<PAGE>
 
                                PROMISSORY NOTE

$1,443,094.00                                                 September 30, 1997


     For value received, MCLEOD PROPERTIES, FONTANA LLC, A CALIFORNIA LIMITED
LIABILITY COMPANY (the "BORROWER"), hereby promises to pay to the order of
Kaiser Ventures Inc., a Delaware corporation (the "LENDER"), at 3633 E. Inland
Empire Blvd., Suite 850, Ontario, California 91764 or at such other place as
Lender may designate from time to time in writing, the principal amount of ONE
MILLION FOUR HUNDRED FORTY-THREE THOUSAND, NINETY-FOUR DOLLARS together with
interest as specified herein on the outstanding principal amount on the dates
and in the amounts as specified below.  The within Note is secured by that
certain Subordinated Deed of Trust, Assignment of Leases and Rents and Security
Agreement dated concurrently herewith by and between Borrower, Lender and
Chicago Title Insurance Company as Beneficiary (the "DEED OF TRUST").  Terms
defined in the Deed of Trust and not otherwise defined herein are used herein as
therein defined.

     The Borrower promises to pay interest at the rate of ten percent (10%) per
annum on the unpaid principal amount of this Note from the date hereof until
such principal amount is paid in full.  If and so long as an Event of Default
has occurred and is continuing, Borrower will pay interest, on demand, on the
unpaid principal amount from the date on which the Event of Default first
occurred, until such Default is cured at a rate of fifteen percent (15%) per
annum.

     Both principal and interest hereunder are payable to the Lender in lawful
money of the United States of America and in immediately available funds, as
follows:

     (a)    Interest on the first Five Hundred Thirty-Three Thousand Seven
Hundred Sixty Dollars ($533,760.00) of the principal amount shall be paid
monthly in arrears, beginning thirty days from the date hereof. 

     (b)    Principal on the first Five Hundred Thirty-Three Thousand Seven
Hundred Sixty Dollars ($533,760.00) of the principal amount shall, at a minimum,
be paid in nine equal monthly installments of Fifty-Nine Thousand Three Hundred
Seven Dollars ($59,307.00), beginning thirty days from the date hereof.

     (c)    Interest on the remaining Nine Hundred Nine Thousand, Three Hundred
and Thirty-Four Dollars ($909,334.00) of the principal amount shall be paid
quarterly in arrears, except that interest shall not accrue and be payable
during the first seven months from the date hereof except upon the occurrence of
any Except of Default.

     (d)    Principal on the remaining Nine Hundred Nine Thousand, Three Hundred
Thirty-Four Dollars ($909,334.00) of the principal amount shall be paid Twenty-
Five Thousand Dollars ($25,000.00) quarterly except that the first principal
payment shall be due seven months from the date hereof.

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     (e)    All remaining principal and interest shall be due seven years from
the date hereof. Borrower may prepay at any time prior to maturity, without
penalty, all or any portion of the principal.

     This Note is the "Note" referred to in, and is entitled to the benefits of
the Deed of Trust.  The Deed of Trust contains, among other things, provisions
for acceleration of the maturity hereof upon the happening of certain stated
events, including the failure to timely pay this note in accordance with its
terms, and also for prepayments of principal hereof before the maturity hereof,
upon the terms and conditions specified therein.

     The Deed of Trust provides in part as follows:

     "Restrictions Upon Transfer.  In the event that the interest of Trustor in
                                                                     ------- --
     the Property, or any part thereof, or any interest therein, is sold, agreed
     to be sold, conveyed, encumbered, alienated or otherwise transferred by
     Trustor whether by operation of law or otherwise, the Note, irrespective of
     the maturity dates expressed therein, at the option of Beneficiary, and
     without demand or notice, shall immediately become due and payable. In the
     event that Beneficiary does not elect to declare the Note immediately due
     and payable, then, unless indicated otherwise in writing by Beneficiary,
     Trustor shall nevertheless remain primarily liable for the obligations
     hereunder and under the Note and any other instrument securing the Note.
     This provision shall apply to each and every sale, transfer, encumbrance or
     conveyance, regardless whether or not Beneficiary has consented to, or
     waived, Beneficiary's rights hereunder, whether by action or nonaction in
     connection with any previous sale, transfer or conveyance. For the purposes
     hereof, any change in the identity, structure, management, nature or
     control of Trustor, whether by way of a change in the identity of any
     shareholder of Trustor or a change in the ownership or control of Trustor
     or any shareholder of Trustor, by merger or otherwise, shall be deemed a
     sale hereunder."

     The Deed of Trust contains a Subordination provision, pursuant to which the
Deed of Trust may become subject to and of lower priority than other security
instruments.
 
     The Borrower, any and all guarantors and sureties of this Note and all
other Persons liable or to become liable on this Note severally waive
presentment for payment, demand, notice of demand and of dishonor and nonpayment
of this Note, notice of intention to accelerate the maturity of this Note,
protest and notice of protest, diligence in collecting, and the bringing of suit
against any other party, and agree to all renewals, extensions, modifications,
partial payments, releases and substitutions of security, in whole or in part,
with or without notice, before or after maturity.  The pleading of any statute
of limitations as a defense to any demand against the makers, guarantors and
sureties hereof is expressly waived by all such parties to the extent permitted
by law.

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     The term "BORROWER" and "LENDER" shall be construed to include their
respective successors, subsequent holders and assignees.

     This Note shall be enforceable in accordance with the laws of the State of
California and shall be construed in accordance therewith.


                                                 MCLEOD PROPERTIES, FONTANA LLC,
                                                 A CALIFORNIA LIMITED LIABILITY
                                                 COMPANY


                                                 By:  /s/ Vincent M. McLeod, Jr.
                                                      --------------------------
                                                 Its: Manager
                                                      --------------------------