**Exhibit3.40(b)**

**SECONDAMENDMENT TOKIMBALL HILL CHADWICK FARMS PARTNERSHIP AGREEMENT**

ThisSECOND AMENDMENT TO KIMBALL HILL CHADWICK FARMS LIMITED PARTNERSHIP AGREEMENTis made as of July 1, 2006, between KIMBALL HILL, INC. (“KHI”), an Illinoiscorporation, and KIMBALL HILL HOMES DALLAS, L.P. (“KHH Dallas”), a Texaslimited partnership.

KHHDallas, as General Partner, and Kimball Hill Texas Development, LLC (“KHTD”),as Limited Partner, entered into the Kimball Hill Chadwick Farms LimitedPartnership Agreement effective as of July 21, 2003.  Subsequently, KHTD assigned and transferredto KHI, and KHI assumed, all of KHTD’s limited partnership interests asprovided in the certain Assignment and Assumption of Limited PartnershipInterest effective as of September 28, 2005. Thereafter, KHI and KHH Dallas entered into the First Amendment toKimball Hill Chadwick Farms Limited Partnership Agreement effective December13, 2005.

KHI(hereinafter called the “Limited Partner”) and KHH Dallas (hereinafter calledthe “General Partner”) wish to further amend the Kimball Hill Chadwick FarmsLimited Partnership Agreement as provided hereinafter.

NOW,THEREFORE, the General Partner and the Limited Partner hereby amend ArticleVIII of the Kimball Hill Chadwick Farms Limited Partnership Agreement bydeleting Article VIII in its entirety and replacing it with the following newArticle VIII:

**ARTICLEVIII**

**MANAGEMENT AND INDEMNIFICATION**

**Section 8.1****            Authorityof General Partner**

The General Partner shallhave sole authority to manage the business and affairs of the Partnership,which authority shall be delegated as provided in this Agreement.  Subject to the limitations in this Agreement,the General Partner shall have the authority to take any action it deems to benecessary or appropriate in connection with the business and affairs of thePartnership, including without limitation the power and authority to:

8.1.1        acquire by purchase,lease, or otherwise, any real or personal property, tangible or intangible andto deal with, purchase, sell, mortgage, transfer, assign or otherwise disposeof any and all of the assets of the Partnership;

8.1.2        construct, operate,maintain, finance, and improve, and to own, sell, convey, assign, mortgage, orlease any real estate and any personal property;

8.1.3        sell, dispose, trade, orexchange Partnership assets in the ordinary course of the Partnership’sbusiness;

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8.1.4        enter into agreements andcontracts and to give receipts, releases, and discharges;

8.1.5        purchase liability andother insurance to protect the Partnership’s properties and business;

8.1.6        execute or modify leaseswith respect to any part or all of the assets of the Partnership;

8.1.7        prepay, in whole or inpart, refinance, amend, mod­ify, or extend any mortgages, trust deeds or securityagreements which may affect any asset of the Partnership and in connectiontherewith to exe­cute for and on behalf of the Partnership any extensions,renewals, or modifications of such mortgages, trust deeds or securityagreements;

8.1.8        execute any and all otherinstruments and docu­ments which may be necessary or in the opinion of theGeneral Partner desirable to carry out the intent and purpose of thisAgreement, including, but not limited to, documents whose operation and effectextend beyond the term of the Partnership;

8.1.9        make any and allexpenditures which the General Partner, in its sole discretion, or in thediscretion of the parties to whom the General Partner has delegated theauthority to act for the Partnership as provided for above, deems necessary orappropriate in connection with the management of the affairs of the Partnershipand the carrying out of its obligations and responsibilities under thisAgreement, including, without limitation, all legal, accounting and otherrelated expenses incurred in connection with the organization and financing andoperation of the Partnership;

8.1.10      enter into any kind ofactivity necessary to, in con­nection with, or incidental to, theaccomplishment of the purposes of the Partnership;

8.1.11      invest and reinvestPartnership reserves in short-term instruments or money market funds;

8.1.12      take any and all otheraction which is permitted under law or which is customary or reasonably relatedto the operation, management or conducting of the business or affairs of thePartnership, subject to the limitations expressly stated in this Agreement; andthe enumeration of powers in this Agreement shall not limit the general orimplied powers of the General Partner or any additional powers provided by law;

8.1.13      take any and all actionrequired to guarantee the indebtedness of Kimball Hill, Inc and/or itssubsidiaries; and

8.1.14      delegate any or all of itsauthority and powers as manager of the Partnership to the Management Committee.

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**Section 8.2****            Establishmentof Management Committee**

The General Partnerhereby establishes a committee (the “Management Committee”) and delegates tothe Management Committee the General Partner’s full power and authority torepresent the Partnership, to act in the name of the Partnership and to managethe business of the Partnership, including without limitation the powers andauthorities set forth in Section 8.1 of this Agreement.  Further, the General Partner herebyauthorizes the Management Committee to delegate its powers and authorities tothe officers or other managers of the Partnership.  In addition, the officers of the Partnershipdescribed in Section 8.5 shall have the powers and authorities set forththerein.  The officers of the Partnershipshall conduct the business operations and activities of the Partnership in amanner consistent with the policies adopted from time to time by the ManagementCommittee.

**Section 8.3****            Compositionof Management Committee**

The Management Committee shall consist of threepersons (“Management Committee Members”), who shall be appointed from time totime by the General Partner.  The GeneralPartner hereby appoints David K. Hill, Eugene K. Rowehl and Hal H. Barber asthe Management Committee Members, effective as of the date of this SecondAmendment.  Each Management CommitteeMember shall hold office until his successor shall have been appointed by theGeneral Partner.  Management CommitteeMembers need not be residents of the state in which the Partnership is organized.  Any vacancy occurring in the ManagementCommittee shall be filled by the General Partner.  The Management Committee from time to timeshall appoint officers of the Company to act for and on behalf of the Company.

**Section 8.4****            Meetingsof Management Committee**

The Management Committeeshall meet at such times and places as a majority of the Management CommitteeMembers may designate from time to time. Notice of any meeting shall be given at least five days previous theretoby written notice mailed or telefaxed to each Management Committee Member athis business address, unless the giving of such notice is waived by suchManagement Committee Member.  Theattendance of a Management Committee Member at any meeting shall constitute awaiver of notice of such meeting. Neither the business to be transacted at, nor the purpose of, anymeeting of the Management Committee need be specified in the notice or waiverof notice of such meeting.

**Section 8.5****            Quorum**

A majority of theManagement Committee shall constitute a quorum for transaction of business atany meeting of the Management Committee. The act of the majority of the Management Committee Members present at ameeting at which a quorum is present shall be the act of the ManagementCommittee.  Any action which may be takenat a meeting of the Management Committee may be taken without a meeting if a

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written consent, setting forth the action so taken,shall be signed by all the Management Committee Members.  Any written consent signed by all theManagement Committee Members shall have the same effect as a unanimous vote,and may be stated as such in any document reflecting action taken by theManagement Committee.

**Section 8.6****            Officersof the Partnership**

The officers of the Partnership shall be a chairmanand chief executive officer, one or more vice chairmen, a president, one ormore vice-presidents, a chief financial officer, a treasurer, a secretary, oneor more assistant treasurers and assistant secretaries, and such other officersas may be elected or appointed from time to time by the ManagementCommittee.  Any two or more offices maybe held by the same person.  Each officershall hold office until his successor shall have been duly elected or until hisdeath or until he shall resign or shall have been removed by the ManagementCommittee.  Election of an officer shallnot of itself create contract rights. Each officer shall have the power and authority, in his sole discretion,to delegate any and all of his duties and responsibilities as an officer of thePartnership.

(a)           Chairmanand Chief Executive Officer.  Subjectto the direction and control of the Management Committee, the chairman andchief executive officer shall be the chief executive officer of the Partnershipand shall have the following general duties and responsibilities:  be in charge of the business of thePartnership: see that the resolutions and directions of the ManagementCommittee are carried into effect except in those instances in which thatresponsibility is specifically assigned to some other person by the ManagementCommittee; and, in general, discharge all duties incident to the office ofchairman and such other duties as may be prescribed by the Management Committeefrom time to time.  The chairman shallpreside at all meetings of the Management Committee.  Except in those instances in which theauthority to execute is expressly delegated to another officer or agent of thePartnership or a different mode of execution is expressly prescribed by theManagement Committee, the chairman may execute for the Partnership any contracts,deeds, mortgages, bonds, or other instruments which the Management Committeehas authorized to be executed.

(b)           ViceChairmen.  The vice chairman (or vicechairmen) shall assist the chairman in the discharge of his duties as thechairman may direct and shall perform such other duties as from time to timemay be assigned to him by the chairman or by the Management Committee.  Except in those instances in which theauthority to execute is expressly delegated to another officer or agent of thePartnership or a different mode of execution is expressly prescribed by theManagement Committee, each vice chairman may execute for the Partnership anycontracts, deeds, mortgages, bonds or other instruments which the ManagementCommittee has authorized to be executed.

(c)           President.  The president shall assist the chairman inthe discharge of the chairman’s duties as the chairman may direct and shallperform such other duties as from time to time may be assigned to him by thechairman or by the Management Committee. In the absence of the chairman or in the event of his inability orrefusal to act, the

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president shall perform the duties of the chairman,and when so acting, shall have all the powers of the chairman.  Except in those instances in which theauthority to execute is expressly delegated to another officer or agent of thePartnership or a different mode of execution is expressly prescribed by theManagement Committee, the president may execute for the Partnership anycontracts, deeds, mortgages, bonds or other instruments which the ManagementCommittee has authorized to be executed.

(d)           VicePresidents.  Each of thevice-presidents shall assist the president in the discharge of the president’sduties as the president may direct and shall perform such other duties as fromtime to time may be assigned to him by the chairman, the president or theManagement Committee.  In the absence ofthe president or in the event of his inability or refusal to act, thevice-presidents in the order of seniority of tenure as vice-president shallperform the duties of the president, and when so acting, shall have all thepowers of the president.  Except in thoseinstances in which the authority to execute is expressly delegated to another officeror agent of the Partnership or a different mode of execution is expresslyprescribed by the Management Committee, each of the vice-presidents may executefor the Partnership any contracts, deeds, mortgages, bonds or other instrumentswhich the Management Committee has authorized to be executed.

(e)           ChiefFinancial Officer.  The chieffinancial officer shall be the principal financial and accounting officer ofthe Partnership.  He shall have charge ofand be responsible for the maintenance of adequate books of account for thePartnership, have charge and custody of all funds and securities of thePartnership and be responsible for the receipt and disbursement thereof, andperform all the duties incident to the office of chief financial officer andsuch other duties as from time to time may be assigned to him by the chairmanor the Management Committee.

(f)            Treasurer.  The treasurer shall be responsible for thePartnership’s cash management systems and procedures and the Partnership’sbanking and finance relationships with lenders and investors, and shall performall the duties incident to the office of treasurer and such other duties asfrom time to time may be assigned to him by the chairman or the ManagementCommittee.

(g)           Secretary.  The secretary shall record the minutes ofManagement Committee meetings or actions taken by unanimous consent of theManagement Committee, be custodian of the Partnership’s records, sign with thechairman or the president or a vice-president or any other officer authorizedby the Management Committee any contracts, deeds, mortgages, bonds or otherinstruments which the Management Committee has authorized to be executed,except when a different mode of execution is expressly prescribed by theManagement Committee, and perform all duties incident to the office of secretaryand such other duties as from time to time may be assigned to him by thechairman, the president or the Management Committee.

(h)           AssistantTreasurers.  The assistant treasurersshall perform such duties as shall be assigned to them by the chief financialofficer, the treasurer, the chairman, the president or the ManagementCommittee.

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(i)            AssistantSecretaries.  The assistantsecretaries shall perform such duties as shall be assigned to them by thesecretary, the chairman, the president or the Management Committee.

**Section 8.7****            Indemnification**

(a)           ThePartnership shall indemnify any person who was or is a party or is threatenedto be made a party to any threatened, pending or completed action, suit orproceeding, whether civil, criminal, administrative or investigative (otherthan an action by or in the right of the Partnership) by reason of the factthat he is or was a Partner, Management Committee Member, officer, employee oragent of the Partnership (collectively, an “Action”), against expenses (includingattorneys’ fees), judgments, fines and amounts paid in settlement actually andreasonably incurred by him in connection with such Action if he acted in goodfaith and in a manner he reasonably believed to be in or not opposed to thebest interests of the Partnership, and, with respect to any criminal action orproceeding, had no reasonable cause to believe his conduct was unlawful.  The termination of any Action by judgment orsettlement, conviction or upon a plea of nolo contendere or its equivalentshall not, of itself, create a presumption that the person did not act in goodfaith and in a manner which he reasonably believed to be in or not opposed tothe best interests of the Partnership, and with respect to any criminal actionor proceeding, had reasonable cause to believe that his conduct was unlawful.

(b)           Anyindemnification under Section 8.7(a) shall be limited by the provisions of applicable law shall be made by thePartnership only as authorized in the specific case upon a determination thatindemnification of the Partner, Management Committee Member, officer, employeeor agent is proper in the circumstances because he has met the applicablestandard of conduct set forth therein. Such determination shall be made (i) by the Management Committee by amajority vote of a quorum consisting of Management Committee Members who arenot parties to such Action, or (ii) if directed by the Management Committee, byindependent legal counsel in a written opinion. Notwithstanding the foregoing, to the extent that a Partner, ManagementCommittee Member, officer, employee or agent of the Partnership has beensuccessful on the merits or otherwise in defense of any Action, or in defenseof any claim, issue or matter therein, he shall be indemnified against expenses(including attorneys’ fees) actually and reasonably incurred by him inconnection therewith.

(c)           Expenses(including attorneys’ fees) actually and reasonably incurred by a Partner,Management Committee Member, officer, employee or agent of the Partnership inconnection with the defense or disposition of any Action may be paid from timeto time by the Partnership in advance of the final disposition thereof uponreceipt of (i) an affidavit by such person of his good faith belief that he hasmet the standard of conduct necessary for indemnification under Section 8.7(a),and (ii) an undertaking by such person to repay to the Partnership the amountsso paid if it is ultimately determined that he is not entitled toindemnification as authorized in Section 8.7(a), which undertaking

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may be accepted by the Partnership without referenceto the financial ability of such person to make repayment.

(d)           Ifboth the Partnership and any person to be indemnified are parties to an Action,legal counsel representing the Partnership therein may, at the request of suchperson, also represent such person (unless such dual representation wouldinvolve such legal counsel in a conflict of interest in violation of applicablelaw or principles of professional ethics), and the Partnership shall pay allfees and expenses of such legal counsel incurred during the period of dualrepresentation other than those, if any, that would not have been incurred iflegal counsel were representing only the Partnership.  Any allocation of fees and expenses betweenthe Partnership and such person made by legal counsel shall be final andbinding upon the Partnership and such person.

(e)           Theindemnification and advancement of expenses provided in this Section 8.7 shallnot be deemed exclusive of any other rights to which a Partner, ManagementCommittee Member, officer, employee or agent of the Partnership may be entitledunder any contract, agreement or otherwise, both as to action in his officialcapacity and as to action in another capacity while holding such position oroffice, and shall continue as to a person who has ceased to be a Partner,Management Committee Member, officer, employee or agent and shall inure to thebenefit of the heirs, executors and administrators of such person.

(f)            ThePartnership shall have power to purchase and maintain insurance on behalf ofany person who is or was a Partner, Management Committee Member, officer,employee or agent of the Partnership, or is or was serving at the request ofthe Partnership as a director, officer, employee or agent of anothercorporation, partnership, joint venture, trust or other enterprise against anyliability asserted against him and incurred by him in any such capacity, orarising out of his status as such, whether or not the Partnership would havethe power to indemnify him against such liability under the provisions of thisSection 8.7.

**Section 8.8****           GeneralPartner Home Builder Expense Reimbursement**

In addition to any otherprovision in this Agreement with respect to sharing of profits andreimbursement and payment of expenses, the General Partner shall receive ageneral contractor and nonsite-specific cost reimbursement fee (“GeneralPartner Home Builder Expense Reimbursement”) from the Partnership payable atthe closing of the sale of each dwelling unit on the Property in the amount offive percent (5%) of the total, gross sales price for such unit.  This and any other reference in thisAgreement to the total, gross sales price for each unit shall in all cases meanthe amount actually paid by the purchaser of such unit and does not include anyupgrades or other similar items which are supplied to such purchaser at noadditional cost to be paid by such purchaser. The General Partner Home Builder Reimbursement shall constitute aPartnership expense for all purposes and not a profit or tier distribution tothe General Partner.  The General PartnerHome Builder Reimbursement may commence at any time during the term  of the Partnership.  If and while payments of First TierDistributions or Second Tier

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Distributions as defined and provided for in Section15.2 below are not current, then payments of the General Partner Home BuilderExpense Reimbursement shall be deferred until such First and Second TierDistributions are current.  Under all circumstancesand for all purposes, the General Partner Home Builder Expense Reimbursementshall be subordinate to the First and Second Tier Distributions.

**Section 8.9****           LimitedPartner’s Liability**

The Limited Partner shallnot take part in the management of the business or transact any business forthe Partnership or have the power to sign for or to bind the Partnership to anyagreement or document.  Except as and tothe extent expressly set forth in this Agreement, the Limited Partner shall notbe subject to assessment nor shall the Limited Partner be personally liable asa Limited Partner for any of the debts of the Partnership or for any of thelosses thereof beyond the amount contributed by it as capital to thePartnership and its share of the undistributed profits of the Partnership,provided, however, that the Limited Partner shall be personally liable to theGeneral Partner with respect to the capital contributions required of theLimited Partner pursuant to the terms of this Agreement.

**Section 8.10****        Requests forInformation and Meetings**

(a)           Any Partner shall beentitled upon request, provided such request is made in good faith and forproper purpose, to (i) review and copy the books and records of the Partnershipat reasonable times and at the location where the records are kept, (ii) obtainthe list of the names and addresses of all the Partners, and (iii) have anaccounting of all Partnership affairs and finances.

(b)           The General Partnershall have a designated employee available to meet monthly with a designatedemployee of the Limited Partner to discuss Partnership matters and to provideto the Limited Partner monthly financial statements and sales and constructionstatus reports.

**Section 8.11****        No Guaranty ofInvestment**

The Limited Partneracknowledges that its capital contributions are being made without any guarantyor representation by the General Partner of any particular return on investmentor of a return of its capital contribution and that such investment involves ahigh degree of risk which the Limited Partner is willing to assume.  All financial projections, proformas, profitssummary results calculations and the like delivered by the General Partner tothe Limited Partner are strictly for projection purposes and are not guaranteesof results.

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IN WITNESS WHEREOF, theundersigned have executed this Second Amendment to Limited PartnershipAgreement of Kimball Hill Chadwick Farms Limited Partnership as of the datefirst above written.
|        | GENERAL PARTNER:                  |
|--------|-----------------------------------|
|   |                              |
|   | KIMBALL HILL HOMES  DALLAS, L.P., |
|   |  a Texas limited partnership |
|   |                              |
|   |                              |
|   | By:                               |  /s/    Eugene  K. Rowehl |   |
|   |                              | Eugene K. Rowehl |
|   |                              | Chief Financial Officer |
|   |                              |
|   |                              |
|   | LIMITED PARTNER:                  |
|   |                              |
|   | KIMBALL HILL,  INC.,              |
|   |  an Illinois corporation     |
|   |                              |
|   |                              |
|   | By:                               |  /s/    Hal  H. Barber |   |
|   |                              | Hal H. Barber |
|   |                              | Senior Vice President |
|        |                                   |  |  |  |

 

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