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PARTICIPATION AGREEMENT
BY AND AMONG
UNITED DEVELOPMENT FUNDING, L.P.,
UNITED DEVELOPMENT FUNDING II, L.P.,
UNITED DEVELOPMENT FUNDING III, L.P.,
UNITED DEVELOPMENT FUNDING LAND OPPORTUNITY FUND, L.P.,
UNITED DEVELOPMENT FUNDING IV AND
UMTH LAND DEVELOPMENT, L.P.

This Participation Agreement (the “Agreement”) is executed this 12th day of
November, 2009, by and among United Development Funding, L.P., a Delaware
limited partnership, (“UDF I”),  United Development Funding II, L.P., a Delaware
limited partnership (“UDF II”), United Development Funding III, L.P., a Delaware
limited partnership (“UDF III”), United Development Funding Land Opportunity
Fund, L.P., a Delaware limited partnership (“UDF LOF”), United Development
Funding IV, a Maryland real estate investment trust (“UDF IV,” and together with
UDF I, UDF II, UDF III and UDF LOF, the “UDF Funds”), and UMTH Land Development,
L.P., a Delaware limited partnership (“UMTH LD”).

FACTUAL BACKGROUND

1.             The UDF Funds invest, or will invest, in the acquisition of land
and development of single-family lots, construction of single-family homes and
model homes, and the acquisition of model homes and finished lots utilizing a
diverse range of capital structures such as equity investments, joint venture
participations, mezzanine loans, subordinated loans and senior loans.

2.             The lifecycle of single-family lot development and home
construction generally begins with the acquisition of land for development of
single-family lots, followed by the entitlement and engineering of the subject
property, followed by the development of raw land into a finished lot, followed
by the construction and sale of a single-family home.  There are differing
levels of capital appreciation, cash flow, loan-to-value ratios, development
risk, market risk and investment yields over the course of the development
lifecycle.

3.             Each of the UDF Funds invests, or will invest, in substantially
similar land development opportunities, although such investments may be made at
different points in the development lifecycle in accordance with the investment
criteria, yield requirements, cash flow expectations, investment horizon and
risk tolerances of the respective UDF Fund at the time the investment is
made.  In addition, the UDF Funds will determine to exit investments in land
development and home construction projects at different points in the
development lifecycle in accordance with the investment criteria, yield
requirements, cash flow expectations, investment horizon and risk tolerances of
the respective UDF Fund at the time the exit is made.

4.             Subject to the respective limitations set forth in the
organizational and operational documents of each of the UDF Funds, investments
may be entered into as co-investments or joint ventures between two or more UDF
Funds, and may be sold to or refinanced by other UDF Funds in accordance with
the investment criteria, yield requirements, cash flow expectations, investment
horizon and risk tolerances of the respective UDF Funds.

5.             UMTH LD is the asset manager of UDF I, UDF II, UDF LOF and UDF IV
and the general partner of UDF III.  In exercising its duties to each of the UDF
Funds, UMTH LD will manage each investment in accordance with the investment
criteria, yield requirements, cash flow expectations, investment horizon and
risk tolerances of the respective UDF Fund as each investment progresses.

 

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6.             The UDF Funds each recognize that, in exercising its duties to
each of them, UMTH LD will encounter conflicts of interest.  Thus, each of the
UDF Funds and UMTH LD seeks to equitably apportion investment opportunities
among and between such entities in accordance with each fund’s investment
criteria, yield requirements, cash flow expectations, investment horizon and
risk tolerances at the time each transaction opportunity is presented by UMTH
LD.

AGREEMENT

 NOW, THEREFORE, in consideration of the covenants and agreements hereinafter
set forth, the parties hereto agree as follows:

1.             In each case in which there is an opportunity to participate in a
transaction, including any investment, co-investment, joint venture,
participation, refinancing or sale, that qualifies for the investment criteria,
yield requirements, cash flow expectations, investment horizon and risk
tolerances of any two or more UDF Funds, which are described generally in
Appendix A hereto, the amount that each respective entity will invest in such
transaction shall be determined as follows:

A.            First, each UDF Fund which is presented the transaction
opportunity will be allocated a percentage of the transaction opportunity
determined as the ratio of the total amount of Equity Invested in such entity
over the Total Combined Equity Invested, such percentage being the “Investment
Percentage.”  For purposes of this Agreement, “Equity Invested” shall include
both direct investment and retained earnings as determined by the Most Recent
Financial Statements, and the “Most Recent Financial Statements” shall mean the
most recently available audited or unaudited financial statements prepared by
the respective entities with respect to the most recent calendar quarter.  For
purposes of this paragraph 1.A., “Total Combined Equity Invested” shall mean the
sum of the Equity Invested in each of the UDF Funds to which the opportunity is
presented.

Each UDF Fund which is presented the transaction opportunity will invest in such
transaction opportunity an amount equal to the Investment Percentage multiplied
by the amount of Required Cash.  For purposes of this Agreement, “Required Cash”
means the aggregate amount of cash required to be invested by the respective UDF
Funds in the transaction opportunity.

 
B.             Second, if, after allocating Available Cash (as defined in
paragraph 1.D. below) pursuant to paragraph 1.A. above, the full amount of the
Required Cash has not been invested, the remaining transaction opportunity shall
be allocated amongst and between the entities with remaining Available Cash as
the ratio of the total amount of Equity Invested in each such entity over the
Total Combined Equity Invested, such percentage being the “Remaining Investment
Percentage.”  For the purposes of this paragraph 1.B., “Total Combined Equity
Invested” shall mean the sum of the Equity Invested in each of the entities with
remaining Available Cash.

Each such UDF Fund will invest in the remaining transaction opportunity an
amount equal to the Remaining Investment Percentage multiplied by the amount of
Required Cash.

C.             Third, if, after allocating Available Cash pursuant to paragraphs
1.A. and 1.B. above, the full amount of the Required Cash has not been invested,
the remaining transaction opportunity shall be allocated amongst and between the
entities with remaining Available Cash by repeating the process set forth in
paragraph 1.B. above until the full amount of Required Cash has been invested.

 
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D.             “Available Cash” shall mean all cash of the respective entity
available for investment, not including lines of credit or other borrowing
facilities, as determined by UMTH LD, taking into consideration the projected
sources and uses of cash for that respective entity.

2.             In each case in which a transaction opportunity is presented to a
UDF Fund, the transaction opportunity shall be structured in compliance with the
investment limitations and requirements set forth in the applicable
organizational and operational documents of the respective UDF Fund and any
applicable prospectus or offering memorandum relating to the respective UDF
Fund.  Unless the organizational and operational documents of the respective UDF
Fund are more restrictive, the following terms apply:

A.            No loan shall be sold between funds for an amount in excess of the
outstanding loan balance, including accrued interest, at the time of the
sale.  This does not prohibit the acquiring entity from subsequently
restructuring the loan in any way, including an increase in the loan amount; and

B.             No asset shall be sold between funds for an amount in excess of
its fair market value as determined by an independent expert.  This does not
prohibit the financing of the investment by another UDF Fund.

3.             Notwithstanding anything contained herein to the contrary, UMTH
LD shall exercise its best efforts to reasonably allocate transaction
opportunities amongst the UDF Funds as set forth herein, provided, however, that
UMTH LD may use approximations and rounding.  UMTH LD will rely on its
Investment Committee to apply each UDF Fund’s investment criteria, yield
requirements, cash flow expectations, investment horizon and risk tolerances to
recommend an investment, co-investment, joint venture, participation,
refinancing or sale by the respective UDF Funds.  Further, notwithstanding
anything contained herein to the contrary, UMTH LD and its agents cannot give
assurance that they will recommend investment in all transaction opportunities
of which they become aware that are suitable for one or more UDF Fund on an
equal allocation amongst such entities.

4.             This Agreement shall be governed and construed under the laws of
the State of Texas.

 
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

 
By:
UMTH Land Development, L.P.,
   
a Delaware limited partnership
               
By:
/s/ Hollis M. Greenlaw
     
Name: 
Hollis M. Greenlaw
     
Title:
Chief Executive Officer
                     
By:
United Development Funding, L.P.,
   
a Delaware limited partnership
             
By:
United Development Funding, Inc.,
     
its general partner
               
By:
/s/ Hollis M. Greenlaw
     
Name:
Hollis M. Greenlaw
     
Title:
Chief Executive Officer
                     
By:
United Development Funding II, L.P.,
   
a Delaware limited partnership
             
By:
United Development Funding II, Inc.,
     
its general partner
               
By:
/s/ Hollis M. Greenlaw
     
Name:
Hollis M. Greenlaw
     
Title:
Chief Executive Officer
                     
By:
United Development Funding III, L.P.,
   
a Delaware limited partnership
             
By:
UMTH Land Development, L.P.,
     
a Delaware limited partnership
               
By:
/s/ Hollis M. Greenlaw
     
Name:
Hollis M. Greenlaw
     
Title:
Chief Executive Officer

 
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By:
United Development Funding Land Opportunity Fund, L.P.,
   
a Delaware limited partnership
             
By:
UDF Land GenPar, L.P.,
     
a Delaware limited partnership
               
By:
/s/ Hollis M. Greenlaw
     
Name:
Hollis M. Greenlaw
     
Title:
Chief Executive Officer
                     
By:
United Development Funding IV
   
a Maryland real estate investment trust
             
By:
/s/ Hollis M. Greenlaw
   
Name: 
Hollis M. Greenlaw
   
Title:
Chief Executive Officer

 
 
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APPENDIX A

Investment Criteria, Yield Requirements, Cash Flow Expectations,
Investment Horizons and Risk Tolerances of the UDF Funds

UDF I:

UDF I provides asset level and fund level leverage and generally seeks to invest
in land acquisition and development loans and participation agreements, provide
equity as an investment in entities that acquire and develop single-family
residential properties, and provide credit enhancements to developers and
entities in connection with third-party financing of land acquisition and
development loans.

UDF I generally seeks capital appreciation through value enhancement, higher
yields and internal rates of return and lower-to-more-moderate cash flow from
loans and equity investments with a mid- to long-term investment horizon and
high risk tolerances.

UDF II:

UDF II provides asset level and fund level leverage and generally seeks to
invest in land acquisition and development loans and participation agreements,
provide equity as an investment in entities that acquire and develop
single-family residential properties, and provide credit enhancements to
developers and entities in connection with third-party financing of land
acquisition and development loans.

UDF II generally seeks capital appreciation through value enhancement, higher
yields and internal rates of return and lower-to-more-moderate cash flow from
loans and equity investments with a mid- to long-term investment horizon and
high risk tolerances.

UDF III:

UDF III does not make equity investments and does not utilize permanent leverage
and generally seeks to (i) invest in secured real estate loans made to persons
and entities for the acquisition of parcels of real property to be developed as
single-family residential lots that will be marketed and sold to home builders,
(ii) secure such loans by a first lien or a second lien on real property or a
pledge of the borrowing entities’ ownership interest, and (iii) provide credit
enhancements to developers, homebuilders and other real estate entities in
connection with third-party financing of home construction loans and land
acquisition and development loans.

UDF III does not seek capital appreciation and generally seeks moderate yield
and higher cash flow from loans with a mid-term investment horizon and a
moderate risk tolerance.

UDF LOF:

UDF LOF generally seeks to invest in and finance finished lots, paper lots and
land to be developed into residential lots and model and finished new home
inventory.

UDF LOF generally seeks capital appreciation, high yields and low-to-moderate
cash flow from loans and equity investments with a mid-to-long-term investment
horizon and a high risk tolerance.

UDF IV:

UDF IV generally seeks to (i) invest in land acquisition and development loans,
finished lot loans, model and new home inventory, loans for the construction of
new homes and participation agreements, (ii) secure such loans by either a first
lien or a second lien on real property or a pledge of the borrowing entities’
ownership interest, (iii) invest in the equity of entities that acquire and
develop single-family residential properties, (iv) invest in discounted cash
flows secured by municipal assessments levied on real property and (v) provide
credit enhancements to developers and entities in connection with third-party
financing of land acquisition and development loans.

UDF IV generally seeks moderate yields and moderate-to-high cash flow from loans
and capital appreciation from equity investments with a mid-term investment
horizon and a low risk tolerance.
 
 
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