Exhibit
10.3


SECURITY
AGREEMENT





This Security Agreement (this “Agreement”) dated the
20th
day of August, 2008, is made by United Development Funding, L.P., a Delaware
limited partnership, formerly a Nevada limited partnership (the “Borrower”), in favor
of United Development Funding III, L.P., a Delaware limited partnership (the
“Lender”).





RECITALS





A.           Borrower
has executed and delivered to Lender that certain Secured Line of Credit
Promissory Note in the principal amount of $45,000,000.00, dated the date of
this Agreement (the “Note”).





B.           It
is a condition precedent to Lender’s advancing of funds under the Note that
Borrower shall have granted the security interests contemplated by this
Agreement.





AGREEMENT:





NOW, THEREFORE, in consideration of the
premises and in order to induce Lender to advance funds under the Note, and for
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, Borrower and Lender agree as follows:





1.           Grant of Security;
Subordination.                                                                           This
Agreement is hereby made subject to the Note and all of its terms and
conditions.  All capitalized terms used but not defined in this
Agreement shall have the respective meanings given to such terms in the
Note.  This Agreement hereby is made subordinate to the Senior
Debt.  Subject to the foregoing, Borrower hereby assigns, pledges and
grants to Lender for its benefit, a continuing security interest in all of
Borrower’s right, title and interest in and to the following (collectively, the
“Collateral”),
wherever located and whether now owned or hereafter acquired:





(a)           all
promissory notes, mortgages and contracts for deed and/or installment contracts
in which Borrower owns a full or partial interest, including, without
limitation, all related loan documents evidencing such promissory notes,
mortgages, and contracts for deed and/or installment contracts, all deeds of
trust or other instruments creating a mortgage lien on an estate in fee simple
in real property and the improvements thereon, all guarantees, all security
agreements, all assignments and all title policies, insurance policies, and
security interests related to any of the foregoing and the rights to receive
payment thereon (all such interests and documents evidencing such interests are
referred to herein collectively as the “Mortgages”).





(b)           all
cash on hand, including, without limitation, cash held in bank accounts,
brokerage accounts, certificates of deposit, and other depositories, all
accounts receivable owing to Borrower by any person or entity, including all
such amounts due Borrower under the Mortgages, and all security for payment
thereof, and in and to all the proceeds, monies, income, instruments,
securities, accounts, benefit, collections, tax refunds, insurance proceeds, and
products thereof and thereon and attributable or accruing thereto;





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(c)           all
of Borrower’s interest in all equipment, inventory, materials, computer software
and records, goods, and other personal property owned by Borrower now or in the
future, and all documents and receipts covering such property, and all licenses
and permits used or held for use in connection with such property;





(d)           all
patents, trademarks, service marks, copyrights, licenses, and all other
intellectual property owned by Borrower (collectively, the “Intellectual
Property”), and all agreements and contracts to which Borrower is a party
regarding the use and exploitation of any  of the Intellectual
Property and applications therefor, now owned or hereafter acquired by
Borrower;





(e)           all
of Borrower’s contract rights and other general intangibles relating to any of
the Collateral, including, without limitation, all license
agreements;





(f)           all
of Borrower’s interest in any subsidiary company, and all capital stock, equity
interests, partnership interests, and membership interests and all warrants,
options and other rights to purchase any such interests, in any other
corporation, partnership, limited liability company or other business
entity;





(g)           all
books and records (including electronic records, computer disks, tapes,
printouts and other storage media) relating to any of the foregoing;
and





(h)           all
of Borrower’s interest in the proceeds of any sale or disposition of any of the
foregoing, and in and to any and all money, documents, instruments, securities,
or accounts owned or belonging to Borrower.





Borrower shall be deemed to have
possession of any of the Collateral in transit to it or set apart for it or for
any of its agents, affiliates or correspondents.





2.           Security for
Obligations.  This Agreement and the security interest created
hereby secures the prompt and complete payment, observance and performance of
all duties, liabilities, obligations and Indebtedness of every kind, nature and
description owing by Borrower to Lender, fixed or contingent, joint or several,
whether as principal, surety, endorser, guarantor, or otherwise, now existing or
hereafter arising, and all modifications, extensions, renewals, replacements,
and increases of each of the foregoing, including, without limitation, those
arising under this Agreement, the Note and the other Loan Documents (all such
obligations and liabilities of Borrower being the “Obligations”).





3.           Borrower Remains
Liable.  Notwithstanding anything to the contrary contained in
this Agreement: (a) Borrower shall remain liable under the contracts and
agreements included in the Collateral and obligated to perform all of its duties
and obligations thereunder to the same extent as if this Agreement had not been
executed, (b) the exercise by Lender of any of its rights hereunder shall not
release Borrower from any of its duties or obligations under the contracts and
agreements included in the Collateral, and (c) Lender shall have no obligation
or liability under the contracts and agreements included in the Collateral by
reason of this Agreement, nor shall Lender be obligated to perform any of the
obligations or duties of Borrower thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.





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4.           Representations and
Warranties.  In addition to any representations and warranties
set forth in any other Loan Document, from the date hereof and until the
Indebtedness hereunder is fully paid and Lender has no further obligation to
extend any Advances hereunder, Borrower represents and warrants as
follows:





(a)           Borrower’s
interest in the Collateral is free and clear of any lien, security interest,
charge or encumbrance of any kind whatsoever (collectively, “Liens”) except for
the security interest created hereby in favor of Lender and for security
interests securing the Senior Debt.  No effective financing statement,
continuation statement or amendment thereto promulgated under the Uniform
Commercial Code of any state (collectively, “Financing
Statements”) or other instrument similar in effect covering all or any
part of the Collateral is on file in any recording office, except such as may
have been filed in favor of Lender or as may be filed in evidence of the Senior
Debt.  The validity of the Collateral in whole or in part, and
Borrower’s title thereto is not currently being questioned in any litigation or
regulatory proceeding to which Borrower is a party, nor is any such litigation
or proceeding threatened.





(b)           This
Agreement creates a valid and perfected security interest in the Collateral,
securing the payment of the Obligations, and all filings and other actions of
Borrower necessary or desirable to perfect and protect such security interest
have been, or will be upon request, duly taken by Borrower.





(c)           Except
for any approvals required by the holders of the Senior Debt, no authorization,
approval or other action by, and no notice to or other filing with, any
governmental authority or regulatory body is required, either (i) for the grant
by Borrower of the security interest granted hereby or for the execution,
delivery or performance of this Agreement by Borrower, or (ii) for the
perfection of or the exercise by Lender of its rights and remedies hereunder
(other than the filing of Financing Statements and Assignments of Notes and
Liens by Lender).





(d)           Set
forth on Exhibit
“A” attached to this Agreement is a list of (i) Borrower’s principal
place of Business and all other places of business and offices of Borrower, and
(ii) all places where Borrower’s books of account and records are kept, and all
places where the Collateral is stored or located.





(e)           Concurrently
with execution and delivery of this Agreement to Lender, Borrower has duly
executed and delivered to Lender, the Assignment of Notes and Liens in the form
attached to this Agreement as Exhibit “B” for each
county in which the Mortgages are located.  Such Assignments of Notes
and Liens shall be held by Lender and not recorded for so long as no Event of
Default exists.





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5.           Covenants and Further
Assurances.  In addition to any covenants set forth in any
other Loan Document, from the date hereof and until the Indebtedness hereunder
is fully paid and Lender has no further obligation to extend any Advances
hereunder, Borrower covenants and agrees as follows:





(a)           Borrower
agrees that from time to time, at the expense of Borrower, Borrower will
promptly execute and deliver all further instruments and documents, and take all
further action, that may be reasonably necessary or desirable, or that Lender
may reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable Lender to exercise and
enforce rights and remedies hereunder with respect to any
Collateral.  Without limiting the generality of the foregoing,
Borrower will:  (i) within five (5) business days of a request by
Lender, mark conspicuously each document included in the Collateral and each of
its records pertaining to the Collateral, with a legend, in form and substance
satisfactory to Lender, indicating that such document or Collateral is subject
to the security interest granted hereby; (ii) within five (5) business days of a
request by Lender, provide Lender with certified copies of any or all Mortgages
included in the Collateral; (iii) within five (5) business days of a request by
Lender, and subject to the rights of the holders of Senior Debt, if any,
transfer to Lender actual possession of the original Mortgages, to the extent
same are in possession or control of Borrower; (iv) within five (5) business
days of a request by Lender, transfer, register or otherwise put any of the
Collateral in the name of Lender or its nominee; and (v) execute and file such
Financing Statements, and such other instruments or notices, as may be necessary
or desirable, or as Lender may request, in order to perfect and preserve the
security interest granted or purported to be granted hereby.





(b)           Borrower
shall file or cause to be filed Financing Statements, assignments and all other
instruments and documents as may be required to perfect Lender’s security
interest in the Collateral and shall provide prompt evidence of having done the
same to Lender.  To further secure Lender hereunder, Borrower hereby
authorizes Lender to file one or more Financing Statements relative to all or
any part of the Collateral without the signature of Borrower where permitted by
law in form satisfactory to Lender in such office(s) as Lender deems
appropriate.  A carbon, photographic or other reproduction of this
Agreement or any financing statement covering the Collateral or any part thereof
shall be sufficient as a financing statement where permitted by
law.  Debtor will pay the cost of filing financing statement(s) in all
public offices wherever filing is deemed desirable by Lender.  This
Agreement shall be terminated only by Lender’s filing of a termination statement
in accordance with the applicable law of the office in which any financing
statement is filed.





(c)           Borrower
will take all actions and pay all costs to keep and maintain the validity,
enforceability, security, priority and collectability of the Mortgages and will
pay all other amounts which may be necessary or desirable to preserve, maintain
and protect Lender’s interest in the Mortgages.





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(d)           Borrower
shall at all times maintain its books of account and records relating to the
Collateral at its principal place of business and its Collateral at the
locations set forth on Exhibit “A”, and
shall not relocate such books of account and records and Collateral unless it
delivers to Lender, prior written notice of such relocation and the new location
thereof (which must be within the United States).  Borrower will
furnish to Lender from time to time statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral as Lender may reasonably request, all in reasonable
detail.





(e)           Borrower
shall not conduct business under any name other than as appears in this
Agreement nor change or reorganize the type of Borrower’s business entity, nor
change the location of any of the Collateral without the prior written consent
of Lender.  Borrower shall not transfer, sell or assign (by operating
of law or otherwise) all or substantially all of Borrower’s assets or property
without the prior written consent of Lender, except for in the ordinary course
of Borrower’s business.





(f)           Borrower
shall continue to conduct its business in the ordinary course and shall continue
to collect and enforce all present and future payments due to Borrower,
including without limitation, those payments due under the
Mortgages.





6.           Insurance.





(a)           Borrower
shall, at its own expense, maintain insurance with respect to the Collateral in
such amounts, against such risks, in such form and with such insurers, as shall
be reasonably satisfactory to Lender from time to time.  Borrower
shall ensure that each of the Mortgages is, and remains, insured against loss by
fire and other casualty in the full amount of the indebtedness secured by such
Mortgage.   Each policy for property damage insurance shall
provide for all losses to be paid on behalf of Lender and Borrower as their
respective interests may appear.  Each such policy shall in addition
(i) contain the agreement (if available) by the insurer that any loss
thereunder shall, subject to the rights of the holders of the Senior Debt, be
payable to Lender notwithstanding any action, inaction or breach of
representation or warranty by Borrower, (ii) provide that there shall be no
recourse against Lender for payment of premiums or other amounts with respect
thereto, and (iii) provide that at least 10 days prior written notice of
cancellation or of lapse shall be given to Lender by the
insurer.  Borrower shall, if so requested by Lender, deliver to Lender
original or duplicate policies of such insurance and, as often as Lender may
reasonably request, a report of a reputable insurance broker selected by
Borrower with respect to such insurance.  Further, subject to the
rights of the holders of the Senior Debt, Borrower shall, at the request of
Lender, duly execute and deliver instruments of assignment of such insurance
policies to comply with the requirements of this Section 6(a) and
cause the respective insurers to acknowledge notice of such
assignment.





(b)           Reimbursement
under any liability insurance maintained by Borrower may be paid directly to the
person who shall have incurred liability covered by such insurance.





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(c)           Subject
to the rights of the holders of the Senior Debt, all insurance payments in
respect of Collateral shall be paid to and applied by Lender as specified in the
Note.





7.           Transfers and Other
Liens.  Borrower shall not:





(a)           sell,
assign (by operation of law or otherwise) or otherwise dispose of any of the
Collateral, other than obsolete or worn out property, or the sale or assignment
of Mortgages in the ordinary course of business; or





(b)           create
or suffer to exist any Lien upon or with respect to any of the Collateral to
secure debt of any person, except for the security interest created by this
Agreement and for security interests securing the Senior Debt.





8.           Lender Appointed
Attorney-in-Fact.  Borrower hereby irrevocably appoints Lender
as Borrower’s attorney-in-fact, with full authority in the place and stead
of  Borrower and in the name of Borrower or otherwise, from time to
time in Lender’s discretion at any time after the occurrence of an Event of
Default (as defined in Section 12), to take
any action and to execute any instrument which Lender may deem necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation:





(a)           to
obtain and adjust insurance required to be paid to Lender pursuant to Section
6;





(b)           to
ask, demand, collect, sue for, recover, compound, receive and give acquittance
and receipts for moneys due and to become due under or in respect of any of the
Collateral, including, without limitation, moneys due and to become due under
the Mortgages;





(c)           to
file any claims or take any action or institute any proceedings which Lender may
deem necessary or desirable to enforce the rights of Lender with respect to any
of the Collateral;





(d)           with
respect to any Mortgage, demand, collect, receive, settle, compromise, adjust,
foreclose and resell and/or give discharges and releases, all as Lender may
determine;





(e)           to
commence and prosecute any actions in any court for the purposes of collecting
amounts owed on Mortgages and enforcing any other rights in respect thereof, and
to defend, settle or compromise any action brought and, in connection therewith,
and to give such discharge or release as Lender may deem
appropriate;





(f)           to
receive, open and dispose of mail addressed to Borrower and endorse checks,
notes, drafts, acceptances, money orders, bills of lading, warehouse receipts or
other instruments or documents evidencing payment made on account of or funds
paid relating to Mortgages on behalf of and in the name of
Borrower;





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(g)           sell,
assign, transfer, make any agreement in respect of, or otherwise deal with or
exercise rights in respect of, any Mortgage as fully and completely as though
Lender were the absolute owner thereof for all purposes;





(h)           to
adjust and settle claims under any insurance policy related to any of the
Mortgages;





(i)           to
execute Financing Statements or any other documents or writing deemed necessary
by Lender to evidence or perfect Lender’s  security interest in the
Mortgages; provided that Lender agrees to furnish copies of any document
executed hereunder to Borrower upon request; and





(j)           to
enter on the premises of Borrower in order to exercise any of Lender’s rights
and remedies.





(k)           to
receive, endorse, and collect any drafts or other instruments, documents,
assignments, and chattel paper in connection with clause (a) or (b) above;
and





(l)           to
file any claims or take any action or institute any proceedings which Lender may
deem necessary or desirable to enforce the rights of Lender with respect to any
of the Collateral.





The
foregoing appointment of Lender as attorney-in-fact is coupled with an interest
and is irrevocable.





9.           Rights Prior to Default;
Termination.





(a)           Rights Prior to
Default.  Until such time as Lender provides Borrower with the
notice described in Section 9(b) hereof,
Borrower shall be entitled to exercise any and all rights and powers relating or
pertaining to the Collateral, including, without limitation, the Mortgages, for
any purpose not inconsistent with the terms of the Note or this
Agreement.





(b)           Termination of
Rights. Subject to the rights of the holders of any Senior Debt, Lender
may, at any time and from time to time for so long as Borrower’s Obligations are
outstanding and until Lender’s obligations to make Advances under the Note
expire, give written notice to Borrower that Lender has exercised its rights
under this Section
9(b), and that all rights of Borrower to exercise its power with respect
to Mortgages, which Borrower was previously entitled to exercise pursuant to
Section 9(a)
shall cease and all such rights shall become vested in Lender, which shall have
the sole and exclusive right and authority to exercise such
power.  Further, Lender shall have the right to notify and direct the
obligors on the Mortgages to make all payments in respect thereof directly to
Lender.  The obligor making any payment to Lender under this Agreement
shall be fully protected in relying on the written statement of Lender that it
then holds a security interest which entitles Lender to receive such
payments.  Any and all money and other property paid over to or
received by Lender pursuant to the provisions of this Section 9(b) shall be
retained by Lender as additional collateral under this
Agreement.  Borrower shall not enter into any agreements with any
persons that will be in conflict with or prevent the exercise of Lender’s rights
under this Section
9(b).





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10.           Lender May
Perform.  If Borrower fails to perform any covenant or
agreement contained in this Agreement, Lender may itself perform, or cause
performance of, such covenant or agreement, and the expenses of Lender incurred
in connection therewith shall be payable by Borrower under Section
15(b).





11.           Lender’s
Duties.  The powers conferred on Lender under this Agreement
are solely to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers.  Except for the safe custody
of any Collateral in its possession and the accounting for moneys actually
received by it hereunder, Lender shall have no duty as to any Collateral or as
to the taking of any necessary steps to preserve rights against prior parties
or  any other rights pertaining to any Collateral.





12.           Events of
Default.  Each of the following events constitutes an Event of
Default (herein so called) under this Agreement:





(a)           Borrower
fails to timely pay any amount due and owing it under the Note when due and
payable, whether at a date for the payment of a fixed installment or as a
contingent or other payment becomes due and payable or as a result of
acceleration or otherwise;





(b)           Any
“default” or “event of default” occurs under any Loan Document that defines
either such term with respect to Borrower, and the same is not remedied within
the applicable period of grace (if any) provided in such Loan
Document;





(c)           Borrower
breaches any representation or warranty contained in this Agreement or any other
Loan Document, or fails to perform or observe any covenant or agreement that is
set forth in this Agreement or any other Loan Document, and such breach is not
cured within 30 days after written notice of such breach is received from
Lender; or





(d)           Any
representation or warranty previously, presently or hereafter made in writing by
or on behalf of Borrower in connection with any Loan Document shall prove to
have been false or incorrect in any material respect on any date on or as of
when made, or any Loan Document at any time ceases to be valid, binding and
enforceable for any reason other than its release or subordination by
Lender.





Upon the
occurrence of an Event of Default and during the continuance thereof, Lender at
any time and from time to time may, without notice to Borrower, declare any or
all of the Obligations immediately due and payable, and all such Obligations
shall thereupon be immediately due and payable, without demand, presentment,
notice of demand or of dishonor and nonpayment, protest, notice of protest,
notice of intention to accelerate, declaration or notice of acceleration, or any
other notice or declaration of any kind, all of which are hereby expressly
waived by Borrower.





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13.           Remedies.  If
any Event of Default shall occur and be continuing, subject to the rights of the
holders of the Senior Debt, Lender may protect and enforce its rights under this
Agreement and the other Loan Documents by any appropriate proceedings, including
proceedings for specific performance of any covenant or agreement contained in
any Loan Document, and Lender may enforce the payment of any Obligations due it
or enforce any other legal or equitable right which it may have.  All
rights, remedies and powers conferred upon Lender under the Loan Documents shall
be deemed cumulative and not exclusive of any other rights, remedies or powers
available under the Loan Documents or at law or in equity.  Subject to
the rights of the holders of the Senior Debt, Lender’s authority and rights
shall include, without limitation, the following:





(a)           Lender
may exercise in respect of the Collateral, in addition to other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party on default under the Uniform Commercial Code (the
“Code”)
(whether or not the Code applies to the affected Collateral) and also may (i)
require Borrower to, and Borrower hereby agrees that it will at its expense and
upon request of Lender forthwith, assemble all or part of the Collateral as
directed by Lender and make it available to Lender at a place to be designated
by Lender which is reasonably convenient to it, and (ii) without notice except
as specified below, sell the Collateral or any part thereof in one or more
parcels at public or private sale, at any of Lender’s offices or elsewhere, for
cash, on credit or for future delivery, and upon such other terms as Lender may
deem commercially reasonable.  Borrower agrees that, to the extent
notice of sale shall be required by law, at least ten (10) business days’ notice
to Borrower of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable
notification.  Lender shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given.  Lender may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.





(b)           All
cash proceeds received by Lender in respect of any sale of, collection from, or
other realization upon all or any part of the Collateral may, in the discretion
of Lender, be held by Lender as collateral for, and/or then or at any time
thereafter applied in whole or in part by Lender against all or any part of the
Obligations in such order as Lender shall elect, subject to any mandatory
provisions of this Agreement or applicable law.  Any surplus of such
cash or cash proceeds held by Lender and remaining after payment in full of all
the Obligations shall be paid over to Borrower or to whomsoever may be lawfully
entitled to receive such surplus.





14.           No
Impairment.  The execution and delivery of this Agreement in no
manner shall impair or affect any other security (by endorsement or otherwise)
for the payment of the Obligations and no security taken hereafter as security
for payment of the Obligations shall impair in any manner or affect this
Agreement, all such present and further additional security to be considered as
cumulative security.  Any of the Collateral for, or any obligor on,
any of the Obligations may be released without altering, varying or diminishing
in any way the force, effect, lien, security interest, or charge of this
Agreement as to the Collateral not expressly released, and this Agreement shall
continue as a security interest and charge on all of the Collateral not
expressly released until all the Obligations secured hereby have been paid in
full and until Lender’s obligations to make further Advances under the Note have
expired.  This Agreement shall not be construed as relieving Borrower
or any Guarantor from full recourse liability on the Obligations and any and all
further and other indebtedness secured hereby and for any deficiency
thereon.





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15.           Indemnity and
Expenses.





(a)           Borrower
agrees to indemnify Lender from and against any and all claims, losses and
liabilities growing out of or resulting from this Agreement (including, without
limitation, enforcement of this Agreement or any other Loan
Document).





(b)           Borrower
will upon demand pay to Lender the amount of any and all reasonable expenses,
including the actual fees and disbursements of its counsel and of any experts
and agents, which Lender may incur in connection with (i) the administration of
this Agreement or any other Loan Document, (ii) the custody, preservation, use
or operation of, or the sale of, collection from, or other realization upon, any
of the Collateral, (iii) the exercise or enforcement of any of the rights of
Lender hereunder or under any other Loan Document, or (iv) the failure by
Borrower to perform or observe any of the provisions hereof or any other Loan
Document.





16.           Security Interest
Absolute.  All rights of Lender and security interests
hereunder, and all obligations of Borrower hereunder, shall be absolute and
unconditional, irrespective of:





(a)           any
lack of validity or enforceability of the Note or any other Loan Document or
instrument relating thereto;





(b)           any
change in the time, manner or place of payment of, or in any other term of, all
or any of the Obligations or any other amendment or waiver of or any consent to
any departure from the Note;





(c)           any
exchange, release or non-perfection of any other collateral, or any release or
amendment or waiver of or consent to departure from any guaranty, for all or any
of the Obligations; or





(d)           any
other circumstance which might otherwise constitute a defense available to, or a
discharge of, Borrower, or a third party holder of a security
interest.





17.           Amendments;
Etc.  No amendment or waiver of any provision of this Agreement
nor consent to any departure by Borrower herefrom, shall in any event be
effective unless the same shall be in writing and signed by Lender and Borrower,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.





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18.           Addresses for
Notices.  Unless otherwise provided herein, all notices,
requests, consents, demands and other communications shall be in writing and
shall be mailed, certified mail with return receipt requested, postage prepaid,
telecopied, delivered by nationally recognized overnight delivery service, or
otherwise physically delivered to their respective addresses as set forth on the
signature page to this Agreement, or, as to any party, to such other address as
may be designated by it in written notice to all other parties.  All
notices, requests, consents and demands hereunder will be effective, if
addressed to Lender or Borrower as aforesaid, when mailed by certified mail,
postage prepaid, return receipt requested, or upon delivery if telecopied,
delivered by nationally recognized overnight delivery service or otherwise
physically delivered, addressed as aforesaid, with receipt confirming
delivery.





19.           Continuing Security
Interest; Transfer of Note.  This Agreement shall create a
continuing security interest in the Collateral and shall (i) be binding upon
Borrower, its successors and assigns, and (ii) inure, together with the rights
and remedies of Lender hereunder, to the benefit of Lender, its successors,
transferees and assigns.  Upon the payment in full of the Obligations,
the security interest granted hereby shall terminate and all rights to the
Collateral shall revert to Borrower.  Upon any such termination,
Lender will, at Borrower’s expense, execute and deliver to Borrower such
documents as Borrower shall reasonably request to evidence such
termination.





20.           Governing Law;
Terms.  This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, except to the extent that the
validity or perfection of the security interest hereunder, or remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction other than the State of Texas.  Terms used in Article 9
of the Uniform Commercial Code in the State of Texas, when used in this
Agreement, have the definitions given to such terms as therein
defined.





21.           Counterparts.  This
Agreement may be executed in multiple counterparts, each of which shall
constitute an original, and all of which shall constitute one and the same
agreement.





22.           Severability.  If
any term or provision of this Agreement shall be determined to be illegal or
unenforceable, all other terms and provisions of this Agreement shall
nevertheless remain effective and shall be enforced to the fullest extent
permitted by applicable law.





23.           WAIVER OF JURY TRIAL,
PUNITIVE DAMAGES, ETC.  BORROWER HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED
BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR THE LOAN DOCUMENTS OR ANY TRANSACTION
CONTEMPLATED HEREBY OR THEREBY OR ASSOCIATED HEREWITH OR THEREWITH, BEFORE OR
AFTER MATURITY; (B) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY “SPECIAL
DAMAGES”, AS DEFINED BELOW, (C) CERTIFIES THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OF LENDER OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT
LENDER HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY AMONG OTHER THINGS, THE
WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION,
“SPECIAL DAMAGES” INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE
DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS
WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER
PARTY HERETO.





11


24.           Subordination.  Notwithstanding
anything contained herein to the contrary, Lender agrees that this Agreement and
all liens and security interests granted herein are and shall be subordinate in
right, priority and payment to the Senior Debt (as defined in the
Note).





[The
remainder of this page is intentionally left blank.]




12


IN WITNESS WHEREOF, Borrower and Lender
have caused this Agreement to be duly executed and delivered as of the date
first above written.





LENDER:





UNITED
DEVELOPMENT FUNDING III, L.P.





By:           UMTH
Land Development, L.P.


Its:           General
Partner





By:           UMT
Services, Inc.


Its:           General
Partner








By:           /s/ Ben
Wissink


Name:       Ben
Wissink


Title:         Chief
Operating Officer








Address:               1812
Cindy Lane, Suite 200


Bedford, Texas 76021


Fax:                   
     (817) 835-0383





BORROWER:





UNITED
DEVELOPMENT FUNDING, L.P.





By:           United
Development Funding, Inc.


Its:           General
Partner








By:           /s/ Hollis M.
Greenlaw


Name:       Hollis
M. Greenlaw


Title:         President








Address:               1812
Cindy Lane, Suite 200


Bedford, Texas 76021


Fax:                      
  (817) 835-0383




13


EXHIBIT
A





BORROWER’S
LOCATIONS








1.           Borrower’s
Principal Place of Business





1812 Cindy Lane, Suite 200


Bedford,
Texas  76021








2.           All
other Offices and Places of Business of Borrower





None





3.           Places
where Borrower’s books and records and Collateral are located





1812 Cindy Lane, Suite 200


Bedford,
Texas  76021








14





EXHIBIT
B





ASSIGNMENT OF NOTES AND
LIENS








FOR VALUE RECEIVED, UNITED DEVELOPMENT
FUNDING, L.P., a Delaware  limited partnership (the “Assignor”) does
hereby sell, assign, transfer, convey and deliver unto UNITED DEVELOPMENT
FUNDING III, L.P., a Delaware limited partnership (the “Assignee”), and its
successors and assigns, all of the Assignor’s right, title and interest in and
to the Mortgages (as such term is defined in the Security Agreement between
Assignor and Assignee dated as of August 20, 2008), and as further described on
the attached Schedule
1, intending hereby to convey all of the right, title and interest, legal
or equitable, contingent, deferred or otherwise, of Assignor in and to the
Mortgages.





Assignor hereby covenants and agrees to
and with Assignee, its successors and assigns, to execute and deliver such
instruments of conveyance and assignment and to take such action as Assignee,
its successors or assigns may reasonably request to more effectively transfer to
and vest in Assignee, and to put Assignee in possession of the Mortgages, free
and clear of any and all liens, prior assignments, security interests, charges,
pledges, claims or encumbrances whatsoever.





The intent of this instrument is to
transfer to Assignee and to confer upon Assignee all of the interest of Assignor
in and to the Mortgages and all of the attendant privileges and obligations
represented by such Mortgages pursuant to the mortgage documents evidencing the
Mortgages.





This instrument, and the rights and
obligations of the parties hereto, shall be governed by and construed and
enforced in accordance with the substantive laws of the State of Texas, without
regard to its principles of conflicts of laws.





Dated
this the ____ day of ______________, 20______.








ASSIGNOR:





UNITED
DEVELOPMENT FUNDING, L.P.





By:           United
Development Funding, Inc.


Its:           General
Partner








By:


Name:


Title:





15


STATE OF
TEXAS                                                 
            §


§


COUNTY OF
DALLAS                                                       §





This
instrument was acknowledged before me on the ____ day of ______________, 2008,
by ____________________, the _____________ of United Development Funding, Inc.,
a Delaware corporation, the general partner of United Development Funding, L.P.,
a Delaware limited partnership, on behalf thereof.





Given
under my hand and the seal of office this ______ day of ___________
20____.














Notary
Public, State of Texas





(SEAL)






























































After
recording return to:


__________________________


__________________________


__________________________











16


SCHEDULE
1





DESCRIPTION OF
MORTGAGES