ex10_2.htm


     

    Exhibit
10.2

    PARTICIPATION
AGREEMENT

    


    This Participation Agreement (this
“Agreement”)
is entered into effective as of the 30th day of September, 2008 (the “Effective
Date”) by and between UNITED MORTGAGE TRUST, a real
estate trust organized under the laws of the State of Maryland with an address
of 1702 N. Collins
Blvd., Suite 100, Richardson, TX 75080, as lender, agent and assignor (“UMT”), and
UNITED DEVELOPMENT FUNDING III,
L.P., a Delaware limited partnership with an address of 1812 Cindy Lane,
Suite 200, Bedford, Texas 76021, as assignee (“UDF
III”).

    


    R
E C I T A L S:

    


    A.           United
Development Funding, L.P., a Delaware limited partnership (“Borrower”)
has executed and delivered that certain First Amended and Restated Secured Line
of Credit Promissory Note, dated as of September 30, 2004, payable to the order
of UMT in the original principal amount of $30,000,000, as amended and restated
in its entirety by that certain Second Amended and Restated Secured Line of
Credit Promissory Note dated as of June 20, 2006 in the increased principal
amount of $45,000,000, as modified by that certain First Modification of Second
Amended and Restated Secured Line of Credit Promissory Note dated as of
September 1, 2006 (as so amended, and as it may be further amended, modified,
renewed, extended, superseded or replaced from time to time, the “Note”).

    


    B.           The
payment and performance of Borrower’s obligations under the Note is secured by
that certain First Amended and Restated Security Agreement dated as of September
30, 2004, executed by Borrower in favor of UMT (as it may be amended, modified,
renewed, extended, superseded or replaced from time to
time,   the “Security
Agreement”).

    


    C.           The
Note, the Security Agreement, and all other instruments, agreements, mortgages,
guarantees, certificates executed or entered into in connection with the Note
are referred to herein collectively as the “Loan
Documents”.

    


    D.           UMT
and UDF III entered into that certain Economic Interest Participation Agreement
and Purchase Option dated effective as of September 19, 2008 (the “Economic
Participation Agreement”) pursuant to which UDF III purchased (i) an
economic interest in the payments of principal and interest made by Borrower
under the Note relating to amounts funded by UDF III towards UMT’s funding
obligations under the Note (the “Economic
Interest”) and (ii) an option to purchase a Participation Interest (as
defined in Section
1 below) in the Note and the other Loan Documents (the “Option”).

    


    E.           On
the Effective Date, UDF III exercised its Option and acquired the Participation
Interest.

    


    F.           UMT
and UDF III are entering into this Agreement in order to set forth their mutual
understanding with respect to the UDF III’s ownership of the Participation
Interest, their respective rights and obligations relating to the
collateral securing the loan, to payments received from Borrower, and to
other related matters of loan and collateral administration.

    
      
         

      

      
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    A
G R E E M E N T:

    


    NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, UMT
and UDF III agree as follows:

    


    1.           Defined Terms.  The
terms defined in the introductory paragraph and the recitals to this Agreement
shall have the respective meanings given to such terms therein.  As
used in this Agreement, the following terms shall have the following
definitions:

    


    “Agent”
means UMT in its capacity as Agent hereunder.

    


    “Bankruptcy
Code” means the federal bankruptcy law of the United States as from time
to time in effect, currently as Title 11 of the United States Code. Section
references to current sections of the applicable Bankruptcy Code shall refer to
comparable sections of any revised version thereof if section numbering is
changed.

    


    “Claims”
means any and all present and future “claims” (used in its broadest sense, as
contemplated by and defined in Section 101(5) of the Bankruptcy Code, but
without regard to whether such claim would be disallowed under the Bankruptcy
Code) of Lenders now or hereafter arising or existing under or relating to the
Note or any other Loan Document, whether joint, several, or joint and several,
whether fixed or indeterminate, due or not yet due, contingent or
non-contingent, matured or unmatured, liquidated or unliquidated, or disputed or
undisputed, whether under a guaranty or a letter of credit, and whether arising
under contract, in tort, by law, or otherwise, any interest or fees thereon
(including interest or fees that accrue after the filing of a petition by or
against Borrower under the Bankruptcy Code, irrespective of whether allowable
under the Bankruptcy Code), any costs of Enforcement Actions, including
reasonable attorneys’ fees and costs, and any prepayment or termination
premiums.

    


    “Collateral”
means the all assets of Borrower on which UMT has been granted a security
interest under the Loan Documents.

    


    “Economic
Interest”
has the meaning given to such term in the recitals to this
Agreement.

    


    “Economic
Participation Agreement” has the meaning given to such term in the
recitals to this Agreement.

    


    “Enforcement
Action” means any action, whether judicial or nonjudicial, to repossess,
collect, accelerate, offset, recoup, give notification to third parties with
respect to, sell, dispose of, foreclose upon, give notice of sale, disposition,
or foreclosure with respect to, or obtain equitable or injunctive relief with
respect to, a Claim or the Collateral. The filing of an involuntary bankruptcy
or insolvency proceeding against Borrower also is an Enforcement
Action.

    


    
      
         

      

      
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    “Event of
Default” shall mean any “event of default” or “default” occurring under
the Note or the other Loan Documents, after giving effect to any applicable
notice and cure periods.

    


    “Exercise
Price” means One Hundred and NO/100 Dollars ($100.00).

    


    “Lender”
means UMT or UDF III, individually, and “Lenders”
means UMT and UDF
III, collectively.

    


    “Loan
Documents” shall have the meaning given to such term in the recitals
to this Agreement.

    


    “Loan”
means the loan made to Borrower pursuant to the Note.

    


    “Non-filing
Lender” shall have the meaning given to such term in Section
11.

    


    “Note” shall
have the meaning given to such term in the recitals to this
Agreement.

    


    “Option”
has the meaning given to such term in the recitals to this
Agreement.

    


    “Participation
Interest” means a participation interest in ownership of the Note and the
Loan Documents relating to the Borrower Advances funded by UDF III with respect
to the Note (irrespective of whether such funding occurred under the Economic
Participation Agreement or under this Agreement, and irrespective of whether
such funding occurred or occurs prior to, on or after the Effective Date)
including, without limitation, a participation in all rights incidental to
ownership of the Note and the Loan Documents.

    


    “Proceeds of
Collection” has the meaning given to such term in Section
10.

    


    “Subordination
Agreement” means that certain Subordination and Intercreditor Agreement
dated as of June 14, 2006 by and among Textron, UMT and Borrower, as the same
may be amended, restated, supplemented or otherwise modified from time to
time.

    


    “Textron”
means Textron Financial Corporation in its capacity as agent for certain lenders
to Borrower, and its successors and assigns.

    


    2.           Conversion of Economic
Interest; Assignment.  UMT and UDF III acknowledge that UDF III
has exercised its Option and that concurrently with such exercise, UDF III’s
Economic Interest in the Note is being converted to a Participation Interest in
the Note and the other Loan Documents.  In furtherance of the
conversion and in consideration for the payment of the Purchase Price (as
defined in Section
3 below), UMT hereby agrees to sell, transfer, assign and convey, and
does hereby sell, transfer, assign and convey to UDF III, and UDF III hereby
agrees to purchase, accept and receive, and does hereby purchase, accept and
receive from UMT, the Participation Interest.

    


    
      
         

      

      
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    3.           Appointment of
Agent.

    


    (a)           UDF
III hereby designates UMT as Agent with respect to its Participation Interest to
act as herein specified.  UDF III hereby authorizes Agent to take such
action on its behalf under the provisions of this Agreement and the Note and the
other Loan Documents and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of Agent
by the terms hereof or by the Note and the other Loan Documents, and such other
powers as are reasonably incidental thereto.  Agent shall receive,
hold and pay to Lenders in accordance with Section 8 or Section 10, as
applicable, all payments of principal, interest, fees, charges and expenses
received pursuant to the Note and Agent shall hold all Collateral for the
ratable benefit of Lenders.  Agent may perform any of its duties
hereunder by or through its agents or employees. UMT’s power to act as Agent
hereunder is subject to the restrictions set forth in Section
4.

    


    (b)           Agent
shall have no duties or responsibilities in its capacity except those expressly
set forth in this Agreement or in the Note and other Loan
Documents.  The duties of Agent shall be mechanical and administrative
in nature and nothing in this Agreement, expressed or implied, is intended to or
shall be so construed as to impose upon Agent any obligations in respect of this
Agreement except as expressly set forth herein.

    


    4.           Management and
Control.

    


    (a)           For
so long as no Event of Default  has occurred and is continuing, UMT
has the administrative authority to manage and control the Note and the Loan
Documents.  Notwithstanding the foregoing provisions of this Section 4, the
following decisions shall require the consent of both Lenders:  (i)
approval of Borrower Advances, (ii) amendments or modifications to the Note or
the other Loan Documents, (iii) any material change in the terms of the Note and
the other Loan Documents (including any change in the terms of principal
repayment, any change of maturity dates, any interest rate or fee reductions, or
any release of Collateral), (iv) any waiver or forbearance of any Event of
Default or known non-compliance by Borrower of any provision in the Note and the
other Loan Documents, and (v) any other material decision related to the Loan,
the Note, the Loan Documents or the Collateral.

    


    (b)           Upon
and during the continuance of an Event of Default, the provisions of Sections 9 through
13, inclusive,
shall govern the respective powers and rights of the Lenders.

    


    5.           Participation in Borrower
Advances.  Commencing on the Effective Date, each time that
Borrower requests an advance of principal under the Note (a “Borrower
Advance”), UMT shall notify UDF III in writing of the principal amount
requested by Borrower and the wire transfer and funding
instructions.  Thereafter, UDF III shall fund an amount to UMT equal
to the amount of the Borrower Advance and upon such funding, UDF III shall own
the Participation Interest related to the Borrower Advance so funded by UDF
III.  UMT shall clearly notate the Participation Interest of UDF III
in its books and records by marking each Borrower Advance funded by UDF III and
notating that the Participation Interest for such Borrower Advance is owned by
UDF III.  Each time UDF III funds a Borrower Advance, UDF III’s
Participation Interest shall be increased accordingly.

    


    
      
         

      

      
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    6.           Purchase
Price.  The purchase price for the Participation Interest shall
be (i) UDF III’s funding of each Borrower Advance made under the Note
(irrespective of whether such funding occurred under the Economic Participation
Agreement or under this Agreement, and irrespective of whether such funding
occurred or occurs prior to, on or after the Effective Date) (ii) UDF III’s
funding of its pro-rata share of any costs of collection, including attorney
fees and (iii) UDF III’s payment of the Exercise Price (collectively, the “Purchase
Price”).

    


    7.           Proportionate
Interests.  Except as otherwise provided in this Agreement, all of
the rights, interests and obligations of each Lender under the Note and the
other Loan Documents, including the Lenders’ respective security interests in
the Collateral, shall be shared by the Lenders in the ratio of (a) the aggregate
outstanding amount (including principal and accrued interest) of the Borrower
Advances funded by such Lender to (b) the aggregate outstanding amount
(including principal and interest) of the Loan to Borrower.  Any reference
in this Agreement to a Lender’s “share” or an allocation between or sharing by
the Lenders of any right, interest or obligation “pro
rata,” “ratably,” “proportionally” or in similar terms shall refer to
this ratio. 

    


    8.           Allocation of Payments Prior
to an Event of Default.  All amounts received by the Agent for
the account of Borrower prior to an Event of Default, whether by payment,
set-off or otherwise (including any voluntary prepayments by Borrower) shall be
allocated between the Lenders as follows:

    


    (a)           Interest.  For
each payment of interest made by Borrower on the Note, UMT shall pay UDF III its
pro rata share of accrued interest paid on the Note based on UDF III’s
Participation Interest.  For example and not necessarily
representative of real transactions hereunder, if $20,000,0000 in principal is
outstanding under the Note, UMT has funded $16,000,000 of such outstanding
principal amount and UDF III has funded $4,000,0000 of such outstanding
principal amount, and Borrower makes a payment equal to all accrued interest
then due and payable under the Note, then UDF III’s pro rata share of Borrower’s
interest payment shall be 20% ($4,000,000 / $20,000,000).

    


    (b)           Principal. For each
repayment of principal made by Borrower under the Note, UMT shall pay UDF III
its pro rata share of the principal repaid based on UDF III’s Participation
Interest.  For example and not necessarily representative of real
transactions hereunder, if $32,000,0000 in principal is outstanding under the
Note, UMT has funded $16,000,000 of such outstanding principal amount and UDF
III has funded $16,000,0000 of such outstanding principal amount, and Borrower
makes a principal payment equal to $1,000,000, then UDF III’s pro rata share of
Borrower’s principal payment shall be $500,000.

    


    
      
         

      

      
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    (c)           Payments. UMT shall
make all payments to UDF III by wire transfer promptly upon receipt of payments
from Borrower under the Note.

    


    9.           Decision to Exercise
Remedies Upon
an Event of Default. Upon the occurrence of an Event of Default, Lenders
shall take such actions and only such actions as Lenders mutually agree to take
to enforce their rights and remedies under the Note; provided, however, that if
after consultation, Lenders cannot mutually agree on what action to take, then
if either Lender desires to accelerate the Note, the Agent shall cause the
acceleration of the Note.  Upon such acceleration, the Lenders shall
mutually agree as to what Enforcement Action should be taken; provided, however, that if
after consultation, Lenders cannot mutually agree on what action to take, then
the Lender with the largest outstanding loan to Borrower (the “Enforcing
Lender”) shall have the right to determine and shall control the timing,
order and type of Enforcement Actions which will be taken and all other matters
in connection with any such Enforcement Actions. In taking such Enforcement
Actions pursuant to the previous sentence, the Enforcing Lender shall act
reasonably and in good faith and shall consult with and keep the other Lender
informed thereof at reasonable intervals; provided, however, that
notwithstanding any such consultations and provision of information to the other
Lender, the Enforcing Lender shall retain the right to make all determinations
in the event of disagreements between the Enforcing Lender and the other Lender.


    


    10.           Application of Proceeds of
Collateral after an Event of Default.  Notwithstanding anything to
the contrary in the Loan Documents, as between the Lenders, the proceeds of all
Collateral, or any part thereof, and the proceeds of any remedy with respect to
the Collateral under the Loan Documents after the occurrence and during the
continuance of an Event of Default (collectively, the “Proceeds of
Collection”) shall upon receipt by Lenders be paid to and applied as
follows:

    


    (a)           First,
to the payment of all then outstanding out-of-pocket costs and expenses incurred
by the Lenders, or either of them, in enforcing the Lenders’ default rights and
remedies, including all amounts expended to preserve the value of the Collateral
and all legal expenses and attorneys’ fees;

    


    (b)           Second,
to the Lenders, ratably, in an amount up to their respective Claims;
and

    


    (c)           Third,
to Borrower, its successors and assigns, or to whomsoever may be lawfully
entitled to receive the same.

    


    11.           Insolvency Events.  If
Borrower: (i) shall make an assignment for the benefit of creditors; or (ii)
shall admit in writing its inability to pay its debts as they become due, or its
inability to payor perform under the Loan Documents; or (iii) shall file a
voluntary petition in bankruptcy; or (iv) shall file any petition, answer, or
document seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation pertinent to such circumstances; or (v) shall
seek or consent to or acquiesce in the appointment of any trustee, receiver, or
liquidator of Borrower or of all or any substantial part (i.e., 33-1/3% or more)
of the assets or property of Borrower; or (vi) shall cease operations of its
business as its business has normally been conducted; or (vii) or its directors
or majority shareholders or partners shall take any action initiating any of the
foregoing actions described in clauses (a) through
(f); or (viii) either (A) forty-five (45) days shall have expired after
the commencement of any involuntary action against Borrower seeking
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statue law or regulation, without
such action being dismissed or all orders or proceedings thereunder affecting
the operations or the business of Borrower being stayed; or (B) a stay of any
such order or proceedings shall thereafter be set aside and the action setting
it aside shall not be timely appealed; or (C) Borrower shall file any
answer admitting or not contesting the material allegations of a petition filed
against Borrower in any such proceedings; or (D) the court in which such
proceedings are pending shall enter a decree or order granting the relief sought
in any such proceedings, or sixty (60) days shall have expired after the
appointment, without the consent or acquiescence of Borrower, of any trustee,
receiver or liquidator of Borrower or of all or any substantial part of the
priorities of Borrower without such appointment being vacated; then, and in any such
event, and subject to any subordination arrangements to which the Lenders may be
subject, (1) all payments and distributions of any kind or character, whether in
cash or property or securities in respect of the Lenders’ Claims shall be
distributed between the Lenders in accordance with the provisions of Section 10 hereof; (2) each
Lender shall promptly file a claim or claims, on the form required in such
proceeding, for the full outstanding amount of such Lender’s Claim, and shall
use its best efforts to cause said claim or claims to be approved; (3) each of
the Lenders hereby irrevocably agrees that, to the extent that it fails timely
to do so (a “Non-filing
Lender”), at least twenty (20) days before the deadline for such filing,
the other Lender may in the name of the Non-filing Lender, or otherwise, file
and prove up any and all claims of the Non-filing Lender relating to the
Non-filing Lender’s Claim; and (4) in the event that, notwithstanding the
foregoing, but subject to the provisions of Section 10) hereof, any
payment or distribution of any kind or character, whether in cash, properties or
securities, shall be received by a Lender in excess of its share, then the
portion of such payment or distribution in excess of such Lender’s share shall
be received by such Lender in trust for and shall be promptly paid over to the
other Lender for application to the payments of amounts due on the other
Lender’s Claims.

    


    
      
         

      

      
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    12.           Return of Payments. To the
extent any payment for the account of Borrower is required to be returned as a
voidable transfer or otherwise, the Lenders shall contribute to one another as
is necessary to ensure that such return of payment is on a pro rata
basis.

    


    13.           Foreclosure.

    


    (a)           Credit (Debt) Bid by Lenders. Only
by mutual agreement shall the Lenders (or any subsidiary of the Lenders) make a
credit (debt) bid at any foreclosure sale or other sale of any of the Collateral
(or the assets underlying the Collateral) on behalf of or for the benefit of the
Lenders. If Lenders are the successful bidders at the sale, then unless
otherwise agreed in writing by the Lenders (i) the amount to be credited against
their respective Claims shall be allocated pro rata between the Lenders
according to the balances of such Claims, and (ii) Lenders shall take title to
the Collateral or assets so purchased together, each holding a pro rata
undivided interest in such Collateral or assets.  The Lenders shall
mutually agree as to the most favorable disposition of any Collateral purchased
with any such credit (debt) bid.

    


    
      
         

      

      
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    (b)           Cash Bid for Account of One
Lender. No Lender or any subsidiary of such Lender shall make a cash bid
at any foreclosure sale or other sale of any of the Collateral (or any asset
underlying the Collateral) without the prior written consent of the other
Lender, which consent shall not be unreasonably withheld, conditioned or
delayed.  If a cash bid is made and is successful, then unless otherwise
agreed in writing by the Lenders (i) the proceeds of the sale shall be allocated
as set forth in Section 10, and (ii) the
Lender that entered the successful bid shall acquire the Collateral or assets so
purchased for its own account, and the other Lender shall have no further
interest in that Collateral or assets upon the payment to such other Lender of
the shares of the proceeds in accordance with Section 10.

    


    14.           Insurance.  In
the event of any loss affecting any Collateral, the proceeds of all insurance
applicable to such Collateral shall (subject to Borrower’s rights under the
Note) be applied in the same manner set forth in Section 8; provided, that if an
Event of Default has occurred and is continuing under the Note, then such
proceeds shall be applied in the same manner as set forth in Section
10.

    


    15.           Exculpation of and
Delegation by Lenders.

    


    (a)           Exculpation. In
connection with any exercise of Enforcement Actions hereunder, neither of the
Lenders nor any partner director, officer, employee, attorney, accountant or
agent of either Lender shall be liable as such for any action taken or omitted
by it or them, except for its or their own gross negligence or willful
misconduct with respect to its duties under this Agreement.

    


    (b)           Delegation of Duties.
Each Lender may execute any of its powers and perform any duties hereunder
either directly or by or through agents or attorneys-in-fact. Each Lender shall
be entitled to advice of counsel concerning all matters pertaining to such
powers and duties. No Lender shall be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it, if the selection
of such agents or attorneys-in-fact was done without gross negligence or willful
misconduct.

    


    16.           No Responsibility for
Investigation.  Each Lender represents that it has made, and
agrees that it will continue to make, its own independent investigation of the
financial condition and affairs of Borrower in connection with the making of
Borrower Advances pursuant to the Note, and that it has made and shall continue
to make its own appraisal of the creditworthiness of Borrower.  Absent a
written request by one Lender to the other Lender, neither Lender shall have any
duty or responsibility either initially or on a continuing basis to make any
such investigation or any such appraisal on behalf of the other Lender or to
provide the other Lender with any credit or other information with respect
thereto whether coming into its possession before the date hereof or any time or
times thereafter and shall further have no responsibility with respect to the
accuracy of or the completeness of the information provided to the Lenders by
Borrower. Notwithstanding the foregoing, each Lender which receives or otherwise
comes into possession of information such Lender would want to receive if it
were not the original recipient thereof shall use commercially reasonable
efforts to provide (or otherwise make available) such information to the other
Lender.

    


    
      
         

      

      
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    17.           Confidentiality.  Each
Lender acknowledges that all information relating to this Agreement is
privileged and confidential. In handling any confidential information related to
this Agreement, each Lender and all employees and agents of each Lender shall
exercise the same degree of care that such Lender exercises with respect to its
own proprietary information of the same types to maintain the confidentiality of
any non-public information thereby received or received pursuant to this
Agreement except that disclosure of such information may be made (i) to the
subsidiaries or other affiliates of such Lender in connection with their present
or prospective business relations, (ii) to prospective transferees or purchasers
of any interest in the Loans, (iii) as required by law, regulations, rule or
order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of such Lender
and (v) as such Lender may determine in connection with the enforcement of any
remedies hereunder or under the Loan Documents.  Confidential information
hereunder shall not include information that either: (a) is in the public domain
or in the knowledge or possession of a Lender when disclosed to such Lender, or
becomes part of the public domain after disclosure to such Lender through no
breach of any contractual obligation of such Lender; (b) is disclosed to Lender
by Borrower, or (c) is disclosed to a Lender by a third party, provided such
Lender does not have actual knowledge that such third party is prohibited from
disclosing such information.

    


    18.           Transfer of Interest in
Loans.

    


    (a)           Consent.  Neither
Lender may sell or otherwise transfer any of its interest in the Note, the
related Loan Documents or the Loan, without the prior written consent of the
other Lender, which consent shall not be unreasonably withheld, conditioned or
delayed; provided, however, that each
Lender agrees that either Lender may collaterally assign to its lender or grant
a security interest in such Lender’s interests without consent and if the
assignee of such Lender is a creditor of such Lender to whom such Lender has
collaterally assigned its interests or granted such a security interest, then
following the occurrence of an event of default (however defined) under or with
respect to the indebtedness held by such assignee or the occurrence of an event
where with the giving of notice or the passage of time or both would constitute
such an event of default, the written consent of such assignee, rather than of
such assignor Lender, shall be required for any modification or amendment to
this Agreement.

    


    (b)           Assumption of
Obligations. As a condition precedent to receipt of an interest in the
Loan, the transferee shall become a party to this Agreement assume all
obligations of the transferring Lender with respect to the portion of the
transferor’s interest under this Agreement and the Note and shall execute a
counterpart hereto or joinder agreement evidencing such assumption, which shall
be satisfactory in all respects to the non-transferring Lender.

    


    
      
         

      

      
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    (c)           Voidability.  Any
sale or transfer of an interest in this Agreement and the Note shall be voidable
at the option of the non-transferring Lender unless the provisions of this Section 18 are
satisfied.

    


    19.           UDF III’s Representations
and Warranties.  UDF III hereby represents and warrants to UMT
that: (i) UDF III is a limited partnership, organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) UDF III has all
requisite limited partnership power and authority to execute and deliver, and to
perform all of its obligations under, this Agreement and each other agreement
executed and delivered by UMT in connection herewith, (iii) this Agreement has
been duly authorized, executed and delivered by UDF III and constitutes the
legal, valid and binding obligation of UDF III, enforceable against UDF III in
accordance with its terms; and (iv) UDF III has obtained all necessary consents,
releases and agreements required to enter into this Agreement and to consummate
the transactions contemplated hereby.

    


    20.           UMT’s Representations and
Warranties.  UMT hereby represents and warrants to UDF III, and
agrees, that: (i) UMT is a real estate investment trust organized, validly
existing and in good standing under the laws of the State of Maryland, (ii) UMT
is the sole owner of the Note and the Loan Documents, (iii) UMT has all
requisite power and authority to execute and deliver, and to perform all of its
obligations under, this Agreement and each other agreement executed and
delivered by UMT in connection herewith and (iv) this Agreement has been duly
authorized, executed and delivered by UMT and constitutes the legal, valid and
binding obligation of UMT, enforceable against UMT in accordance with its
terms.

    


    21.           Subordination
Agreement. This Agreement is subject to that certain Subordination and
Intercreditor Agreement executed by UMT in favor of Textron Financial
Corporation, as agent for certain lenders to Borrower, dated as of June 14, 2006
(as it may be amended, modified, renewed, extended, superseded or replaced from
time to time, the “Subordination
Agreement”).  Nothing herein shall effect or impede the
obligations of UMT under the Subordination Agreement.  UDF III hereby
accepts, assumes and agrees to be bound by, all of the terms and provisions of
the Subordination Agreement; provided however, that such agreement shall not be
deemed to create privity between UDF III and Textron Financial
Corporation.

    


    
      	
              22.

            	
              Successors and
      Assigns.  This Agreement shall be binding upon and shall
      inure to the benefit of the parties hereto and their respective heirs,
      representatives, administrators, successors and assigns; provided,
      however, that (i) UMT may assign this Agreement and its rights and
      obligations hereunder to any entity acquiring the Note and Loan Documents
      with the prior written consent of UDF III, and (ii) UDF III may not assign
      or transfer all or any portion of this Agreement and its rights and
      obligations hereunder without the prior written consent of
      UMT.

            


    

    


    23.           Indemnification by UDF
III.  UMT shall not be liable or responsible for, UDF III shall
protect, indemnify, defend and hold UMT harmless from and against, any and all
claims and damages of every kind relating to (i) its performance as Agent for
UDF III with respect to the Participation Interest, (ii) the performance or
nonperformance of any act by UMT under the Note and other Loan Documents,
(iii) Borrower’s failure to pay the Note in full or to comply with any of
its obligations under the Note or any other Loan Document, or any “default” or
“event of default” by Borrower under the Note or any other Loan Document, or any
breach by Borrower of any representation, warranty, covenant or agreement
contained in the Note or any other Loan Document, (iv) UMT’s enforcement, or
lack of enforcement, of any right it may have arising under the Note and the
other Loan Documents; and (v) UDF III’s loss of its investment in the
Participation Interest, in whole or in part, should such loss occur for any
reason; provided, however, that UDF III shall have no indemnity obligations
under this Section
23 to the extent that any claims or damages arise from the gross
negligence or willful misconduct of UMT or UMT’s failure to obtain any consent
of UDF III required by Section
4(a).

    


    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    24.           Indemnification by
UMT.  UMT shall not be liable or responsible for, and UMT shall
protect, indemnify, defend and hold UDF III harmless from and against, any and
all claims and damages of every kind relating to (i) the performance or
nonperformance of any act by UDF III with respect to its Participation Interest
in the Note and other Loan Documents, (ii) Borrower’s failure to pay the
Note in full or to comply with any of its obligations under the Note or any
other Loan Document, or any “default” or “event of default” by Borrower under
the Note or any other Loan Document, or any breach by Borrower of any
representation, warranty, covenant or agreement contained in the Note or any
other Loan Document, (iv) UDF III’s enforcement, or lack of enforcement, of any
right it may have arising with respect to the Participation Interest under the
Note and the other Loan Documents; and (v) UMT’s loss of its investment in the
Note and the Loan Documents, in whole or in part, should such loss occur for any
reason.

    


    25.           Entire Agreement;
Amendment.  This Agreement together with its exhibits contain
the entire understanding and agreement of UMT and UDF III regarding the subject
matter hereof and may not in any way be altered, amended or modified except by
an instrument in writing signed by UMT and UDF III.

    


    26.           Governing
Law.  This Agreement and the rights of UMT and UDF III shall be
governed by and construed in accordance with the laws of the State of Texas,
without giving effect to its rules regarding conflict of laws.

    


    27.           Headings.  The
headings of the sections in this Agreement are for convenience of reference only
and shall have no application in the interpretation of this
Agreement.

    


    28.           Exhibits.  The
exhibits hereto are incorporated by reference to the same extent as if fully set
forth herein.

    


    29.           Severability.  If
any provision of this Agreement or application to any party or circumstance
shall be determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances, other than those as to which
it is so determined invalid or unenforceable, shall not be affected thereby, and
each provision hereof shall be valid and shall be enforced to the fullest extent
permitted by law.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    30.           Further
Assurances.  The parties agree to execute such other and
further documents as may be reasonably necessary or appropriate to consummate
the transactions contemplated by this Agreement.

     

    31.           Counterparts.  This
Agreement may be executed in multiple counterparts, each of which shall
constitute an original.

    


    32.           Costs of
Collection.  UDF III shall fund its pro-rata share of any costs
of collection of the Note, including attorney fees, upon UMT’s
request.

    


    33.           Notices.  All
notices under this Agreement shall be in writing and sent by hand delivery,
overnight courier, or certified or registered mail, return receipt requested, to
the parties at their respective addresses set forth in the introductory
paragraph hereof, or to such other address as a party shall have designated by
notice in the manner described above.  Any notice shall be deemed to
be delivered upon actual receipt by the party to whom it is
addressed.

    


    


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remainder of this page is left blank intentionally.]

    


    


    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    


    


    IN
WITNESS WHEREOF, this Agreement has been executed on this the 30th day of
September, 2008, effective for all purposes as of the Effective
Date.

    


    UMT:

     

    UNITED
MORTGAGE TRUST

     

    


    


    
      	
               
      

            	
              By:

            	
                  /s/ David
      Hanson

            


    

    
      	
               
      

            	
              Name:  David
      Hanson

            


    

    
      	
               
      

            	
              Title:    UMTH GP, LP -
      Advisor

            


    

    


    


    UDF III:

     

    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