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EX-32.1 - EXHIBIT 32.1 - United Development Funding IVv423157_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - United Development Funding IVv423157_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - United Development Funding IVv423157_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

[Mark One]

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number: 001-36472

 

United Development Funding IV

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   26-2775282
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

1301 Municipal Way, Suite 100, Grapevine, Texas 76051

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (214) 370-8960

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

The number of shares outstanding of the Registrant’s common shares of beneficial interest, par value $0.01 per share, as of the close of business on November 4, 2015 was 30,672,626.

 

 

 

  

UNITED DEVELOPMENT FUNDING IV

FORM 10-Q

Quarter Ended September 30, 2015

 

    Page
     
 

PART I
FINANCIAL INFORMATION

 
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 3
     
  Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2015 and 2014 4
     
  Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2015 and 2014 5
     
  Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2015 and 2014 6
     
  Notes to Consolidated Financial Statements (Unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 54
     
Item 4. Controls and Procedures 55
     
 

PART II
OTHER INFORMATION

 
     
Item 1. Legal Proceedings 56
     
Item 1A. Risk Factors 56
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 58
     
Item 3. Defaults Upon Senior Securities 59
     
Item 4. Mine Safety Disclosures 59
     
Item 5. Other Information 59
     
Item 6. Exhibits 59
     
Signatures   60

 

 2 

 

  

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

UNITED DEVELOPMENT FUNDING IV

CONSOLIDATED BALANCE SHEETS

 

   September 30,
2015 (Unaudited)
   December 31, 2014 
Assets          
Cash and cash equivalents  $18,979,309   $30,481,912 
Restricted cash   8,762,368    7,048,976 
Accrued interest receivable   29,817,746    18,098,976 
Accrued receivable – related parties   6,207,849    3,343,867 
Loan participation interest – related parties, net   35,255,640    40,658,253 
Notes receivable, net   513,177,132    508,435,988 
Notes receivable – related parties, net   69,644,615    60,497,391 
Lot inventory   -    10,621,316 
Other assets   2,214,647    2,966,105 
Total assets  $684,059,306   $682,152,784 
           
Liabilities and Shareholders’ Equity          
Liabilities:          
Accrued liabilities  $1,642,185   $5,518,861 
Accrued liabilities – related parties   1,352,357    1,228,028 
Distributions payable   -    1,224,956 
Notes payable   50,000,000    50,000,000 
Lines of credit   120,906,488    120,238,340 
Total liabilities   173,901,030    178,210,185 
           
Commitments and contingencies          
           
Shareholders’ equity:          
Shares of beneficial interest; $0.01 par value; 400,000,000 shares authorized; 32,699,815 shares issued and 30,669,362 shares outstanding at September 30, 2015, and 32,657,880 shares issued and 30,627,427 shares outstanding at December 31, 2014   326,998    326,578 
Additional paid-in-capital   573,120,388    572,077,700 
Accumulated deficit   (21,887,324)   (27,059,893)
Shareholders’ equity before treasury shares   551,560,062    545,344,385 
Less:  Treasury shares, 2,030,453 shares at September 30, 2015 and December 31, 2014, at cost   (41,401,786)   (41,401,786)
Total shareholders’ equity   510,158,276    503,942,599 
Total liabilities and shareholders’ equity  $684,059,306   $682,152,784 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 3 

 

 

UNITED DEVELOPMENT FUNDING IV

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Interest income:                    
Interest income  $17,196,861   $16,554,881   $50,895,925   $47,228,062 
Interest income – related parties   3,490,930    2,672,045    10,429,239    7,290,717 
Total interest income   20,687,791    19,226,926    61,325,164    54,518,779 
                     
Interest expense:                    
Interest expense   2,621,865    1,909,455    7,860,380    2,885,557 
                     
Net interest income   18,065,926    17,317,471    53,464,784    51,633,222 
Provision for loan losses   -    773,820    -    2,214,607 
Net interest income after provision for loan losses   18,065,926    16,543,651    53,464,784    49,418,615 
                     
Noninterest income:                    
Commitment fee income   390,065    754,067    1,477,212    2,275,605 
Commitment fee income – related parties   113,082    79,767    332,870    173,451 
Lot inventory sales income   6,107,131    2,976,000    10,621,316    6,864,137 
Total noninterest income   6,610,278    3,809,834    12,431,398    9,313,193 
                     
Noninterest expense:                    
Management fees – related party   2,392,690    2,325,276    7,479,095    7,629,346 
Lot inventory sales cost   6,107,131    2,976,000    10,621,316    6,864,137 
Listing expenses   -    77,028    -    5,115,229 
General and administrative   1,521,734    1,217,717    3,701,910    3,934,933 
General and administrative – related parties   340,673    382,431    1,218,328    (1,376,394)
Total noninterest expense   10,362,228    6,978,452    23,020,649    22,167,251 
                     
Net income  $14,313,976   $13,375,033   $42,875,533   $36,564,557 
                     
Net income per weighted average share outstanding  $0.47   $0.44   $1.40   $1.16 
                     
Weighted average shares outstanding   30,663,199    30,632,925    30,646,129    31,616,870 
                     
Distributions per weighted average share outstanding  $0.41   $0.34   $1.23   $1.14 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 4 

 

 

UNITED DEVELOPMENT FUNDING IV

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended September 30, 
   2015   2014 
Operating Activities          
Net income  $42,875,533   $36,564,557 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   -    2,214,607 
Amortization expense   1,710,612    955,686 
Share-based compensation   483,838    557,531 
Changes in assets and liabilities:          
Accrued interest receivable   (11,513,703)   (9,909,085)
Accrued receivable – related parties   (3,183,764)   859,788 
Other assets   (959,154)   (1,124,539)
Accrued liabilities (including related parties)   (1,632,434)   711,314 
Net cash provided by operating activities   27,780,928    30,829,859 
           
Investing Activities          
Investments in loan participation interest – related parties   (17,172,868)   (16,212,677)
Principal receipts from loan participation interest – related parties   16,472,966    17,265,709 
Investments in notes receivable   (107,374,139)   (169,294,765)
Principal receipts from notes receivable   109,273,884    97,298,100 
Investments in notes receivable – related parties   (16,454,016)   (20,092,790)
Principal receipts from notes receivable – related parties   6,883,134    3,911,059 
Investments in lot inventory   -    (9,786,217)
Receipts from lot inventory   8,501,402    5,497,128 
Net cash provided by (used in) investing activities   130,363    (91,414,453)
           
Financing Activities          
Purchase of treasury shares   -    (37,058,319)
Proceeds from borrowings on lines of credit   27,466,230    85,992,416 
Payments on lines of credit   (26,798,082)   (9,162,986)
Proceeds from notes payable   -    35,000,000 
Distributions, net of shareholders’ distribution reinvestment   (38,368,650)   (29,968,122)
Restricted cash   (1,713,392)   (5,767,581)
Net cash (used in) provided by financing activities   (39,413,894)   39,035,408 
           
Net decrease in cash and cash equivalents   (11,502,603)   (21,549,186)
Cash and cash equivalents at beginning of period   30,481,912    33,565,191 
Cash and cash equivalents at end of period  $18,979,309   $12,016,005 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $7,755,068   $2,450,728 
           
Supplemental Cash Flow Information – Non-Cash Investing and Financing Activities:          
Shareholders’ distribution reinvestment  $559,270   $8,703,842 
Assignment of loans  $6,640,888   $8,342,680 
Lot inventory – earnest money  $2,119,913   $1,064,274 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 5 

 

  

UNITED DEVELOPMENT FUNDING IV

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

   Shares of   Additional                 
   Beneficial Interest   Paid-in   Treasury Shares   Accumulated     
   Shares   Amount   Capital   Shares   Amount   Deficit   Total 
                             
BALANCE – December 31, 2013   32,115,232   $321,152   $562,442,028    212,907   $(4,257,653)  $(27,395,968)  $531,109,559 
                                    
Redemption of shares   -    -    85,814    1,817,546    (37,144,133)   -    (37,058,319)
                                    
Share-based compensation   97,410    974    556,557    -    -    -    557,531 
                                    
Net income   -    -    -    -    -    36,564,557    36,564,557 
                                    
Distributions   -    -    -    -    -    (36,018,514)   (36,018,514)
                                    
Shareholders’ distribution reinvestment   435,250    4,353    8,699,489    -    -    -    8,703,842 
                                    
BALANCE – September 30, 2014   32,647,892   $326,479   $571,783,888    2,030,453   $(41,401,786)  $(26,849,925)  $503,858,656 
                                    
BALANCE – December 31, 2014   32,657,880   $326,578   $572,077,700    2,030,453   $(41,401,786)  $(27,059,893)  $503,942,599 
                                    
Share-based compensation   10,000    100    483,738    -    -    -    483,838 
                                    
Net income   -    -    -    -    -    42,875,533    42,875,533 
                                    
Distributions   -    -    -    -    -    (37,702,964)   (37,702,964)
                                    
Shareholders’ distribution reinvestment   31,935    320    558,950    -    -    -    559,270 
                                    
BALANCE – September 30, 2015   32,699,815   $326,998   $573,120,388    2,030,453   $(41,401,786)  $(21,887,324)  $510,158,276 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 6 

 

  

UNITED DEVELOPMENT FUNDING IV

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A. Nature of Business

 

United Development Funding IV (which may be referred to as the “Trust,” “we,” “our,” or “UDF IV”) was organized on May 28, 2008 (“Inception”) as a Maryland real estate investment trust. The Trust is the sole general partner of and owns a 99.999% partnership interest in United Development Funding IV Operating Partnership, L.P. (“UDF IV OP”), a Delaware limited partnership. UMTH Land Development, L.P. (“UMTH LD”), a Delaware limited partnership and the affiliated asset manager of the Trust, is the sole limited partner and owner of 0.001% of the partnership interests in UDF IV OP. At September 30, 2015 and December 31, 2014, UDF IV OP had no assets, liabilities or equity.

 

As of September 30, 2015, the Trust owns a 100% limited partnership interest in the following Delaware limited partnerships:

 

·UDF IV Home Finance, L.P. (“UDF IV HF”)
·UDF IV Finance I, L.P. (“UDF IV FI”)
·UDF IV Finance II, L.P. (“UDF IV FII”)
·UDF IV Acquisitions, L.P. (“UDF IV AC”)
·UDF IV Finance III, L.P. (“UDF IV FIII”)
·UDF IV Finance IV, L.P. (“UDF IV Fin IV”)
·UDF IV Finance V, L.P. (“UDF IV Fin V”)
·UDF IV Finance VI, L.P. (“UDF IV Fin VI”)
·UDF IV Finance VII, L.P. (“UDF IV Fin VII”)
·UDF IV Finance VIII, L.P. (“UDF IV Fin VIII”)
·UDF IV Finance IX, L.P. (“UDF IV Fin IX”)
·UDF IV Finance X, L.P. (“UDF IV Fin X”)

 

As of September 30, 2015, the Trust is the sole member of the following Delaware limited liability companies, each of which, as of September 30, 2015 and December 31, 2014, had no assets, liabilities or equity:

 

·UDF IV HF Manager, LLC, the general partner of UDF IV HF
·UDF IV Finance I Manager, LLC, the general partner of UDF IV FI
·UDF IV Finance II Manager, LLC, the general partner of UDF IV FII
·UDF IV Acquisitions Manager, LLC, the general partner of UDF IV AC
·UDF IV Finance III Manager, LLC, the general partner of UDF IV FIII
·UDF IV Finance IV Manager, LLC, the general partner of UDF IV Fin IV
·UDF IV Finance V Manager, LLC, the general partner of UDF IV Fin V
·UDF IV Finance VI Manager, LLC, the general partner of UDF IV Fin VI
·UDF IV Finance VII Manager, LLC, the general partner of UDF IV Fin VII
·UDF IV Finance VIII Manager, LLC, the general partner of UDF IV Fin VIII
·UDF IV Finance IX Manager, LLC, the general partner of UDF IV Fin IX
·UDF IV Finance X Manager, LLC, the general partner of UDF IV Fin X

 

As of September 30, 2015, the Trust owns 100% of the outstanding shares of the following Delaware corporations:

 

·UDF IV LB I, Inc. (“UDF IV LBI”)
·UDF IV LB II, Inc. (“UDF IV LBII”)
·UDF IV Woodcreek, Inc.
·UDF IV LB III, Inc. (“UDF IV LBIII”)
·UDF IV LB IV, Inc. (“UDF IV LBIV”)
·UDF IV LB V, Inc. (“UDF IV LBV”)
·UDF IV TRS-BR1, Inc.
·UDF IV TRS-BR2, Inc.

 

 7 

 

  

The Trust primarily originates, purchases, participates in and holds for investment secured loans made directly by the Trust or indirectly through its affiliates to persons and entities for the acquisition and development of parcels of real property as single-family residential lots or mixed-use master planned residential communities, for the construction of single-family homes and for completed model homes. The Trust also makes direct investments in land for development into single-family lots, home construction and portfolios of finished lots and model homes; provides credit enhancements to real estate developers, home builders, land bankers and other real estate investors; and purchases participations in, or finances for other real estate investors the purchase of, securitized real estate loan pools and discounted cash flows secured by state, county, municipal or other similar assessments levied on real property. The Trust also may enter into joint ventures with unaffiliated real estate developers, home builders, land bankers and other real estate investors, or with other United Development Funding-sponsored programs, to originate or acquire, as the case may be, the same kind of loans or real estate investments the Trust may originate or acquire directly.

 

UMTH General Services, L.P. (“UMTH GS” or the “Advisor”), a Delaware limited partnership, is the Trust’s advisor and is responsible for managing the Trust’s affairs on a day-to-day basis. UMTH GS has engaged UMTH LD as the Trust’s asset manager. The asset manager oversees the investing and financing activities of the affiliated programs managed and advised by the Advisor and UMTH LD. In addition, the asset manager underwrites transactions within the guidelines adopted by the Trust and advises the Trust regarding investments and finance transactions, management, policies and guidelines. The asset manager reviews the transaction structure and terms, underwriting, collateral, performance and risk management for each investment, and also manages the Trust’s capital structure.

 

On June 4, 2014, we listed our common shares of beneficial interest (the “Listing”) on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “UDF” and concurrently commenced an offer to purchase up to 1,707,317 common shares of beneficial interest at a price of $20.50 per common share of beneficial interest (the “Tender Offer”). See Note C – Shareholders’ Equity for additional discussion of the Tender Offer, which was fully subscribed and completed in July 2014.

 

The Trust’s sole employee is its Chief Operating Officer, who was appointed by our board of trustees on February 3, 2014, effective February 17, 2014. The Trust does not maintain any physical properties. The Trust’s operations are conducted at the corporate offices of the Trust’s Advisor at 1301 Municipal Way, Grapevine, Texas 76051.

 

B. Summary of Significant Accounting Policies

 

A summary of our significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

 

Basis of Presentation

 

These consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, with the instructions to Form 10-Q and with Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, there has been no material change to the information disclosed in our 2014 Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on March 16, 2015 (the “2014 10-K”). The accompanying interim consolidated financial statements should be read in conjunction with the consolidated financial statements filed in our 2014 10-K. In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, considered necessary to present fairly our financial position, results of operations and cash flows as of and for the interim period. Operating results and cash flows for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Trust and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

 8 

 

  

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.

 

Loan Participation Interest – Related Parties

 

As of September 30, 2015, the loan participation interest – related parties have terms ranging from 7 to 31 months and bear interest at rates ranging from 12% to 15%.

 

Notes Receivable and Notes Receivable – Related Parties

 

As of September 30, 2015, the notes receivable and notes receivable – related parties have terms ranging from 4 to 84 months and bear interest at rates ranging from 11% to 15%. The notes may be paid off prior to maturity; however, we intend to hold all notes for the life of the notes.

 

Lot Inventory

 

Lot inventory consists of finished single-family residential lots purchased by UDF IV LBI, UDF IV LBII, UDF IV LBIII, UDF IV LBIV and UDF IV LBV (collectively, the “UDF IV LB Entities”) from third-party builders. Each UDF IV LB Entity has entered into a lot option agreement with a builder whereby the builder will reacquire the lots in accordance with a takedown schedule for a pre-determined lot price identified in the lot option agreement. As of September 30, 2015, there are no lots remaining in our lot inventory.

 

Allowance for Loan Losses

 

The allowance for loan losses is our estimate of incurred losses in our portfolio of notes receivable, notes receivable – related parties and loan participation interest – related parties. We periodically perform a detailed review of our portfolio of notes and other loans to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses. Our review consists of evaluating economic conditions, the estimated value of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral, and other relevant factors. We also utilize a peer group analysis and a historical analysis to validate the overall adequacy of our allowance for loan losses. This review is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

In reviewing our portfolio, we consider cash flow estimates from the disposition of finished lots, paper lots (residential lots shown on a plat that has been accepted by the city or county) and undeveloped land as well as cash flow received from the issuance of bonds from municipal reimbursement and public improvement districts. These estimates are based on current market metrics, including, without limitation, the supply of finished lots, paper lots and undeveloped land, the supply of homes and the rate and price at which land and homes are sold, historic levels and trends, executed contracts, appraisals and discussions with third-party market analysts and participants, including homebuilders. We base our valuations on current and historic market trends and on our analysis of market events and conditions, including activity within our portfolio, and on the analysis of third-party services such as Metrostudy and Residential Strategies, Inc. Cash flow forecasts are also based on executed purchase contracts, which provide base prices, escalation rates, and absorption rates on an individual project basis. We also consider third-party appraisals which provide a valuation in accordance with guidelines set forth in the Uniform Standards of Professional Appraisal Practice. In addition to cash flows from the disposition of property, cost analysis is performed based on estimates of development and senior financing expenditures provided by developers and independent professionals on a project-by-project basis. These amounts are reconciled with our best estimates to establish the net realizable value of the portfolio.

 

We charge additions to the allowance for loan losses to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against, or “charged off,” the allowance for loan losses, and therefore decrease such allowance, while amounts recovered on previously charged off accounts increase the allowance. As of both September 30, 2015 and December 31, 2014, the allowance for loan losses had a balance of approximately $6.8 million, offset against notes receivable.

 

Interest Income and Non-Interest Income Recognition

 

As of September 30, 2015 and December 31, 2014, we were accruing interest on all loan participation interest – related parties, notes receivable and notes receivable – related parties.

 

 9 

 

 

Commitment fee income and commitment fee income – related parties represents non-refundable fees charged to borrowers for entering into an obligation that commits us to make or acquire a loan or to satisfy a financial obligation of the borrower when certain conditions are met within a specified time period. As of September 30, 2015 and December 31, 2014, approximately $743,000 and $1.5 million, respectively, of unamortized commitment fees are included as an offset of notes receivable. Approximately $52,000 and $124,000 of unamortized commitment fees are included as an offset of notes receivable – related parties as of September 30, 2015 and December 31, 2014, respectively.

 

Advisor Fees

 

Pre-Listing Advisory Agreement

 

In connection with the advisory agreement dated November 12, 2009, between the Trust and the Advisor, as amended by the first amendment dated June 2, 2010 (the “Pre-Listing Advisory Agreement”), the Trust was required to pay certain fees to the Advisor or an affiliate of the Advisor, as described below.

 

·An amount equal to 3% of the net amount available for investment in secured loans and other real estate assets (after payment of selling commissions, dealer manager fees and organization costs) (“Acquisition and Origination Fees”);

 

·An amount equal to 2% per annum of the average of invested assets, including secured loan assets (“Advisory Fees”); and

 

·An amount equal to 1% of the amount made available to the Trust pursuant to the origination of any line of credit or other debt financing, provided that the Advisor provided a substantial amount of services as determined by the Trust’s independent trustees and, on each anniversary date of the origination of any such line of credit or other debt financing, an additional fee of 0.25% of the primary loan amount (collectively, “Debt Financing Fees”) was paid if such line of credit or other debt financing continued to be outstanding on such date, or a prorated portion of such additional fee was paid for the portion of such year that the financing was outstanding.

 

Advisory Agreement

 

On May 29, 2014, the Trust and the Advisor entered into a new advisory agreement, effective upon the completion of the Listing (the “Advisory Agreement”). The Pre-Listing Advisory Agreement automatically terminated upon completion of the Listing.

 

The Advisory Agreement changed the compensation arrangement with the Advisor. Pursuant to the Advisory Agreement, the Trust is required to pay the following fees to its Advisor or an affiliate of its Advisor:

 

·An amount paid monthly equal to one-twelfth of 1.5% of the equity of the Trust, as defined in the Advisory Agreement (the “Base Management Fee”);

 

·An amount payable in quarterly installments equal to the difference between (1) the product of (a) 20% and (b) the difference between (i) the Trust’s core earnings (as defined in the Advisory Agreement) for the preceding twelve months and (ii) the product of (A) the weighted average shares outstanding for the preceding twelve months multiplied by the weighted average issue price for all of the Trust’s outstanding shares (as defined in the Advisory Agreement) (the “Incentive Management Fee”) and (B) 8%, and (2) the sum of Incentive Management Fees paid to the Advisor with respect to the first three calendar quarters of such twelve month period. Prior to the completion of a twelve month period during the term of the Advisory Agreement, core earnings will be calculated on the basis of the number of days the Advisory Agreement has been in effect on an annualized basis; and

 

·Debt Financing Fees equal to 0.5% of the amount made available to the Trust pursuant to the origination of any line of credit or other debt financing, provided that the Advisor provided a substantial amount of services as determined by a majority of the Trust’s independent trustees. On each anniversary date of the origination of any such line of credit or other debt financing, the Trust will pay an additional fee of 0.25% of the primary loan amount if such line of credit or other debt financing continues to be outstanding on such date or the Trust will pay a prorated portion of such additional fee for the portion of each year that the financing is outstanding.

 

 10 

 

 

In addition to the fees described above, pursuant to the terms of the Advisory Agreement, the Trust will reimburse the Advisor and its affiliates for expenses they incur on behalf of the Trust, including expenses incurred by the Advisor in employing the Trust’s Chief Financial Officer and Treasurer (the “Advisor Expense Reimbursement”).

 

Impact of Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. In August 2015, the FASB provided for a one-year deferral of the effective date for ASU 2014-09 which is now effective for fiscal years beginning after December 15, 2017, and interim periods within those years; however, early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. The standard shall be adopted using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (“ASU 2015-02”).  ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities and all legal entities are subject to reevaluation under ASU 2015-02. Specifically, ASU 2015-02 (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”); (2) eliminates the presumption that a general partnership should consolidate a limited partnership; (3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted, but the guidance must be applied as of the beginning of the annual period containing the adoption date. The Trust does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This new guidance is a change from the current treatment of recording debt issuance costs as an asset representing a deferred charge, and is consistent with the accounting treatment for debt discounts. In August 2015, the FASB sought to clarify questions that arose after ASU 2015-03 was issued by issuing ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). The update clarifies that debt issuance costs related to securing a revolving line of credit may be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Both ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, and are to be applied retrospectively, with early adoption permitted. The Trust does not expect the adoption of ASU 2015-03 and ASU 2015-15 to have a material impact on its consolidated financial statements.

 

 11 

 

 

C. Shareholders’ Equity

 

Offering

 

On November 12, 2009, the Trust’s Registration Statement on Form S-11, covering an initial public offering (the “Offering”) of up to 25,000,000 common shares of beneficial interest to be offered in the primary offering at a price of $20 per share (the “Primary Offering”), was declared effective under the Securities Act of 1933, as amended. On December 18, 2009, the Trust’s initial public subscribers were accepted as shareholders pursuant to the Offering, and the subscription proceeds from such initial public subscribers were released to the Trust from escrow.

 

The Offering also initially covered up to 10,000,000 common shares of beneficial interest to be issued pursuant to our distribution reinvestment plan (the “DRIP”) for $20 per share (the “Primary DRIP Offering”). We had the right to reallocate the common shares of beneficial interest registered in the Offering between the Primary Offering and the Primary DRIP Offering, and pursuant to Supplement No. 6 to our prospectus regarding the Offering, which was filed with the SEC on May 3, 2013, we reallocated the shares being offered to be 34,000,000 shares offered pursuant to the Primary Offering and 1,000,000 shares offered pursuant to the Primary DRIP Offering.  

 

On April 19, 2013, we registered 7,500,000 additional common shares of beneficial interest to be offered pursuant to the DRIP in a Registration Statement on Form S-3 (File No. 333-188045) for $20 per share (the “Secondary DRIP Offering”).  We ceased offering common shares of beneficial interest under the Primary DRIP Offering upon the termination of the Offering on May 13, 2013, and concurrently began offering our common shares of beneficial interest to our shareholders pursuant to the Secondary DRIP Offering. Effective May 24, 2014, in contemplation of the Listing, we suspended our DRIP. On May 30, 2014, in contemplation of the Listing, we announced the termination of our DRIP, effective ten days from the notice of such termination, pursuant to the terms of the DRIP. Upon termination of the DRIP, we ceased offering common shares of beneficial interest pursuant to the Secondary DRIP Offering.

 

On August 4, 2014, we filed a Registration Statement on Form S-3 with the SEC that allows us to publicly offer and sell common shares of beneficial interest, preferred shares of beneficial interest and debt securities, from time to time, in one or more future offerings, up to a maximum aggregate offering price of $750 million (the “Shelf Registration”).  The Shelf Registration was declared effective by the SEC on August 27, 2014. As of September 30, 2015, no offerings have been commenced pursuant to the Shelf Registration.

 

On August 4, 2014, we filed Post-Effective Amendment No. 1 (the “Amended Secondary DRIP Offering”) to our Registration Statement on Form S-3 filed on April 19, 2013, in which we originally registered 7,500,000 common shares of beneficial interest to be offered pursuant to our DRIP. Pursuant to our Amended Secondary DRIP Offering, we began offering common shares of beneficial interest pursuant to our new distribution reinvestment plan (the “New DRIP”) in August 2014. The purchase price for shares under the New DRIP is equal to the current market value of our shares, calculated based upon the average of the open and close prices per share on the distribution payment date, as reported by NASDAQ. 

 

As of September 30, 2015, the Trust had issued an aggregate of 32,592,405 common shares of beneficial interest pursuant to the Primary Offering, Primary DRIP Offering, Secondary DRIP Offering and Amended Secondary DRIP Offering, consisting of 30,735,813 common shares of beneficial interest pursuant to the Primary Offering in exchange for gross proceeds of approximately $614.7 million (approximately $535.0 million, net of costs associated with the Primary Offering), 723,617 common shares of beneficial interest in accordance with our Primary DRIP Offering in exchange for gross proceeds of approximately $14.5 million, 1,087,543 common shares of beneficial interest in accordance with our Secondary DRIP Offering in exchange for gross proceeds of approximately $21.7 million and 45,432 common shares of beneficial interest in accordance with our Amended Secondary DRIP Offering in exchange for gross proceeds of approximately $0.8 million. As of September 30, 2015, the Trust had redeemed an aggregate of 2,030,453 common shares of beneficial interest at a cost of approximately $41.4 million, including shares repurchased pursuant to our Tender Offer, as discussed further below.

 

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Distributions

 

We must distribute to our shareholders at least 90% of our taxable income each year in order to meet the requirements for being treated as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). In accordance with this requirement, we pay distributions on a monthly basis to our shareholders. Our distribution rate is determined quarterly by our board of trustees and is dependent on a number of factors, including funds available for payment of distributions, our financial condition, loan funding commitments and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code. In addition to these distributions, in an effort to ensure we distribute at least 90% of our taxable income, our board of trustees will periodically authorize additional, special distributions.

 

Our board of trustees authorized distributions payable to our shareholders on a monthly basis commencing on December 18, 2009. For distributions declared for each record date in the July 2011 through May 2014 periods, our daily distribution rate was $0.0044932 per common share of beneficial interest, which is equal to an annualized distribution rate of $1.64 per share. These daily distributions were aggregated and paid monthly in arrears on or about the 25th day of each month. Distributions for shareholders participating in our distribution reinvestment plans were reinvested into our shares on the payment date of each distribution prior to the termination of our DRIP.

 

From June 2014 through December 2015, our board of trustees has authorized monthly distributions of $0.1367 per common share of beneficial interest to be paid on or about the 25th day of each month to shareholders of record on or about the 15th day of each month, which is equal to an annualized distribution rate of $1.64 per share. See Note K – Subsequent Events for further discussion. All monthly distributions are paid in cash and New DRIP shares as of September 30, 2015.

 

In addition to the distributions discussed above, the following table represents all special distributions authorized by our board of trustees that were paid during the nine months ended September 30, 2015. No special distributions were paid during the nine months ended September 30, 2014.

 

Authorization Date (1)  Record Date (2)  Rate (3)   Pay Date (4)
November 17, 2014  November 28, 2014  $0.04   February 4, 2015

 

(1)Represents the date the distribution was authorized by our board of trustees.

 

(2)All outstanding common shares of beneficial interest as of the record date received the distribution.

 

(3)Represents the distribution rate per common share of beneficial interest on the record date.

 

(4)Represents the date the special distribution was paid in cash.

 

The distributions paid for the nine months ended September 30, 2015 and 2014, along with the amount of distributions reinvested pursuant to our Secondary DRIP Offering and Amended Secondary DRIP Offering and the sources of our distributions are reflected in the table below.

 

   Nine Months Ended September 30, 
   2015   2014 
Distributions paid in cash  $38,369,000        $29,968,000      
Distributions reinvested   559,000         8,704,000      
Total distributions  $38,928,000        $38,672,000      
Source of distributions:                    
Cash from operations  $27,781,000    71%  $29,107,000    75%
Borrowings under credit facilities   11,147,000    29%   9,565,000    25%
Total sources  $38,928,000    100%  $38,672,000    100%

 

For the nine months ended September 30, 2015 and 2014, respectively, we issued 31,935 and 435,250 common shares of beneficial interest pursuant to distributions that were reinvested.

 

 13 

 

 

We utilize cash to fund operating expenses, make investments, service debt obligations and pay distributions. We receive cash from operations (which includes interest payments), as well as cash from investing activities (which includes repayment of principal on loans we have made) and financing activities (which includes borrowing proceeds and additional capital from the sale of our shares). We have secured various lines of credit to manage the timing of our cash receipts and funding requirements. We expect that the majority of our future distributions will be funded from operating cash flow.

 

The following tables reconcile the total distributions paid to our calculation of distributions per weighted average share outstanding for the periods indicated:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Distributions paid (1)  $12,575,000   $12,554,000   $38,928,000   $38,672,000 
Add:  current period distribution accrual (2)   -    -    -    - 
Less:  previous period accrual reversal (2)   -    (2,209,000)   (1,225,000)   (2,653,000)
Distributions  $12,575,000   $10,345,000   $37,703,000   $36,019,000 
                     
Weighted average shares outstanding   30,663,199    30,632,925    30,646,129    31,616,870 
                     
Distributions paid per weighted average share outstanding  $0.41   $0.41   $1.27   $1.22 
                     
Distributions per weighted average share outstanding  $0.41   $0.34   $1.23   $1.14 

 

(1)Represents total cash and DRIP distributions paid during the period indicated.
(2)Represents impact of accruals and accrual reversals during the period indicated for distributions declared, but not paid.

 

Share Redemption Program

 

Prior to its suspension and ultimate termination, our share redemption program enabled our shareholders to sell their shares back to us in limited circumstances. On May 30, 2014, we announced the termination of our share redemption program, effective upon Listing. Pursuant to our share redemption program, for the nine months ended September 30, 2014, we received valid redemption requests relating to 183,166 shares of beneficial interest, 106,018 of which were redeemed for an aggregate purchase price of approximately $2.0 million (an average redemption price of $18.60 per share). Shares redeemed are included in treasury shares in the consolidated balance sheets.

 

On January 13, 2015, our board of trustees authorized the Trust to repurchase up to $25 million of the Trust’s common shares of beneficial interest, par value $0.01 per share, in the open market or in privately negotiated transactions at the discretion of management. This authorization does not obligate the Trust to purchase any common shares, is in effect until January 13, 2016 and may be suspended or discontinued at any time. The Trust has not repurchased any shares as of the date of the filing of this Quarterly Report on Form 10-Q in connection with this authorization.

 

Tender Offer

 

Pursuant to our Tender Offer, on July 9, 2014, we purchased 1,707,317 common shares of beneficial interest at a purchase price of $20.50 per share, for an aggregate cost of $35.0 million, excluding fees and expenses related to the Tender Offer. In addition, on July 9, 2014, in connection with our Tender Offer, we eliminated 4,211 fractional common shares of beneficial interest (the “Fractional Shares”) for an aggregate cost of approximately $86,000 by paying each holder of a Fractional Share an amount in cash equal to the fraction of a share being repurchased multiplied by $20.50 per share. Shares purchased pursuant to our Tender Offer and Fractional Shares purchased in connection with our Tender Offer are included in treasury shares in the consolidated balance sheet.

 

Adoption of Equity Incentive Plans

 

In connection with the Listing, on May 29, 2014, our board of trustees, including a majority of the independent trustees, approved the adoption of equity incentive plans for the Advisor (the “Advisor Equity Plan”), its trustees, officers, advisors and consultants (the “Equity Plan”) and its non-executive trustees (the “Non-Executive Trustee Stock Plan”). These equity incentive plans (collectively, the “Equity Incentive Plans”) are overseen by our board of trustees’ compensation committee, which consists solely of non-executive trustees. Shares issued pursuant to the Equity Incentive Plans are subject to an aggregate limitation of 2,423,284 shares of beneficial interest (7.5% of the number of shares that were issued and outstanding immediately following the approval for listing and trading of the shares on NASDAQ).

 

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The Advisor Equity Plan provides for the grant of stock options, restricted common shares, restricted stock units, stock appreciation rights and other equity-based awards to the Advisor. The Advisor may in turn issue such awards to its officers, employees or other consultants in order to promote the success of the Trust.

 

The Equity Plan provides for the grant of stock options, restricted common shares, restricted stock units, dividend equivalent rights and other equity-based awards to the trustees, officers and other employees and independent contractors, including employees or trustees of the Advisor and its affiliates who are providing services to the Trust.

 

The Non-Executive Trustee Stock Plan provides for the issuance of restricted common shares, restricted stock units, or other equity-based awards to the Trust’s non-executive trustees in order to provide incentives to such trustees to promote the success of the Trust.

 

Share Based Compensation

 

On February 3, 2014, our board of trustees appointed Stacey H. Dwyer as our Chief Operating Officer, effective February 17, 2014. In connection with this appointment, we entered into an employment agreement with Ms. Dwyer effective as of February 17, 2014.

 

Pursuant to her employment agreement, Ms. Dwyer’s compensation includes an initial equity award of 82,410 common shares of beneficial interest and an annual equity grant of 12,500 common shares of beneficial interest. Terms of the initial equity award and the annual equity grant are described in the notes to the table below. From the date of grant until such time as they become vested, the shares granted to Ms. Dwyer pursuant to her employment agreement (the “Restricted Shares”) may not be sold, assigned, transferred or otherwise disposed of. Compensation expense will be recognized on a straight-line basis over the vesting period of each grant.

 

The following table reflects Restricted Shares that have been granted to Ms. Dwyer and Restricted Shares that vested or have been forfeited by Ms. Dwyer during the nine months ended September 30, 2015.

 

   Restricted
Shares
   Grant Date
Fair Value
Per Share
   Total 
Outstanding as of January 1, 2015 (1)   82,410   $20.00   $1,648,200 
Granted (2)   -    -    - 
Vested (1)   (20,602)   20.00    (412,050)
Forfeited   -    -    - 
                
Outstanding as of September 30, 2015   61,808   $20.00   $1,236,150 

 

(1)In accordance with her employment agreement, the Trust and Ms. Dwyer entered into a Restricted Stock Award Agreement on February 21, 2014, pursuant to which the Trust issued 82,410 shares to Ms. Dwyer. These shares vest and become non-forfeitable annually over four years after the grant date of February 21, 2014. Specifically, 20,602.50 shares shall vest and become non-forfeitable on each of the first, second, third and fourth anniversaries of the grant date, subject to Ms. Dwyer’s continued employment as an officer of the Trust as of each such vesting date.

 

(2)In accordance with Ms. Dwyer’s employment agreement and pursuant to its Equity Plan, the trust will grant 12,500 common shares of beneficial interest to Ms. Dwyer on each anniversary date of the effective date of the Employment Agreement (the first anniversary of which was February 17, 2015), with each annual equity grant vesting five years after the applicable grant date, subject to Ms. Dwyer’s continued employment as an officer of the Trust as of each such vesting date provided that, if the closing price per share is less than $18.00 as of any anniversary of the effective date, the annual equity grant with respect thereto will not be made, and shall instead be deferred to the next anniversary of the effective date on which the closing price per share is at least $18.00. The annual equity grant scheduled for February 17, 2015 was deferred as the closing price per share of the Trust’s common shares on February 17, 2015 was less than $18.00.

 

 15 

 

 

The following table summarizes the impact of share-based compensation on equity and expense for the periods indicated.

 

      For the Nine Months Ended September 30, 2014   For the Nine Months Ended September 30, 2015 
      Common Shares of   Additional       Common Shares of   Additional     
      Beneficial Interest   Paid-in       Beneficial Interest   Paid-in     
Date of issue  Description  Shares   Amount   Capital   Expense   Shares   Amount   Capital   Expense 
February 17, 2014  Initial equity award   82,410   $824   $256,707   $257,531(1)   -   $-   $309,038   $309,038(1)
June 4, 2014  Listing award (2)   15,000    150    299,850    300,000(2)   -    -    -    - 
June 30, 2015  Bonus payment (3)   -    -    -    -    10,000    100    174,700    -(3)
TOTAL      97,410   $974   $556,557   $557,531    10,000   $100   $483,738   $309,038 

 

(1)Compensation expense associated with the initial equity award of 82,410 shares is included in general and administrative expense. Compensation expense is recognized on a straight-line basis over the four year vesting period associated with the initial equity award based on a grant date fair value of $20 per share.
(2)As a result of the Listing on June 4, 2014, a total of 15,000 common shares, with a grant date fair value of $20.00 per share, were awarded to members of our board of trustees and a consultant providing services to us pursuant to our Equity Incentive Plans. These shares vested immediately upon issuance. In connection with these shares, $300,000 of share-based compensation is included in listing expense in the accompanying consolidated statements of income for the nine months ended September 30, 2014.
(3)Pursuant to her employment agreement, Ms. Dwyer receives an annual minimum guaranteed bonus of $350,000. The bonus for a preceding calendar year will be paid to Ms. Dwyer on or before June 30 of the year following the year that the bonus was earned. At Ms. Dwyer’s discretion, she can choose to receive the bonus in cash or in common shares of beneficial interest of the Trust, or any combination thereof. Ms. Dwyer’s 2014 bonus (prorated based on an effective employment date of February 17, 2014) was accrued and included in general and administrative expense during the year ended December 31, 2014. On June 30, 2015, as payment for her 2014 bonus, Ms. Dwyer elected to receive 10,000 common shares of beneficial interest, with the remainder of her 2014 bonus payable in cash. The closing per share price of UDF IV shares on September 30, 2015 was $17.48.

 

D. Loans and Allowance for Loan Losses

 

The table below reflects our aggregate loan portfolio as of September 30, 2015 and December 31, 2014, which comprises loan participation interest – related parties, net, notes receivable, net and notes receivable – related parties, net and is recorded at the lower of cost or estimated net realizable value.

 

   September 30, 2015   December 31, 2014 
Loan participation interest – related parties, net  $35,256,000   $40,658,000 
Notes receivable, net   513,177,000    508,436,000 
Notes receivable – related parties, net   69,645,000    60,497,000 
Total  $618,078,000   $609,591,000 

 

Our loans are classified as follows:

 

   September 30, 2015   December 31, 2014 
Real Estate:          
Construction, acquisition and land development  $625,624,000   $618,006,000 
Provision for loan losses   (6,752,000)   (6,752,000)
Unamortized commitment fees   (794,000)   (1,663,000)
Total  $618,078,000   $609,591,000 

 

 16 

 

 

The following table represents the scheduled maturity dates of the 127 loans outstanding as of September 30, 2015:

 

   Related Party   Non-related party   Total 
Maturity
Date
  Amount   Loans   % of
Total
   Amount   Loans   % of
Total
   Amount   Loans   % of
Total
 
Matured  $-    -    -   $35,304,000    8    7%  $35,304,000    8    6%
2015   20,057,000    4    19%   125,462,000    15    24%   145,519,000    19    23%
2016   56,862,000    10    54%   260,932,000    58    50%   317,794,000    68    51%
2017   8,707,000    2    8%   87,159,000    22    17%   95,866,000    24    15%
2018   7,826,000    3    8%   11,815,000    4    2%   19,641,000    7    3%
2019   -    -    -    -    -    -    -    -    - 
2020   -    -    -    -    -    -    -    -    - 
2021   11,500,000    1    11%   -    -    -    11,500,000    1    2%
Total  $104,952,000    20    100%  $520,672,000    107    100%  $625,624,000    127    100%

 

Full collectability is considered probable for all eight loans that have matured as of September 30, 2015.

 

The following table represents the scheduled maturity dates of the 131 loans outstanding as of December 31, 2014:

 

   Related Party   Non-related party   Total 
Maturity
Date
  Amount   Loans   % of
Total
   Amount   Loans   % of
Total
   Amount   Loans   % of
Total
 
Matured  $-    -    -   $16,357,000    5    3%  $16,357,000    5    3%
2015   58,812,000    11    58%   300,727,000    46    58%   359,539,000    57    57%
2016   15,857,000    5    16%   118,308,000    37    23%   134,165,000    42    22%
2017   10,231,000    2    10%   81,334,000    23    16%   91,565,000    25    15%
2018   4,880,000    1    5%   -    -    -    4,880,000    1    1%
2019   -    -    -    -    -    -    -    -    - 
2020   -    -    -    -    -    -    -    -    - 
2021   11,500,000    1    11%   -    -    -    11,500,000    1    2%
Total  $101,280,000    20    100%  $516,726,000    111    100%  $618,006,000    131    100%

 

The following table describes the loans that were matured as of December 31, 2014, the activity with respect to such loans during the nine months ended September 30, 2015 and the loans that matured during the nine months ended September 30, 2015 and remained matured as of September 30, 2015:

 

Maturity
Date
  Amount   Loans   % of
Total
   Matured Loan
Extensions
During the
Nine Months
Ended
September 30,
2015 for Loans
Matured as of
December 31,
2014 (1)
   Net Activity
During the
Nine Months
Ended
September
30, 2015 for
Loans
Matured as of
December 31,
2014 (2)
   Loans
Matured
During the
Nine Months
Ended
September 30,
 2015 (3)
   Amount   Loans   % of
Total
 
   Non-Related 
   Matured as of December 31, 2014   2015 Activity (4)   Matured as of September 30, 2015 
2014  $16,357,000    5    100%  $-   $676,000   $-   $17,033,000    5    48%
2015   -    -    -    -    -    18,271,000    18,271,000    3    52%
Total  $16,357,000    5    100%  $-   $676,000   $18,271,000   $35,304,000    8    100%

 

(1)Amounts represent aggregate unpaid principal balance as of December 31, 2014 of matured loans as of December 31, 2014 that were extended during the nine months ended September 30, 2015.

 

(2)For loans matured as of December 31, 2014, net loan activity represents all activity on the loans during the nine months ended September 30, 2015, including accrued interest, payment of fees and expenses, charge-offs and/or repayments. There were no charge-offs during the nine months ended September 30, 2015.

 

(3)Amounts represent aggregate unpaid principal balance as of September 30, 2015 of loans that matured during the nine months ended September 30, 2015 and remained matured as of September 30, 2015.

 

(4)The table does not reflect activity for loans that matured or were due to mature during the nine months ended September 30, 2015, but were extended effective on or prior to September 30, 2015.

 

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A loan is placed on non-accrual status and income recognition is suspended at the date at which, in the opinion of management, a full recovery of income and principal becomes more likely than not, but is no longer probable, based upon our review of economic conditions, the estimated value of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Any payments received on loans classified as non-accrual status are typically applied first to outstanding loan amounts and then to the recovery of lost interest. As of September 30, 2015 and December 31, 2014, we have not placed any loans on non-accrual status.

 

We evaluate our portfolio of notes receivable, notes receivable – related parties, and loan participation interest – related parties on a loan-by-loan basis quarterly or as circumstances or events arise that warrant more frequent review. In conjunction with this evaluation, we apply the guidance in FASB Accounting Standards Codification (“ASC”) 310-10-35, Receivables – Overall – Subsequent Measurement (“ASC 310-10-35”) in determining whether it is probable that we will be unable to collect all of the contractual principal and interest payments as scheduled in our loan agreements (i.e., whether the loan is impaired). In assessing the collectability of each portfolio loan, we conduct our detailed review on three levels: an economic fundamentals review, a submarket analysis, and active portfolio monitoring. In addition to loans being considered impaired when they remain outstanding beyond the contractual term of the loan agreement, loans are also considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled principal and interest payments. If an individual loan is considered impaired, a specific valuation allowance may be allocated, if necessary, so that the individual loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. Loans that are not individually considered impaired are collectively and qualitatively measured as a portfolio for general valuation allowance. In reviewing our portfolio for this valuation analysis, we consider cash flow estimates from the disposition of finished lots, paper lots (residential lots shown on a plat that has been accepted by the city or county) and undeveloped land as well as cash flow received from the issuance of bonds from municipal reimbursement and public improvement districts. These estimates are based on current market metrics, including, without limitation, the supply of finished lots, paper lots and undeveloped land, the supply of homes and the rate and price at which land and homes are sold, historic levels and trends, executed contracts, appraisals and discussions with third-party market analysts and participants, including homebuilders. We base our valuations on current and historic market trends and on our analysis of market events and conditions, including activity within our portfolio, and on the analysis of third-party services such as Metrostudy and Residential Strategies, Inc. Cash flow forecasts also are based on executed purchase contracts which provide base prices, escalation rates, and absorption rates on an individual project basis. We also consider third-party appraisals which provide a valuation in accordance with guidelines set forth in the Uniform Standards of Professional Appraisal Practice. In addition to cash flows from the disposition of property, cost analysis is performed based on estimates of development and senior financing expenditures provided by developers and independent professionals on a project-by-project basis. These amounts are reconciled with our best estimates to establish the net realizable value of the portfolio.

 

Interest is recognized on an accrual basis for impaired loans in which the collectability of the unpaid principal amount is deemed probable. Any payments received on such loans are first applied to outstanding accrued interest receivable and then to outstanding unpaid principal balance. Unpaid principal balance is materially the same as recorded investments. Any payments received on impaired loans in which the collectability of the unpaid principal amount is less than probable are typically applied to outstanding unpaid principal and then to the recovery of lost interest on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

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As of September 30, 2015, we had eight matured loans with an unpaid principal balance of approximately $35.3 million. Of these eight loans, seven loans, with an unpaid principal balance of approximately $34.2 million, are considered impaired because they remain outstanding beyond the contractual terms of the loan agreements and one loan, with an unpaid principal balance of $1.1 million, was not considered impaired as payment was received in October 2015, after an insignificant delay. Full collectability is considered probable for all seven impaired loans and we have not recorded a specific allowance related to any of these impaired loans. The average monthly outstanding balance associated with impaired loans for the nine months ended September 30, 2015 was approximately $35.0 million. For the nine months ended September 30, 2015, we recognized approximately $3.1 million in interest income associated with impaired loans and we did not recognize any cash basis interest income. As of December 31, 2014, we had five matured loans with an unpaid principal balance of approximately $16.4 million that are considered impaired because they remain outstanding beyond the contractual terms of the loan agreements. Full collectability is considered probable for all five loans and we have not recorded a specific allowance related to any of these impaired loans. The average monthly outstanding balance associated with impaired loans for the year ended December 31, 2014 was approximately $1.6 million. For the year ended December 31, 2014, we recognized approximately $25,000 in interest income associated with impaired loans and we did not recognize any cash basis interest income.

 

As part of the ongoing monitoring of the credit quality of the loan portfolio, we periodically, no less than quarterly, perform a detailed review of our portfolio of mortgage notes and other loans. The following is a general description of the credit levels used:

 

Level 1 – Full collectability of loans in this category is considered probable.

 

Level 2 – Full collectability of loans in this category is deemed more likely than not, but not probable, based upon our review of economic conditions, the estimated value of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. Interest income is suspended on Level 2 loans.

 

Level 3 – For loans in this category, it is probable that we will be unable to collect all amounts due.

 

As of the dates indicated, our loans were classified as follows:

 

   September 30, 2015   December 31, 2014 
Level 1  $625,624,000   $618,006,000 
Level 2   -    - 
Level 3   -    - 
Total  $625,624,000   $618,006,000 

 

The allowance for loan losses is our estimate of incurred losses in our portfolio of notes receivable, notes receivable – related parties and loan participation interest – related parties. We periodically perform a detailed review of our portfolio of notes and other loans to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses. We charge additions to the allowance for loan losses to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against (and decrease) the allowance for loan losses (“charged off”), while amounts recovered on previously charged off amounts increase the allowance for loan losses.

 

An analysis of the allowance for loan losses and the recorded investment in financing receivables is included in the following table for the periods indicated:

 

   Three Months Ended September
30,
   Nine Months Ended September 30,  

Year

Ended

December 31,

 
   2015   2014   2015   2014   2014 
Allowance for loan losses:                         
Balance at beginning of period  $6,752,000   $5,269,000   $6,752,000   $3,828,000   $3,828,000 
Provision charged to earnings   -    774,000    -    2,215,000    2,924,000 
Loan losses:                         
Charge-offs   -    -    -    -    - 
Recoveries   -    -    -    -    - 
Net loan losses   -    -    -    -    - 
Balance at end of period  $6,752,000   $6,043,000   $6,752,000   $6,043,000   $6,752,000 
Ending balance, individually evaluated for impairment  $-   $-   $-   $-   $- 
Ending balance, collectively evaluated for impairment  $6,752,000   $6,043,000   $6,752,000   $6,043,000   $6,752,000 
                          
Financing receivables:                         
Balance at end of period  $625,624,000   $601,469,000   $625,624,000   $601,469,000   $618,006,000 
Ending balance, individually evaluated for impairment  $34,167,000   $564,000   $34,167,000   $564,000   $16,357,000 
Ending balance, collectively evaluated for impairment  $591,457,000   $600,905,000   $591,457,000   $600,905,000   $601,649,000 

 

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We have adopted the provisions of ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In accordance with ASU 2011-02, the restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. As of September 30, 2015 and December 31, 2014, we have no loan modifications that are classified as troubled debt restructurings.

 

E. Lot Inventory

 

Lot inventory consists of finished single-family residential lots purchased by the UDF IV LB Entities from third-party builders. The following table summarizes the purchase and sale activity associated with these lots for the periods indicated.

 

   For the Nine Months Ended September 30, 
   2015   2014 
Lot inventory, beginning of period  $10,621,000   $8,237,000 
Purchases of lots   -    12,217,000 
Sales of lots   (10,621,000)   (6,864,000)
Lot inventory, end of period  $-   $13,590,000 

 

F. Notes Payable and Lines of Credit

 

In connection with the credit facilities described below, we have agreed to pay Debt Financing Fees to the Advisor. See Note I – Related Party Transactions, for further discussion of fees paid to related parties.

 

Notes Payable

 

Waterfall 4 Loan

 

On July 2, 2014, we entered into a loan agreement (as amended, the “Waterfall 4 Loan”) with Waterfall Finance 4, LLC (“Waterfall 4”) for a $35 million term loan. As of September 30, 2015, the loan bears interest at 10.0% and was scheduled to mature on October 14, 2015, but could be extended pursuant to the terms of the Waterfall 4 Modification Documents described below. Effective January 20, 2015, Waterfall 4 assigned its interest in the Waterfall 4 Loan to Waterfall Eden Master Fund, Ltd., Waterfall Sandstone Fund, L.P. and HEDCO ABS Limited (collectively, the “Waterfall 4 Assignees”). At such time, the Trust began making required interest payments to the Waterfall 4 Assignees in proportion to their respective interests in the Waterfall 4 Loan. As of September 30, 2015, the Trust is in compliance with all financial covenants associated with the Waterfall 4 Loan. The Waterfall 4 Loan is secured by a first priority lien on the mortgage loans and other assets of the Trust. On October 12, 2015, the Trust notified the Waterfall 4 Assignees that it had elected to extend the Waterfall 4 Loan by one month pursuant to the terms of the Waterfall 4 Modification Documents described below, resulting in an extension of the maturity date of the Waterfall 4 Loan to November 14, 2015.

 

On July 23, 2015, the Trust and the Waterfall 4 Assignees entered into a Loan Modification Agreement and an Amended and Restated Promissory Note (collectively, the “Waterfall 4 Modification Documents”) which extended the maturity date of the Waterfall 4 Loan from July 2, 2015 to October 14, 2015. Pursuant to the Waterfall 4 Modification Documents, the Trust may, at its option, (i) extend the maturity date of the loan on a monthly basis for up to an additional three months or (ii) extend the term of the loan until October 14, 2016, provided that the Trust is in compliance with the financial covenants of the loan agreement. All accrued and unpaid interest is payable on the fifth day of each calendar month during the term or any extended term of the Waterfall 4 Loan. If the Trust extends the loan to October 14, 2016, the Trust is required to make monthly principal payments in the amount of $2,916,667 on the fifth day of each calendar month commencing November 5, 2015, and the outstanding principal balance of the loan together with all accrued interest is due and payable on October 14, 2016. If the Trust elects each of the three monthly extensions, the outstanding principal balance of the loan together with all unpaid accrued interest is due and payable on January 14, 2016; however, the Trust is required to prepay the loan in full if a qualified financing transaction occurs during the period from October 14, 2015 through January 14, 2016. A qualified financing transaction is defined as one or more series of financing transactions in which the Trust raises gross proceeds of not less than $50 million pursuant to the issuance of debt or equity securities; provided that such securities are issued on terms reasonably satisfactory to the Waterfall 4 Assignees in their sole discretion. In addition, the Trust was required to prepay the Waterfall 4 Loan if a qualified financing transaction occurred prior to October 14, 2015; however, the Trust was not otherwise permitted to prepay the loan prior to October 14, 2015. The Trust did not enter into any qualified financing transactions prior to October 15, 2015. In consideration of the Waterfall 4 Assignees entering into the Loan Modification Agreement, the Trust paid the Waterfall 4 Assignees a $175,000 amendment fee. 

 

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Waterfall 3 Loan

 

On October 14, 2014, we entered into a loan agreement (as amended, the “Waterfall 3 Loan”) with Waterfall Finance 3, LLC (“Waterfall 3”) for a $15 million term loan. As of September 30, 2015, the loan bears interest at 10.0% and was scheduled to mature on October 14, 2015, but could be extended pursuant to the terms of the Waterfall 3 Modification Documents described below. Effective June 1, 2015, Waterfall 3 assigned its interest in the Waterfall 3 Loan to Waterfall Eden Master Fund, Ltd. and Waterfall Sandstone Fund, L.P. (collectively, the “Waterfall 3 Assignees”). At such time, the Trust began making required interest payments to the Waterfall 3 Assignees in proportion to their respective interests in the Waterfall 3 Loan. As of September 30, 2015, the Trust is in compliance with all financial covenants associated with the Waterfall 3 Loan. The Waterfall 3 Loan is secured by a first priority lien on the mortgage loans and other assets of the Trust. On October 12, 2015, the Trust notified the Waterfall 3 Assignees that it had elected to extend the Waterfall 3 Loan by one month pursuant to the terms of the Waterfall 3 Modification Documents described below, resulting in an extension of the maturity date of the Waterfall 3 Loan to November 14, 2015.

 

On July 23, 2015, the Trust and the Waterfall 3 Assignees entered into a Loan Modification Agreement and an Amended and Restated Promissory Note (collectively, the “Waterfall 3 Modification Documents”), pursuant to which the Trust may, at its option, (i) extend the maturity date of the loan on a monthly basis for up to an additional three months or (ii) extend the term of the loan until October 14, 2016, provided that the Trust is in compliance with the financial covenants of the loan agreement. All accrued and unpaid interest is payable on the fifth day of each calendar month during the term or any extended term of the Waterfall 3 Loan. If the Trust extends the loan to October 14, 2016, the Trust is required to make monthly principal payments in the amount of $1,250,000 on the fifth day of each calendar month commencing November 5, 2015, and the outstanding principal balance of the loan together with all accrued interest is due and payable on October 14, 2016. If the Trust elects each of the three monthly extensions, the outstanding principal balance of the loan together with all unpaid accrued interest is due and payable on January 14, 2016; however, the Trust is required to prepay the loan in full if a qualified financing transaction occurs during the period from October 14, 2015 through January 14, 2016. A qualified financing transaction is defined as one or more series of financing transactions in which the Trust raises gross proceeds of not less than $50 million pursuant to the issuance of debt or equity securities; provided that such securities are issued on terms reasonably satisfactory to the Waterfall 3 Assignees in their sole discretion. In addition, the Trust was required to prepay the Waterfall 3 Loan if a qualified financing transaction occurred prior to October 14, 2015; however, the Trust was not otherwise permitted to prepay the loan prior to October 14, 2015. The Trust did not enter into any qualified financing transactions prior to October 15, 2015. In consideration of the Waterfall 3 Assignees entering into the Loan Modification Agreement, the Trust paid the Waterfall 3 Assignees a $75,000 amendment fee.

 

Lines of Credit

 

UDF IV HF CTB Revolver

 

On May 19, 2010, UDF IV HF entered into a revolving line of credit (as amended, the “UDF IV HF CTB Revolver”) with Community Trust Bank of Texas (“CTB”) with a maximum principal amount of $30.0 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 4.25%. Pursuant to a modification agreement entered into effective as of July 30, 2015, the maturity date of the UDF IV HF CTB Revolver was extended to July 30, 2016 and, on a quarterly basis, UDF IV HF agreed to pay an unused line fee to CTB of 0.25% per annum on the average daily unused portion of the $30.0 million loan commitment. The UDF IV HF CTB Revolver is guaranteed by us and by United Development Funding III, L.P. (“UDF III”), an affiliated and publicly registered Delaware limited partnership. UMTH LD, our asset manager, is the general partner of UDF III. The UDF IV HF CTB Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and construction loans held by UDF IV HF.

 

In consideration for its guarantee of the UDF IV HF CTB Revolver, UDF IV HF agreed to pay UDF III a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance of the UDF IV HF CTB Revolver at the end of each month. See Note I – Related Party Transactions, for further discussion of fees paid to related parties.

 

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CTB Revolver

 

On August 19, 2010, UDF IV AC entered into a revolving line of credit (as amended, the “CTB Revolver”) with CTB with a maximum principal amount of $25.0 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 4.25%. Pursuant to a modification agreement entered into effective as of July 30, 2015, the maturity date of the CTB Revolver was extended to July 30, 2016 and, on a quarterly basis, UDF IV AC agreed to pay an unused line fee to CTB of 0.25% per annum on the average daily unused portion of the $25.0 million loan commitment. The CTB Revolver is guaranteed by us and by UDF III. UMTH LD, our asset manager, is the general partner of UDF III. The CTB Revolver is secured by a first priority collateral assignment and lien on the loans purchased or held by UDF IV AC, and by a first lien security interest in all of UDF IV AC’s assets.

 

In consideration for its guarantee of the CTB Revolver, UDF IV AC agreed to pay UDF III a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance of the CTB Revolver at the end of each month. See Note I – Related Party Transactions, for further discussion of fees paid to related parties.

 

Prosperity Revolver

 

On December 14, 2010, UDF IV FII obtained a revolving credit facility (as amended, the “Prosperity Revolver”) from F&M Bank and Trust Company (“F&M”) in the maximum principal amount of $15.0 million at September 30, 2015. F&M was subsequently acquired by Prosperity Bancshares, Inc. (“Prosperity”). As of September 30, 2015, the loan bears interest at 5.0% and is scheduled to mature on December 14, 2016. The Prosperity Revolver is guaranteed by us and by UDF III. The Prosperity Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and construction loans originated by UDF IV FII.

 

In consideration for its guarantee of the Prosperity Revolver, UDF IV FII agreed to pay UDF III a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance of the Prosperity Revolver at the end of each month. See Note I – Related Party Transactions, for further discussion of fees paid to related parties.

 

Legacy Revolver

 

On November 1, 2011, UDF IV FIII obtained a credit facility (as amended, the “Legacy Revolver”) from LegacyTexas Bank (“Legacy”) in the maximum principal amount of $15.0 million at September 30, 2015. As of December 31, 2014, the interest rate on the Legacy Revolver was equal to the greater of prime plus 1% or 5.5% per annum, provided that the interest rate associated with advances related to development loans was 5.875% until substantial completion of the development project. Pursuant to a modification agreement entered into on January 21, 2015, the maturity date of the Legacy Revolver was extended to January 12, 2017, the interest rate was modified to be the greater of prime plus 1% or 4.5% per annum (4.5% as of September 30, 2015) and there is no longer a different interest rate associated with advances related to development loans. Pursuant to a modification agreement entered into on March 25, 2015, the maximum principal amount of the Legacy Revolver was increased to $15.0 million. The Legacy Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and construction loans held by UDF IV FIII and is guaranteed by us.

 

Veritex Revolver

 

On July 31, 2012, UDF IV Fin IV obtained a revolving credit facility (as amended, the “Veritex Revolver”) from Veritex Community Bank, National Association (“Veritex”) in the maximum principal amount of $14.5 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 4.5% and is scheduled to mature on July 31, 2017. The Veritex Revolver is secured by a first priority collateral assignment and lien on certain finished lot loans funded by UDF IV Fin IV and is guaranteed by us.

 

Affiliated Bank Revolver

 

On July 23, 2013, UDF IV Fin V obtained a revolving credit facility (as amended, the “Affiliated Bank Revolver”) from Affiliated Bank (“Affiliated Bank”) in the maximum principal amount of $7.5 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 5.0% and is scheduled to mature on July 23, 2016. The Affiliated Bank Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and loans held by UDF IV Fin V and is guaranteed by us.

 

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UDF IV Fin VII Legacy Revolver

 

On August 5, 2013, UDF IV Fin VII obtained a revolving credit facility (the “UDF IV Fin VII Legacy Revolver”) from Legacy in the maximum principal amount of $10.0 million at September 30, 2015. As of December 31, 2014, the loan bore interest at 5.0% per annum. Pursuant to a modification agreement entered into effective as of August 5, 2015, the maturity date of the UDF IV Fin VII Legacy Revolver was extended to August 5, 2017 and the interest rate was modified to 4.5% per annum. In connection with this modification, UDF IV Fin VII agreed to pay a supplemental commitment fee of $100,000 to Legacy. The UDF IV Fin VII Legacy Revolver is guaranteed by us and secured by a first priority collateral assignment and lien on certain mortgage notes and loans held by UDF IV Fin VII as well as certain cash deposits.

 

UDF IV Fin VI CTB Revolver

 

On August 19, 2013, UDF IV Fin VI obtained a revolving credit facility (as amended, the “UDF IV Fin VI CTB Revolver”) from CTB in the maximum principal amount of $15.0 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 4.25%. In addition, on a quarterly basis, UDF IV Fin VI is required to pay an unused line fee to CTB of 0.25% per annum on the average daily unused portion of the $15.0 million loan commitment. Pursuant to a modification agreement entered into effective as of August 14, 2015, the maturity date of the UDF IV Fin VI CTB Revolver was extended to July 30, 2016. The UDF IV Fin VI CTB Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and loans held by UDF IV Fin VI as well as certain cash deposits. The UDF IV Fin VI CTB Revolver is guaranteed by us and by UDF III.

 

In consideration for its guarantee of the UDF IV Fin VI CTB Revolver, UDF IV Fin VI agreed to pay UDF III a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance of the UDF IV Fin VI CTB Revolver at the end of each month. See Note I – Related Party Transactions, for further discussion of fees paid to related parties.

 

Independent Bank Revolver

 

On December 6, 2013, UDF IV Fin VIII obtained a revolving credit facility (the “Independent Bank Revolver”) from Independent Bank (“Independent Bank”) in the maximum principal amount of $15.0 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 4.125% and is scheduled to mature on December 6, 2015. In addition, on a quarterly basis, UDF IV Fin VIII is required to pay an unused line fee to Independent Bank of 0.5% per annum on the average daily unused portion of the $15.0 million loan commitment. The Independent Bank Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and loans held by UDF IV Fin VIII and is guaranteed by us.

 

Capital Bank Revolver

 

On December 11, 2014, UDF IV Fin IX obtained a revolving credit facility (the “Capital Bank Revolver”) from Capital Bank (“Capital Bank”) in the maximum principal amount of $8.0 million at September 30, 2015. As of September 30, 2015, the loan bears interest at 4.125% and is scheduled to mature on December 11, 2018. The Capital Bank Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and loans held by UDF IV Fin IX and is guaranteed by us.

 

AMB Revolver 

 

On June 24, 2015, UDF IV Fin X obtained a revolving credit facility from American Momentum Bank (“AMB”) in the maximum principal amount of $15.0 million pursuant to a loan agreement (the “AMB Revolver”). The interest rate under the AMB Revolver is equal to the greater of prime plus 1.25% or 4.5% per annum (4.5% at September 30, 2015). Accrued interest on the outstanding principal amount of the AMB Revolver is payable monthly. The AMB Revolver matures and becomes due and payable in full on June 24, 2018. Proceeds from the revolver will be used to fund our obligations under development loans and finished lot loans that have been approved by AMB. The AMB Revolver is secured by a first priority collateral assignment and lien on certain mortgage notes and loans held by UDF IV Fin X and is guaranteed by us.

 

In connection with the AMB Revolver, UDF IV Fin X agreed to pay an origination fee of $150,000 to AMB.

 

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Summary Information

 

The chart below summarizes the approximate outstanding balance of our notes payable and each of our lines of credit as of the date indicated:

 

Facility  September 30, 2015   December 31, 2014 
Waterfall 4 Loan  $35,000,000   $35,000,000 
Waterfall 3 Loan   15,000,000    15,000,000 
UDF IV HF CTB Revolver   16,848,000    19,290,000 
CTB Revolver   21,659,000    19,826,000 
Prosperity Revolver   11,757,000    14,512,000 
Legacy Revolver   4,834,000    5,000,000 
Veritex Revolver   10,274,000    13,064,000 
Affiliated Bank Revolver   7,500,000    7,500,000 
UDF IV Fin VII Legacy Revolver   9,299,000    6,028,000 
UDF IV Fin VI CTB Revolver   13,744,000    13,560,000 
Independent Bank Revolver   13,816,000    13,756,000 
Capital Bank Revolver   8,000,000    7,702,000 
AMB Revolver   3,175,000    - 
Total  $170,906,000   $170,238,000 

 

G. Commitments and Contingencies

 

Litigation

 

In the ordinary course of business, the Trust may become subject to litigation or claims. There are no material pending or threatened legal proceedings known to be contemplated against the Trust.

 

Off-Balance Sheet Arrangements

 

From time to time, we enter into guarantees of debtor’s borrowings and provide credit enhancements for the benefit of senior lenders in connection with our debtors and investments in partnerships (collectively referred to as “guarantees”), and account for such guarantees in accordance with FASB ASC 460-10, Guarantees. Guarantees generally have fixed expiration dates or other termination clauses and may require payment of a fee by the debtor. A guarantee involves, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the instrument is represented by the contractual notional amount of the guarantee.

 

Related Party Guarantees

 

A majority of our trustees (including a majority of our independent trustees) who are not otherwise interested in these transactions have approved the following related party guarantees as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

 

In connection with the funding of some of our organization costs, on June 26, 2009, UMTH LD, our asset manager, entered into a $6.3 million line of credit (as amended, the “UMTH LD CTB LOC”) with CTB. The Trust has agreed to guaranty all obligations under the UMTH LD CTB LOC. As of September 30, 2015, the UMTH LD CTB LOC is scheduled to mature on December 26, 2018. As of September 30, 2015 and December 31, 2014, the outstanding balance on the line of credit was $3.3 million and $4.0 million, respectively.

 

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Effective December 30, 2011, we entered into a Guaranty of Payment and Guaranty of Completion (collectively, the “Stoneleigh Guaranty”) for the benefit of Babson Mezzanine Realty Investors II, L.P. (“Babson”) as agent for a group of lenders pursuant to which we guaranteed all amounts due associated with a $25.0 million construction loan agreement (the “Stoneleigh Construction Loan”) entered into between Maple Wolf Stoneleigh, LLC, an affiliated Delaware limited liability company (“Stoneleigh”), and Babson. United Development Funding Land Opportunity Fund, L.P., an affiliated Delaware limited partnership (“UDF LOF”), owns a 75% interest in Stoneleigh. Our asset manager, UMTH LD, also serves as the asset manager of UDF LOF. The general partner of our Advisor also serves as the general partner of UMTH LD. UMTH LD controls 100% of the partnership interests of the general partner of UDF LOF. In consideration of us entering into the Stoneleigh Guaranty, we entered into a letter agreement with Stoneleigh which provided for Stoneleigh to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the Stoneleigh Construction Loan at the end of each month. On October 1, 2014, Stoneleigh refinanced the remaining balance on the Stoneleigh Construction Loan with a new lender and we were released from our guaranty.

 

Effective July 22, 2013, we entered into a guaranty agreement (the “URHF Guaranty”) pursuant to which we guaranteed all amounts due associated with a $15.0 million revolving credit facility (the “URHF Southwest Loan”) entered into between United Residential Home Finance, L.P. (“URHF”), an affiliated Delaware limited partnership, and Southwest Bank (“Southwest”). Our Advisor also serves as the advisor for United Mortgage Trust (“UMT”), a Maryland real estate investment trust, which owns 100% of the interests in URHF. As of September 30, 2015, the URHF Southwest Loan is scheduled to mature on July 22, 2016. In consideration of us entering into the URHF Guaranty, we entered into a letter agreement with URHF which provides for URHF to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the URHF Southwest Loan at the end of each month. As of September 30, 2015 and December 31, 2014, approximately $2.3 million and $5.0 million, respectively, was outstanding under the URHF Southwest Loan.

 

Effective July 18, 2014, we entered into a guaranty agreement (the “Rowe Lane Guaranty”) pursuant to which we guaranteed all amounts due associated with a $6.0 million revolving credit facility (the “RL Commerce Bank Loan”) entered into between Rowe Lane 285, L.P., an affiliated Texas limited partnership (“Rowe Lane”), and Commerce National Bank (“Commerce Bank”). Rowe Lane is a wholly-owned subsidiary of United Development Funding, L.P., a Delaware limited partnership (“UDF I”). The general partner of our Advisor is the general partner of UMTH LD, our asset manager, and UMTH LD also serves as the asset manager of UDF I. As of September 30, 2015, the RL Commerce Bank Loan is scheduled to mature on July 18, 2018. In consideration of us entering into the Rowe Lane Guaranty, we entered into a letter agreement with Rowe Lane which provides for Rowe Lane to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the RL Commerce Bank Loan at the end of each month. As of September 30, 2015 and December 31, 2014, approximately $5.0 million and $3.3 million, respectively, was outstanding under the RL Commerce Bank Loan.

 

Effective August 29, 2014, we entered into a credit enhancement in the form of a guarantee (the “BRHG TX-I Guaranty”) pursuant to which we guaranteed all amounts due associated with a $25.0 million loan (the “BRHG Sovereign Loan”) entered into between BRHG TX-I, LLC, an affiliated Delaware limited liability company (“BRHG TX-I”), and Sovereign Bank (“Sovereign”) in connection with BRHG TX-I’s acquisition of Scott Felder Homes. BRHG TX-I is a wholly-owned subsidiary of BR Homebuilding Group, L.P., a Delaware limited partnership (“BR Homebuilding”). John R. (“Bobby”) Ray, a former trustee of UDF IV, Hollis Greenlaw, our Chief Executive Officer and a trustee of UDF IV, and Todd Etter, Chairman and partner of UMT Holdings, L.P. (“UMT Holdings”), each own approximately 25% of the common equity of BR Homebuilding. UMT Holdings owns all of the limited partnership interests of UMTH LD, our asset manager. Strategic decisions for BR Homebuilding are made by BR Homebuilding Group Gen Par, LLC (“BRHG Gen Par”). Mr. Ray and Mr. Etter are two of the three managers of BRHG Gen Par, and Mr. Etter has the ability to appoint the third manager. The BRHG TX-I Guaranty was approved by a majority of our independent trustees on August 26, 2014. Pursuant to an extension agreement entered into on August 29, 2015, the BRHG TX-I Sovereign Loan is scheduled to mature on August 29, 2020. The BRHG TX-I Sovereign Loan is secured by a pledge of all of BR Homebuilding’s interests in BRHG TX-I. In consideration of us entering into the BRHG TX-I Guaranty, we entered into a letter agreement with BRHG TX-I which provides for BRHG TX-I to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the BRHG TX-I Sovereign Loan at the end of each month. As of September 30, 2015 and December 31, 2014, approximately $24.6 million and $25.0 million, respectively, was outstanding under the BRHG TX-I Sovereign Loan.

 

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Effective May 13, 2015, we entered into a credit enhancement in the form of a guarantee (the “SFH DFW Guaranty”) pursuant to which we guaranteed all amounts due associated with a $3.0 million loan (the “SFH DFW Loan”) entered into between SFH DFW, LLC, an affiliated Delaware limited liability company (“SFH DFW”), and American National Bank of Texas (“ANB”) to finance SFH DFW’s acquisition of finished lots and construction of single-family residences. SFH DFW is a wholly-owned subsidiary of BRHG TX-II, LLC, an affiliated Delaware limited liability (“BRHG TX-II”). BRHG TX-II is a wholly-owned subsidiary of BR Homebuilding. John R. (“Bobby”) Ray, a former trustee of UDF IV, Hollis Greenlaw, our Chief Executive Officer and a trustee of UDF IV, and Todd Etter, Chairman and partner of UMT Holdings, L.P. (“UMT Holdings”), each own approximately 25% of the common equity of BR Homebuilding. UMT Holdings owns all of the limited partnership interests of UMTH LD, our asset manager. Strategic decisions for BR Homebuilding are made by BRHG Gen Par. Mr. Ray and Mr. Etter are two of the three managers of BRHG Gen Par, and Mr. Etter has the ability to appoint the third manager. The SFH DFW Guaranty was approved by a majority of our independent trustees. As of September 30, 2015, the SFH DFW Loan is scheduled to mature on May 13, 2016. The SFH DFW Loan is secured by a first lien deed of trust on the lots and homes financed by the loan. In consideration of us entering into the SFH DFW Guaranty, we entered into a letter agreement with SFH DFW which provides for SFH DFW to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the SFH DFW Loan at the end of each month. As of September 30, 2015, approximately $733,000 was outstanding under the SFH DFW Loan.

 

Effective May 21, 2015, we entered into a credit enhancement in the form of a guarantee (the “Felder CND Guaranty”) pursuant to which we guaranteed all amounts due associated with a $6.4 million loan (the “Felder CND Loan”) entered into between Felder CND, LLC, an affiliated Delaware limited liability company (“Felder CND”), and International Bank of Commerce (“IBC”) to finance Felder CND’s acquisition of a 132.594 acre tract in Kyle, Texas and development of the tract into 332 finished lots and once commercial parcel. Felder CND is a joint venture between Scott Felder Homes and David Weekley Homes. Scott Felder Homes is a wholly-owned subsidiary of BRHG TX-I and BRHG TX-I is a wholly-owned subsidiary of BR Homebuilding. John R. (“Bobby”) Ray, a former trustee of UDF IV, Hollis Greenlaw, our Chief Executive Officer and a trustee of UDF IV, and Todd Etter, Chairman and partner of UMT Holdings, each own approximately 25% of the common equity of BR Homebuilding. UMT Holdings owns all of the limited partnership interests of UMTH LD, our asset manager. Strategic decisions for BR Homebuilding are made by BRHG Gen Par. Mr. Ray and Mr. Etter are two of the three managers of BRHG Gen Par, and Mr. Etter has the ability to appoint the third manager. The Felder CND Guaranty was approved by a majority of our independent trustees. As of September 30, 2015, the Felder CND Loan is scheduled to mature on May 21, 2018. The Felder CND Loan is secured by a second lien deed of trust on acreage acquired. In consideration of us entering into the Felder CND Guaranty, we entered into a letter agreement with Felder CND which provides for Felder CND to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the Felder CND Loan at the end of each month. As of September 30, 2015, approximately $1.1 million was outstanding under the Felder CND Loan.

 

The following table represents the approximate amount included in commitment fee income – related parties for the periods indicated in connection with credit enhancement fees associated with the guaranties described above.

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Facility  2015   2014   2015   2014 
Stoneleigh Guaranty  $-   $10,000   $-   $36,000 
URHF Guaranty   9,000    12,000    35,000    24,000 
Rowe Lane Guaranty   13,000    8,000    33,000    8,000 
BRHG TX-I Guaranty   62,000    21,000    187,000    21,000 
SFH DFW Guaranty   2,000    -    2,000    - 
Felder CND Guaranty   3,000    -    4,000    - 
Total  $89,000   $51,000   $261,000   $89,000 

 

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As of September 30, 2015 and December 31, 2014, approximately $325,000 and $104,000, respectively, is included in accrued receivable – related parties in connection with credit enhancement fees associated with the guaranties described above.

 

As of September 30, 2015, including the related party guarantees described above, we had 12 outstanding repayment guarantees with total credit risk to us of approximately $82.5 million, of which approximately $50.2 million had been borrowed against by the debtor. As of December 31, 2014, including the related party guarantees described above, we had 8 outstanding repayment guarantees with total credit risk to us of approximately $59.7 million, of which approximately $43.1 million had been borrowed against by the debtor.

 

H. Economic Dependency

 

Under various agreements, the Trust has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Trust, including asset management services, asset acquisition and disposition decisions, as well as other administrative responsibilities for the Trust. As a result of these relationships, the Trust is dependent upon the Advisor and its affiliates. In the event that these entities were unable to provide the Trust with the respective services, the Trust would be required to find alternative providers of these services.

 

I. Related Party Transactions

 

Guarantees

 

From time to time, we enter into guarantees of our affiliates’ borrowings. For further discussion of related party guarantees, see Note G – Commitments and Contingencies.

 

Management Fees

 

Prior to the Listing, we incurred monthly Advisory Fees payable to our Advisor. Subsequent to the Listing, we incur monthly Base Management Fees and potentially quarterly Incentive Management Fees payable to our Advisor. The Advisory Fees, Base Management Fees and Incentive Management Fees (collectively, “Management Fees”) are discussed further in Note B above. As of September 30, 2015 and December 31, 2014, approximately $1.3 million and $1.2 million, respectively, is included in accrued liabilities – related parties associated with Management Fees payable to our Advisor. See tables within this note in Summary of Related Party Payments and Expenses for details of payments and expenses associated with related party Management Fees.

 

Acquisition and Origination Fees

 

Prior to the Listing on June 4, 2014, we incurred Acquisition and Origination Fees equal to 3% of the net amount available for investment in secured loans and other real estate assets (after payment of selling commissions, dealer manager fees and organization costs) (as discussed in Note B). These fees, including estimated fees on the entire registered amount of our Secondary DRIP Offering when it was established, were accrued and expensed as we entered into new loan commitments. Acquisition and Origination Fees were paid to UMTH LD, our asset manager, as we raised capital through our Primary Offering, Primary DRIP Offering and Secondary DRIP Offering. The general partner of our Advisor is also the general partner of UMTH LD.

 

In connection with our Listing on June 4, 2014, we ceased offering common shares of beneficial interest pursuant to our Secondary DRIP Offering and concurrently reversed approximately $3.2 million in unpaid Acquisition and Origination Fees that remained in accrued liabilities – related parties.  Since we ceased offering common shares of beneficial interest pursuant to our Secondary DRIP Offering, the Acquisition and Origination Fees which had previously been accrued and expensed related to estimated Secondary DRIP Offering proceeds will not be paid.

 

In accordance with the terms of the Advisory Agreement entered into on May 29, 2014, we do not pay Acquisition and Origination Fees to our Advisor. Therefore, there were no Acquisition and Origination Fees payable to UMTH LD as of September 30, 2015 or December 31, 2014. See tables within this note in Summary of Related Party Payments and Expenses for details of payments and expenses associated with related party Acquisition and Origination Fees.

 

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Debt Financing Fees

 

Pursuant to the origination of any line of credit or other debt financing, we pay Debt Financing Fees to our Advisor, as described in Note B. These Debt Financing Fees are expensed on a straight line basis over the life of the financing arrangement.

 

The following table represents the approximate amount included in general and administrative – related parties expense for the period indicated associated with Debt Financing Fees paid to our Advisor in connection with our notes payable and lines of credit:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Facility  2015   2014   2015   2014 
UDF IV HF CTB Revolver  $7,000   $56,000   $120,000   $93,000 
CTB Revolver   12,000    15,000    53,000    24,000 
Prosperity Revolver   5,000    16,000    14,000    49,000 
Legacy Revolver   8,000    -    21,000    - 
Veritex Revolver   10,000    13,000    36,000    26,000 
Affiliated Bank Loan   8,000    10,000    29,000    25,000 
UDF IV Fin VII Legacy Revolver   7,000    17,000    45,000    42,000 
UDF IV Fin VI CTB Revolver   17,000    38,000    98,000    100,000 
Independent Bank Revolver   28,000    19,000    84,000    56,000 
Waterfall 4 Loan   44,000    44,000    131,000    44,000 
Waterfall 3 Loan   19,000    -    56,000    - 
Capital Bank Revolver   3,000    -    7,000    - 
AMB Revolver   6,000    -    8,000    - 
Total  $174,000   $228,000   $702,000   $459,000 

 

As of both September 30, 2015 and December 31, 2014, there were no unpaid Debt Financing Fees included in accrued liabilities – related parties.

 

Credit Enhancement Fees

 

We and our wholly-owned subsidiaries will occasionally enter into financing arrangements that require guarantees from entities affiliated with us. These guarantees require us to pay fees (“Credit Enhancement Fees”) to our affiliated entities as consideration for their guarantees. These Credit Enhancement Fees are expensed as incurred or recorded as a prepaid asset and amortized, based on the terms of the guarantee agreements.

 

The following table represents the approximate amount included in general and administrative – related parties expense for the periods indicated associated with Credit Enhancement Fees paid to UDF III for its guarantees of our lines of credit, as discussed in Note F. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD is the general partner of UDF III. UDF III has received an opinion from Jackson Claborn, Inc., an independent appraiser, that these credit enhancements are fair and at least as reasonable as credit enhancements with unaffiliated entities in similar circumstances.

 

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   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Facility  2015   2014   2015   2014 
UDF IV HF CTB Revolver  $44,000   $42,000   $150,000   $97,000 
CTB Revolver   53,000    47,000    150,000    119,000 
Prosperity Revolver   31,000    34,000    99,000    53,000 
UDF IV Fin VI CTB Revolver   33,000    26,000    99,000    48,000 
Total  $161,000   $149,000   $498,000   $317,000 

 

As of September 30, 2015 and December 31, 2014, approximately $53,000 and $56,000, respectively, is included in accrued liabilities – related parties associated with Credit Enhancement Fees payable to our Advisor or its affiliates.

 

Advisor Expense Reimbursement

 

See tables within this note in Summary of Related Party Payments and Expenses for details of payments and expenses associated with the Advisor Expense Reimbursement. As of both September 30, 2015 and December 31, 2014, approximately $2,000 is included in accrued liabilities – related parties associated with the Advisor Expense Reimbursement.

 

Summary of Related Party Payments and Expenses

 

The table below summarizes the approximate payments to related parties for the periods indicated:

 

      For the Nine Months Ended September 30,   For the Year Ended 
Payee  Purpose  2015   2014   December 31, 2014 
UMTH GS                          
   Management Fees  $7,351,000    88%  $7,422,000    88%  $9,751,000    87%
   Debt Financing Fees   480,000    6%   601,000    7%   754,000    7%
   Advisor Expense Reimbursement   18,000    *    4,000    *    12,000    * 
                                  
UMTH LD                                 
   Acquisition and Origination Fees   -    -    259,000    3%   259,000    2%
                                  
UDF III                                 
   Credit Enhancement Fees   501,000    6%   193,000    2%   416,000    4%
                                  
Total Payments     $8,350,000    100%  $8,479,000    100%  $11,192,000    100%

 

* Less than 1%

 

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The table below summarizes the approximate expenses associated with related parties for the periods indicated:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
Purpose  2015   2014   2015   2014 
                                 
Management Fees  $2,393,000    100%  $2,325,000    100%  $7,479,000    100%  $7,629,000    100%
                                         
Total Management Fees – related party  $2,393,000    100%  $2,325,000    100%  $7,479,000    100%  $7,629,000    100%
                                         
                                         
Amortization of Debt Financing Fees  $174,000    51%  $227,000    60%  $702,000    58%  $459,000    (33)%
                                         
Acquisition and Origination Fees (1)   -    -    -    -    -    -    (2,160,000)   157%
                                         
Credit Enhancement Fees   161,000    47%   149,000    39%   498,000    41%   317,000    (23)%
                                         
Advisor Expense Reimbursement   6,000    2%   6,000    1%   18,000    1%   8,000    (1)%
                                         
Total General and administrative – related parties  $341,000    100%  $382,000    100%  $1,218,000    100%  $(1,376,000)   100%

 

(1) Includes approximately $3.2 million in Acquisition and Origination Fees that were reversed in June 2014 associated with estimated Secondary DRIP Offering proceeds. In connection with our Listing, we ceased offering common shares of beneficial interest pursuant to our Secondary DRIP Offering.

 

Loan Participation Interest – Related Parties

 

A majority of our trustees (including a majority of our independent trustees) who are not otherwise interested in these transactions have approved the following loan participation interest – related parties agreements as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

 

Buffington Participation

 

On December 18, 2009, we entered into a participation agreement (the “Buffington Participation”) with UMT Home Finance, LP (“UMTHF”), an affiliated Delaware limited partnership, pursuant to which we purchased a participation interest in UMTHF’s construction loan to Buffington Texas Classic Homes, LLC (“Buffington Classic”), an affiliated Texas limited liability company. Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in UMTHF. UMTH LD has a minority limited partnership interest in Buffington Homebuilding Group, Ltd., which is the parent of Buffington Classic. The Buffington Participation matured and was not renewed on October 28, 2014.

 

Buffington Classic Participation

 

On March 24, 2010, we entered into a participation agreement (the “Buffington Classic Participation”) with UDF III pursuant to which we purchased a 100% participation interest in UDF III’s lot inventory line of credit loan facility with Buffington Classic (the “Buffington Classic Line”). The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD is the general partner of UDF III, and UMTH LD has a minority limited partnership interest in Buffington Homebuilding Group, Ltd., which is the parent of Buffington Classic. We received payment in full for the Buffington Classic Participation on August 8, 2014.

 

TR Finished Lot Participation

 

On June 30, 2010, we purchased a participation interest (the “TR Finished Lot Participation”) in a finished lot loan (the “Travis Ranch II Finished Lot Loan”) made by UDF III to CTMGT Travis Ranch II, LLC, an unaffiliated Texas limited liability company. Our asset manager, UMTH LD, is also the general partner of UDF III. On December 17, 2014, UDF III sold its interest in the Travis Ranch II Finished Lot Loan to an unrelated third party and our participation in this loan was paid in full.

 

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TR Paper Lot Participation

 

On June 30, 2010, we purchased a participation interest (the “TR Paper Lot Participation”) in a paper lot loan (the “Travis Ranch Paper Lot Loan”) from UDF III to CTMGT Travis Ranch, LLC, an unaffiliated Texas limited liability company. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD is the general partner of UDF III. The TR Paper Lot Participation is due and payable in full on January 28, 2016.

 

Pine Trace Participation

 

On May 31, 2012, we entered into a participation agreement (the “Pine Trace Participation”) with UMT Home Finance III, L.P. (“UMTHFIII”), an affiliated Delaware limited partnership, pursuant to which we purchased a participation interest in UMTHFIII’s loan (the “Pine Trace Loan”) to Pine Trace Village, LLC an unaffiliated Texas limited liability company (“Pine Trace”). Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in UMTHFIII. Effective March 29, 2015, the Pine Trace Loan was amended, resulting in a current maturity date of March 29, 2016. The Pine Trace Participation has also been extended to March 29, 2016 in connection with this amendment. In determining whether to extend this participation, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

 

Northpointe Participation

 

On June 11, 2012, we entered into a participation agreement (the “Northpointe Participation”) with UDF III pursuant to which we purchased a participation interest in UDF III’s loan (the “Northpointe Loan”) to UDF Northpointe, LLC, an unaffiliated Texas limited liability company (“Northpointe”). The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD is the general partner of UDF III. Effective June 4, 2015, the Northpointe Loan was amended, resulting in a current maturity date of June 4, 2016. The Northpointe Participation has also been extended to June 4, 2016 in connection with this amendment. In determining whether to extend this participation, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

 

Northpointe II Participation

 

On May 2, 2013, we entered into a participation agreement (the “Northpointe II Participation”) with UDF III pursuant to which we purchased a participation interest in UDF III’s loan (the “Northpointe II Loan”) to UDF Northpointe II, LLC (“Northpointe II”), an affiliated Delaware limited partnership. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD is the general partner of UDF III. The Northpointe II Participation is due and payable in full on December 28, 2015.

 

UMTHF Megatel Participation

 

On October 3, 2013, we entered into a participation agreement (the “UMTHF Megatel Participation”) with UMTHF pursuant to which we purchased a participation interest in UMTHF’s construction loan (the “UMTHF Megatel Loan”) to Megatel Homes II, LLC (“Megatel”). Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in UMTHF. The UMTHF Megatel Participation matures and becomes due and payable in full as the final interim loan financed under the UMTHF Megatel Loan matures. As of September 30, 2015, the final interim loan financed under the UMTHF Megatel Loan is scheduled to mature on November 14, 2015.

 

URHF Buckingham Participation

 

On December 16, 2013, we entered into a participation agreement (the “URHF Buckingham Participation”) with URHF pursuant to which we purchased a participation interest in URHF’s $4.9 million loan (the “URHF Buckingham Loan”) to CTMGT Buckingham, LLC (“Buckingham”), a Texas limited liability company. Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in URHF. The URHF Buckingham Participation is due and payable in full on June 28, 2016.

 

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URHF Bratton Hill Participation

 

On December 16, 2013, we entered into a participation agreement (the “URHF Bratton Hill Participation”) with URHF pursuant to which we purchased a participation interest in URHF’s $3.0 million loan (the “URHF Bratton Hill Loan”) to BLD Bratton Hill, LLC (“Bratton Hill”), a Texas limited liability company. Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in URHF. The URHF Bratton Hill Participation is due and payable in full on July 31, 2016.

 

URHF Glenmore Participation

 

On May 6, 2014, we entered into a participation agreement (the “URHF Glenmore Participation”) with URHF pursuant to which we purchased a participation interest in URHF’s $4.2 million loan (the “URHF Glenmore Loan”) to CADG Glenmore, LLC (“Glenmore”), an unaffiliated Texas limited liability company. Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in URHF. Effective April 10, 2015, the URHF Glenmore Loan was amended, resulting in a maturity date of October 10, 2015. The URHF Glenmore Participation was also extended to October 10, 2015 in connection with this amendment. In determining whether to extend this participation, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. On May 15, 2015, we received payment in full for the URHF Glenmore Participation.

 

URHF Gateway Participation

 

On May 6, 2014, we entered into a participation agreement (the “URHF Gateway Participation”) with URHF pursuant to which we purchased a participation interest in URHF’s $7.6 million loan (the “URHF Gateway Loan”) to CADG Gateway, LLC (“Gateway”), a Texas limited liability company. Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in URHF. On September 30, 2015, URHF assigned the URHF Gateway loan to UDF IV Fin VIII and the URHF Gateway Participation was paid in full.

 

UMTHF Mason Park Participation

 

On October 6, 2014, we entered into a participation agreement (the “UMTHF Mason Park Participation”) with UMTHFIII pursuant to which we purchased a participation interest in UMTHFIII’s loan (the “Mason Park Loan”) to Buffington Mason Park, Ltd., an unaffiliated Texas limited partnership (“Mason Park”). Our Advisor also serves as the advisor for UMT, which owns 100% of the interests in UMTHFIII. The UMTHF Mason Park Participation is due and payable in full on April 26, 2016.

 

Summary Information

 

The chart below summarizes the approximate outstanding balance of each of our loans included in loan participation interest – related parties as of the date indicated:

 

Loan Name  September 30, 2015   December 31, 2014 
Buffington Participation  $-   $- 
Buffington Classic Participation   -    - 
TR Finished Lot Participation   -    - 
TR Paper Lot Participation   17,763,000    15,014,000 
Pine Trace Participation   3,008,000    3,766,000 
Northpointe Participation   1,216,000    1,216,000 
Northpointe II Participation   10,204,000    10,754,000 
UMTHF Megatel Participation   3,065,000    2,095,000 
URHF Buckingham Participation   -    153,000 
URHF Bratton Hill Participation   -    34,000 
URHF Glenmore Participation   -    3,700,000 
URHF Gateway Participation   -    2,349,000 
UMTHF Mason Park Participation   -    1,577,000 
Total  $35,256,000   $40,658,000 

 

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The chart below summarizes the approximate accrued interest included in accrued receivable – related parties associated with each of our loans included in loan participation interest – related parties as of the date indicated:

 

Loan Name  September 30, 2015   December 31, 2014 
Buffington Participation  $-   $- 
Buffington Classic Participation   -    - 
TR Finished Lot Participation   -    - 
TR Paper Lot Participation   51,000    609,000 
Pine Trace Participation   1,000    111,000 
Northpointe Participation   120,000    11,000 
Northpointe II Participation   741,000    14,000 
UMTHF Megatel Participation   1,000    1,000 
URHF Buckingham Participation   -    2,000 
URHF Bratton Hill Participation   -    - 
URHF Glenmore Participation   -    74,000 
URHF Gateway Participation   -    48,000 
UMTHF Mason Park Participation   -    133,000 
Total  $914,000   $1,003,000 

 

The following table summarizes the approximate income included in interest income – related parties associated with each of our loans included in loan participation interest – related parties for the periods indicated:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Loan Name  2015   2014   2015   2014 
Buffington Participation  $-   $-   $-   $122,000 
Buffington Classic Participation   -    1,000    -    20,000 
TR Finished Lot Participation   -    41,000    -    225,000 
TR Paper Lot Participation   596,000    502,000    1,735,000    1,451,000 
Pine Trace Participation   103,000    165,000    317,000    607,000 
Northpointe Participation   37,000    35,000    109,000    124,000 
Northpointe II Participation   309,000    198,000    918,000    414,000 
UMTHF Megatel Participation   126,000    188,000    427,000    408,000 
URHF Buckingham Participation   5,000    2,000    39,000    55,000 
URHF Bratton Hill Participation   -    -    2,000    40,000 
URHF Glenmore Participation   -    126,000    182,000    203,000 
URHF Gateway Participation   82,000    136,000    251,000    221,000 
UMTHF Mason Park Participation   59,000    -    168,000    - 
Total  $1,317,000   $1,394,000   $4,148,000   $3,890,000 

 

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Notes Receivable – Related Parties

 

A majority of our trustees (including a majority of our independent trustees) who are not otherwise interested in these transactions have approved the following notes receivable – related parties agreements as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

 

Buffington Classic CL

 

On April 30, 2010, we entered into a construction loan agreement with Buffington Classic (the “Buffington Classic CL”) through which we agreed to provide an interim construction loan facility to Buffington Classic. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD owns an investment in Buffington Homebuilding Group, Ltd., which is the parent of Buffington Classic. Our obligation to originate loans to Buffington Classic under the Buffington Classic CL terminated and was not renewed on October 28, 2014, at which point there was no outstanding balance.

 

HLL II Highland Farms Loan

 

Effective December 22, 2010, we made a finished lot loan (the “HLL II Highland Farms Loan”) of approximately $1.9 million to HLL II Land Acquisitions of Texas, L.P., an affiliated Texas limited partnership (“HLL II”). HLL II is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. Effective March 22, 2015, we amended the HLL II Highland Farms Loan, resulting in a current maturity date of March 22, 2016. In determining whether to extend this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

 

HLL Hidden Meadows Loan

 

Effective February 17, 2011, we entered into a Loan Agreement providing for a $9.9 million loan (the “HLL Hidden Meadows Loan”) to be made to HLL Land Acquisitions of Texas, L.P., an affiliated Texas limited partnership (“HLL”). HLL is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. Effective June 30, 2015, we modified the HLL Hidden Meadows Loan to increase the loan amount to $14.0 million. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. The HLL Hidden Meadows Loan is due and payable in full on January 21, 2016.

 

In connection with the HLL Hidden Meadows Loan, HLL agreed to pay a $99,000 origination fee to us, which was funded at the closing of the HLL Hidden Meadows Loan. Revenue associated with this origination fee is included in commitment fee income – related parties and is recognized over the life of the loan.

 

Ash Creek Loan

 

Effective April 20, 2011, we entered into a $3.0 million loan agreement (the “Ash Creek Loan”) with UDF Ash Creek, LP (“UDF Ash Creek”), an affiliated Delaware limited partnership. UDF Ash Creek is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. Effective October 20, 2015, we amended the Ash Creek Loan, resulting in a current maturity date of October 20, 2016. In determining whether to extend this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

 

UDF TX Two Loan

 

On September 20, 2012, we entered into a loan purchase agreement with a third party to acquire a loan obligation (the “UDF TX Two Loan”) owing from UDF TX Two, L.P., an affiliated Texas limited partnership (“UDF TX Two”), for approximately $2.9 million. UDF I has a 50% partnership interest in UDF TX Two. Our asset manager, UMTH LD, also serves as the asset manager of UDF I. The general partner of our Advisor is also the general partner of UMTH LD. The UDF TX Two Loan was paid in full on October 9, 2014.

 

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UDF PM Loan

 

Effective October 17, 2012, we entered into a $5.1 million loan agreement (the “UDF PM Loan”) with UDF PM, LLC (“UDF PM”), an affiliated Texas limited liability company. UDF PM is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. Effective June 30, 2015, we modified the UDF PM Loan to increase the loan amount to $6.3 million. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. Effective October 17, 2015, we amended the UDF PM Loan, resulting in a current maturity date of October 17, 2016. In determining whether to extend this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

 

HLL IS Loan

 

Effective November 29, 2012, we entered into a $6.4 million loan agreement (the “HLL IS Loan”) with HLL. HLL is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. The HLL IS Loan was paid in full on July 8, 2015.

 

In connection with the HLL IS Loan, HLL agreed to pay a $64,000 origination fee to us, which was funded at the closing of the HLL IS Loan. Revenue associated with this origination fee is included in commitment fee income – related parties and is recognized over the life of the loan.

 

One KR Loan

 

Effective December 14, 2012, we entered into a $15.3 million loan agreement (the “One KR Loan”) with One KR Venture, L.P., an affiliated Texas limited partnership (“One KR”). One KR is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. Effective April 16, 2015, we modified the One KR Loan to increase the loan amount to $18.7 million. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. The One KR Loan is due and payable in full on June 14, 2016.

 

In connection with the One KR Loan, One KR agreed to pay a $153,000 origination fee to us, which was funded at the closing of the One KR Loan. Revenue associated with this origination fee is included in commitment fee income – related parties and is recognized over the life of the loan.

 

Rowe Lane Loan

 

Effective February 18, 2014, we entered into a $7.5 million loan agreement (the “Rowe Lane Loan”) with Rowe Lane. Rowe Lane is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is the general partner of UMTH LD, our asset manager, and UMTH LD also serves as the asset manager of UDF I. The Rowe Lane Loan matures and becomes due and payable in full on February 18, 2018.

 

In connection with the Rowe Lane Loan, Rowe Lane agreed to pay an origination fee of approximately $75,000 to us, which was funded at the closing of the Rowe Lane Loan. Revenue associated with this origination fee is included in commitment fee income – related parties and is recognized over the life of the loan.

 

BRHG TX-I Loan

 

On August 29, 2014, we entered into an $11.5 million loan (the “BRHG TX-I Loan”) with BRHG TX-I. BRHG TX-I is a wholly-owned subsidiary of BR Homebuilding. John R. (“Bobby”) Ray, a former trustee of UDF IV, Hollis Greenlaw, our Chief Executive Officer and a trustee of UDF IV, and Todd Etter, Chairman and partner of UMTH, each own approximately 25% of the common equity of BR Homebuilding. UMT Holdings owns all of the limited partnership interests of UMTH LD, our asset manager. Strategic decisions for BR Homebuilding are made by BRHG Gen Par. Mr. Ray and Mr. Etter are two of the three managers of BRHG Gen Par, and Mr. Etter has the ability to appoint the third manager. As partial consideration for making the BRHG TX-I Loan, BR Homebuilding has delivered to us a warrant to purchase up to 25 Series A-1 Tracking Units in BR Homebuilding for $11.5 million (the “Series A Warrant”). UDF IV has contributed the Series A Warrant to a taxable REIT subsidiary that is wholly-owned by UDF IV.  As principal is repaid on the BRHG TX-I Loan, the equity interest that can be acquired under the Series A Warrant will be proportionately reduced.  The BRHG TX-I Loan matures and becomes due and payable in full on August 29, 2021.

 

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Stoneleigh Loan

 

Effective October 13, 2014, we entered into a $13.9 million loan agreement (the “Stoneleigh Loan”) with Stoneleigh. UDF LOF owns a 75% interest in Stoneleigh. Our asset manager, UMTH LD, also serves as the asset manager of UDF LOF. The general partner of our Advisor also serves as the general partner of UMTH LD. UMTH LD controls 100% of the partnership interests of the general partner of UDF LOF. The Stoneleigh Loan matures and becomes due and payable in full on October 13, 2017.

 

One KR Venture Loan

 

Effective December 30, 2014, we entered into a $5.3 million loan agreement (the “One KR Venture Loan”) with One KR. One KR is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. The One KR Venture Loan matures and becomes due and payable in full on December 30, 2016.

 

Almeda Crossing Loan

 

Effective May 12, 2015, we entered into a $2.2 million loan agreement (the “Almeda Crossing Loan”) with Almeda Crossing FL-1, LP, a Delaware limited partnership (“Almeda”). Almeda Crossing is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. The Almeda Crossing Loan provides Almeda with up to $2.0 million to acquire and develop 9.8 acres of land into 58 single-family lots. As of September 30, 2015, the Almeda Crossing Loan is secured by a first lien deed of trust recorded against the 9.8 acres of real property located in Harris County, Texas, as well as a promissory note, assignments of certain lot sale contracts and other loan documents. The interest rate under the Almeda Crossing Loan is the lower of 13% per annum, or the highest rate allowed by law. The loan matures and becomes due and payable in full on May 12, 2017. The Almeda Crossing Loan also provides Almeda with an interest reserve of approximately $200,000, pursuant to which we will accrue Almeda’s monthly interest payments and add the unpaid portion of the accrued interest payments to the outstanding principal balance of the loan on the anniversary of the loan origination.

 

BRHG TX-II Loan

 

On August 13, 2015, we entered into a $3.0 million loan (the “BRHG TX-II Loan”) with BRHG TX-II. BRHG TX-II is a wholly-owned subsidiary of BR Homebuilding. John R. (“Bobby”) Ray, a former trustee of UDF IV, Hollis Greenlaw, our Chief Executive Officer and a trustee of UDF IV, and Todd Etter, Chairman and partner of UMT Holdings, each own approximately 25% of the common equity of BR Homebuilding. UMT Holdings owns all of the limited partnership interests of UMTH LD, our asset manager. Strategic decisions for BR Homebuilding are made by BRHG Gen Par. Mr. Ray and Mr. Etter are two of the three managers of BRHG Gen Par, and Mr. Etter has the ability to appoint the third manager. The loan-to-value ratio associated with this loan may exceed 85% at origination due to BRHG TX-II being a start-up company; however, substantial justification to exceed an 85% loan-to-value ratio was approved by our trustees due to the presence of other underwriting criteria, including the Series B Warrant described below. The BRHG TX-II Loan was approved by a majority of our independent trustees on August 7, 2015. The BRHG TX-II Loan bears interest at 13% and is unsecured. As partial consideration for making the BRHG TX-II Loan, BR Homebuilding has delivered to us a warrant to purchase up to 25 Series B-1 Tracking Units in BR Homebuilding for $3.0 million (the “Series B Warrant”). UDF IV has contributed the Series B Warrant to a taxable REIT subsidiary that is wholly-owned by UDF IV.  As principal is repaid on the BRHG TX-II Loan, the equity interest that can be acquired under the Series B Warrant will be proportionately reduced.  The BRHG TX-II Loan matures and becomes due and payable in full on August 13, 2018.

 

SM Place Loan

 

Effective September 22, 2015, we entered into a $7.5 million loan agreement (the “SM Place Loan”) with SM Place FL-1, LP, a Delaware limited partnership (“SM Place”). SM Place is a wholly-owned subsidiary of UDF I. The general partner of our Advisor is also the general partner of UMTH LD, our asset manager. UMTH LD also serves as the asset manager of UDF I. The SM Place Loan provides SM Place with up to $6.3 million to acquire 61.31 acres of land and develop 16.70 acres into 92 single-family lots. As of September 30, 2015, the SM Place Loan is secured by a first lien deed of trust recorded against the 61.31 acres of real property located in Harris County, Texas, as well as a promissory note and other loan documents. The interest rate under the SM Place Loan is the lower of 13% per annum, or the highest rate allowed by law. The loan matures and becomes due and payable in full on September 22, 2018. The SM Place Loan also provides SM Place with an interest reserve of approximately $1.2 million, pursuant to which we will accrue SM Place’s monthly interest payments and add the unpaid portion of the accrued interest payments to the outstanding principal balance of the loan on the anniversary of the loan origination.

 

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Summary Information

 

The chart below summarizes the approximate outstanding balance of each of our loans included in notes receivable – related parties as of the date indicated:

 

Loan Name  September 30, 2015   December 31, 2014 
Buffington Classic CL  $-   $- 
HLL II Highland Farms Loan   1,760,000    1,773,000 
HLL Hidden Meadows Loan   12,653,000    11,317,000 
Ash Creek Loan   1,534,000    1,428,000 
UDF TX Two Loan   -    - 
UDF PM Loan   5,254,000    4,989,000 
HLL IS Loan   -    2,761,000 
One KR Loan   19,050,000    13,669,000 
Rowe Lane Loan   5,079,000    4,879,000 
BRHG TX-I Loan   11,500,000    11,500,000 
Stoneleigh Loan   7,883,000    7,882,000 
One KR Venture Loan   1,413,000    423,000 
Almeda Crossing Loan   824,000    - 
BRHG TX-II Loan   1,198,000    - 
SM Place Loan   1,549,000    - 
Total  $69,697,000   $60,621,000 

  

The chart below summarizes the approximate accrued interest included in accrued receivable – related parties associated with each of our loans included in notes receivable – related parties as of the date indicated:

 

Loan Name  September 30, 2015   December 31, 2014 
Buffington Classic CL  $-   $- 
HLL II Highland Farms Loan   163,000    6,000 
HLL Hidden Meadows Loan   891,000    404,000 
Ash Creek Loan   89,000    8,000 
UDF TX Two Loan   -    - 
UDF PM Loan   583,000    134,000 
HLL IS Loan   -    32,000 
One KR Loan   253,000    62,000 
Rowe Lane Loan   5,000    71,000 
BRHG TX-I Loan   1,614,000    496,000 
Stoneleigh Loan   941,000    672,000 
One KR Venture Loan   7,000    - 
Almeda Crossing Loan   31,000    - 
BRHG TX-II Loan   3,000    - 
SM Place Loan   3,000    - 
Total  $4,583,000   $1,885,000 

 

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The following table summarizes the approximate income included in interest income – related parties associated with each of our loans included in notes receivable – related parties for the period indicated:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Loan Name  2015   2014   2015   2014 
Buffington Classic CL  $-   $-   $-   $- 
HLL II Highland Farms Loan   58,000    51,000    171,000    148,000 
HLL Hidden Meadows Loan   409,000    368,000    1,171,000    1,079,000 
Ash Creek Loan   50,000    50,000    145,000    158,000 
UDF TX Two Loan   -    16,000    -    49,000 
UDF PM Loan   171,000    142,000    499,000    404,000 
HLL IS Loan   2,000    88,000    140,000    252,000 
One KR Loan   604,000    296,000    1,608,000    903,000 
Rowe Lane Loan   166,000    148,000    480,000    289,000 
BRHG TX-I Loan   377,000    119,000    1,118,000    119,000 
Stoneleigh Loan   258,000    -    766,000    - 
One KR Venture Loan   48,000    -    146,000    - 
Almeda Crossing Loan   25,000    -    31,000    - 
BRHG TX-II Loan   3,000    -    3,000    - 
SM Place Loan   3,000    -    3,000    - 
Total  $2,174,000   $1,278,000   $6,281,000   $3,401,000 

 

Commitment Fee Income

 

We and our wholly-owned subsidiaries will occasionally enter into loan agreements with affiliated entities that require origination fees to be funded to us at the closing of the loan. These origination fees are recognized as revenue over the life of the resulting loan and this revenue is included in commitment fee income – related parties.

 

The following table represents the approximate origination fees included in commitment fee income – related parties associated with each loan for the periods indicated:

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
Loan Name  2015   2014   2015   2014 
HLL II Highland Farms Loan  $-   $-   $-   $- 
HLL Hidden Meadows Loan   -    6,000    2,000    19,000 
HLL IS Loan   7,000    5,000    18,000    16,000 
One KR Loan   13,000    13,000    38,000    38,000 
Rowe Lane Loan   5,000    5,000    14,000    12,000 
Total  $25,000   $29,000   $72,000   $85,000 

 

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J. Concentration of Credit Risk

 

Financial instruments that potentially expose us to concentrations of credit risk are primarily cash and cash equivalents, accrued interest receivable, loan participation interest – related parties, notes receivable and notes receivable – related parties. 

 

We maintain deposits in financial institutions that may at times exceed amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”). We have not experienced any losses related to amounts in excess of FDIC limits.

 

As of September 30, 2015, approximately 99% of our real property loans and investments are secured by or related to properties located in Texas and approximately 1% of our real property loans and investments are secured by properties located in Florida. In addition, we have one real property loan secured by property in North Carolina which represents less than 1% of our real property loans and investments.

 

We may invest in multiple secured loans that share a common borrower. The bankruptcy, insolvency or other inability of any borrower that is the subject of multiple loans to pay interest or repay principal on its loans would have adverse consequences on our income and reduce the amount of funds available for distribution to investors. The more concentrated our portfolio is with one or a few borrowers, the greater credit risk we face. The loss of any one of these borrowers would have a material adverse effect on our financial condition and results of operations.

 

We did not have any individual loans to borrowers that accounted for over 10% of the outstanding balance of our portfolio as of September 30, 2015. As of September 30, 2015, we have invested approximately 62% of the outstanding balance of our portfolio in 69 loans to our largest group of related borrowers. In addition, we are participating in 5 loans originated by our affiliates to the same group of related borrowers, representing an additional 5% of the outstanding balance of our loan portfolio.

 

K. Subsequent Events

 

On October 1, 2015, our board of trustees authorized monthly distributions of $0.1367 per share for the fourth quarter of 2015 payable on October 26, November 25 and December 28, 2015 to shareholders of record at the close of business on October 15, November 13 and December 15, 2015, respectively.

 

On November 4, 2015, our board of trustees authorized a special distribution of $0.055 per common share of beneficial interest payable on February 16, 2016 to shareholders of record as of the close of business on November 30, 2015.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto:

 

Forward-Looking Statements

 

This section of the quarterly report contains forward-looking statements, including discussion and analysis of us, our financial condition, amounts of anticipated cash distributions to common shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guaranties of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

 

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution you not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this quarterly report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this quarterly report on Form 10-Q include the following:

 

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·changes in general economic conditions, the real estate market and the credit market;

 

·increases in development costs that may exceed estimates;

 

·development delays;

 

·increases in interest rates, decreases in residential lot take down or purchase rates;

 

·our borrowers’ inability to sell residential lots;

 

·potential need to fund development costs not completed by the initial borrower or other capital expenditures out of operating cash flows;

 

·economic fluctuations in Texas, where our investments are geographically concentrated;

 

·retention of our senior management team;

 

·changes in property taxes;

 

·legislative and regulatory changes, including changes to laws governing the taxation of REITs;

 

·the availability of capital and financing;

 

·restrictive covenants in our credit facilities; and

 

·our ability to remain qualified as a REIT.

 

The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of this quarterly report on Form 10-Q and our 2014 10-K, as filed with the SEC.

 

Overview

 

We are an externally-managed Maryland real estate investment trust formed on May 28, 2008 primarily to generate current interest income by investing in loans secured by residential real estate and by producing profits from investments in residential real estate. On June 4, 2014, we listed our common shares of beneficial interest on NASDAQ under the ticker symbol “UDF” and concurrently commenced our Tender Offer. On August 4, 2014, we established our New DRIP, began offering shares pursuant to our Amended Secondary DRIP Offering and filed a $750 million Shelf Registration. No offerings have been commenced pursuant to the Shelf Registration. For further discussion of our New DRIP, Amended Secondary DRIP Offering and our Shelf Registration, see Note C to the accompanying consolidated financial statements. 

 

We made an election under Section 856(c) of the Internal Revenue Code to be taxed as a REIT, beginning with the taxable year ended December 31, 2010, which was the first year in which we had material operations. As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we later fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and may not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied, unless we are entitled to relief under certain statutory provisions. Such an event could materially and adversely affect our net income. However, we believe that we are organized and operate in a manner that will enable us to remain qualified as a REIT for federal income tax purposes.

 

We primarily originate, purchase, participate in and hold for investment secured loans made directly by us or indirectly through our affiliates to persons and entities for the acquisition and development of parcels of real property as single-family residential lots or mixed-use master planned residential communities, for the construction of single-family homes and for completed model homes. We also make direct investments in land for development into single-family lots, home construction and portfolios of finished lots and model homes; provide credit enhancements to real estate developers, home builders, land bankers and other real estate investors; and may purchase participations in, or finance for other real estate investors the purchase of, securitized real estate loan pools and discounted cash flows secured by state, county, municipal or other similar assessments levied on real property. We also may enter into joint ventures with unaffiliated real estate developers, home builders, land bankers and other real estate investors, or with other United Development Funding-sponsored programs, to originate or acquire, as the case may be, the same kind of secured loans or real estate investments we may originate or acquire directly.

 

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As of September 30, 2015, substantially all of our investments, including 123 loans, are in Texas. In addition, we have 3 loans in Florida and 1 loan in North Carolina. We intend to invest in markets that demonstrate economic stability and sound demand fundamentals. To gauge economic health and demand, we closely monitor job creation, wage inflation, home and rental prices, demographic trends, and other economic indicators both in the markets in which we currently make loans, and in markets where we may expand our operations in the future.  In addition, we review trends in new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, foreclosures, absorption, land prices, and changes in the levels of sales incentives or discounts in a given market. Within these markets, we also monitor market disruption activity that may affect home pricing, such as investor or speculator activity.

 

We believe that the housing recovery will vary by geography, led by housing markets and submarkets with strong demand fundamentals and balanced supplies of land and housing inventory.  We believe the recovery depends upon increasing consumer demand for housing, and the ability of developers and homebuilders to supply the finished lot and new home inventory necessary to meet this demand. Household formations increased significantly during 2014 and have shown continued strength in 2015, reflecting improvement in employment levels, wage growth and economic growth. In the coming quarters, we anticipate growing demand for new homes on the part of the consumer.

 

We expect to grow revenue and improve financial performance through strategic expansion within our established markets and entry into new markets.  We expect that demand in our target markets will continue to rise at a moderate rate over an extended period of time, driven by economic improvement, job creation, historically low interest rates, attractive housing affordability levels, relaxation of the mortgage underwriting environment, low production of single-family homes and a continued increase in the number of household formations. 

 

Nevertheless, the pace of the housing recovery and our future results could be negatively affected by weakening economic conditions, decreases in the level of employment, underemployment, decreased home affordability, significant increases in mortgage interest rates or tightening of mortgage lending standards. In some instances, the loans we make will be junior in the right of repayment to these senior lenders.  As senior lenders reengage or become willing to lend to our borrowers at higher loan-to-value ratios than are currently available, demand for our mortgage loans may decrease.

 

We also face a risk of loss resulting from adverse changes in interest rates. Changes in interest rates may impact demand for our real estate finance products, the rate of interest we receive on our loans receivable and the rate of interest we pay on outstanding loans. If interest rates increase or if mortgage financing underwriting criteria become more restrictive, demand for single-family residences may decrease, and developers and builders may be unable to generate sufficient cash flow from the sale of land parcels, finished lots or homes to repay loans from us.

 

Our loan portfolio, consisting of notes receivable, notes receivable – related parties and loan participation interest – related parties, grew from approximately $508.5 million as of December 31, 2013, to approximately $609.6 million as of December 31, 2014, to approximately $618.1 million as of September 30, 2015. With the increase in our loan portfolio, our revenues, the majority of which is from recognizing interest income associated with our loan portfolio, also increased.

 

Our working capital reserves may be invested in short-term, highly-liquid investments including, but not limited to, government obligations, bank certificates of deposit, short-term debt obligations and interest-bearing accounts. Our cash balances were approximately $19.0 million and $30.5 million as of September 30, 2015 and December 31, 2014, respectively.

 

We use debt as a means of providing additional funds for the acquisition or origination of secured loans, acquisition of properties and the diversification of our portfolio. Interest expense associated with our indebtedness was approximately $2.6 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $7.9 million and $2.9 million for the nine months ended September 30, 2015 and 2014, respectively. The increase in interest expense is a result of an increase in our aggregate borrowings from approximately $30.5 million as of December 31, 2013, to approximately $170.2 million and $170.9 million as of December 31, 2014 and September 30, 2015, respectively.

 

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Net income was approximately $14.3 million and $13.4 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $42.9 million and $36.6 million for the nine months ended September 30, 2015 and 2014, respectively. Net income per share of beneficial interest was approximately $0.47 and $0.44 for the three months ended September 30, 2015 and 2014, respectively, and approximately $1.40 and $1.16 for the nine months ended September 30, 2015 and 2014, respectively. Our net income per share of beneficial interest is calculated based on net income divided by the weighted average shares of beneficial interest outstanding.

 

As of September 30, 2015, we had 127 outstanding loan agreements, with maximum loan amounts totaling approximately $1.0 billion.  Of the 127 loans outstanding as of September 30, 2015, 12 loans totaling approximately $69.7 million and 8 loans totaling approximately $35.3 million are included in notes receivable – related parties, net and loan participation interest – related parties, net, respectively, on our balance sheet.

 

Critical Accounting Policies and Estimates

 

Our accounting policies have been established to conform to GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the consolidated financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

 

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

 

There have been no significant changes to our critical accounting policies as disclosed in our 2014 10-K.

 

Recent Accounting Updates

 

Recent accounting updates are included in Note B to our accompanying consolidated financial statements.

 

Lot Inventory and Loan Portfolio

 

Lot Inventory

 

As of September 30, 2015, we had no remaining lots included in our lot inventory.

 

Loan Portfolio

 

For loans in which we are a subordinate lender, we are generally second in lien priority behind the senior lender. In some cases, we permit builders to file performance deeds of trust in second priority behind the senior lender. In such cases, we are generally third in lien priority behind the senior lender and the builder performance deeds of trust. For loans in which we are a subordinate lender, the aggregate of all loan balances on an individual project, both senior and subordinated, divided by the value of the collateral is 85% or less at origination, unless substantial justification to exceed an 85% loan-to-value ratio exists because of the presence of other underwriting criteria.

 

We may secure our loans with pledges of equity interests in lieu of, or in addition to, real property liens.  Pledges of equity interests are documented by pledge agreements, assignments of equity interests, and Uniform Commercial Code (“UCC”) financing statements.  In some cases, we also secure assignments of distributions to secure our pledges of equity interests.  Should a loan secured by a pledge of equity interests default, we may foreclose on the pledge of equity interests through a personal property foreclosure under the terms of the pledge agreement and the UCC. 

 

We may secure our loans with assignments of reimbursement rights in lieu of, or in addition to, real property liens.  Assignments of reimbursement rights are documented by deeds of trust or by assignments and UCC financing statements.  Should a loan secured by an assignment of reimbursement rights default, we may foreclose on the reimbursement rights either in conjunction with a real property foreclosure or through a personal property foreclosure under the terms of the UCC.

 

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In addition, as of September 30, 2015, we have five loans, totaling approximately $19.3 million, that are not secured by real property liens, a pledge of equity interest in the borrower or assignments of reimbursement rights. Two of these loans, totaling approximately $12.7 million, are to related parties, which are further discussed in Note I to the accompanying consolidated financial statements.

 

As of September 30, 2015, we had 8 outstanding participation agreements with related parties with aggregate, maximum loan amounts of approximately $66.6 million (with an unfunded balance of approximately $8.5 million) and 12 related party note agreements with aggregate, maximum loan amounts totaling approximately $95.2 million (with an unfunded balance of approximately $19.9 million).  Additionally, we had 107 outstanding note agreements with third parties with aggregate, maximum loan amounts of approximately $879.1 million, of which approximately $189.4 million had yet to be funded.

 

The participation agreements outstanding as of September 30, 2015 are made to borrower entities which may hold ownership interests in projects in addition to the project funded by us and/or may be secured by multiple single-family residential communities. Certain participation agreements are secured by a personal guarantee of the borrower in addition to a lien on the real property or the equity interests in the entity that holds the real property. The outstanding aggregate principal amount of mortgage notes held by us as of September 30, 2015 are secured by properties located in the Dallas, Fort Worth, Austin, Houston, San Antonio and Lubbock metropolitan markets in Texas as well as Tampa and Orlando, Florida and Charlotte, North Carolina. Security for such loans takes the form of either a direct security interest represented by a first or subordinate lien on the respective property and/or an indirect security interest represented by a pledge of the ownership interests of the entity which holds title to the property.

 

Security

 

As of September 30, 2015, approximately 89% of our loans were secured by multiple security interests or a security interest and a repayment guaranty. Additional security interests for our loans include reimbursements of development costs due to the developer being under contract with districts or municipalities, pledges of equity interests (generally, partnership interests or limited liability company interests, as applicable) that are documented by pledge agreements, assignments of equity interests, assignments of distributions from equity interests, assignments of lot sale contracts, cross collateralization agreements and subordinate deeds of trust. We also utilize guarantees to secure our loans.

 

The table below represents the primary form of security and the approximate associated loan balance for each of our loans for the period indicated.

 

   As of September 30, 2015 
Primary Security  # of
Loans
   Loan
Balance
   % of
Total
Loan
Balance
 
Parcels of land under development or to be developed   49   $294,665,000    47%
Finished lots   42    82,230,000    13%
Parcels of land under development or to be developed and finished lots   18    135,057,000    22%
Model and single-family homes   5    37,521,000    6%
Pledge of equity interests in borrower or borrower affiliate   4    29,182,000    5%
Reimbursements of development costs   4    27,719,000    4%
Unsecured   5    19,250,000    3%
TOTAL   127   $625,624,000    100%

 

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In addition to the primary form of security identified above, each of our outstanding loans may be secured by other forms of collateral, as reflected in the information below, as of September 30, 2015:

 

·83 loans, representing approximately 59% of the aggregate principal amount of the outstanding loans, include a first lien on the respective property as security for the loan;

 

·42 loans, representing approximately 45% of the aggregate principal amount of the outstanding loans, include a subordinate lien on the respective property as security for the loan;

 

·23 loans, representing approximately 26% of the aggregate principal amount of the outstanding loans, include a pledge of some or all of the equity interests in the developer entity or other parent entity that owns the borrower entity as security for the loan;

 

·42 loans, representing approximately 48% of the aggregate principal amount of the outstanding loans, include reimbursements of development costs due to the developer under contracts with districts and municipalities as security for the loan;

 

·100 loans, representing approximately 75% of the aggregate principal amount of the outstanding loans, include a guarantee of the principals or parent companies of the borrower as security for the loan.

 

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The following table summarizes our real property loans as of September 30, 2015:

 

 

                              2015   2014   2013     
            Interest   Original Note  Maturity  Maximum Loan   Principal   Cash   Cash   Cash   Unfunded 
Borrower  Lender (1)  Location  Collateral (2)  Rate   Date  Date (3)  Amount (3)   Balance   Receipts   Receipts   Receipts   Balance 
                                                   
Notes Receivable - Related Parties                                                  
HLL II Land Acquisitions of Texas, LP  UDF IV AC  Bexar County, TX  1st lien; 17 finished lots; 147 paper lots   13%  12/22/2010  3/22/2016  $1,854,200   $1,760,309   $19,617   $85,913   $101,404   $- 
HLL Land Acquisitions of Texas, LP  UDF IV FVIII  Harris County, TX  1st lien and reimbursements; 644 paper lots   13%  2/17/2011  1/21/2016   14,022,000    12,652,467    -    1,015,179    -    354,354 
UDF Ash Creek, LP  UDF IV  Dallas County, TX  1st  lien; 9 finished lots; 28 paper lots   13%  4/20/2011  10/20/2015   3,000,000    1,533,791    -    412,702    934,197    43,599 
UDF PM, LLC  UDF IV  Lubbock County, TX  Reimbursements   13%  10/17/2012  10/17/2015   6,250,000    5,254,219    -    -    -    995,781 
One KR Venture, LP  UDF IV AC  Bexar County, TX  1st lien and pledge of equity; 7 finished lots; 258.5 acres   13%  12/14/2012  6/14/2016   19,302,730    19,050,163    -    1,664,294    4,866,556    - 
Rowe Lane 285, LP  UDF IV  Travis County, TX; Williamson County, TX  Subordinate lien and reimbursements; 94 finished lots and 173 paper lots   13%  2/18/2014  2/18/2018   7,457,000    5,078,891    219,404    205,086    -    1,953,618 
BRHG TX-1, LLC  UDF IV  Travis County, TX  Unsecured   13%  8/29/2014  8/29/2021   11,500,000    11,500,000    -    -    -    - 
Maple Wolf Stoneleigh, LLC  UDF IV  Dallas County, TX  1st lien; 12 condominium units   13%  10/13/2014  10/13/2017   13,851,000    7,883,153    -    -    -    5,967,847 
One KR Venture, LP  UDF IV FVIII  Bexar County, TX  1st lien; 57 paper lots   13%  12/30/2014  12/30/2016   5,250,000    1,412,509    2,360,114    -    -    1,477,377 
Almeda Crossing FL-1, LP  UDF IV  Harris County, TX  1st lien and reimbursements; 58 paper lots   13%  5/12/2015  5/12/2017   2,223,000    824,149    -    -    -    1,398,851 
BRHG TX-II, LLC  UDF IV  Travis County, TX  Unsecured   13%  8/13/2015  8/13/2018   3,000,000    1,197,683    -    -    -    1,802,317 
SM Place FL-1, LP  UDF IV  Harris County, TX  1st lien and reimbursements; 331 paper lots   13%  9/22/2015  9/22/2018   7,474,000    1,549,278    -    -    -    5,924,722 
                                                   
     Subtotal - Notes Receivable - Related Parties                      $95,183,930   $69,696,612   $2,599,135   $3,383,174   $5,902,157   $19,918,466 
                                                   
Notes Receivable - Non-Related Parties                                                  
CTMGT Granbury, LLC  UDF IV FI  Hood County, TX  1st lien, 552 acres; Subordinate lien, 1,541.338 acres; reimbursements   13%  5/21/2010  5/21/2016  $22,905,000   $15,930,883   $-   $-   $-   $6,974,117 
Crescent Estates Custom Homes, LP  UDF IV FII  Dallas and Denton County, TX  1st lien; 7 homes   13%  6/10/2010  6/10/2016   4,000,000    2,207,384    245,791    2,132,510    4,109,611    - 
CTMGT Land Holdings, LP  UDF IV  Rockwall County, TX  Subordinate lien and reimbursements; 807.906 acres   14%  7/23/2010  1/28/2016   25,012,000    22,731,555    -    -    -    344,583 
Megatel Homes II, LLC  UDF IV HF  Dallas/Ft. Worth, TX; Austin, TX; San Antonio, TX; Houston, TX; Lubbock, TX  1st lien homebuilding line; 80 homes   13%  8/24/2011  8/24/2016   40,000,000    25,026,417    30,900,702    46,678,440    34,987,757    - 
Nuway Homes Texas, LP/Lexington 26, LP  UDF IV HF  Harris County, TX  1st lien homebuilding line; 10 homes   13%  6/13/2014  6/13/2016   3,000,000    505,160    776,652    167,230    -    1,550,957 
165 Howe, LP  UDF IV  Denton County, TX  Unsecured   13%  11/22/2010  11/22/2015   2,575,000    1,583,627    -    -    -    - 
BHM Highpointe, LTD  UDF IV FIV  Travis County, TX  1st lien; 24 finished lots   13%  11/16/2010  11/30/2014   2,858,309    2,138,128    75,199    532,526    254,421    - 
The Resort at Eagle Mountain Lake, LP  UDF IV  Tarrant County, TX  Reimbursements and pledge of equity; 116 acres   13%  12/21/2010  12/21/2015   8,715,000    5,674,342    -    -    3,667,751    - 
FH 295, LLC/CTMGT  UDF IV AC  Denton County, TX  Unsecured   15%  10/5/2010  10/5/2015   22,342,515    3,831,691    15,967,183    4,828,741    8,406,785    - 
CTMGT Williamsburg, LLC  UDF IV FII  Rockwall County, TX  1st lien and reimbursements; 13 finished lots and 220 paper lots   13%  11/30/2011  10/31/2015   24,500,000    19,150,272    -    4,670,333    1,431,964    - 
UDF Sinclair, LP  UDF IV AC  Bexar County, TX  1st lien; 5 finished lots   13%  2/16/2011  12/31/2015   1,479,000    42,675    -    205,484    99,772    18,698 
Buffington Land, LTD  UDF IV  Travis County, TX  1st lien and reimbursements; 4 finished lots   13%  1/26/2011  1/26/2015   18,000,000    16,603,627    -    2,483,538    6,596,690    - 
Shale-114, LP  UDF IV  Denton and Wise County, TX  Subordinate lien and reimbursements; 422 paper lots   13%  3/28/2011  3/28/2016   5,400,000    4,679,994    -    106,965    2,840,080    - 
Woods Chin Chapel, LTD  UDF IV  Denton County, TX  Subordinate lien, 55 finished lots and 57 paper lots; pledge of equity, 512.183 acres and 10 finished lots   13%  6/30/2011  1/31/2016   13,800,000    12,870,450    -    1,427,070    -    - 

 

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                               2015   2014   2013     
            Interest   Original Note  Maturity   Maximum Loan   Principal   Cash   Cash   Cash   Unfunded 
Borrower  Lender (1)  Location  Collateral (2)  Rate   Date  Date (3)   Amount (3)   Balance   Receipts   Receipts   Receipts   Balance 
                                             
High Trophy Development, LLC  UDF IV FVI  Tarrant County, TX  1st lien and pledge of equity; 35 finished lots   13%  11/7/2011  7/29/2016    $3,300,000   $3,024,459   $2,119,794   $948,480   $6,003,317   $- 
CTMGT Montalcino, LLC  UDF IV  Denton County, TX  Subordinate lien; 24 finished lots and 125 paper lots   13%  12/13/2011  12/13/2015    32,550,000    28,323,188    -    -    -    4,226,812 
CTMGT Williamsburg, LLC  UDF IV FV  Rockwall County, TX  1st lien; 803 paper lots   13%  2/7/2012  2/7/2017    5,653,700    5,636,045    -    -    -    17,655 
CTMGT Valley Ridge, LLC  UDF IV FVIII  Tarrant County, TX  1st lien; 9 finished lots   13%  3/2/2012  3/2/2016    3,613,000    201,539    1,779,307    1,419,071    -    213,084 
Crescent Estates Custom Homes, LP  UDF IV AC  Dallas County, TX  1st lien; 11 homes; 30 finished lots   13%  4/27/2012  4/27/2016    13,587,566    6,717,141    7,655,291    10,490,465    6,215,403    - 
PH SLII, LP  UDF IV FII  Travis County, TX  1st lien and reimbursements; 9 finished lots   13%  6/12/2012  12/31/2014    4,727,016    -    608,149    1,607,790    2,044,850    466,227 
CTMGT Barcelona, LLC  UDF IV  Collin County, TX  Subordinate lien and pledge of equity; 5 finished lots and 216 paper lots   13%  6/6/2012  6/11/2018    8,373,000    5,557,844    181,602    250    -    2,633,304 
PH SPM2B, LP  UDF IV FII  Travis County, TX  1st lien; 8 finished lots   13%  6/26/2012  6/30/2015    3,738,507    530,300    567,026    2,810,297    796,257    - 
CTMGT Alpha Ranch, LLC  UDF IV  Tarrant County, TX  Subordinate lien, pledge of equity and reimbursements; 3,026 paper lots   13%  7/31/2012  10/31/2015    27,335,800    21,757,358    -    -    -    5,578,442 
BHM Highpointe, LTD  UDF IV FIII  Travis County, TX  1st lien and reimbursements; 20 finished lots   13%  8/7/2012  12/31/2014    3,809,735    13,156    158,588    2,081,802    1,299,120    257,070 
287 Waxahachie, LP  UDF IV  Ellis County, TX  1st lien, subordinate lien and reimbursements; 252 acres   13%  8/10/2012  8/10/2016 (4)  9,732,500    1,315,127    -    1,298,047    1,192,693    5,926,633 
SH 161 Acquisitions, LP  UDF IV FVII  Dallas County, TX  1st lien; 6 finished lots   13%  9/7/2012  9/7/2016    1,301,248    23,548    -    820,854    1,116,223    - 
Megatel Homes II, LLC  UDF IV FIII  Bexar County, TX  1st lien; 9 finished lots   13%  3/27/2012  11/27/2015    1,500,000    612,000    788,885    426,562    904,123    - 
CTMGT AR II, LLC  UDF IV  Denton County, TX  Subordinate lien and pledge of equity; 501 paper lots   13%  11/14/2012  11/14/2015    2,880,000    2,004,026    -    -    -    875,974 
CTMGT Legends, LLC  UDF IV  Denton County, TX  Subordinate lien; 64 finished lots   13%  11/16/2012  11/16/2015    3,063,040    2,767,114    -    -    -    295,927 
CTMGT Erwin Farms, LLC  UDF IV  Collin County, TX  Subordinate lien; 565 paper lots   13%  12/6/2012  9/30/2016    7,400,000    6,449,323    -    -    -    950,677 
BLG Plantation, LLC  UDF IV FVIII  Harris County, TX  1st lien and reimbursements; 27 finished lots and 55 paper lots   13%  11/26/2012  11/26/2015    4,095,000    1,931,059    150,237    847,180    108,837    1,057,687 
CTMGT Regatta II, LLC  UDF IV  Denton County, TX  1st lien, 10.97 acres; Subordinate lien, 516.832 acres; reimbursements   13%  12/27/2012  10/25/2015    12,640,000    9,172,204    -    -    -    3,467,796 
CTMGT Rancho Del Lago, LLC  UDF IV FIV  Bexar County, TX  1st lien, 462 paper lots, 68.13 acres; Subordinate lien, 392.38 acres   13%  12/31/2012  12/31/2016    24,048,798    18,828,923    5,510,821    3,894,103    -    - 
CTMGT Rockwall 38, LLC  UDF IV  Rockwall County, TX  Subordinate lien; 62 finished lots   13%  2/4/2013  2/4/2016    1,910,064    1,825,790    -    -    -    84,274 
BLG Hawkes, LLC  UDF IV  Travis County, TX  Subordinate lien and pledge of equity; 10 finished lots and 258 paper lots   13%  1/25/2013  1/25/2016    10,565,880    4,229,540    -    30,530    -    6,305,810 
CTMGT Verandah, LLC  UDF IV AC  Hunt County, TX  1st lien; 16 finished lots   13%  4/15/2013  4/15/2016    3,084,300    760,809    1,522,981    962,840    -    - 
BLD Scenic Loop, LLC  UDF IV FVI  Bexar County, TX  1st lien and pledge of equity; 29 finished lots   13%  4/19/2013  4/19/2016    4,603,900    3,743,780    425,735    -    -    434,385 
Buffington VOHL 5A 6A 6B, Ltd  UDF IV FIX  Travis County, TX  1st lien and reimbursements; 113 paper lots   13%  4/26/2013  4/26/2016 (4)  4,500,000    4,276,223    -    8,322    1,294,274    - 
PH Park at BC, LP  UDF IV FVII  Travis County, TX  1st lien; 4 finished lots   11%  5/3/2013  12/30/2014 (4)  1,540,200    293,654    126,841    510,661    430,798    178,246 
CTMGT Frisco 122, LLC  UDF IV  Denton County, TX  Subordinate lien; 350 paper lots   13%  5/30/2013  3/31/2016    7,400,000    5,750,184    -    -    -    1,649,816 
Buffington Westpointe, LLC  UDF IV AC  Bexar County, TX  1st lien; 37 paper lots   13%  5/31/2013  5/31/2016    4,850,000    2,727,009    -    2,454,318    53,313    - 
CTMGT Five Oaks Crossing, LLC  UDF IV  Tarrant County, TX  Subordinate lien; 89 finished lots   13%  6/5/2013  6/5/2016    3,515,000    2,866,606    -    -    -    648,394 
CTMGT Valley Ridge II, LLC  UDF IV  Tarrant County, TX  Subordinate lien; 103 paper lots   13%  7/18/2013  7/18/2016    1,603,700    1,523,552    -    -    -    80,148 
BLD Gosling, LLC  UDF IV FII  Harris County, TX  1st lien and pledge of equity; 96 paper lots   13%  6/28/2013  6/28/2016    9,582,400    6,322,104    -    -    -    3,260,296 
BLD SPM 2A, LLC  UDF IV FIII  Travis County, TX  1st lien; 43 finished lots   13%  6/28/2013  6/28/2016    2,650,000    2,209,999    -    -    -    440,001 
BLD SPM 3A, LLC  UDF IV FIII  Travis County, TX  1st lien; 32 finished lots   13%  6/28/2013  6/28/2016    2,375,000    2,604,172    135    -    -    - 
BLD PBC 4A, LLC  UDF IV FIV  Travis County, TX  1st lien and pledge of equity; 7 finished lots and 49 paper lots   13%  6/28/2013  6/28/2016    3,467,600    991,254    523,635    828,810    -    1,123,901 
BLD Crystal Springs, LLC  UDF IV FVIII  Williamson County, TX  1st lien; 261 paper lots   13%  7/15/2013  12/31/2014    14,500,000    14,588,228    -    -    485,885    - 
CTMGT CR 2C, LLC  UDF IV FIII  Collin County, TX  1st lien; 71 finished lots   13%  7/24/2013  7/24/2016    5,550,000    2,657,002    437,385    984,578    -    1,471,036 
CTMGT Riverwalk Villas, LLC  UDF IV  Denton County, TX  Subordinate lien; 83 finished lots   13%  8/1/2013  8/1/2016    5,237,300    4,306,039    -    -    -    931,261 
CTMGT Lewisville 14, LLC  UDF IV  Denton County, TX  Subordinate lien; 53 finished lots   13%  8/15/2013  8/15/2016    2,800,000    2,050,486    -    -    664,368    85,145 
CTMGT Hickory Creek 13, LLC  UDF IV FII  Denton County, TX  Subordinate lien; 38 paper lots   13%  8/30/2013  8/30/2016    1,630,000    1,003,206    -    -    -    626,794 
CTMGT Lucas 238, LLC  UDF IV  Collin County, TX  Subordinate lien; 43 finished lots; 66 paper lots   13%  8/30/2013  8/30/2016    12,574,000    4,175,160    -    2,920,703    -    5,478,137 
CTMGT Frontier 80, LLC  UDF IV  Collin County, TX  Subordinate lien and reimbursements; 288 paper lots   13%  9/6/2013  2/18/2017    32,600,000    15,608,611    -    559    -    16,990,830 
CTMGT Glenmere, LLC  UDF IV  Denton County, TX  Subordinate lien; 25 finished lots   13%  9/12/2013  9/12/2016    1,132,017    1,124,408    -    -    -    7,609 
CTMGT Frisco Hills 1A, 1B, 1C FL-2, LLC  UDF IV FVI  Denton County, TX  1st lien and reimbursements; 9 finished lots   13%  11/13/2013  11/13/2016    10,027,896    2,787,845    2,976,118    4,976,705    -    - 
CTMGT Frisco Hills 4B FL-2, LLC  UDF IV AC  Denton County, TX  1st lien and reimbursements; 1 finished lot   13%  10/9/2013  10/9/2016    4,654,111    186,856    1,878,370    1,647,440    -    941,445 

 

 46 

 

 

                               2015   2014   2013     
            Interest   Original Note  Maturity   Maximum Loan   Principal   Cash   Cash   Cash   Unfunded 
Borrower  Lender (1)  Location  Collateral (2)  Rate   Date  Date (3)   Amount (3)   Balance   Receipts   Receipts   Receipts   Balance 
                                             
BHM HP 5.3, LLC  UDF IV  Hays County, TX  1st lien and reimbursements; 53 paper lots   13%  10/1/2013  10/1/2016   $4,776,300   $2,817,372   $-   $-   $-   $1,958,928 
CTMGT Turbeville, LLC  UDF IV  Denton County, TX  Subordinate lien, pledge of equity and reimbursements; 64 finished lots, 46 paper lots and 19.23 acres   13%  4/8/2014  4/8/2017    18,200,000    11,121,735    1,506,104    -    -    5,572,161 
CTMGT Williamsburg 1B FL-2, LLC  UDF IV FII  Rockwall County, TX  1st lien and reimbursements; 141 paper lots   13%  10/31/2013  10/31/2016    7,838,300    5,048,270    -    -    -    2,790,030 
CTMGT Travis Ranch 3G FL-2, LLC  UDF IV FII  Kaufman County, TX  1st lien and reimbursements; 25 finished lots   13%  11/21/2013  11/21/2016    14,936,200    4,689,773    814,961    -    -    9,431,466 
CTMGT Craig Ranch, LLC  UDF IV FVIII  Collin County, TX  Subordinate lien; 67 finished lots   13%  11/19/2013  11/19/2016    6,415,000    1,253,714    4,040,263    -    -    1,121,023 
CTMGT Dominion Estates, LLC  UDF IV  Dallas County, TX  Subordinate lien; 137 paper lots   13%  12/6/2013  12/6/2016    9,610,000    3,389,621    -    968,985    -    5,251,394 
CTMGT Pine Trace Village FL-1, LLC  UDF IV FII  Harris County, TX  1st lien and reimbursements; 3 finished lots and 32.693 acres   13%  1/29/2014  1/29/2017    3,825,800    1,490,830    452,519    651,060    -    1,231,391 
CTMGT Bear Creek, LLC  UDF IV  Dallas County, TX  Subordinate lien and reimbursements; 367.983 acres   13%  12/27/2013  6/27/2016    2,270,000    1,425,072    -    -    -    844,928 
CTMGT Southlake Houston, LLC  UDF IV  Galveston County, TX  1st lien collateral assignment; 1,220 paper lots   13%  12/27/2013  12/27/2015 (4)  8,000,000    6,802,487    -    -    -    1,197,513 
BDMR Development, LLC  UDF IV  Kaufman County, TX  1st lien; 1,236 paper lots   13%  1/9/2014  1/9/2016    15,236,000    7,565,277    1,479,162    -    -    6,191,561 
Scofield 46, LLC  UDF IV  Travis County, TX  Subordinate lien; 46 paper lots   15%  1/31/2014  1/31/2017    1,525,000    1,455,136    -    -    -    69,864 
CTMGT Plano 17, LLC  UDF IV  Collin County, TX  Subordinate lien; 65 paper lots   13%  3/20/2014  3/20/2017    5,400,000    3,119,564    -    -    -    2,280,436 
K. Hovnanian Terra Bella, LLC  UDF IV FVI  Pasco County, FL  1st lien; 21 finished lots   12%  3/19/2014  1/19/2016    2,602,935    274,477    1,396,823    931,635    -    - 
CTMGT Spring Creek PH 2, LLC  UDF IV  Tarrant County, TX  1st lien; 4 finished lots and 94 paper lots   13%  5/14/2014  5/14/2017    1,770,000    1,046,441    -    -    -    723,559 
CTMGT, LLC  UDF IV FV  Hunt County, TX  1st lien collateral assignment and reimbursements; 6 finished lots and 512.183 acres   13%  6/30/2014  6/30/2017    15,700,000    13,737,608    12,830    83,325    -    1,866,236 
Classic Neighborhood Alternate Holdings, LLC  UDF IV FVIII  Travis County, TX  1st lien; 31 finished lots   13%  7/10/2014  7/10/2016    2,305,000    1,280,951    534,681    -    -    489,368 
Megatel Capital, LLC  UDF IV  Dallas County, TX  Pledge of equity   15%  7/8/2014  7/8/2017    17,000,000    -    -    -    -    17,000,000 
278 Georgetown, Inc  UDF IV FIV  Williamson County, TX  1st lien and subordinate lien; 521 paper lots   13%  11/21/2014  11/21/2017    18,750,000    6,787,036    17,072    63    -    11,945,828 
CND-ALT Oviedo, LLC  UDF IV FVI  Seminole County, FL  1st lien; 37 finished lots   13%  12/15/2014  12/15/2016    3,157,770    2,216,946    467,905    -    -    472,919 
349 Memorial, LLC  UDF IV  Fort Bend County, TX  Subordinate lien; 912 paper lots   13%  2/27/2015  2/27/2016    2,142,400    707,736    -    -    -    1,434,664 
Belle Glade Holdings, LLC  UDF IV FVI  Union County, NC  1st lien; 55 finished lots   13%  12/26/2014  12/26/2016    3,566,100    2,716,388    429,949    -    -    419,763 
Morrisville Investments, LLC  UDF IV  Ellis County, TX  1st lien; 226 acres   13%  12/30/2014  12/30/2017    7,185,000    4,487,434    -    -    -    2,697,566 
Prosper 236, LLC  UDF IV  Collin County, TX  Unsecured   13%  1/28/2015  8/28/2015    2,500,000    1,136,648    49,944    -    -    1,313,408 
UDF Sinclair, LP  UDF IV FII  Bexar County, TX  1st lien; 68 paper lots   13%  2/4/2015  2/4/2017    2,047,000    1,286,200    -    -    -    760,800 
CADG Sutton Fields, LLC  UDF IV  Denton County, TX  Subordinate lien and pledge of equity; 494.86 acres   13%  3/25/2015  3/31/2016    6,500,000    4,683,377    -    -    -    1,816,623 
Stablewood Farms Estates, Ltd.  UDF IV FIII  Harris County, TX  1st lien and reimbursements; 47 paper lots   13%  6/19/2015  6/19/2017    1,870,000    513,517    -    -    -    1,356,483 
CTMGT Travis Ranch 3D-1 FL-2, LLC  UDF IV FIV  Kaufman County, TX  1st lien; 77 paper lots   13%  7/2/2015  7/2/2018    3,760,000    1,373,158    -    -    -    2,386,842 
Carlton Development, LLC  UDF IV FX  Hillsborough County, FL  1st lien; 319 paper lots   13%  8/14/2015  8/14/2018    13,408,000    4,884,050    -    -    -    8,523,950 
Katy Reserve, LTD  UDF IV  Fort Bend and Waller County, TX  Subordinate lien and reimbursements; 174 paper lots   13%  9/23/2015  9/23/2018    19,844,000    -    -    -    -    - 
CADG Gateway Lakes, LLC  UDF IV FVIII  Tarrant County, TX  1st lien; 39 paper lots   13%  9/30/2015  1/15/2017    7,602,000    6,102,514    -    -    -    1,499,486 
CTMGT Bridges at Preston Crossing FL-1, LLC  UDF IV  Grayson County, TX  1st lien; 55 finished lots   13%  6/19/2013  6/19/2017    1,500,000    1,500,000    -    -    -    - 
CTMGT Resort at Eagle Mtn Lake FL-1, LLC  UDF IV FVII  Tarrant County, TX  1st lien; 114 finished lots   13%  11/4/2013  11/4/2017    9,410,000    8,299,773    -    1,110,227    -    - 

 

 47 

 

 

                               2015   2014   2013     
            Interest   Original Note  Maturity   Maximum Loan   Principal   Cash   Cash   Cash   Unfunded 
Borrower  Lender (1)  Location  Collateral (2)  Rate   Date  Date (3)   Amount (3)   Balance   Receipts   Receipts   Receipts   Balance 
CTMGT Saddlebrook Estates FL-1, LLC  UDF IV FVII  Ellis County, TX  1st lien; 46 finished lots   13%  11/5/2013  11/5/2017   $2,566,400   $1,164,632   $834,899   $486,498   $70,371   $10,000 
CTMGT Waterview Estates FL-1, LLC  UDF IV FVIII  Tarrant County, TX  1st lien; 8 finished lots   13%  9/27/2013  9/27/2017    1,620,000    182,561    617,389    691,327    45,732    82,990 
CTMGT Terracina FL-1, LLC  UDF IV FVIII  Denton County, TX  1st lien; 3 finished lots   13%  4/2/2014  8/2/2017    1,550,905    323,060    88,083    1,110,377    -    29,385 
CTMGT Lakeshore, LLC  UDF IV FII  Collin County, TX  1st lien; 52 finished lots   13%  6/26/2013  6/26/2017    2,114,900    2,094,468    -    -    -    20,433 
CTMGT Pine Trace Village FL-1, LLC  UDF IV FVII  Harris County, TX  1st lien; 67 finished lots   13%  2/13/2015  8/13/2016    3,348,400    3,283,097    4,037    -    -    61,266 
Megatel Artesia VDL, LLC  UDF IV FVII  Denton County, TX  1st lien; 5 finished lots   13%  11/26/2013  3/26/2017    2,400,000    37,601    294,088    1,485,631    698,840    - 
CTMGT Bear Creek FL-1, LLC  UDF IV FVII  Dallas County, TX  Subordinate lien; 182 finished lots   13%  12/27/2013  4/27/2017    4,440,000    1,164,027    2,754,558    521,415    -    - 
Megatel Bedford VDL, LLC  UDF IV FVI  Tarrant County, TX  1st lien; 22 finished lots   13%  5/9/2014  5/9/2016    2,103,000    1,492,630    324,479    276,175    -    9,716 
One Creekside, LP  UDF IV  Tarrant County, TX  Subordinate lien; 224.627 acres   13%  11/30/2011  4/25/2016 (4)  2,830,000    749,930    -    221,441    859,015    999,614 
Hidden Lakes Investments, LP  UDF IV FIV  Galveston County, TX  1st lien and reimbursements; 81 finished lots   13%  1/30/2012  4/30/2016 (4)  9,986,762    4,923,415    878,325    2,294,893    1,943,092    - 
One Windsor Hills, LP  UDF IV  Ellis County, TX  Subordinate lien, reimbursements and pledge of equity; 575.371 acres   13%  5/9/2012  5/9/2016    9,490,397    7,805,341    -    -    -    1,685,056 
One Windsor Hills, LP  UDF IV  Ellis County, TX  Subordinate lien, reimbursements and pledge of equity; 128.78 acres   13%  5/25/2012  5/25/2016    1,858,666    1,610,000    -    -    -    248,666 
One Windsor Hills, LP  UDF IV  Ellis County, TX  Subordinate lien, reimbursements and pledge of equity; 842.9685 acres   13%  10/16/2012  10/16/2015    11,819,137    11,743,192    -    -    -    75,944 
CTMGT Regatta, LLC  UDF IV  Denton County, TX  Subordinate lien and reimbursements; 1,870 paper lots   13%  10/25/2012  10/25/2015    11,880,000    10,066,569    -    -    -    1,813,431 
BLD VOHL 6A-1, LLC  UDF IV FVIII  Travis County, TX  1st lien and pledge of equity; 29 finished lots   13%  5/20/2013  5/20/2016    2,934,000    1,010,218    843,556    93,419    -    986,807 
BLD VOHL 6B-2, LLC  UDF IV FII  Travis County, TX  1st lien and pledge of equity; 16 finished lots   13%  5/20/2013  5/20/2016    3,377,000    980,140    182,207    1,112,764    -    1,101,889 
Southstar Woodcreek Developer, LLC  UDF IV FIX  Rockwall County, TX  1st lien and reimbursements; 549.867 acres   13%  9/27/2013  9/27/2016    30,000,000    12,888,523    531,327    6,840,621    -    9,739,528 
One Windsor Hills, LP  UDF IV  Ellis County, TX  Subordinate lien, reimbursements and pledge of equity; 406.638 acres   13%  10/17/2013  5/25/2016    15,227,000    9,486,458    -    -    -    5,740,542 
                                                    
Subtotal - Notes Receivable - Non-Related Parties                       $880,488,474   $520,672,043   $93,931,588   $124,083,060   $88,621,342   $190,846,628 
                                                    
Total Notes Receivable                       $975,672,404   $590,368,655   $96,530,723   $127,466,234   $94,523,499   $210,765,094 
                                                    
Loan Participation Interests - Related Parties                                                   
UDF III, LP  UDF IV  Rockwall County, TX  Participation in 1st lien,  pledge of equity and reimbursements; 401.1745 acres; 10 finished lots   15%  6/30/2010  1/28/2016   $17,813,552   $17,762,455   $-   $-   $719,432   $- 
UMT Home Finance III, LP  UDF IV  Harris County, TX  Participation in 1st lien and reimbursements; 4 finished lots; 224 paper lots   13%  5/31/2012  3/29/2016    7,535,000    3,008,298    3,021,112    3,586,458    -    - 
UDF III, LP  UDF IV  Collin and Tarrant County, TX  Participation in 1st lien, 145 acres; pledge of equity, 248.7 acres; reimbursements   12%  6/11/2012  6/4/2016    1,700,000    1,216,126    -    439,676    36,994    - 
UDF III, LP  UDF IV  Collin County, TX  Participation in 1st lien, 1 finished lot; pledge of equity, 288 paper lots and 178.5 acres; reimbursements   12%  5/2/2013  12/28/2015    15,000,000    10,203,886    550,922    753,227    1,490,405    2,001,559 
UMT Home Finance, LP  UDF IV  Dallas County, TX  Participation in 1st lien homebuilding line   13%  10/3/2013  11/14/2015    10,000,000    3,064,875    5,388,249    6,284,641    -    - 
United Residential Home Finance, LP  UDF IV  Dallas County, TX  Participation in 1st lien; 61 finished lots   13%  12/16/2013  6/28/2016    4,868,200    -    768,901    2,390,488    -    1,708,811 
United Residential Home Finance, LP  UDF IV  Travis County, TX  Participation in 1st lien; 56 paper lots   13%  12/16/2013  7/31/2016    3,026,000    -    63,663    1,315,467    -    - 
UMT Home Finance III, LP  UDF IV  Harris County, TX  Participation in 1st lien and reimbursements; 3 finished lots; 116 paper lots   13%  10/6/2014  4/26/2016    6,650,000    -    1,817,862    -    -    4,832,138 
                                                    
Total Loan Participation Interests - Related Parties                       $66,592,752   $35,255,640   $11,610,709   $14,769,957   $2,246,831   $8,542,508 
                                                    
Grand Total                       $1,042,265,156   $625,624,295   $108,141,432   $142,236,191   $96,770,330   $219,307,602 

 

(1)Represents lender as of September 30, 2015. In some cases, loans may be assigned between UDF IV and its wholly-owned subsidiaries.
(2)Reflects remaining collateral as of September 30, 2015.
(3)Reflects most current amendment to loan as of September 30, 2015, if applicable.
(4)Loan acquired from a senior lender. Original Note Date represents date of acquisition.

 

 48 

 

 

Location of Real Property Loans and Investments

 

As of September 30, 2015, approximately 99% of our real property loans and investments are secured by or related to properties located in Texas and approximately 1% are secured by properties located in Florida. In addition, we have one real property loan secured by property in North Carolina which represents less than 1% of our real property loans and investments. The following table summarizes the location of our real property loans and investments as of September 30, 2015:

 

Location  % of Balance 
Dallas, Texas area   68%
Austin, Texas area   13%
Houston, Texas area   8%
San Antonio, Texas area   9%
Lubbock, Texas area   1%
Tampa and Orlando, Florida area   1%
North Carolina area   * 
Total   100%

 

* Less than 1%

 

Results of Operations

 

The three months ended September 30, 2015 as compared to the three months ended September 30, 2014

 

Revenues

 

Interest income (including interest income – related parties) for the three months ended September 30, 2015 and 2014 was approximately $20.7 million and $19.2 million, respectively. The increase in interest income for the three months ended September 30, 2015 is primarily the result of our increased notes receivable, notes receivable – related parties and loan participation interest – related parties portfolio of approximately $618.1 million as of September 30, 2015, compared to approximately $593.4 million as of September 30, 2014 as we continued to re-invest proceeds from loan repayments and as we invested increased amounts of leverage in revenue-generating real estate investments.

 

 49 

 

 

Commitment fee income (including commitment fee income – related parties) for the three months ended September 30, 2015 and 2014 was approximately $503,000 and $834,000, respectively. The decrease in commitment fee income for the three months ended September 30, 2015 is primarily the result of a reduction in loan origination fees earned by us on loans to our borrowers.  Commitment fee income may fluctuate based on (1) the terms of the notes that we enter into with our borrowers, (2) the timing and amount of credit enhancements that we provide our borrowers or other third parties and (3) the timing and amount of owned lot inventory under option agreements with builders.

 

We expect revenues to increase as we grow our portfolio with capital from additional debt or possible future equity offerings and as we reinvest proceeds from loans that are repaid.

 

Expenses

 

Interest expense related to our notes payable and lines of credit totaled approximately $2.6 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively. The increase in interest expense for the three months ended September 30, 2015 is primarily the result of the increase in our aggregate borrowings to approximately $170.9 million as of September 30, 2015, from approximately $142.3 million as of September 30, 2014. We increased our aggregate borrowings as of September 30, 2015 to fund the growth of our portfolio. Interest expense will fluctuate based on the timing of leverage introduced to the fund as well as the timing of draws and payments on our lines of credit. We expect interest expense to increase as we add additional debt to our balance sheet to grow our portfolio.

 

Management fees – related party expense represents the expense associated with the Base Management Fees and Incentive Management Fees payable in connection with our Advisory Agreement. See Note B to the accompanying consolidated financial statements for further discussion of our Management Fees. Management fees – related party expense was approximately $2.4 million and $2.3 million for the three months ended September 30, 2015 and 2014, respectively. We expect management fees – related party expense to increase as we grow our shareholders’ equity and as our returns increase, resulting in an increase to the Incentive Management Fees. The Incentive Management Fee may cause significant fluctuations in management fees – related party expense in the future.

 

We incurred listing expenses totaling approximately $77,000 during the three months ended September 30, 2014, which were primarily for legal fees, consulting and other third-party service provider costs incurred by us in connection with our Listing and Tender Offer.

 

General and administrative expense for the three months ended September 30, 2015 and 2014 was approximately $1.5 million and $1.2 million, respectively. General and administrative expense consists primarily of legal and accounting fees, transfer agent fees, insurance expense, compensation expense and amortization of debt financing costs. The increase in general and administrative expense is primarily a result of an increase in legal fees and an increase in amortization of debt financing costs corresponding to an increase in borrowings on our note payable and lines of credit when compared to the same period for the prior year. We expect general and administrative expense to increase as our portfolio grows, although quarterly amounts may fluctuate significantly.

 

General and administrative – related parties expense for the three months ended September 30, 2015 and 2014 was approximately $341,000 and $382,000, respectively. General and administrative – related parties expense consists of amortization of Debt Financing Fees, expense associated with Credit Enhancement Fees and the Advisor Expense Reimbursement. We expect general and administrative – related parties expense will decline from the historical run rate since we will no longer incur Acquisition and Origination Fees under the Advisory Agreement. Other components of general and administrative – related parties expense are expected to increase as our portfolio grows.

 

The nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014

 

Revenues

 

Interest income (including interest income – related parties) for the nine months ended September 30, 2015 and 2014 was approximately $61.3 million and $54.5 million, respectively. The increase in interest income for the nine months ended September 30, 2015 is primarily the result of our increased notes receivable, notes receivable – related parties and loan participation interest – related parties portfolio of approximately $618.1 million as of September 30, 2015, compared to approximately $593.4 million as of September 30, 2014 as we continued to re-invest proceeds from loan repayments and as we invested increased amounts of leverage in revenue-generating real estate investments.

 

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Commitment fee income (including commitment fee income – related parties) for the nine months ended September 30, 2015 and 2014 was approximately $1.8 million and $2.4 million, respectively. The decrease in commitment fee income for the nine months ended September 30, 2015 is primarily the result of a reduction in loan origination fees earned by us on loans to our borrowers.  Commitment fee income may fluctuate based on (1) the terms of the notes that we enter into with our borrowers, (2) the timing and amount of credit enhancements that we provide our borrowers or other third parties and (3) the timing and amount of owned lot inventory under option agreements with builders.

 

We expect revenues to increase as we grow our portfolio with capital from additional debt or potential future equity offerings and as we reinvest proceeds from loans that are repaid.

 

Expenses

 

Interest expense related to our notes payable and lines of credit totaled approximately $7.9 million and $2.9 million for the nine months ended September 30, 2015 and 2014, respectively. The increase in interest expense for the nine months ended September 30, 2015 is primarily the result of the increase in our aggregate borrowings of approximately $170.9 million as of September 30, 2015, as compared to approximately $142.3 million as of September 30, 2014. Interest expense will fluctuate based on the timing of leverage introduced to the fund as well as the timing of draws and payments on our lines of credit. We expect interest expense to increase as we add additional debt to our balance sheet to grow our portfolio.

 

Management fees – related party expense represents the expense associated with the Advisory Fees payable in connection with our Pre-Listing Advisory Agreement and the Base Management Fees and Incentive Management Fees payable in connection with our Advisory Agreement. In connection with the Listing, we terminated the Pre-Listing Advisory Agreement and adopted the Advisory Agreement, which became effective upon our Listing on June 4, 2014. See Note B to the accompanying consolidated financial statements for further discussion of our Management Fees. Management fees – related party expense was approximately $7.5 million and $7.6 million for the nine months ended September 30, 2015 and 2014, respectively. Management Fees incurred during the nine months ended September 30, 2015 include a combination of the Base Management Fees and Incentive Management Fees paid pursuant to the Advisory Agreement, while Management Fees incurred during the nine months ended September 30, 2014 include a combination of fees paid pursuant to the Pre-Listing Advisory Agreement as well as the Base Management Fees and Incentive Management Fees paid pursuant to the Advisory Agreement. The decrease in management fees – related party expense is primarily associated with the change in the calculation of Management Fees associated under the Advisory Agreement.  We expect management fees – related party expense to increase as we grow our shareholders’ equity, and as the returns in the fund increase such that we are paying the Incentive Management Fee described further in Note B to the accompanying consolidated financial statements. The Incentive Management Fee may cause significant fluctuations in management fees – related party expense in the future.

 

We incurred listing expenses totaling approximately $5.1 million during the nine months ended September 30, 2014, which were primarily for legal, investment banking, NASDAQ fees, share-based compensation, consulting and other third-party service provider costs incurred by us in connection with our Listing and Tender Offer.

 

General and administrative expense for the nine months ended September 30, 2015 and 2014 was approximately $3.7 million and $3.9 million, respectively. General and administrative expense consisted primarily of legal and accounting fees, transfer agent fees, insurance expense, compensation expense and amortization of debt financing costs. The decrease in general and administrative expense is primarily a result of a decrease in legal fees and transfer agent fees offset by an increase in amortization of debt financing costs corresponding to an increase in borrowings on our note payable and lines of credit when compared to the same period for the prior year.  We expect general and administrative expense to increase as our portfolio grows, although quarterly amounts may fluctuate significantly.

 

General and administrative – related parties expense for the nine months ended September 30, 2015 and 2014 was approximately $1.2 million and $(1.4) million, respectively. General and administrative – related parties expense consists of Acquisition and Origination Fees, amortization of Debt Financing Fees and expense associated with Credit Enhancement Fees. The change in general and administrative – related parties expense is primarily due to the fact that we no longer incur Acquisition and Origination Fees in accordance with the terms of the Advisory Agreement entered into on May 29, 2014 and, in connection with the Listing, we reversed approximately $3.2 million in unpaid Acquisition and Origination Fees, as discussed further in Note I to the accompanying consolidated financial statements. We expect general and administrative – related parties expense will decline from the historical run rate since we will no longer incur Acquisition and Origination Fees under the Advisory Agreement. Other components of general and administrative expense – related parties are expected to increase as our portfolio grows.

 

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Comparison Charts

 

The table below summarizes the approximate expenses associated with related parties for the periods indicated. We believe that these fees and reimbursements are reasonable and customary for comparable mortgage REITs.

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
Purpose  2015   2014   2015   2014 
                                 
Management Fees  $2,393,000    100%  $2,325,000    100%  $7,479,000    100%  $7,629,000    100%
                                         
Total Management Fees – related party  $2,393,000    100%  $2,325,000    100%  $7,479,000    100%  $7,629,000    100%
                                         
                                         
Amortization of Debt Financing Fees  $174,000    51%  $227,000    60%  $702,000    58%  $459,000    (33)%
                                         
Acquisition and Origination Fees (1)   -    -    -    -    -    -    (2,160,000)   157%
                                         
Credit Enhancement Fees   161,000    47%   149,000    39%   498,000    41%   317,000    (23)%
                                         
Advisor Expense Reimbursement   6,000    2%   6,000    1%   18,000    1%   8,000    (1)%
                                         
Total General and administrative – related parties  $341,000    100%  $382,000    100%  $1,218,000    100%  $(1,376,000)   100%

 

(1) Includes approximately $3.2 million in Acquisition and Origination Fees that were reversed in June 2014 associated with estimated Secondary DRIP Offering proceeds. In connection with our Listing, we ceased offering common shares of beneficial interest pursuant to our Secondary DRIP Offering.

 

The table below summarizes the approximate payments to related parties for the periods indicated:

 

      For the Nine Months Ended September 30,   For the Year Ended 
Payee  Purpose  2015   2014   December 31, 2014 
UMTH GS                          
   Management Fees  $7,351,000    88%  $7,422,000    88%  $9,751,000    87%
   Debt Financing Fees   480,000    6%   601,000    7%   754,000    7%
   Advisor Expense Reimbursement   18,000    *    4,000    *    12,000    * 
                                  
UMTH LD                                 
   Acquisition and Origination Fees   -    -    259,000    3%   259,000    2%
                                  
UDF III                                 
   Credit Enhancement Fees   501,000    6%   193,000    2%   416,000    4%
                                  
Total Payments     $8,350,000    100%  $8,479,000    100%  $11,192,000    100%

 

* Less than 1%

 

Cash Flow Analysis

 

Cash flows provided by operating activities for the nine months ended September 30, 2015 were approximately $27.8 million and primarily comprised net income offset partially by accrued interest receivable and accrued receivable – related parties. Cash flows provided by operating activities for the nine months ended September 30, 2014 were approximately $30.8 million and primarily comprised net income offset partially by accrued interest receivable.

 

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Cash flows provided by investing activities for the nine months ended September 30, 2015 were approximately $130,000, and primarily comprised originations of notes receivable (including related party transactions) and loan participation interest – related parties, offset by receipts from notes receivable (including related party transactions), loan participation interest – related parties and sales of lot inventory. Cash flows used in investing activities for the nine months ended September 30, 2014 were approximately $91.4 million and primarily comprised originations of notes receivable (including related party transactions) and loan participation interest – related parties, offset by receipts from notes receivable (including related party transactions) and loan participation interest – related parties.

 

Cash flows used in financing activities for the nine months ended September 30, 2015 were approximately $39.4 million and primarily comprised distributions to shareholders and an increase in restricted cash. Cash flows provided by financing activities for the nine months ended September 30, 2014 were approximately $39.0 million and were comprised primarily of net borrowings on lines of credit offset by distributions to shareholders, purchases of treasury shares and restricted cash.

 

Our cash and cash equivalents were approximately $19.0 million as of September 30, 2015, compared to approximately $12.0 million at September 30, 2014.

 

Liquidity and Capital Resources

 

Our liquidity requirements will be affected by (1) outstanding loan funding obligations, (2) purchases of finished single-family residential lots, (3) our administrative expenses, (4) debt service on our indebtedness, (5) acquisitions of senior indebtedness required to preserve our collateral position and (6) cash distributions (which have increased in connection with the termination of our DRIP, as discussed further in Note C to the accompanying consolidated financial statements). We expect that our liquidity will be provided by (1) loan interest, transaction fees and the receipt of credit enhancement fee payments, (2) loan principal payments, (3) sales of finished single-family residential lots, (4) credit lines available to us and (5) proceeds from potential offerings conducted pursuant to the Shelf Registration described further in Note C to the accompanying consolidated financial statements.

 

There may be a delay in deploying cash on our balance sheet into real estate-related investments, which could result in a delay in our ability to make distributions to our shareholders. In accordance with our organizational documents and Maryland law, we may not make distributions that would (1) cause us to be unable to pay our debts as they become due in the usual course of business or (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any. In addition, to the extent our investments are in development projects or in other properties that have significant capital requirements and/or delays in their ability to generate income, our ability to make distributions may be negatively impacted.

 

We may use debt as a means of providing additional funds for the acquisition or origination of secured loans, acquisition of properties and the diversification of our portfolio. There is no limitation on the amount we may borrow for the purchase or origination of a single secured loan, the purchase of any individual property or other investment. However, our board of trustees has adopted a policy to generally limit our borrowings to 50% of the aggregate fair market value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.

 

Our current typical indebtedness is a term loan or revolving credit facility permitting us to borrow up to an agreed-upon outstanding principal amount from senior commercial lenders who lend against a percentage of the fair market value of the assets which collateralize the loan. Indebtedness may be secured by required cash deposits and a first priority lien upon specified assets or all of our existing and future acquired assets.

 

Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the repayment of loans, sale of assets, undistributed funds from operations and proceeds from potential offerings conducted pursuant to the Shelf Registration described further in Note C to the accompanying consolidated financial statements. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. Although we believe that the resources stated above will be sufficient to satisfy our operating requirements for the near future, depending on market conditions and other factors, we may choose to raise funds through additional debt or equity offerings or other means.

 

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Off-Balance Sheet Arrangements

 

For a discussion of off-balance sheet arrangements, see Note G to our accompanying consolidated financial statements.

 

Contractual Obligations

 

For the three months ended September 30, 2015, we have no material changes to contractual obligations, other than loan commitments discussed above in “Lot Inventory and Loan Portfolio” and notes payable and lines of credit discussed in Note F to the accompanying consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk is the exposure to loss resulting from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. A significant market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. Another significant market risk is the market price of finished homes and lots. The market price of finished homes or lots is driven by the demand for new single-family homes and the supply of unsold homes and finished lots in a market. The change in one or both of these factors can have a material impact on the cash realized by our borrowers and resulting collectability of our loans and interest.

 

Demand for our secured loans and the amount of interest we collect with respect to such loans depends on the ability of borrowers of real estate construction and development loans to sell single-family lots to homebuilders and the ability of homebuilders to sell homes to homebuyers.

 

The single-family lot and residential homebuilding market is highly sensitive to changes in interest rate levels. As interest rates available to borrowers increase, demand for secured loans decreases, and vice versa. Housing demand is also adversely affected by increases in housing prices and unemployment and by decreases in the availability of mortgage financing. In addition, from time to time, there are various proposals for changes in the federal income tax laws, some of which might remove or limit the deduction for home mortgage interest. If effective mortgage interest rates increase and/or the ability or willingness of prospective buyers to purchase new homes is adversely affected, the demand for new homes may also be negatively affected. As a consequence, demand for and the performance of our real estate finance products may also be adversely impacted.

 

We seek to mitigate our single-family lot and residential homebuilding market risk by closely monitoring economic, project, market and homebuilding fundamentals. We review a variety of data and forecast sources, including public reports of homebuilders, mortgage originators and real estate finance companies; financial statements of developers; project appraisals; proprietary reports on primary and secondary housing market data, including land, finished lot, and new home inventory and prices and concessions, if any; and information provided by government agencies, the Federal Reserve Bank, the National Association of Home Builders, the National Association of Realtors, public and private universities, corporate debt rating agencies, and institutional investment banks regarding the homebuilding industry and the prices of and supply and demand for single-family residential homes.

 

In addition, we further seek to mitigate our single-family lot and residential homebuilding market risk by having UMTH LD assign an individual asset manager to each secured note or equity investment. This individual asset manager is responsible for monitoring the progress and performance of the builder or developer and the project, as well as assessing the status of the marketplace and value of our collateral securing repayment of our loan or equity investment.

 

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of September 30, 2015, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

 

We are not a party to, and none of our assets are subject to, any material pending legal proceedings.

 

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors included in our 2014 10-K except for the following:

 

We, our affiliates, our Advisor and its affiliates will have equity interests and/or profit participations in entities for which we provide financing, and we may have a greater incentive to make loans and/or provide credit enhancements to such entities to preserve and/or enhance our economic interest or the economic interest of our affiliates, our Advisor or its affiliates in such entities.

 

We expect to make loans and/or provide credit enhancement transactions to our affiliates and affiliates of our Advisor. If our affiliate, our Advisor or its affiliate has an equity interest or participation interest in an entity that requires a loan or credit enhancement, we and our Advisor may have a greater incentive to make a loan to such entity to preserve and/or enhance our economic interest or the economic interest of our affiliate, our Advisor or its affiliate in such entity. As of September 30, 2015, our 20 loans to related parties have an outstanding balance of approximately $105.0 million.

 

We will face risks relating to joint ventures with our affiliates and third parties that are not present with other methods of investing in properties and secured loans.

 

We may enter into joint ventures with certain of our affiliates, as well as with third parties, for the funding of loans or the acquisition of properties. We may also purchase loan participation interests or loans through joint ventures, partnerships or other co-ownership arrangements with our affiliates, the sellers of the loans, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other methods of investment in secured loans, including, for example:

 

·that such affiliate, co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals, which may cause us to disagree with our affiliate, co-venturer or partner as to the best course of action with respect to the investment and which disagreement may not be resolved to our satisfaction;

 

·that such affiliate, co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, which may cause us not to realize the return anticipated from our investment; or

 

·that it may be difficult for us to sell our interest in any such participation, co-venture or partnership.

 

Moreover, in the event we determine to foreclose on the collateral underlying a non-performing investment, we may be required to obtain the cooperation of our affiliate, co-venturer or partner to do so. We anticipate that we will participate with our affiliates in certain development projects where we and our affiliates make loans to the borrower, in which case we expect to enter into an inter-creditor agreement that will define our rights and priority with respect to the underlying collateral. Our inability to foreclose on a property acting alone may cause significant delay in the foreclosure process, in which time the value of the property may decline.

 

As of September 30, 2015, we have not entered into any joint ventures. As of September 30, 2015, we are participating in 8 loans originated by affiliates, with an outstanding balance of approximately $35.3 million.

 

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Our Advisor faces additional conflicts of interest relating to management relationships with affiliated entities and may make decisions that disproportionately benefit one or more of our affiliated entities instead of us.

 

Our Advisor also serves as the advisor for UMT and is an affiliate of the other United Development Funding programs, all of which engage in the same businesses as us. Our asset manager also serves as the asset manager for the other United Development Funding programs, but does not serve as the asset manager for UMT. Because our Advisor or our asset manager have advisory and management arrangements with UMT and the other United Development Funding programs, it is likely that they will encounter opportunities to invest in or acquire interests in secured loans, participations and/or properties to the benefit of UMT or one of the United Development Funding programs, but not others. Our Advisor or our asset manager may make decisions to finance certain properties, which decisions might disproportionately benefit UMT or another United Development Funding program other than us. In such event, our results of operations and ability to pay distributions to our shareholders could be adversely affected.

 

Because our Advisor and its affiliates are affiliated with UMT, UDF I, UDF II, UDF III, UDF V and UDF LOF, agreements and transactions among the parties with respect to any loan participation among two or more of such parties will not have the benefit of arm’s length negotiation of the type normally conducted between unrelated co-venturers. Under these loan participation arrangements, we may not have a first priority position with respect to the underlying collateral. In the event that a co-venturer has a right of first refusal to buy out the other co-venturer, it may be unable to finance such buy-out at that time. In addition, to the extent that our co-venturer is an affiliate of our Advisor, certain conflicts of interest will exist. As of September 30, 2015, we are participating in 8 loans originated by affiliates, with an outstanding balance of approximately $35.3 million.

 

Investments in subordinate, mezzanine and wraparound mortgage loans present additional risks compared to loans secured by first deeds of trust.

 

We expect that we will be the junior lender with respect to some of our loans. We may invest in (a) subordinate mortgage loans (some of which are also secured by pledges), which investments represent approximately 45% of our outstanding loans as of September 30, 2015; (b) co-investment loans (which are secured by pledges and collateral-sharing arrangements permitting us to share in the proceeds of subordinate liens held by affiliates), which investments represent 0% of our outstanding loans as of September 30, 2015; (c) mezzanine loans (which are secured by pledges), which investments represent approximately 3% of our outstanding loans as of September 30, 2015; and (d) wraparound mortgage loans, which investments represent 0% of our outstanding loans as of September 30, 2015. A wraparound, or all-inclusive, mortgage loan is a loan in which the lender combines the remainder of an old loan with a new loan at an interest rate that blends the rate charged on the old loan with the current market rate. In a subordinate mortgage loan and in a mezzanine loan, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the prior mortgage lender. In a wraparound mortgage loan, our rights will be similarly subject to the rights of any prior mortgage lender, but the aggregate indebtedness evidenced by our loan documentation will be the prior mortgage loans in addition to the new funds we invest. Under a wraparound mortgage loan, we would receive all payments from the borrower and forward to any senior lender its portion of the payments we receive. Because all of these types of loans are subject to the prior mortgage lender’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans.

 

Larger loans result in less portfolio diversity and may increase risk.

 

We intend to invest in individual loans with principal amounts generally between $2.5 million and $15 million. However, we may invest in larger loans depending on such factors as our performance and the value of the collateral. These larger loans are riskier because they may reduce our ability to diversify our loan portfolio. As of September 30, 2015, we have invested approximately 5% of the outstanding balance of our portfolio in our largest loan to a single borrower.

 

The concentration of loans with a common borrower may increase our risks.

 

We may invest in multiple mortgage loans that share a common borrower or loans to related borrowers. As of September 30, 2015, we have invested approximately 62% of the outstanding balance of our portfolio in 69 loans to our largest group of related borrowers. In addition, we are participating in 5 loans originated by our affiliates to the same group of related borrowers, representing an additional 5% of the outstanding balance of our loan portfolio. The bankruptcy, insolvency or other inability of any borrower that is the subject of multiple loans to pay interest or repay principal on its loans would have adverse consequences on our income and reduce the amount of funds available for distribution to investors. In addition, we expect to be dependent on a limited number of borrowers for a large portion of our business. The more concentrated our portfolio is with one or a few borrowers, the greater credit risk we face. The loss of any one of these borrowers would have a material adverse effect on our financial condition and results of operations.

 

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We have made loans that are not secured by real estate or pledges of equity interest, and we may make additional unsecured loans in the future.

 

As of September 30, 2015, we have made 5 loans that are not secured by real estate or by a pledge of the equity interest in the borrower, with an outstanding balance of approximately $19.3 million.  2 of those loans, which have an outstanding balance of approximately $12.7 million as of September 30, 2015, were made to affiliated parties.  Loans that are not secured are inherently riskier than secured loans.  In the event a borrower of an unsecured loan performs poorly, the borrower may be unable to repay our loan, and our results of operations and our ability to pay distributions to our shareholders could be adversely affected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Unregistered Sales of Equity Securities

 

On February 3, 2014, our board of trustees appointed Stacey H. Dwyer as our Chief Operating Officer, effective February 17, 2014, and in connection with this appointment, we entered into an employment agreement with Ms. Dwyer effective as of February 17, 2014.

 

Pursuant to her employment agreement, Ms. Dwyer’s compensation includes (a) an initial equity award of 82,410 common shares, one-quarter of which will vest annually over four years, subject to Ms. Dwyer’s continued employment with us through such date and (b) an annual equity grant of 12,500 common shares on each anniversary date of the effective date of the employment agreement, with each annual equity grant vesting five years after the applicable grant date, subject to Ms. Dwyer’s continued employment with us through such date. Notwithstanding the foregoing, if the closing price per share is less than $18.00 as of any anniversary of the effective date, the annual equity grant with respect thereto shall not be made, and shall instead be deferred to the next anniversary of the effective date on which the closing price per share is at least $18.00. From the date of grant until such time as they become vested and payable, the Restricted Shares granted to Ms. Dwyer pursuant to her employment agreement may not be sold, assigned, transferred or otherwise disposed of. All Restricted Shares were issued in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

 

The following table reflects Restricted Shares that have been granted to Ms. Dwyer and Restricted Shares that vested or have been forfeited by Ms. Dwyer during the nine months ended September 30, 2015.

 

   Restricted
Shares
   Grant Date
Fair Value
   Total 
Outstanding as of January 1, 2015 (1)   82,410   $20.00   $1,648,200 
Granted (2)   -    -    - 
Vested (1)   (20,602)   20.00    (412,050)
Forfeited   -    -    - 
                
Outstanding as of September 30, 2015   61,808   $20.00   $1,236,150 

 

(1)In accordance with her employment agreement, the Trust and Ms. Dwyer entered into a Restricted Stock Award Agreement on February 21, 2014, pursuant to which the Trust issued 82,410 shares to Ms. Dwyer. These shares vest and become non-forfeitable annually over four years after the grant date of February 21, 2014. Specifically, 20,602.50 shares shall vest and become non-forfeitable on each of the first, second, third and fourth anniversaries of the grant date, subject to Ms. Dwyer’s continued employment as an officer of the Trust as of each such vesting date.

 

(2)In accordance with Ms. Dwyer’s employment agreement and pursuant to its Equity Plan, the trust will grant 12,500 common shares to Ms. Dwyer on each anniversary date of the effective date of the Employment Agreement (the first anniversary of which was February 17, 2015), with each annual equity grant vesting five years after the applicable grant date, subject to Ms. Dwyer’s continued employment as an officer of the Trust as of each such vesting date provided that, if the closing price per share is less than $18.00 as of any anniversary of the effective date, the annual equity grant with respect thereto will not be made, and shall instead be deferred to the next anniversary of the effective date on which the closing price per share is at least $18.00. The annual equity grant scheduled for February 17, 2015 was deferred as the closing price per share of the Trust’s common shares on February 17, 2015 was less than $18.00.

 

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Pursuant to her employment agreement, Ms. Dwyer receives an annual minimum guaranteed bonus of $350,000. The bonus for a preceding calendar year will be paid to Ms. Dwyer on or before June 30 of the year following the year that the bonus was earned. At Ms. Dwyer’s discretion, she can choose to receive the bonus in cash or in common shares of beneficial interest of the Trust, or any combination thereof. Ms. Dwyer’s 2014 bonus (prorated based on an effective employment date of February 17, 2014) was accrued and included in general and administrative expense during the year ended December 31, 2014. On June 30, 2015, as payment for her 2014 bonus, Ms. Dwyer elected to receive 10,000 common shares of beneficial interest with the remainder of her 2014 bonus payable in cash. The closing per share price of UDF IV shares on June 30, 2015 was $17.48.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Index to Exhibits attached hereto.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  United Development Funding IV
   
Dated:  November 9, 2015 By: /s/ Hollis M. Greenlaw
    Hollis M. Greenlaw
    Chief Executive Officer
    Principal Executive Officer
     
Dated:  November 9, 2015 By: /s/ Cara D. Obert
    Cara D. Obert
    Chief Financial Officer
    Principal Financial Officer

 

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Index to Exhibits

 

Exhibit Number   Description
     
3.1   Third Articles of Amendment and Restatement of Declaration of Trust of United Development Funding IV, effective July 30, 2014 (previously filed in and incorporated by reference to Exhibit 3.1 to Form 10-Q filed on August 13, 2014)
     
3.2   Amended and Restated Bylaws of United Development Funding IV, effective July 30, 2014 (previously filed in and incorporated by reference to Exhibit 3.2 to Form 8-K filed on July 31, 2014)
     
4.1   Distribution Reinvestment Plan (previously filed in and incorporated by reference to Exhibit 4.5 to Post-Effective Amendment No. 1 to Registration Statement on Form S-3, Commission File No. 333-188045, filed on August 4, 2014)
     
4.2   Form of Senior Indenture (previously filed in and incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3, Commission File No. 333-197841, filed on August 4, 2014)
     
4.3   Form of Subordinated Indenture (previously filed in and incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-3, Commission File No. 333-197841, filed on August 4, 2014)
     
10.1   Amendment No. 2 to Loan Agreement by and between Waterfall Eden Master Fund, Ltd., Waterfall Sandstone Fund, LP, HEDCO ABS, Ltd. and United Development Funding IV, dated July 2, 2015 (previously filed in and incorporated by reference to Exhibit 10.1 to Form 10-Q filed on August 10, 2015)
     
10.2   Amended and Restated Promissory Note by United Development Funding IV in favor of Waterfall Eden Master Fund, Ltd., Waterfall Sandstone Fund, LP and HEDCO ABS, Ltd., dated July 2, 2015 (previously filed in and incorporated by reference to Exhibit 10.2 to Form 10-Q filed on August 10, 2015)
     
31.1*   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
     
31.2*   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
     
32.1**   Section 1350 Certifications
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document

 

*Filed herewith.

 

**Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.