Document:

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renewed, extended, superseded or replaced from time to time, the “Note”).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renewed, extended, superseded or replaced from time to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.

    

    

    [The
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
      Officerex10_1.htm

    Exhibit
10.1

    SECURED
LINE OF CREDIT PROMISSORY NOTE

    

    U.S.
$45,000,000.00 August 20, 2008

    

    FOR VALUE
RECEIVED, the undersigned, United Development Funding, L.P., a Delaware limited
partnership, formerly a Nevada limited partnership (the “Borrower”), hereby
makes this Secured Line of Credit Promissory Note (this “Note”) and promises
to pay to the order of United Development Funding III, L.P., a Delaware limited
partnership, or its assigns (the “Lender”), the sum of
up to Forty-five Million and NO/100 Dollars ($45,000,000.00) in Principal (as
hereinafter defined), or, if greater or less, the aggregate unpaid Principal
amount advanced to Borrower under this Note, together with accrued, unpaid
interest thereon, pursuant to the terms and conditions set forth in this
Note.  All amounts are payable to Lender in lawful money of the United
States of America at the address for Lender provided in this Note, or at such
other address as from time to time may be designated by Lender.

    

    1.           This
Note shall be subject to the following terms:

    

    Date of this
Note:                                  August
20, 2008

    

    Borrower:                                                United
Development Funding, L.P., a Delaware limited partnership

    

    Borrower’s
Address

    For
Notice:                                                  
1812 Cindy Lane, Suite 200

          
Bedford, Texas 76021    

          
Fax:           (817)
835-0383

    

    Lender:                                                   United
Development Funding III, L.P., a Delaware limited partnership

     

    Lender's
Address

    For Notice and
Payment:            
       1812 Cindy Lane, Suite
200

    Bedford,
Texas 76021

    Fax:           (817)
835-0383

    

    
      	
              Principal
      Amount:

            	
              Up
      to $45,000,000.00, or such amount of Principal that is actually advanced
      under this Note (the “Loan”).

            

    

    

    
      	
              Revolver:

            	
              This
      Note is a revolver and thus, Borrower may borrow, repay and then reborrow
      the Principal amount of this Note, subject to the other terms of this
      Note.

            

    

    

    
      	
              Loan
      Components:

            	
              The
      purpose of the Loan is to finance Borrower’s investments in real estate
      development projects.

            

    

    

    
      	
              Maturity:

            	
              Subject
      to the provisions of this Note requiring scheduled payments during the
      term hereof and subject to any permitted acceleration of this Note, this
      Note shall mature, and all outstanding Principal and unpaid accrued
      interest under this Note and any other indebtedness due under the other
      Loan Documents shall be due and payable in full, on or before 5:00 p.m.,
      Dallas, Texas time on December 31, 2009 (the “Maturity
      Date”).

            

    

    

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    
      	
              Base
      Rate:

            	
              Unless
      the Default Rate (defined below) shall apply, interest on the outstanding
      Principal balance of this Note shall accrue at the lesser of (i) 14% per
      annum, accrued and compounded annually, or (ii) the Highest Lawful Rate
      (defined below) (the “Base
      Rate”).

            

    

    

    
      	
              Default
      Rate:

            	
              Upon
      the occurrence and during the continuation of an Event of Default,
      interest on the outstanding Principal balance of this Note which is
      delinquent (which may be the entire Principal balance of this Note in
      circumstances where this Note matures or has been accelerated), together
      with any accrued and unpaid interest then due, shall accrue at the lesser
      of (i) 18% per annum, accrued and compounded annually, or (ii) the Highest
      Lawful Rate (the “Default
      Rate”).

            

    

    

    2.           Definitions.  In
addition to the terms which are defined elsewhere in this Note, the following
terms have the meanings indicated for purposes of this Note:

    

    (a)           “Advance” means any
advance of funds by Lender to Borrower pursuant to the terms of this
Note.

    

    (b)           “Borrowing Base
Report” shall mean, at any time, the calculation of the Borrowing Base
prepared by Borrower and approved by Lender in its reasonable discretion,
including a detailed summary of (i) the Retail Appraised Value of all loans and
equity interests for land development and/or land acquisition owned by Borrower,
to the extent such loans and equity interests are included in the calculation of
the Borrowing Base, (ii) the date of the last payment made on the Loan and
confirmation that all regular payments have been made in a timely manner, (iii)
all asset-specific debt senior to such loans and equity interests owned by
Borrower, (iv) all outstanding Senior Debt, (v) all amounts outstanding under
this Note, and (vi) the remaining Principal amount available under this
Note.

    

    (c)           “Borrowing Base” shall
mean, at any time, an amount equal to the outstanding balances of all secured
land acquisition and development loans made by Borrower and all equity interests
owned by Borrower, the repayment of which is secured; in each case, whether
payment or priority of liens is subordinate to payment or priority of liens in
favor of any other creditor, provided that the Borrowing Base shall at no time
exceed a Combined Loan-to-Value Ratio of 90% of the Retail Appraised Value of
all subordinate loans and equity interests for land development and/or land
acquisition owned by Borrower and 90% of the Retail Appraised Value for first
lien secured loans for land development and/or land acquisition owned by
Borrower.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    (d)           “Combined Loan-to-Value
Ratio” shall mean the ratio of (i) all Senior Debt and all other debt
(senior or subordinated to this Note) issued by Borrower to (ii) the Retail
Appraised Value of the Borrowing Base.  For purposes of the definition
of Combined Loan-to-Value Ratio, Senior Debt shall include all asset-specific
debt, including any asset specific Senior Debt and indebtedness senior to the
loans and equity interests owned by Borrower and shall exclude any unfunded
portions of the Senior Debt.

    

    (e)           “Indebtedness” shall
mean and shall include by way of example, but not by way of
limitation:  (i) all indebtedness, obligations and liabilities of
Borrower and/or any Guarantors under the Loan or arising under any of the Loan
Documents, of whatsoever kind, nature and description, primary or secondary,
direct, indirect or contingent, due or to become due, and whether now existing
or hereafter arising, and including without limitation of the generality of the
foregoing, all indemnities, defenses and hold harmless obligations of Borrower
and/or any Guarantor(s) to Lender in connection with the Loan as evidenced by
this Note; (ii) all present and future Advances made by Lender in connection
with the Loan and the Loan Documents, and whether made at Lender’s option or
otherwise, from time to time; (iii) all future Advances made by Lender for the
protection or preservation of Lender’s rights and interest in the Collateral (as
defined in the Security Agreement), as provided herein or in the Loan Documents,
including, without limitation, advances for taxes, levies, assessments,
insurance or maintenance of the Collateral; (iv) all costs and expenses incurred
by Lender in connection with or arising out of the protection, enforcement or
collection of any of the foregoing, including, without limitation, Lender’s
actual attorney fees; and (v) all costs and expenses incurred by Lender in
connection with, or arising out of, the sale, disposition, liquidation or other
realization including, but not by way of limitation, the taking, retaking or
holding, and all proceedings (judicial or otherwise) of the Collateral,
including, without limitation, Lender’s actual attorney fees.

    

    (f)           “Material Adverse
Effect”) shall mean any material adverse effect whatsoever
upon:  (a) the validity, performance, or enforcement of any Loan
Documents; (b) the properties, contracts, business operations, prospects,
profits, or condition (financial or otherwise) of Borrower; or (c) the ability
of Borrower to fulfill its obligations under the Loan Documents.

    

    (g)           “Principal” shall mean
the principal amounts outstanding from time to time pursuant to the terms of
this Note.

    

    (h)           “Retail Appraised
Value” means the value (determined by an appraiser if such value was so
determined in connection with Senior Debt or otherwise requested by Lender) of
the real property securing the loans and equity interests for land development
and/or land acquisition owned by Borrower based on the market value of the
finished sites sold to a merchant builder reflecting all estimated costs to
carry and sell the finished building lots.

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    (i)           “Senior Debt” shall
mean, collectively, all indebtedness due and owing by Borrower pursuant to (i) a
line of credit provided by Textron Financial Group in the amount of $30,000,000,
and (ii) all other indebtedness of Borrower to any national or state chartered
banking association or other institutional lender that is approved by Lender in
writing to be Senior Debt for purposes of this definition.

    

    2.           Applicable Interest
Rate.  The outstanding Principal amount shall bear interest on
each day outstanding at the Base Rate in effect on such day, unless the Default
Rate shall apply.  Upon the occurrence and during the continuation of
an Event of Default, the outstanding Principal amount, and all past-due interest
thereon, shall bear interest on each day outstanding at the Default Rate
automatically and without the necessity of notice, until such delinquent amount
is paid or such breach or default is otherwise cured to the satisfaction of
Lender or waived by Lender in writing.  Notwithstanding anything to
the contrary contained in this Note, (a) this Note shall never bear interest in
excess of the Highest Lawful Rate, and (b) if at any time the rate at which
interest is payable on this Note is limited by the Highest Lawful Rate by the
foregoing clause
(a) or by reference to the Highest Lawful Rate in the definitions of Base
Rate and Default Rate, then this Note shall bear interest at the Highest Lawful
Rate and shall continue to bear interest at the Highest Lawful Rate until such
time as the total amount of interest accrued on this Note equals (but does not
exceed) the total amount of interest which would have accrued on this Note, had
there been no Highest Lawful Rate applicable to this Note.  As used in
this Note, the term “Highest Lawful Rate”
shall mean the lesser of (a) 18%, or (b) the maximum lawful rate of interest
which may be contracted for, charged, taken, received or reserved by Lender in
accordance with the applicable laws of the State of Texas (or applicable United
States federal law, to the extent that it permits Lender to contract or charge,
take, receive or reserve a  greater amount of interest than under
Texas law), taking into account all fees and expenses if any, contracted for,
charged, received, taken or reserved by Lender in connection with the
transaction relating to this Note and the indebtedness evidenced hereby or by
the other Loan Documents which are treated as interest under applicable
law.

    

    3.           Security; Loan
Documents.  This Note is secured by, and entitled to the
benefits of, a security agreement dated the date of this Agreement (the “Security Agreement”)
between Borrower and Lender, pursuant to which the Borrower has granted to
Lender, a security interest in the Collateral (as defined in the Security
Agreement).  This Note, the Security Agreement, all UCC financing
statements, amendments thereto and continuation statements (collectively, “Financing
Statements”) filed by or in favor of Lender, all Advance Requests (herein
so called) and any instruments, agreements, or certificates executed, entered
into or delivered by any party in connection with this Note, are collectively
referred to in this Agreement as the “Loan
Documents”.

    

    4.           Use of
Proceeds.  The proceeds of this Note shall be used solely for
business and commercial purposes and shall be used to acquire assets to seek
income that qualifies under the Real Estate Investment Trust provisions of the
Internal Revenue Code.  In no event shall any funds advanced under
this Note be used, directly or indirectly, by any person for personal, family,
household or agricultural purposes or for the purpose, whether immediate,
incidental or ultimate, of purchasing, acquiring or carrying any “margin stock”
(as such term is defined in Regulation U promulgated by the Board of Governors
of the Federal Reserve System).  Further, no funds advanced under this
Note may be used by Borrower to either:  (a) finance indebtedness
associated with any real estate development project to the extent such
indebtedness, including indebtedness financed by funds advanced hereunder and
indebtedness financed by funds advanced from any other source, including without
limitation Senior Debt, exceeds 90% of the Retail Appraised Value of such real
estate development project; or (b) finance indebtedness associated with any real
estate development project upon which Borrower has a junior priority lien to the
extent such indebtedness, including indebtedness financed by funds advanced
hereunder and indebtedness financed by funds advanced from any other source,
including without limitation Senior Debt, exceeds 90% of the Retail Appraised
Value of such real estate development project.

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    5.           Advances and Advance
Procedures.

    

    (a)           Advance
Request.  Borrower may request, upon and at any time after the
date of this Note until 30 days prior to the Maturity Date, that Lender advance
an amount of Principal to Borrower under this Note by presenting an Advance
Request to Lender in the form attached as Exhibit
“A”.  Subject to the other provisions of this Note, within
three business days after its receipt of the Advance Request, Lender shall fund
the requested Advance.  At no time shall the amount of an Advance
cause the outstanding Principal to exceed the Borrowing Base as set forth in the
immediately preceding Borrowing Base Report delivered by Borrower to
Lender.  At any time that the outstanding Principal exceeds the
Borrowing Base, Borrower shall immediately pay Lender an amount equal to such
excess.

    

    (b)           Advance
Schedule.  Attached to this Note as Schedule 1 is a list
of the Advances by type made under this Note, any payments applied to reduce
Principal  outstanding under this Note, and the aggregate amount of
Principal outstanding under this Note (the “Advance Schedule”).
The amount of Principal owing on this Note at any given time shall be equal to
(i) the aggregate amount of all Principal advanced by Lender under this Note,
minus
(ii) all payments made on this Note and applied by Lender to reduce the
Principal amount of this Note in accordance with Section 6(c). The
Advance Schedule shall be revised by Lender from time to time as
appropriate.

    

    (c)           Advances.  Subject
to the terms of this Note, Lender agrees to make one or more advances to
Borrower from time to time from the date hereof to and including the Maturity
Date, provided that the aggregate amount of all Advances at any time outstanding
shall not exceed the lesser of the Borrowing Base or the maximum amount of
Principal Amount of this Note.

    

    6.           Payment.

    

    (a)           Mandatory
Payments.  Mandatory payments equal to the amount of unpaid
accrued interest on the outstanding Principal balance of this Note from time to
time shall be due and payable on the 15th day of
each month for the prior calendar month interest due during the term of this
Note, commencing on September 15, 2008.

    

    (b)           Maturity.  Subject
to any acceleration of this Note, the outstanding Principal, together with
accrued, unpaid interest thereon, shall be due and payable on the Maturity
Date.

    

    (c)           Application of
Payments.  Payments made on this Note will be applied first to
unpaid, accrued interest, next, to any unpaid collection costs, fees and other
charges permitted under this Note, and last, to reduce the Principal outstanding
under this Note, subject,
however,
to any adjustments required or permitted by this Note or applicable
law.

    

    (d)           General.  Borrower
will make each payment that it owes under this Note to Lender (interest, any
applicable fees and charges, and outstanding Principal) in full and in lawful
money of the United States, without set-off, deduction or
counterclaim.  All payments shall be made by check or wire transfer of
immediately available funds.  Should any such payment become due and
payable on a day other than a business day, the date for such payment shall be
extended to the next succeeding business day, and, in the case of a payment of
Principal or past-due interest, interest shall accrue and be payable on such
amount for the period of such extension.  Each such payment must be
received by Lender not later than 5:00 p.m., Dallas, Texas time on the date such
payment becomes due and payable.  Any payment received by Lender after
such time will be deemed to have been made on the next succeeding business
day.

    

    7.           Prepayment; Lender's
Rights.  Borrower may prepay this Note, or any portion of this
Note, at any time and from time to time, without the payment of any fee or
penalty.

    

    8.           Representations and
Warranties.  Borrower represents and warrants to Lender
that:

    

    (a)           Organization and Good
Standing.  Borrower is a limited partnership, duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, having all limited partnership powers required to carry on its
business and to enter into and carry out the transactions contemplated by this
Note and the other Loan Documents.  Borrower has taken all appropriate
actions and complied in all material respects with all laws applicable to it in
each jurisdiction within and without outside the United States where Borrower
owns or leases any properties or conducts any business.

    

    (b)           Authorization;
Validity.  Borrower has the limited partnership power,
authority and legal right to execute, deliver and perform its obligations under,
this Note and the other Loan Documents.  The execution and delivery by
Borrower of the Loan Documents and the performance of its obligations under each
such Loan Document have been duly authorized by proper limited partnership
proceedings.  The Loan Documents to which Borrower is a party
constitute the legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally.

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (c)           Approvals.  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
execution, delivery or performance of this Note by Borrower, or (ii) for the
exercise by Lender of its rights and remedies under this Note.

    

    (d)           No
Conflicts.  The execution, delivery, and performance by
Borrower of this Note and the other Loan Documents will not conflict with, or
result in a violation of or a default under, (i) any applicable law, ordinance,
regulation, or rule (federal, state, or local); (ii) any judgment, order, or
decree of any arbitrator, other private adjudicator, or governmental authority
to which Borrower is a party or by which Borrower or any of the assets of
Borrower is bound; (iii) or any agreement, document, or instrument to which
Borrower is a party or by which Borrower or any of the assets of Borrower is
bound.

    

    (e)           Accurate
Information.  All information in any loan application,
financial statement, report (including those reports required by Section 10 hereof),
certificate, or other document, and all other information delivered by or on
behalf of Borrower to Lender in connection with this Note or the Indebtedness is
correct and complete in all material respects as of the date thereof, and there
are no omissions from any such information that result in any such information
being materially incomplete, incorrect, or misleading as of the date
thereof.  Borrower does not have knowledge of any material change in
any such information.  All financial statements heretofore delivered
to Lender by Borrower were prepared in accordance with Generally Accepted
Accounting Principles and accurately present the financial conditions and
results of operations as at the dates thereof and for the periods covered
thereby in all material respects.  Since the date of each respective
financial statement or report, no Material Adverse Effect has
occurred.

    

    (f)           Legal Proceedings, Hearings,
Inquiries and Investigations.  Except as disclosed to Lender in
writing prior to the date of this Agreement:  (i) no legal proceeding,
individually or in the aggregate with related proceedings, involving a sum of
$50,000 or more, is pending or, to best knowledge of Borrower, threatened before
any arbitrator, other private adjudicator, or governmental authority to which
Borrower is a party or by which Borrower or any assets of Borrower may be bound
or affected that if resolved adversely to Borrower could result in a Material
Adverse Effect; (ii) no hearing, inquiry, or investigation relating to Borrower
or any assets of Borrower is pending or, to the best knowledge of Borrower,
threatened by any Governmental Authority that if resolved adversely to Borrower
could result in a Material Adverse Effect; and/or (iii) neither Borrower nor any
Guarantor is in default with respect to any order, writ, injunction, decree, or
demand of any court, governmental agency, regulatory body, or administrative
tribunal, which default might have consequences which would materially and
adversely affect their respective business or properties.

    

    (g)           
Usury.  Borrower
has been involved in the structure and negotiation of the Note and the other
Loan Documents.  It is the intention of Borrower that all aspects of
the Note and the other Loan Documents, and any related transaction, comply with
all laws, including, specifically, any applicable usury laws.  If for
any reason, it is determined by a governing authority that the loan made
pursuant to the Note and the other Loan Documents is usurious in any manner,
Borrower hereby represents that, as to Borrower, such result was unintentional
and the result of a bona fide mistake and, to the extent permitted under
law,  BORROWER HEREBY WAIVES ANY AND ALL DEFENSES, CLAIMS AND/OR
COUNTERCLAIMS BASED ON USURY.

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    9.           Conditions
Precedent.  Lender has no obligation to make any Advance to
Borrower unless at the time of such Advance, each of the following conditions
has been fully satisfied:

    

    (a)           Borrower
shall have paid all amounts then due to Lender under this Note;

    

    (b)           No
Event of Default shall exist under this Note, and no “default” or “event of
default” shall exist under any other Loan Document (“default” and “event of
default” having the meaning given to such terms in any of such Loan Documents);
and

    

    (c)           Such
Advance would not otherwise cause the outstanding Principal to exceed the
Borrowing Base as set forth in the immediately preceding Borrowing Base Report
delivered by Borrower to Lender.

    

    (d)           Borrower
shall have provided Lender with:  (i) copies of all reports required
by Section 10
of this Note with respect to the indebtedness that Borrower intends to finance
or the equity that Borrower intends to purchase with such Advance; and (ii) such
further documentation as Lender shall reasonably require.

    

    10.           Covenants.  Borrower
covenants and agrees with Lender that it will deliver each of the following, on
a quarterly basis, commencing with the quarter ending September 30, 2008, in
form and substance reasonably satisfactory to Lender:

    

    (a)           Borrowing Base
Report.  A Borrowing Base Report certified by an executive
officer of the general partner of Borrower.

    

    (b)           Summary of
Loans.  A summary of each real estate development loan, bridge
loan and equity investment by Borrower, the borrowers and/or joint venture
partners associated with such loans or equity investments, and a summary of
concentration of credit by borrower, partner and geographical
region.

    

    (c)           Schedule of
Maturities.  A summary of scheduled maturities for each real
estate development loan and bridge loan made by Borrower, payment status for
each such loan, and the status of the real estate development that is being
financed by such loans (including a discussion of any variances from the initial
plans for such project previously delivered to Lender).

    

    (d)           Summary of Amounts
Loaned/Invested.  A summary of the aggregate amount loaned or
invested by Borrower with respect to unimproved real property projects
(including Lender’s prorated portion of such amounts loaned to or invested in
unimproved real property projects) and the aggregate amount loaned to or
invested by Borrower with respect to real property designated for improvement
within twelve (12) months of such date (including Lender’s prorated portion of
such amounts loaned to or invested in real property designated for improvement
within twelve (12) months of such date).

    

    (e)           Note
Proceeds.  A summary of all proceeds of this Note that are
allocated by Borrower to each real estate development project (whether in the
form of loans or equity) or for the payment of any Senior Debt.

    

    (f)           Certificate.  A
certificate stating that, to Borrower’s knowledge, no Material Adverse Effect
has occurred to date.

    

    (g)           Estoppels from Borrower’s
Borrowers.  Upon the occurrence of an Event of Default under
this Note or any other Loan Document and for so long as an Event of Default
shall be continuing and upon written request by Lender, an estoppel, in a form
reasonably requested by Lender, from each of Borrower’s borrowers, confirming
any or all of the information described above with respect to that borrower’s
indebtedness to Borrower.

    

    (h)           Appraisals.  Borrower
shall obtain appraisals by an independent expert on all underlying
properties.  All appraisals will be addressed to the
Lender.

    

    11.           Default.

    

    (a)           For
purposes of this Note, the following events shall constitute an “Event of
Default”:

    

    (i)           the
default by Borrower in any payment required by this Note by the fifth day
following the date when due, whether on or prior to the Maturity Date;
or

    

    (ii)           Borrower
breaches any representation or warranty contained in this Note or any other Loan
Document, or fails to perform or observe any covenant or agreement that is set
forth in this Note 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

    

    (iii)           the
entry of a decree or order for relief by a court having jurisdiction in respect
of Borrower in an involuntary case under the federal bankruptcy laws, as now or
hereafter constituted, or any other applicable federal or state bankruptcy,
insolvency or other similar law, which is not vacated or dismissed within 30
days, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of Borrower for any substantial part of
Borrower’s property, or ordering the winding up or liquidation of such person's
affairs; or

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    (iv)           the
commencement by Borrower of a voluntary case under the federal bankruptcy laws,
as now constituted or hereafter amended, or any other applicable federal or
state bankruptcy, insolvency or other similar law, or the consent by it to the
appointment to or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or other similar official) of Borrower for any
substantial part of its property, or the making by Borrower of any assignment
for the benefit of creditors, or the admission by Borrower in writing of
Borrower’s inability to pay its debts generally as they become due;
or

    

    
      	
               
      

            	
              (v)

            	
              the
      appointment of or taking possession by a receiver, liquidator, assignee,
      custodian, trustee, sequestrator or similar official of all or a
      substantial part of its assets or of any part of the Collateral (as such
      term is defined in the Security Agreement) in a proceeding brought against
      or initiated by Borrower; or

            

    

    

    (vi)           Borrower
suffers the entry against it of a final judgment for the payment of money in
excess of $50,000 (not covered by insurance satisfactory to Lender in its
discretion), unless the same is discharged within thirty days after the date of
entry thereof or an appeal or appropriate proceeding for review thereof is taken
within such period and a stay of execution pending such appeal is obtained;
or

    

    (vii)           Borrower
suffers a writ or warrant of attachment or any similar process to be issued by
any tribunal against all or any substantial part of its assets or any part of
the Collateral, and such writ or warrant of attachment or any similar process is
not stayed or released within thirty (30) days after the entry or levy thereof
or after any stay is vacated or set aside; or

    

    (viii)                      Borrower
is sold, liquidated or winds up its affairs, without the prior written consent
of Lender or the full payment of the Indebtedness due under this Note in full;
or

    

    (ix)           Any
“default” or “event of default” is declared under any Senior Debt;
or

    

    (x)           Lender
in good faith deems itself insecure provided that Lender notifies Borrower of
the related event(s) or condition(s) and Borrower fails to correct or resolve
the same to Lender’s reasonable satisfaction within thirty (30)
days.

    

    (b)           Upon
the occurrence of an Event of Default described in subsection (a)(iii),
(iv) or (v) of this Section 11 with
respect to Borrower, all of Borrower's obligations under this Note and the other
Loan Documents (accrued and unpaid interest, outstanding Principal, and fees and
charges) 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.  During the continuance of any
other Event of Default, then and in every such case the Lender may do any or all
of the following: (i) declare the Principal of this Note together with all
accrued and unpaid interest on the unpaid Principal balance, and other
Indebtedness due to Lender under this Note or the other Loan Documents, to be
due and payable immediately, and the same shall become and be due and payable,
without notices, demands for payment, presentations for payment, notices of
payment default, notices of intention to accelerate maturity, protest and notice
of protest, and any other notices of any kind, all of which are expressly waived
by Borrower and any and all sureties, guarantors and endorsers of this Note,
(ii) exercise its rights under the Security Agreement or any other Loan
Document, and (iii) exercise all other rights and remedies available to Lender
at law or in equity or under this Note and the other Loan
Documents.  No delay on the part of Lender in exercising any power
under this Note shall operate as a waiver of such power or right nor shall any
single or partial exercise of any power or right preclude further exercise of
that power or right.

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    (c)           If
this Note is placed in the hands of an attorney for collection after an Event of
Default or failure to pay under this Note, or if all or any part of the
indebtedness represented hereby is proved, established or collected in any court
or in any bankruptcy, receivership, debtor relief, probate or other court
proceedings, Borrower and all endorsers, sureties and guarantors of this Note,
jointly and severally, agree to pay reasonable attorneys' fees and collection
costs to the Lender in addition to the Principal and interest payable under this
Note.

    

    12.           Usury
Laws.                                It
is the intention of the parties to this Note to comply with all applicable laws,
including, without limitation, usury laws.  In furtherance thereof,
Borrower stipulates and agrees with Lender that none of the terms and provisions
contained in the Loan Documents shall ever be construed to create a contract to
pay for the use, forbearance, or detention of money, or interest, in excess of
the maximum amount of interest permitted to be charged by applicable law in
effect from time to time.  Neither Borrower nor any present or future
guarantors, endorsers, or other persons or entities hereafter becoming liable
for payment of the obligations hereunder and under the other Loan Documents
shall ever be liable for unearned interest thereon or shall ever be required to
pay interest thereon in excess of the maximum amount that may be lawfully
charged under applicable law from time to time in effect, and the provisions of
this section shall control over all other provisions of the Loan Documents that
may be in conflict or apparent conflict herewith.  Lender expressly
disavows any intention to charge or collect excessive unearned interest or
finance charges in the event the maturity of this Note is accelerated. If (a)
the maturity of this Note is accelerated for any reason, (b) this Note is
prepaid and as a result any amounts held to constitute interest are determined
to be in excess of the legal maximum, or (c) Lender or any other holder of the
Note shall otherwise collect moneys which are determined to constitute interest
which would otherwise increase the interest hereon to an amount in excess of
that permitted to be charged by applicable law, then all sums determined to
constitute interest in excess of such legal limit shall, without penalty, be
promptly applied to reduce the then outstanding Principal of this Note or, at
Lender's or such holder's option, promptly returned to Borrower or the other
payor thereof upon such determination. In determining whether or not the
interest paid or payable, under any specific circumstance, exceeds the maximum
amount permitted under applicable law, Lender and Borrower (and any other payors
of this Note) shall to the greatest extent permitted under applicable law, (a)
characterize any non-Principal payment as an expense, fee or premium rather than
as interest, (b) exclude voluntary prepayments and the effects thereof, and (c)
amortize, prorate, allocate, and spread the total amount of interest throughout
the entire contemplated term of this Note in accordance with the amounts
outstanding from time to time hereunder and the maximum legal rate of interest
from time to time in effect under applicable law in order to lawfully charge the
maximum amount of interest permitted under applicable law.  In the
event applicable law provides for an interest ceiling under Chapter 303 of the
Texas Finance Code (the “Texas Finance Code”)
as amended, for that day, the ceiling shall be the “weekly ceiling” as defined
in the Texas Finance Code. As used in this section the term “applicable law”
means the laws of the State of Texas or the laws of the United States of
America, whichever laws allow the greater interest, as such laws now exist or
may be changed or amended or come into effect in the future.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    13.           Notice.  All
notices and other communications required or permitted under this Note will be
in writing and will be mailed by registered or certified mail, postage prepaid,
sent by facsimile, or otherwise delivered by hand or by nationally recognized
overnight delivery service addressed to the addresses provided in Section 1 of this
Note, or to such other address as a party may have delivered by like method to
the other party for purposes of notice.  Each notice or other
communication will be treated as effective or having been given when delivered
if delivered personally, or, if sent by mail, at the earlier of its receipt or
three business days after such notice or other communication has been deposited
in a regularly maintained receptacle for deposit of United States mail or, if
sent by facsimile, upon confirmation of facsimile transfer or, if sent by
nationally recognized overnight delivery service, upon confirmation of delivery
from such service.

    

    14.           JURISDICTION;
VENUE.  EXCEPT TO THE EXTENT THAT A LOAN DOCUMENT SPECIFIES
THAT THE LAWS OF A STATE OTHER THAN THE STATE OF TEXAS SHALL APPLY AND EXCEPT TO
THE EXTENT THE VALIDITY OR PERFECTION OF SECURITY INTERESTS OR REMEDIES IN
RESPECT OF ANY PARTICULAR COLLATERAL IS GOVERNED BY THE LAWS OF A JURISDICTION
OTHER THAN THE STATE OF TEXAS, THIS NOTE AND THE OTHER LOAN DOCUMENTS SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE
OF TEXAS, WITHOUT REGARD TO ITS CONFLICTS OF LAWS
PROVISIONS.  JURISDICTION FOR ALL MATTERS ARISING OUT OF THIS NOTE AND
THE OTHER LOAN DOCUMENTS SHALL BE EXCLUSIVELY IN THE STATE AND FEDERAL COURTS
SITTING IN DALLAS COUNTY, TEXAS, AND BORROWER HEREBY IRREVOCABLY SUBMITS ITSELF
TO THE JURISDICTION OF SUCH STATE AND FEDERAL COURTS AND AGREES AND CONSENTS NOT
TO ASSERT IN ANY PROCEEDING, THAT ANY SUCH PROCESS IS BROUGHT IN AN INCONVENIENT
FORUM OR THAT THE VENUE THEREOF IS IMPROPER, AND FURTHER AGREES TO A TRANSFER OF
SUCH PROCEEDING TO THE COURTS SITTING IN DALLAS COUNTY, TEXAS.

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    15.           Miscellaneous.  This
Note and the other Loan Documents (a) together represent the entire agreement
between Borrower and Lender regarding the subject matter hereof, (b) may not be
amended or modified except in writing signed by both Borrower and Lender, (c)
may be executed in multiple counterparts, (d) is binding upon, and shall inure
to the benefit of, Borrower and Lender, and their respective successors and
permitted assigns, and (e) may be freely assigned, transferred or pledged by
Lender without the consent of Borrower, and (f) may not be assigned,
transferred, pledged or delegated by Borrower without the prior written consent
of Lender.

    

    16.           Lender’s
Costs.  Borrower will pay the cost of all charges and premiums
of any title insurance obtained by Lender, recording fees, costs of lien
perfection, appraisal fees, reasonable attorney fees and any other out-of-pocket
expenses incurred by Lender in connection with the Loan, including without
limitation, the costs and expense of Lender in connection with the preparation
of the Loan Documents and the enforcement of Lender’s rights and remedies under
the Loan Documents and any other agreement between Borrower and
Lender.

    

    17.           Consent and
Waiver.  No consent or waiver granted by Lender hereunder or in
respect of this Note or any other Loan Document shall be effective unless it is
in writing and signed by Lender.

    

    18.           Third Party
Beneficiaries.  This Agreement shall not be construed to make
Lender liable to any third party, including without limitation any borrower of
Borrower or entity in which Borrower holds an equity interest or for debts or
claims accruing to such parties against Borrower.  It is expressly
agreed that there are no contractual relationships, either express or implied,
between Lender and any borrower of Borrower or any entity in which Borrower
holds an equity interest.

    

    19.           Further
Assurances.  Borrower shall execute, acknowledge and deliver,
or cause to be executed, acknowledged or delivered, any and all such further
assurances and other agreements or instruments, and take or cause to be taken
all such other action, as shall be reasonably necessary from time to time to
give full effect to this Note or any Loan Document and the transactions
contemplated thereby.

    

    20.           Conflict.  If
any provision of this Note expressly conflicts with any provision of any other
Loan Document, such provision of this Note shall control as to such
conflict.

    

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

    

    22.           Subordination.  Lender
agrees that this Note and all liens, pledges and security instruments securing
this Note pursuant to the Security Agreement or any other Loan Document, are and
shall be subordinate in right, priority and payment to all Senior
Debt.

    

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

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    This Note has been executed by Borrower
and is effective, on and as of the date first set forth above.

    

    BORROWER:

    

    UNITED
DEVELOPMENT FUNDING, L.P.

    

    By:           United
Development Funding, Inc.

    Its:           General
Partner

    

    

    By:           /s/ Hollis
Greenlaw

    Name:       Hollis
Greenlaw

    Title:         President

    

    

    

    

    

    

    

    

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    

    Schedule
1

    

    ADVANCE
SCHEDULE

    

    

    
      	
               

              ADVANCES

            	
               

              REPAYMENTS

            	
              PRINCIPAL

              OUTSTANDING

            
	
               

               

              Date
      of

              Advance

            	
               

               

               

              Amount Advanced

            	
               

              Date
      of Principal
Repayment

            	
               

              Amount
      of

              Principal Repayment

            	
              Aggregate
      Principal Amount
      Outstanding

            
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      

    

    

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
A

    

    ADVANCE
REQUEST

    

    1.           Submission
Pursuant To Note.  This Advance Request is executed and
delivered by United Development Funding, L.P., a Delaware limited partnership,
formerly a Nevada limited partnership (“Borrower”), to United
Development Funding III, L.P., a Delaware limited partnership (“Lender”), pursuant to
the Secured Line of Credit Promissory Note dated as of August 20, 2008 executed
by Borrower in favor of Lender (the “Note”).  Capitalized
terms used but not defined in this Advance Request shall have the respective
meanings assigned to such terms in the Note.

    

    2.           Request
For Borrowing.  Borrower hereby requests an Advance under the
Note as follows:

    

    (a)           Date
of this Advance
Request:                                                                

    

    (b)           Amount
of Advance
requested:                                                                $                                

    

    
      	
               
      

            	
              (c)

            	
              Date
      the Advance is requested to be made:

            	 

    

    

    3.           Certification.  The
undersigned certifies on behalf of the undersigned Borrower that, on and as of
the date of this Advance Request:

    

    (a)           The
undersigned is a duly elected, qualified, and acting officer of
Borrower.

    

    (b)           All
representations and warranties made by Borrower in the Note and each other Loan
Document are true and correct in all material respects, and Borrower is in
compliance in all material respects with all covenants and agreements in the
Note and the other Loan Documents.

    

    (c)           No
Event of Default exists under the Note or any other Loan Document.

    

    BORROWER:

    

    UNITED
DEVELOPMENT FUNDING, L.P.

    

    By:           United
Development Funding, Inc.

    Its:           General
Partner

    

    

    By:           

    Name:                      

    Title:

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