure you incur to increase or preserve the value of your
     Ordinary Units.

5.   Fifth element includes capital expenditure you incur to preserve or defend your title or right to the
     Ordinary Units you held in the PFMF.

The CGT provisions also exclude certain expenditure from the reduced cost base, and these provisions
may result in a further reduction of the reduced cost base. Examples of expenditure that do not form part
of the reduced cost base include deductible expenditure (refer subsection 110-55(4)), recouped
expenditure defined under section 20-25 (refer subsection 110-55(6)) and amounts corresponding to GST
input tax credits to which you are entitled in relation to expenditure you incurred on any of the five basic
elements of the reduced cost base.

Your reduced cost base can also be modified if you have received any capital distributions debited to the
capital account of the PFMF, or you have received any non assessable payments for tax deferred or CGT
concession amounts, in respect of your Ordinary Units. We are instructed the PFMF has not made any
distributions of tax deferred or CGT concession amounts.

CGT Reporting Obligations

Where the Ordinary Units or Litigation Units held by you in the PFMF are redeemed, Unitholders should
disclose in their income tax return for the relevant year of income that a CGT event did occur in relation to
their Units and complete the requisite CGT information in your income tax return.

You should consult your tax agent to assist you with any CGT reporting obligations.



Pacific First Mortgage Fund - Independent Expert’s Report                                                  90
Disclaimer

Unitholders who participate in the New Strategy Redemption Proposal should seek their own independent
taxation advice and should not rely on the comments set out in this Appendix for the purpose of finalising
their taxation affairs for the relevant year of income.




Pacific First Mortgage Fund - Independent Expert’s Report                                             91
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