Document:

exv10w4

 

Exhibit 10.4

SECURED PROMISSORY NOTE

					
	 	 	 	 	 
	U.S. $3,617,500.00
	 	Dallas, Texas
	 	September 27, 2006

FOR VALUE RECEIVED, ARETE REAL ESTATE AND DEVELOPMENT COMPANY, a Texas corporation (“Arete”),
MODERN MODULAR HOME RENTAL CORP., a Texas corporation (“MMHRC”) and CREATIVE MODULAR HOUSING, INC.,
a Texas corporation (“CMH”; Arete, MMHRC and CMH are referred to herein individually, as a
“Borrower” and collectively, as the “Borrowers”), hereby jointly and severally make and issue this
Secured Promissory Note (this “Note”), and promise to pay to the order of UNITED DEVELOPMENT
FUNDING III, L.P., a Delaware limited partnership (together with its successors and assigns,
“Lender”) the principal sum of U.S. Three Million Six Hundred Seventeen Thousand Five Hundred and
NO/100 Dollars ($3,617,500.00) or, if greater or less, the aggregate amount of all funds advanced
to Borrowers under this Note, together with accrued, unpaid interest thereon, and all other amounts
due to Lender hereunder.

     1. Certain Definitions. Certain capitalized terms which are defined in the text of
this Note shall have the respective meanings given to such terms herein. The following capitalized
terms shall have the following meanings:

     (a) “Accrued Interest Payments” shall mean payments equal to the amount of accrued
interest on the outstanding principal balance of this Note, calculated at the applicable
rate of interest provided herein, and payable as provided herein.

     (b) “Base Rate” shall mean the lesser of (i) sixteen and one-half percent (16.5%),
accrued and compounded monthly, or (ii) the Highest Lawful Rate.

     (c) “Borrower Principals” shall mean, collectively, Joe Fogarty and Nancy Fogarty.

     (d) “Cash Flow” shall mean all proceeds, cash and cash equivalents received by any
Borrower, Pledgor or any of their respective affiliates relating to the Pledged Securities
and/or the Properties, including, without limitation, in connection with the sale of any
Property or any lot thereof, agreements and contracts for reimbursement from sources such as
cities, municipal utility districts, water districts and assessment districts, joint venture
agreements, profit sharing agreements, and development agreements.

     (e) “Collateral” shall have the meaning given to such term in the Security Agreement.

     (f) “Commitment” shall mean the aggregate amount of U.S. Three Million and NO/100
Dollars ($3,000,000.00).

     (g) “Commitment Advance” shall mean full or partial advance of the Commitment to any
Borrower pursuant to the terms hereof.

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     (h) “Commitment Fee” shall mean the fee paid by Borrowers to Lender or its assigns
pursuant to that certain Commitment Letter dated September 18, 2006, in consideration of
Lender’s commitment to make the Loan, subject to the terms and conditions hereof.

     (i) “Default Rate” shall mean the lesser of (i) eighteen percent (18%), accrued and
compounded annually, or (ii) the Highest Lawful Rate.

     (j) “Effective Date” shall mean September 27, 2006.

     (k) “Event of Default” shall have the meaning given to such term in Section 10
of this Note.

     (l) “Guaranty” shall mean that certain Continuing Unconditional Guaranty executed by
the Borrower Principals and The Fogarty Family Trust in favor of Lender, dated the Effective
Date, as such Guaranty may be amended from time to time.

     (m) “Highest Lawful Rate” shall mean 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
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.

     (n) “Interest Reserve” shall mean an aggregate of up to U.S. Four Hundred and NO/100
Dollars ($400,000.00) to be advanced by Lender hereunder and to be applied against Accrued
Interest Payments, subject to the provisions of Sections 4(b) and 4(c) of
this Note.

     (o) “Interest Reserve Advance” means an advance under this Note in the amount of an
Accrued Interest Payment pursuant to Section 4(b) of this Note.

     (p) “Lien” shall mean any lien, security interest, charge, tax lien, pledge,
encumbrance, conditional sales or other title retention arrangement or any other interest in
property designed to secure the repayment of indebtedness or the satisfaction of any other
obligation, whether arising by agreement or under any statute or law, or otherwise.

     (q) “Loan” shall mean the loan made to Borrowers pursuant to this Note.

     (r) “Loan Administration Fee” shall mean a fee charged by Lender in consideration of
administrative costs and expenses incurred by Lender in connection with each Commitment
Advance hereunder.

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     (s) “Loan Documents” shall mean, collectively, this Note, the Pledge Agreement, the
Security Agreement, the Guaranty, the error and omissions letter and all other documents,
certificates, instruments, and agreements executed, entered into or delivered by Borrower,
Pledgors, the Borrower Principals, or any of their respective affiliates in connection with
the Loan, as each such document may be amended from time to time.

     (t) “Loan Expenses” shall mean all fees and expenses incurred by Lender in connection
with the loan made pursuant to this Note and the preparation of this Note and the other Loan
Documents, including, without limitation, attorneys fees, accountants fees, closing costs,
due diligence costs and expenses, recording fees, courier and delivery fees, document
preparation fees, wire transfer and bank fees, title company fees, and all other fees and
costs incurred by Lender.

     (u) “Maturity Date” means October 31, 2009.

     (v) “Pledge Agreement” shall mean that certain Pledge Agreement executed by the
Pledgors in favor of Lender dated as of the Effective Date, pursuant to which the Pledgors
pledge their respective interests in the Pledged Securities to Lender, as such agreement may
be amended from time to time.

     (w) “Pledged Securities” shall have the meaning given to such term in the Pledge
Agreement.

     (x) “Pledgors” shall mean, collectively, the Borrower Principals, the Borrowers, The
Fogarty Family Trust, El Tesoro General Partner, Inc., a Texas corporation, Forestwood
General Partner, Inc., a Texas corporation, 26 Gleneagles GP, Inc., a Texas corporation,
Dollar Cay Development, Inc., a Texas corporation, 170 Dowdell GenPar, Inc., a Nevada
corporation, Twelve Oaks General Partner, Inc., a Texas corporation, GP Woodland Lakes
Estates, Inc., a Texas corporation, 501 Maple Ridge GP, Inc., a Texas corporation, NEHC
Properties, Inc., a Texas corporation, Thompson Road Development GP, Inc., a Texas
corporation, Burnet Bay GP, Inc., a Texas corporation, No. 75 Brunswick, Inc., a Texas
corporation, 115 Greensbrook, Inc., a Texas corporation, 110 Bay Oaks Real Estate, Inc., a
Texas corporation, Greensbrook Arete, Inc., a Texas corporation, Affordable Cottages, Inc.,
a Texas corporation, Fifty One Greensbrook Manor, Inc., a Texas corporation, 393 Smith
County GP, Inc., a Texas corporation, 550 Bent Tree Estates GP, Inc., a Texas corporation,
250 Brunswick, Inc., a Texas corporation and Dowdell Development, Inc., a Texas corporation.

     (y) “Properties” shall mean, collectively, all real properties now owned or hereinafter
acquired by those corporations, partnerships and limited liability companies, the equity
interests of which are Pledged Securities under the Pledge Agreement.

     (z) “Security Agreement” shall mean that certain Security Agreement executed by
Borrowers in favor of Lender dated as of the Effective Date, as it may be amended from time
to time.

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     (aa) “Senior Indebtedness,” if any, shall mean the amount of indebtedness owed to a
Senior Lender that Lender has agreed in writing will have (i) priority in payment over the
indebtedness evidenced by this Note, and/or (ii) priority over the Liens created by the
Pledge Agreement and/or the Security Agreement.

     (bb) “Senior Lender” shall mean any bank, financial institution or other lender having
made a loan to any Borrower and/or any Pledgor that has a senior position ahead of Lender
with respect to the payment of Borrower indebtedness and/or the priority of Liens on or
against the Pledged Securities or the Collateral, or any other collateral granted or pledged
as security for the Loan; provided, that Lender has agreed in writing to be subordinate
thereto.

     2. Loan Expenses; Fees.

     (a) Loan Expenses. Upon Lender’s demand from time to time, Borrowers shall pay
Lender, the full amount of all Loan Expenses incurred by Lender.

     (b) Loan Administration Fee. In consideration of administrative costs and
expenses incurred by Lender in connection with Commitment Advances, Borrowers agree to pay
Lender a Loan Administration Fee at the time of each Commitment Advance equal to one-quarter
percent (0.25%) of such Commitment Advance. The Loan Administration Fee with respect to
each Commitment Advance made hereunder is fully earned by Lender at the time such Commitment
Advance is funded and, if not otherwise paid, shall be funded by Lender at the time of the
Commitment Advance and upon disbursement shall automatically constitute principal
outstanding hereunder and cause a corresponding increase in the aggregate amount of
Borrowers’ obligations hereunder (even if such disbursement causes the aggregate amount
outstanding hereunder to exceed the face amount of this Note).

     (c) Commitment Fee. Pursuant to the terms and conditions of that certain
Commitment Letter between Borrowers and Lender dated September 18, 2006, Borrowers agreed to
pay Lender a Commitment Fee in the amount of $204,000.00 in consideration of Lender’s
commitment to make the Loan to Borrowers. Pursuant to Borrowers’ request, the Commitment
Fee shall be funded by Lender under this Note and upon disbursement shall automatically
constitute principal outstanding hereunder and cause a corresponding increase in the
aggregate outstanding amount of Borrowers’ obligations hereunder.

     (d) Usury Savings Clause Applies. Borrowers, the Borrower Principals and
Lender agree that Lender has provided, and shall provide, separate and distinct
consideration for the fees and expenses described in Sections 2(a), (b) and
(c) above and/or that such fees and expenses represent bona fide fees and expenses
incurred by Lender. Borrowers, the Borrower Principals and Lender further agree that such
fees and expenses are not, are not intended to be, and shall not be characterized as,
interest or as compensation for the use, forbearance or detention of money. Despite the
foregoing and

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notwithstanding anything else in this Note and the other Loan Documents to the contrary, if
any fees or expenses charged or chargeable to Borrowers hereunder are determined to
constitute interest and such fees or expenses, when added to the interest charged hereunder,
would cause the aggregate interest charged hereunder to exceed the Highest Lawful Rate,
then Section 11 of this Note shall automatically apply to reduce the interest
charged hereunder so as not to exceed the Highest Lawful Rate.

     (e) Assignment. The Loan Administration Fee and all Loan Expenses are
assignable by the payee to any affiliate or third party.

     3. Closings; Commitment Advances; Borrowing Procedures; etc.

     (a) Closings; Commitment Advances. Subject to the terms and conditions of this
Note, Lender agrees to make Commitment Advances to Borrowers from time to time prior to the
Maturity Date in an aggregate amount not to exceed the Commitment. It is anticipated that
$350,000.00 of the Commitment shall be funded to Borrowers at the closing of the Loan, and
that the remainder of the Commitment shall be funded over the life of the Loan. This Note
is not a revolver and thus, the portion of the Commitment borrowed may not be repaid to
Lender and subsequently reborrowed under this Note.

     (b) Procedure for Borrowing. Each Commitment Advance after the initial closing
hereof shall be made by Borrowers’ delivery of a written request to Lender. Such notice
must be received by Lender no less than five (5) business days prior to the date that is the
requested funding date, and shall specify the amount of the Commitment Advance so requested,
and the requested funding date.

     (c) Making of Commitment Advances. Subject to the terms and conditions of this
Note, after receipt of a request for an Commitment Advance pursuant to Section 2(b),
Lender shall make the amount of the requested Commitment Advance available to Borrowers on
the applicable funding date; provided, however, that Lender shall have no obligation to make
any Commitment Advance unless each of the conditions precedent in Section 7 have
been satisfied.

     (d) Discretionary Advances. Lender is authorized to make advances hereunder
that Lender, in its sole discretion, deems necessary or desirable to pay any Loan Expense or
other amount chargeable to Borrowers pursuant to the terms of this Note or any other Loan
Document (such advances made for the foregoing purposes are referred to herein as the
“Discretionary Advances”). Each Discretionary Advance shall, upon disbursement,
automatically constitute principal outstanding hereunder and cause a corresponding increase
in the aggregate amount of Borrowers’ obligations hereunder (even if such Discretionary
Advance causes the aggregate amount outstanding hereunder to exceed the face amount of this
Note). The making by Lender of any Discretionary Advance shall not cure any Event of
Default hereunder, unless Lender provides Borrowers with a written waiver of such Event of
Default.

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     (e) Face Amount of Note. The $3,617,500.00 face amount of the Note consists of
the sum of (i) the Commitment ($3,000,000.00), plus (ii) the Interest Reserve
($400,000.00), plus (iii) the Commitment Fee ($204,000.00), plus (iv) an
aggregate of $13,500.00 in anticipated Loan Expenses and Loan Administration Fees.

     4. Interest; Payments.

     (a) Interest Rate. The outstanding principal amount of this Note shall bear
interest on each day outstanding at the Base Rate in effect on such day, unless the Default
Rate shall apply. Subject to the other provisions of this Note, upon the occurrence and
during the continuation of an Event of Default, the outstanding principal amount of this
Note shall, at Lender’s option, automatically and without the necessity of notice, bear
interest from the date of such Event of Default at the Default Rate, until all such
delinquent amounts are paid or such breach or Event of Default is otherwise cured to the
satisfaction of Lender or waived by Lender in writing.

     (b) Interest Payments; Interest Reserve Advances. Accrued Interest Payments
shall be due and payable on the last day of each month for interest accrued during that
month. Notwithstanding the foregoing sentence and subject to the other provisions hereof,
on each date that an Accrued Interest Payment becomes due and payable hereunder, Lender
shall make an Interest Reserve Advance hereunder in the amount of such Accrued Interest
Payment, which shall be applied to the Accrued Interest Payment then due and payable, until
the Interest Reserve has been fully exhausted. Subject to the other provisions of this
Note, each time Lender funds an Interest Reserve Advance hereunder, (i) Borrowers’
requirement to make the Accrued Interest Payment for such month shall be satisfied, (ii) the
amount of remaining Interest Reserve shall be reduced by the amount of such Interest Reserve
Advance, and (iii) such Interest Reserve Advance funded by Lender hereunder shall
automatically become principal outstanding under this Note upon such funding. The Interest
Reserve Advances may be funded by Lender even if such funding causes the outstanding
principal balance of this Note to exceed its face amount. Notwithstanding anything else to
the contrary contained herein, (i) if at any time an Event of Default has occurred and is
continuing under this Note, Lender shall not be obligated to make any further Interest
Reserve Advances, and thereafter, shall do so only in its sole discretion, unless and until
the Event of Default is cured to Lender’s satisfaction as agreed by Lender in writing, and
(ii) in no event shall Lender be obligated to make any Interest Reserve Advance that would
cause the aggregate amount of Interest Reserve Advances made hereunder to exceed the
remaining Interest Reserve.

     (c) Replenishment of Interest Reserve. To the extent Borrowers make any
prepayment of the Loan and such prepayment is applied to accrued interest in accordance with
Section 5(a) of this Note, the Interest Reserve shall be replenished in an amount
equal to the prepayment of accrued interest, up to $400,000.00.

     (d) Payments. Subject to the other provisions of this Note:

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     (i) Accrued Interest Payments shall be due and payable as provided in
Section 4(b) of this Note;

     (ii) upon the receipt of any Cash Flow by any Borrower, Pledgor or any of their
respective affiliates, from any source, Borrowers shall pay or cause to be paid to
Lender, eighty percent (80%) of such Cash Flow remaining after payment of any
applicable Senior Indebtedness, excluding events resulting in Cash Flow of
$25,000.00 or less per event; and

     (iii) the outstanding principal balance of this Note, together with all
accrued, unpaid interest thereon, unpaid Loan Expenses and other unpaid amounts due
hereunder, shall be due and payable on the Maturity Date.

     5. Terms and Conditions of Payment.

     (a) Application of Payments. Subject to the application of Interest Reserve
Advances to Accrued Interest Payments as provided in Section 4(b) of this Note, all
payments on this Note shall be applied first, to unpaid Loan Expenses due hereunder, next,
to unpaid accrued interest, and last, to principal outstanding under this Note.
Notwithstanding the foregoing sentence, if any Event of Default occurs and is existing under
this Note or any other Loan Document, Lender shall have the right to apply payments toward
amounts due under this Note as Lender determines in its sole discretion.

     (b) General. 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. Borrowers shall make each payment which
they owe under this Note and the other Loan Documents to Lender in full and in lawful money
of the United States, without set-off, deduction or counterclaim. Under no circumstance may
Borrowers offset any amount owed by any Borrower to Lender under this Note with an amount
owed by Lender to Borrowers under any other arrangement. All payments shall be made by
cashier’s 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 required payment of
principal, interest or Loan Expenses or other amounts then due, 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 3:00 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.

     (c) Prepayment. Borrowers may prepay this Note in whole or in part at any time
and from time to time without incurring any prepayment fee or penalty; provided, that
interest shall accrue on the portion of this Note so prepaid through the date of such
prepayment.

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     6. Loan Deliveries. At or prior to the closing of the Loan (except as set forth
below), Borrowers shall deliver or cause to be delivered to Lender, the following items, each of
which shall be satisfactory in form and substance to Lender:

     (a) this Note and each other Loan Document, duly executed by Borrowers, Pledgors and
the Borrower Principals, as applicable;

     (b) the most recent financial statements of Borrowers, the Pledged Securities and the
Borrower Principals, in the form specified in Section 9(f), and accompanied by the
certification required by Section 9(f);

     (c) a certified copy of Borrowers’ and the Pledged Securities’ formation documents and
bylaws, and all amendments thereto;

     (d) certificates of existence and good standing for Borrowers and the Pledged
Securities, issued by the appropriate state authorities;

     (e) resolutions of the board of directors of each Borrower authorizing Borrowers’
execution, delivery, and performance of this Note and the other Loan Documents, and the
transactions contemplated hereby and thereby, and resolutions of the general partner or
other governing body of each Pledgor and each Pledged Security, authorizing the transactions
contemplated hereby and by the Pledge Agreement;

     (f) an opinion of counsel for Borrowers, Pledgors, the Pledged Securities and the
Borrower Principals, satisfactory in all respects to Lender and its counsel, including,
without limitation, an opinion that the Loan Documents and the Loan made pursuant thereto
are not usurious, which shall be delivered to Lender within thirty (30) days following the
initial closing of the Loan;

     (g) a certificate of Borrowers’ general liability policies, evidence of payment of the
premium through at least one year and endorsemens of such policies to Lender;

     (h) a certificate (the “Officer’s Certificate”) executed by Joe Fogarty in his capacity
as President of each Borrower, and in his individual capacity, certifying that (i) no Event
of Default has occurred and is continuing under this Note, (ii) all representations and
warranties made by Borrowers, Pledgors and the Borrower Principals, respectively, in this
Note and the other Loan Documents are true and correct in all respects, and (iii) Borrowers,
Pledgors and the Borrower Principals have complied with and performed, in all respects, all
covenants, conditions and agreements which are then required by this Note and the other Loan
Documents to have been complied with or performed;

     (i) copies of the loan documents in effect on the Effective Date evidencing the Senior
Indebtedness and all amendments thereto;

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     (j) all written consents that are required with respect to the Note and the other Loan
Documents and the transactions contemplated thereby, including, without limitation, any
consents that are required in respect to the pledge of the Pledged Securities to Lender
pursuant to the Pledge Agreement; and

     (k) such other and further documents, agreements and certificates as are reasonably
required by Lender.

     7. Conditions Precedent to Commitment Advances. Borrowers and the Borrower Principals
agree that, notwithstanding anything to the contrary contained herein or in the other Loan
Documents, Lender’s obligation to fund each Commitment Advance shall be conditioned upon the
satisfaction of each of the following conditions, on and as of the funding date for the applicable
Commitment Advance:

     (a) Borrowers and the Borrower Principals shall have executed and delivered to Lender,
an Officer’s Certificate dated as of the funding date, and all matters certified in the
Officer’s Certificate shall be true and correct in all respects;

     (b) the requested Commitment Advance, if made, would not cause the aggregate amount of
all Commitment Advances made hereunder to exceed the Commitment; and

     (c) Borrowers, Pledgors and the Borrower Principals shall have complied with each other
reasonable request of Lender made in connection with the Commitment Advance.

     8. Representations and Warranties. Each Borrower and each Borrower Principal jointly
and severally represents and warrants to Lender that:

     (a) Organization and Good Standing; Authorization. Each Borrower (i) is duly
organized, validly existing and in good standing under the laws of its jurisdiction of
organization, and (ii) has full power and authority to own its properties, carry on its
business and to perform the transactions contemplated by this Note and the other Loan
Documents. All necessary corporate, shareholder, and other actions required to be taken on
behalf of Borrowers to approve this Note and the other Loan Documents and the transactions
contemplated hereby and thereby, have been duly taken. Each Borrower is in compliance in
all material respects with all laws applicable to it in each jurisdiction within and without
outside the United States where it owns or leases any properties or conducts any business,
except for any such non-compliance that would not have a material adverse effect,
individually or in the aggregate, on its financial condition or operations.

     (b) Authority; Validity. Each Borrower has the 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 Borrowers, Pledgors and the Borrower Principals of
this Note and the other Loan Documents, and the performance of their

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respective obligations thereunder, will not (i) violate the certificate of formation of any
Borrower or Pledgor, or the respective bylaws, partnership agreement, regulations, operating
agreement or limited liability company agreement, as applicable, of any Borrower or Pledgor,
(ii) violate any law or result in a default under any contract, agreement, or instrument to
which any Borrower, Pledgor or Borrower Principal is a party or by which any Borrower,
Pledgor or Borrower Principal or any of their respective assets or properties are bound, or
(iii) result in the creation or imposition of any Lien upon any of their respective assets.
The Loan Documents constitute the legal, valid and binding obligations of Borrowers,
Pledgors and the Borrower Principals and are enforceable against Borrowers, Pledgors and the
Borrower Principals in accordance with their terms, except as enforceability may be limited
by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights
generally.

     (c) Litigation. There is no pending order, notice, claim, litigation,
proceeding or investigation against or affecting Borrowers, Pledgors or the Borrower
Principals or any of their respective assets or properties, or any Property or Pledged
Security whether or not covered by insurance, that could materially and adversely affect
either the financial condition or business prospects of any Borrower, Pledgor or Borrower
Principal, if adversely determined.

     (d) Indebtedness. No Borrower or Borrower Principal has any material
indebtedness of any nature, except to the extent disclosed in the latest financial
statements delivered to Lender or otherwise disclosed in writing to Lender and approved by
Lender’s prior written consent.

     (e) Environmental Liability. To the best of Borrowers’ and the Borrower
Principals’ knowledge, no hazardous substances or solid wastes have been disposed of or
otherwise released on any Property, except as may have been otherwise disclosed to Lender in
a Phase I environmental report delivered to Lender. The terms “hazardous substance” and
release” shall have the meanings specified in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, (“CERCLA”), and the terms “solid waste”
and “disposal” (or “disposed”) shall have the meanings specified in the Resource
Conservation and Recovery Act of 1976, as amended, (“RCRA”); provided, to the extent that
the laws of the State of Texas establish a meaning for “hazardous substance”, “release”,
“solid waste”, or “disposal” or “disposed”) that is broader than that specified in either
CERCLA or RCRA, such broader meaning shall apply.

     (f) Tax Liabilities. Each Borrower, Pledgor and Borrower Principal has filed,
or caused to be filed, all federal, state, county, local, and foreign tax returns and
reports required to have been filed by them or with respect to any Property or Pledged
Security (or has obtained valid extensions with respect to such returns and reports),
including but not limited to such returns and reports with respect to income, payroll,
personal property, real property, employee withholding, social security, unemployment,
franchise, excise, use and sales taxes. Each Borrower, Pledgor and Borrower Principal has
paid in full all taxes that have become due as reflected on all such returns and reports
(including any

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interest and penalties) and has established adequate reserves for all taxes payable but not
yet due. No governmental claim for additional taxes, interest, or penalties is pending or,
to Borrowers’ and the Borrower Principals’ knowledge, threatened against any Property or
Pledged Security, or the respective assets of any Borrower, Pledgor or Borrower Principal.

     (g) Commercial Loan.  

     (i) Borrowers and the Borrower Principals hereby acknowledge and agree that
Lender has previously advised, and again hereby advises prior to the execution of
this Note and the other Loan Documents, that they seek the advice of an attorney and
an accountant in connection with the Loan, this Note and the other Loan Documents.

     (ii) Borrowers and the Borrower Principals hereby jointly and severally confirm
that they have had the opportunity to seek the advice of an attorney and an
accountant of their choice in connection with the Loan, this Note and the other Loan
Documents.

     (h) Acknowledgement of Joint and Several Obligations. Each Borrower acknowledges and
agrees that such Borrower is a co-borrower of the Loan and, in its capacity as a co-borrower, is
jointly and severally responsible for the obligations of the Borrowers hereunder, irrespective of
the use of proceeds funded under this Note.

     9. Covenants. Borrowers and the Borrower Principals jointly and severally covenant
and agree with Lender that they agree with, and agree to comply with, each of the following
covenants below:

     (a) Payment; Performance. Borrowers shall promptly pay all amounts due and
owing to Lender under this Note. Borrowers and the Borrower Principals shall timely perform
and comply with each agreement and covenant made under this Note and the other Loan
Documents, and shall cause Pledgors to timely perform and comply with each agreement and
covenant made by them under any Loan Document.

     (b) Use of Proceeds. The proceeds of this Note shall be used solely for such
business purposes as are approved in writing by Lender. In no event shall the proceeds of
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).

     (c) Other Loans. Except for any Senior Indebtedness in existence on the
Effective Date and any other indebtedness in existence on the Effective Date that is shown
on the financial statements delivered to Lender prior to the closing of this Note, no
Borrower shall enter into any promissory note, loan documents, or other agreement for
borrowed money without the prior written consent of Lender, including, without

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limitation, any loan documents for Senior Indebtedness. Unless otherwise agreed by Lender
in writing, all loan documents evidencing any Senior Indebtedness entered into after the
Effective Date shall provide that (i) the Senior Lender shall give Lender written notice of
any default or event of default occurring under the loan documents evidencing the Senior
Indebtedness, and (ii) upon any default by a Borrower, Lender shall have the right, but not
the obligation, to cure such Borrower’s default thereunder and to purchase the loan and the
loan documents evidencing the Senior Indebtedness from the Senior Lender.

     (d) Termination of Existence. No Borrower or Borrower Principal shall cause or
permit, or enter into any agreement to cause or permit, the dissolution or termination of
the existence of any Borrower, any Pledged Security or any Pledgor that is an entity, or the
merger, consolidation, or reorganization of any Borrower, any Pledged Security or any
Pledgor that is an entity with or into any other entity, whether or not such party would be
the surviving entity.

     (e) Notice of Certain Events. Borrowers shall promptly notify Lender in
writing of the occurrence of any event or series of events of which Borrowers or the
Borrower Principals have actual knowledge causing, or that could be expected to cause or has
caused (i) a material adverse effect on the operations or financial condition of any
Borrower or Borrower Principal, (ii) the occurrence of any Event of Default (without giving
effect to any cure period applicable thereto), or (iii) any default by any Borrower or
Borrower Principal or the acceleration of the maturity of any indebtedness owed by any
Borrower or Borrower Principal under any Senior Indebtedness or any indenture, mortgage,
agreement, promissory note, contract or other instrument to which any Borrower or Borrower
Principal is a party or by which any material asset or property of any Borrower or Borrower
Principal is bound. In addition, Borrowers and the Borrower Principals agree to notify
Lender in writing at least twenty (20) business days prior to the date that any Borrower,
Borrower Principal, Pledgor or Pledged Security changes its name or address, the location of
its chief executive office or principal place of business, and the place where it keeps its
books and records.

     (f) Financial Statements. Borrowers shall deliver or cause to be delivered to
Lender, the following financial statements: (i) within sixty (60) days after the end of
each fiscal quarter, the unaudited financial statements of Borrowers, Pledgors, the Borrower
Principals, and the Pledged Securities prepared in accordance with GAAP and combined or
consolidated as appropriate, including all notes related thereto; and (ii) within one
hundred twenty (120) days after the end of each fiscal year, the unaudited financial
statements of Borrowers, Pledgors, the Borrower Principals and the Pledged Securities,
prepared in accordance with accepted accounting principals and combined or consolidated as
appropriate, including all notes related thereto. All financial statements provided to
Lender shall be certified as to accuracy and completeness by a Borrower Principal.

     (g) Taxes. Borrowers and the Borrower Principals shall pay, and cause all
Pledgors to pay, all federal, state and local taxes levied against them and their respective

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properties and assets, including all Properties, as they become due and payable and before
the same become delinquent. Borrowers, Pledgors and the Borrower Principals shall have the
right to pay such tax under protest or to otherwise contest any such tax or assessment, but
only if (i) such contest has the effect of preventing the collection of such taxes so
contested and also of preventing the sale or forfeiture of any property subject thereto,
(ii) Borrowers have notified Lender of the intent to contest such taxes, and (iii) adequate
reserves for the liability associated with such tax have been established in accordance with
GAAP. Borrowers, Pledgors and the Borrower Principals shall furnish to Lender evidence that
all such taxes are paid at least five (5) days prior to the last date for payment of such
taxes.

     (h) Certain Liens. No Borrower or Borrower Principal shall create, incur,
assume, or suffer to exist, or permit any Pledgor to create, incur, assume or suffer to
exist, directly or indirectly, any Lien on, against or with respect to the Pledged
Securities or the Collateral, whether now owned or hereafter acquired, or any interest in
income or profits therefrom, except for (i) Liens in favor of Lender, (ii) Liens in favor of
Senior Lenders that secure Senior Indebtedness, (iii) Liens in favor of United Development
Funding, L.P., a Nevada limited partnership, and (iv) other Liens approved by Lender’s prior
written consent.

     (i) Indebtedness. No Borrower shall incur any indebtedness for borrowed money
after the Effective Date, other than Senior Indebtedness, or other indebtedness for borrowed
money approved by Lender’s prior written consent.

     (j) Distributions. At any time when any amounts are due to Lender hereunder,
without Lender’s prior written consent, (i) no Borrower shall declare, pay, make, or
authorize any dividends or distributions of any kind to its shareholders or any other person
or entity, and (ii) no Borrower or Borrower Principal shall permit or cause any Pledged
Security to declare, pay, make or authorize any dividends or distributions of any kinds to
its owners or any other person or entity. If Lender approves any such dividend or
distribution, Lender may, in its sole discretion, require that the full amount of such
dividend or distribution (or any portion thereof) to be paid to Lender to reduce any
indebtedness outstanding under this Note.

     (k) Borrower and Pledgor Documents. In addition to the information otherwise
required to be provided to Lender pursuant to this Note, Borrowers and the Borrower
Principals shall, promptly upon request, furnish to Lender, all of the following documents:

     (i) all financial statements, pro formas, projections, budgets, capital
expenditure and expense reports, and other material financial and operational
information related to Borrowers, Pledgors and the Pledged Securities;

     (ii) minutes of the meetings and all written consents of the board of directors
and the shareholders (or other governing authorities) of Borrowers, Pledgors, and
each Pledged Security;

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     (iii) all loan documents evidencing indebtedness for borrowed money of all
Borrowers, Pledgors and each Pledged Security, and all amendments thereto;

     (iv) the survey and/or plat for each Property, a copy of the owner’s title
commitment for each Property, the title exception documents and, upon issuance, a
copy of the owner’s title policy for each Property;

     (v) all due diligence documents related to each Property, including, without
limitation, a Phase I Environmental Report, survey, plat, appraisal, and engineering
due diligence report, land use, zoning, subdivision, grading, municipal district,
environmental, and other governmental permits, approvals, authorizations and maps
necessary to develop such Property in compliance with applicable Governmental
Regulations;

     (vi) certificates of general liability and hazard insurance for each Borrower
and endorsements of such policies to Lender (in accordance with and meeting the
requirement of Section 9(n) hereof), and copies of certificates of builder’s
liability insurance covering each Property; and

     (vii) all project updates, development reports, sales reports, budgets, pro
formas, and similar information with respect to each Property.

     (l) Audit. Each Borrower shall permit Lender and its employees,
representatives, auditors, collateral verification agents, attorneys and accountants
(collectively, the “Lender Representatives”), at any time and from time to time, at their
expense, to (i) audit all books and records related to Borrowers, Pledgors, the Properties,
the Pledged Securities and the Collateral, and (ii) visit and inspect the offices of
Borrowers, Pledgors and the Pledged Securities, to inspect and make copies of all books and
records, and to write down and record any information the Lender Representatives obtain.
Borrowers and the Borrower Principals agree to cooperate fully with Lender and to cause
Pledgors to cooperate fully with Lender in connection with such audits and inspections.

     (m) Assignments. No Borrower, Pledgor or Borrower Principal shall assign,
transfer or convey, any Pledged Security without the prior written consent of Lender.
Borrowers and Borrower Principals shall take all actions, and refrain from taking all
actions, required to cause Pledgors to comply with this Section 9(m).

     (n) General Liability Insurance. Each Borrower shall, at all times, maintain
or cause to be maintained, general liability insurance on such Borrower with coverage
amounts that are normal and customary for similarly-situated entities engaged in similar
businesses. Each such policy shall provide that Lender be given at least thirty (30) days
written notice as a condition precedent to any cancellation thereof or material change
therein. Borrowers shall obtain an endorsement to each such policy naming Lender as an

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additional insured to each such policy, and provide Lender annually with the insurance
certificate, evidencing such coverage, the endorsement of each such policy to Lender, and
evidence of payment of the premium for each such policy.

     (o) Property Insurance. Borrowers shall, at all times, maintain or cause to be
maintained, hazard insurance on each Property with coverage amounts that are normal and
customary for similarly-situated entities engaged in similar businesses.

     (p) Operation of Business. Borrowers and the Borrower Principals shall operate
Borrowers’ and Pledgors’ respective businesses in compliance with all applicable federal,
state and local laws, rules, regulations, and ordinances. Each Borrower and each Pledgor
that is an entity shall maintain its existence and good standing in each state where it
operates or does any business, except in any jurisdictions where the failure to maintain
such existence and good standing would not have a material adverse effect individually or in
the aggregate, on its financial condition or operations. Each Borrower and each Pledgor
shall obtain, maintain and keep current, all consents, licenses, permits, authorizations,
permissions and certificates which may be required or imposed by any governmental or
quasi-governmental agency, authority or body which are required by applicable federal, state
or local laws, regulations and ordinances.

     (q) Alterations. Without the prior written consent of Lender, Borrowers shall
not enter into any Loan Documents evidencing Senior Indebtedness, permit any material
amendment to any loan documents evidencing Senior Indebtedness, permit any increase in the
maximum amount of any Senior Indebtedness, or enter into any renewal or extension of the
loan documents evidencing any Senior Indebtedness.

     (r) Opinion Letter. Borrowers shall deliver the opinion letter required by
Section 6(f), which shall be satisfactory in form and substance satisfactory to
Lender and its counsel, to Lender within thirty (30) days following the initial closing of
the Loan.

     (s) Key Man Life Insurance. Within sixty (60) days after the Effective Date,
Borrower shall have caused Lender to be named as an additional insured on the life insurance
policy on the life of Joe Fogarty in the amount of $6,000,000, which policy currently names
United Development Funding, L.P., a Nevada limited partnership, as the sole beneficiary.

     10. Default.

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

     (i) except for Accrued Interest Payments due during any period when Accrued
Interest Payments are required to be made by Lender pursuant to Section
4(b), the failure of Borrowers to make any payment required by this Note in full
on or before the date such payment is due (or declared due pursuant to the terms of
this Note), whether on or prior to the Maturity Date; or

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     (ii) any financial statement, representation, warranty, or certificate made or
furnished by or with respect to Borrowers, Pledgors or the Borrower Principals
contained in this Note or any other Loan Document or made in connection herewith or
therewith, shall be materially false, incorrect, or incomplete when made; or

     (iii) any Borrower, Pledgor or Borrower Principal shall fail to perform or
observe any covenant or agreement contained in this Note or any other Loan Document
that is not separately listed in this Section 10(a) as an Event of Default,
and the same remains unremedied for ten (10) days after written notice of such
failure is given by Lender; or

     (iv) any “event of default” or “default” occurs under any Loan Document other
than this Note and the same remains unremedied for ten (10) days after written
notice of such “event of default” or “default” is given by Lender; or

     (v) the entry of a decree or order for relief by a court having jurisdiction in
respect of any Borrower, Pledgor or Borrower Principal 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 thirty (30) days, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar official)
of any Borrower, Pledgor or the Borrower Principal for any substantial part of their
respective properties or any Property, or ordering the winding up or liquidation of
such person’s affairs; or

     (vi) the commencement by any Borrower, Pledgor or Borrower Principal 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 any Borrower, Pledgor or Borrower Principal for any substantial part of
their respective properties or any Property, or the making by any Borrower, Pledgor
or Borrower Principal of any assignment for the benefit of creditors, or the
admission by any Borrower, Pledgor or Borrower Principal in writing of its inability
to pay its debts generally as they become due; or

     (vii) the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of all or a
substantial part of the assets of any Borrower, Pledgor or Borrower Principal or any
Property in a proceeding brought against or initiated by any Borrower; Pledgor or
Borrower Principal or any Property;

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     (viii) if any Borrower or Pledgor that is an entity is liquidated or dissolved
or winds up their affairs, or the sale or liquidation of all or substantially all of
the assets of any Borrower or Pledgor that is an entity; or

     (ix) any assignment, transfer, or conveyance of any Pledged Security occurs
without the prior written consent of Lender; or

     (x) any “default” or “event of default” not cured within the grace period, if
any, for such default or event of default, shall occur under (A) the Senior
Indebtedness or any credit agreement, loan agreement, promissory note, or other
document evidencing indebtedness for borrowed money incurred by any Borrower,
Pledgor or Borrower Principal, or (B) any subordination agreement, security
agreement, pledge agreement, guaranty, deed of trust, or other agreement providing
security or collateral for indebtedness, executed by any Borrower, Pledgor or
Borrower Principal, or (C) any joint venture agreement, revenue or profits sharing
or participation agreement, partnership agreement, shareholders agreement,
securities purchase agreement or any other agreement governing to which any
Borrower, Pledgor or Borrower Principal is a party, if Lender or any of its
affiliates is also a party to such agreement (the terms “default” and “event of
default” having the meaning given to such terms in any of the agreements described
above); or

     (xi) the death or disability of Joe Fogarty; or

     (xii) in Lender’s opinion, any material adverse change occurs in the financial
condition or business of any Borrower, Pledgor or Borrower Principal; or

     (xiii) any Loan Document ceases to become valid and binding for any reason; or

     (xiv) any Property is sold, transferred, conveyed or assigned without Lender’s
prior written consent; or

     (xv) any Borrower, Pledgor or Borrower Principal suffers the entry against it
of a final judgment for the payment of money in excess of $50,000 which is not
covered by insurance; or

     (xvi) any Borrower, Pledgor or Borrower Principal 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 properties, assets or any collateral for this Note, 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

17

 

     (xvii) in Lender’s opinion, the prospect for payment or the prospect for
performance with respect to this Note or any other agreement that any Borrower,
Pledgor or Borrower Principal may have with Lender is impaired and Lender so
notifies Borrowers in writing.

     (b) Upon the occurrence of an Event of Default described in subsection (a)(v),
(vi) or (vii) above, all obligations under this Note and the other Loan
Documents 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 Borrowers, the Borrower
Principals and Pledgors. During the continuance of any other Event of Default, then and in
every such case 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 Loan
Expenses and other amounts 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 Borrowers, the Borrower Principals and
Pledgors and any and all sureties, guarantors and endorsers of this Note, (ii) exercise any
its rights under any of the Loan Documents, and/or (iii) exercise all other rights and
remedies available to Lender at law and at equity, including, without limitation, such
rights existing under the Uniform Commercial Code. 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.

     (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, Borrowers, the Borrower
Principals and Pledgors, and all endorsers, sureties and guarantors of this Note, jointly
and severally, agree to pay reasonable attorneys’ fees and collection costs to Lender in
addition to the principal and interest payable under this Note.

     11. Usury Laws.

     (a) Notwithstanding anything to the contrary contained in this Note or any other Loan
Document, (i) this Note shall never bear interest in excess of the Highest Lawful Rate, and
(ii) 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 (i) 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.

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     (b) It is the intention of the parties hereto that all aspects of this Note and the
other Loan Documents, and the transactions contemplated hereby and thereby, comply with all
laws, including, specifically, any applicable usury laws. In furtherance thereof,
Borrowers, the Borrower Principals, Pledgors and Lender stipulate and agree that none of the
terms and provisions contained in this Note or the other 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. No Borrower, Pledgor or Borrower Principal nor any present
or future guarantors, endorsers, or other persons or entities hereafter becoming liable for
payment of Borrowers’ 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 11 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 (i) the maturity
of this Note is accelerated for any reason, (ii) 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
(iii) Lender or any other holder of this 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 Borrowers 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
Borrowers (and any other payors of this Note) shall to the greatest extent permitted under
applicable law, (i) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and
(iii) 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.

     12. Indemnity; Release. Borrowers, the Borrower Principals and Pledgors, jointly and
severally, agree to indemnify Lender, upon demand, from and against any and all liabilities,
obligations, claims, losses, damages, penalties, fines, actions, judgments, suits, settlements,
costs, expenses or disbursements (including reasonable, documented fees of attorneys,

19

 

accountants, experts and advisors) of any kind or nature whatsoever, now existing (in this section,
collectively called “Liabilities and Costs”) to the extent actually imposed on, incurred by, or
asserted against Lender in its capacity as lender hereunder growing out of, resulting from or in
any other way associated with (a) this Note and the other Loan Documents or any of the transactions
and events (including the enforcement or defense thereof) at any time associated therewith or
contemplated therein, (b) any claim that the Loan evidenced hereby is contractually usurious, and
(c) any use, handling, storage, transportation, or disposal of hazardous or toxic materials on or
about any Property or any part thereof or any real properties owned, managed or operated by any
Borrower, Pledgor or Borrower Principal.

THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY
OR TO ANY EXTENT OWED IN WHOLE OR IN PART UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE
CAUSED IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY LENDER;

provided only that Lender shall not be entitled under this section to receive indemnification for
that portion, if any, of any Liabilities and Costs which is proximately caused by its own
individual gross negligence or willful misconduct, as determined in a final judgment. If any
person (including Borrowers, Pledgors and the Borrower Principals) ever alleges such gross
negligence or willful misconduct by Lender, the indemnification provided for in this section shall
nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a
court of competent jurisdiction enters a final judgment as to the extent and effect of the alleged
gross negligence or willful misconduct. As used in this section, the term “Lender” shall refer not
only to the person designated as such in this Note but also to each partner, director, officer,
attorney, employee, representative and affiliate of such person.

     13. Mutual Understanding. Borrowers, Pledgors and the Borrower Principals jointly and
severally represent and warrant to Lender that they have read and fully understands the terms and
provisions hereof, have had an opportunity to review this Note with legal counsel and have executed
this Note based on its own judgment and advice of counsel. If an ambiguity or question of intent
or interpretation arises, this Note will be construed as if drafted jointly by Borrowers, the
Borrower Principals, Pledgors and Lender and no presumption or burden of proof will arise favoring
or disfavoring any party because of authorship of any provision of this Note.

     14. Further Assurances. Borrowers and the Borrower Principals, at their expense, will
promptly execute and deliver to Lender, and cause to be executed and delivered to Lender by the
Pledgors and the Pledged Securities, all such other and further documents, agreements and
instruments, and shall deliver all such supplementary information, in compliance with or
accomplishment of the agreements of Borrowers, Pledgors and the Borrower Principals under this Note
and the other Loan Documents as Lender shall request.

     15. Cumulative Remedies. Borrowers, the Borrower Principals and Pledgors hereby agree
that all rights and remedies that Lender is afforded by reason of this Note are separate and
cumulative with respect to Borrowers, the Borrower Principals and Pledgors and otherwise and may be
pursued separately, successively, or concurrently, as Lender deems advisable. In

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addition, all such rights and remedies are non-exclusive and shall in no way limit or prejudice
Lender’s ability to pursue any other legal or equitable rights or remedies that may be available to
Lender.

     16. Notice. All notices and other communications under this Note will be in writing
and will be mailed by registered or certified mail, postage prepaid, sent by facsimile, delivered
personally by hand, or delivered by nationally recognized overnight delivery service addressed to
Borrowers and the Borrower Principals at 340 North Sam Houston Parkway East, #100, Houston, Texas
77060, Facsimile No. (281) 260-9798, or, with respect to Lender, to Lender at 1812 Cindy Lane,
Suite 200, Bedford, Texas 76021, Facsimile No. (817) 835-0383 or with respect to any party, to such
other address as a party may have delivered to the other parties for purposes of notice. Each
notice or other communication will be treated as effective and as having been given and received
(a) if sent by mail, at the earlier of its receipt or three (3) business days after such notice or
other communication has been deposited in a regularly maintained receptacle for deposit of United
States mail, (b) if sent by facsimile, upon written or electronic confirmation of facsimile
transfer, (c) if delivered personally by hand, upon written or electronic confirmation of delivery
from the person delivering such notice or other communication, or (d) if sent by nationally
recognized overnight delivery service, upon written or electronic confirmation of delivery from
such service.

     17. Enforcement and Waiver by Lender. Lender shall have the right at all times to
enforce the provisions of this Note and the other Loan Documents in strict accordance with their
respective terms, notwithstanding any conduct or custom on the part of Lender in refraining from so
doing at any time or times. The failure of Lender at any time or times to enforce its rights under
such provisions, strictly in accordance with the same, shall not be construed as having created a
custom or in any way or manner modified or waived the same.

     18. CHOICE OF LAW; JURISDICTION; VENUE. EXCEPT TO THE EXTENT THAT 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 EACH BORROWER AND EACH THE BORROWER PRINCIPAL HEREBY IRREVOCABLY
SUBMITS 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.

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     19. Counterparts. This Note and each other Loan Document may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all of which together
shall constitute but one and the same instrument.

     20. Severability. If any provision of this Note or any other Loan Document shall be
held invalid under any applicable laws, then all other terms and provisions of this Note and the
Loan Documents shall nevertheless remain effective and shall be enforced to the fullest extent
permitted by applicable law.

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

     22. Binding Effect; Assignment. This Note and the other Loan Documents shall be
binding on Borrowers, Pledgors and the Borrower Principals and their respective successors and
assigns, including, without limitation, any receiver, trustee or debtor in possession of or for any
Borrower, Pledgor or Borrower Principal, and shall inure to the benefit of Lender and its
successors and assigns. No Borrower, Pledgor or Borrower Principal shall be entitled to transfer
or assign this Note and the other Loan Documents in whole or in part without the prior written
consent of Lender. This Note and the other Loan Documents are freely assignable and transferable by
Lender without the consent of Borrowers, Pledgors and the Borrower Principals or any of their
respective affiliates. Should the status, composition, structure or name of any Borrower, Pledgor
or Borrower Principal change, this Note and the other Loan Documents shall continue to be binding
upon such person or entity and also cover such person or entity under the new status composition,
structure or name according to the terms hereof and thereof.

     23. Captions. The captions in this Note are for the convenience of reference only and
shall not limit or otherwise affect any of the terms or provisions hereof.

     24. Number of Gender of Words. Except where the context indicates otherwise, words in
the singular number will include the plural and words in the masculine gender will include the
feminine and neutral, and vice versa, when they should so apply.

     25. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. EACH BORROWER, EACH BORROWER
PRINCIPAL AND EACH PLEDGOR HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY (A)
WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT
OF, UNDER OR IN CONNECTION WITH THIS NOTE OR THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED
HEREBY OR THEREBY OR ASSOCIATED HEREWITH OR THEREWITH, BEFORE OR AFTER MATURITY OF THIS NOTE; (B)
WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT SUCH PARTY MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY “SPECIAL DAMAGES”, AS DEFINED BELOW, (C)

22

 

CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OF LENDER OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT LENDER WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT LENDER HAS BEEN INDUCED TO ENTER
INTO THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY
BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS
SECTION, “SPECIAL DAMAGES” INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES
(REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS WHICH ANY PARTY HERETO HAS
EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER PARTY HERETO.

     26. ENTIRE AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS TOGETHER CONSTITUTE THE
ENTIRE AGREEMENT AMONG THE PARTIES CONCERNING THE SUBJECT MATTER HEREOF, AND ALL PRIOR DISCUSSIONS,
AGREEMENTS AND STATEMENTS, WHETHER ORAL OR WRITTEN, ARE MERGED INTO THIS NOTE AND THE OTHER LOAN
DOCUMENTS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES AND THIS NOTE AND THE OTHER
LOAN DOCUMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

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

23

 

     This Note has been executed by each Borrower, each Borrower Principal and Lender on this the
___day of September, 2006, effective for all purposes as of the Effective Date.

	 	 	 	 	 	 	 
	BORROWERS:	 	ARETE REAL ESTATE

AND DEVELOPMENT COMPANY,	 	 
	 	 	a Texas corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joe Fogarty	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Joe Fogarty	 	 
	 	 	Its: President	 	 
	 
	 	 	 	 	 	 
	 	 	CREATIVE MODULAR HOUSING, INC.,	 	 
	 	 	a Texas corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joe Fogarty	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Joe Fogarty	 	 
	 	 	Its: President	 	 
	 
	 	 	 	 	 	 
	 	 	MODERN MODULAR HOME RENTAL CORP.,	 	 
	 	 	a Texas corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joe Fogarty	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Joe Fogarty	 	 
	 	 	Its: President	 	 
	 
	 	 	 	 	 	 
	BORROWER PRINCIPALS:
	 	 	 	 	 	 
	 
	 	/s/ Joe Fogarty	 	 
	 	 	 	 	 
	 	 	Joe Fogarty	 	 
	 
	 
	 	/s/ Nancy Fogarty	 	 
	 	 	 	 	 
	 	 	Nancy Fogarty	 	 

24

 

	 	 	 	 	 	 	 
	LENDER:	 	UNITED DEVELOPMENT FUNDING III, L.P.,	 	 
	 	 	a Delaware limited partnership	 	 
	 
	 	 	 	 	 	 
	 	 	By: UMTH Land Development, L.P.	 	 
	 	 	Its: General Partner	 	 
	 
	 	 	 	 	 	 
	 	 	By: UMT Services Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Jeff Shirley	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Jeff Shirley	 	 
	 	 	Its: Executive Vice President	 	 

25exv10w5

 

Exhibit 10.5

SECURITY AGREEMENT

     This Security Agreement (this “Agreement”) dated as of the 27th day of September,
2006 (the “Effective Date”), is made by Arete Real Estate and Development Company, a Texas
corporation, Creative Modular Housing, Inc., a Texas corporation, and Modern Modular Home Rental
Corp., a Texas corporation (each, a “Debtor” and collectively, “Debtors”), in favor of United
Development Funding III, L.P., a Delaware limited partnership (“Lender”).

R E C I T A L S:

     A. Lender has agreed to advance funds to Debtors pursuant to that Secured Promissory Note
dated as of the Effective Date in the principal amount of $3,617,500.00 (the “Note”), under which
Debtors are co-borrowers.

     B. It is a condition precedent to Lender’s willingness to accept the Note and advance funds to
Debtors thereunder that Debtors enter into this Agreement with Lender, pursuant to which Debtors
grant Lender a security interest in and lien on all of their respective assets, and Debtors are
willing to enter into this Agreement and agree to be bound by its terms and conditions.

AGREEMENT:

     NOW, THEREFORE, in consideration of the foregoing premises and in order to induce Lender to
accept the Note and advance funds thereunder, and for other good and valuable consideration, the
receipt and sufficiency of which are acknowledged, Debtors jointly and severally covenant and agree
with Lender as follows:

     1. Definitions. All capitalized terms used but not defined in this Agreement shall
have the respective meanings given to such terms in the Note. Notwithstanding the foregoing
sentence, terms used in Article 9 of the Uniform Commercial Code (the “Code”) in the State of
Texas, when used in this Agreement, have the definitions given to such terms as therein defined.

     2. Grant of Security Interest. Each Debtor hereby assigns, pledges and grants to
Lender for its benefit, a continuing security interest in all of such Debtor’s right, title and
interest in and to all of its assets, whether now owned or hereafter acquired, and including,
without limitation, all full and partial interests in the following (collectively, the
“Collateral”):

     (a) all accounts receivable, rights to payment, promissory notes, and all guarantees,
security agreements, insurance policies, and security interests and the rights to receive
payment thereon;

     (b) all cash on hand, including, without limitation, cash held in bank accounts,
brokerage accounts, certificates of deposit, and other depositories, all accounts receivable
owing by any person or entity, including all such amounts due to such Debtor, and all
security for payment thereof, and in and to all the proceeds, monies, income, instruments,

1

 

securities, accounts, benefit, collections, tax refunds, insurance proceeds, and products
thereof and thereon and attributable or accruing thereto;

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

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

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

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

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

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

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

     3. Security for Obligations. This Agreement and the security interest created and
evidenced hereby secures the prompt and complete payment, observance and performance of all duties,
liabilities, obligations and indebtedness owing by Debtors to Lender arising under the Note and the
other Loan Documents, fixed or contingent, joint or several, whether as principal, surety,
endorser, guarantor, or otherwise, now existing or hereafter arising, and all modifications,
extensions, renewals, replacements, and increases of each of the foregoing (all such obligations
and liabilities being the “Obligations”).

     4. Debtors Remains Liable. Notwithstanding anything to the contrary contained in this
Agreement: (a) Debtors shall remain liable under the contracts and agreements included in the
Collateral and obligated to perform all of their respective duties and obligations thereunder to
the same extent as if this Agreement had not been executed, (b) the exercise by Lender of any of
its rights hereunder shall not release Debtors from any of their respective duties or obligations

2

 

under the contracts and agreements included in the Collateral, and (c) Lender shall have no
obligation or liability under the contracts and agreements included in the Collateral by reason of
this Agreement, nor shall Lender be obligated to perform any of the obligations or duties of
Debtors thereunder or to take any action to collect or enforce any claim for payment assigned
hereunder.

     5. Representations and Warranties. Debtors jointly and severally represent and
warrant as follows:

     (a) Debtors own the Collateral free and clear of any lien, security interest, charge or
encumbrance of any kind whatsoever (collectively, “Liens”) except for (i) the security
interest created hereby in favor of Lender, (ii) Liens in favor of any person or entity that
Lender has agreed in writing shall have priority over the Collateral (the “Senior Liens”),
(iii) Liens approved by Lender pursuant to a written consent or agreement executed by Lender
or otherwise permitted by the Loan Documents, and (iv) Liens for taxes not yet due and
payable (collectively, the Liens described in clauses (i) through (iv) above are referred to
herein as the “Permitted Liens”). A schedule of the Senior Liens shall be attached hereto
as Schedule 1. No effective financing statement, continuation statement or
amendment thereto promulgated under the Uniform Commercial Code of any state (collectively,
“Financing Statements”) or other instrument similar in effect covering all or any part of
the Collateral is on file in any recording office, except such as may have been filed in
favor of Lender or in favor of the holder(s) of the Permitted Liens. The validity of the
Collateral in whole or in part, and Debtors’ title thereto is not currently being questioned
in any litigation or regulatory proceeding to which any Debtor is a party, nor is any such
litigation or proceeding threatened.

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

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

     (d) Each Debtor’s principal place of business is at the address for Debtors set forth
in Section 17 of this Agreement (the “Principal Place of Business”). All Collateral
and books of account and records relating to the Collateral are located at Debtors’
Principal Place of Business.

3

 

     6. Covenants and Further Assurances.

     (a) Each Debtor agrees that from time to time, at its own expense, it will promptly
execute and deliver all further instruments and documents, and take all further action, that
may be reasonably necessary or desirable, or that Lender may reasonably request, in order to
perfect and protect any security interest granted or purported to be granted hereby or to
enable Lender to exercise and enforce rights and remedies hereunder with respect to any
Collateral. Without limiting the generality of the foregoing, each Debtor will, subject to
the priority rights, if any, of the holders of the Senior Liens: (i) mark conspicuously
each document included in the Collateral and each of its records pertaining to the
Collateral, with a legend, in form and substance satisfactory to Lender, indicating that
such document or Collateral is subject to the security interest granted hereby; (ii)
transfer, register or otherwise put any of the Collateral in the name of Lender or its
nominee; and (iii) execute and file such Financing Statements, and such other instruments or
notices, as may be necessary or desirable, or as Lender may request, in order to perfect and
preserve the security interest granted or purported to be granted hereby.

     (b) Debtors hereby authorize Lender to file one or more Financing Statements relative
to all or any part of the Collateral without the signature of Debtors where permitted by
law. A carbon, photographic or other reproduction of this Agreement or any financing
statement covering the Collateral or any part thereof shall be sufficient as a Financing
Statement where permitted by law. Each Debtor acknowledges and agrees that any Financing
Statement filed by or on behalf of Lender against such Debtor, whether such filing is or was
made prior to or after the date of this Agreement, is hereby deemed to include the security
interest granted by this Agreement, regardless of whether such Financing Statement is or was
filed in connection with the Loan or some other indebtedness owed to Lender.

     (c) Debtors shall at all times maintain the Collateral and their respective books of
account and records relating to the Collateral at their Principal Place of Business, and
shall not relocate such books of account and records and Collateral unless they deliver to
Lender, prior written notice of such relocation and the new location thereof (which must be
within the United States). Debtors will furnish to Lender from time to time statements and
schedules further identifying and describing the Collateral and such other reports in
connection with the Collateral as Lender may reasonably request, all in reasonable detail.

     7. Insurance.

     (a) Debtors shall, at their own expense, maintain insurance with respect to the
Collateral in such amounts, against such risks, in such form and with such insurers, as
shall be reasonably satisfactory to Lender from time to time. Debtors shall ensure that the
Collateral is, and remains, insured against loss by fire and other casualty. Each policy
for property damage insurance shall provide for all losses to be paid to Lender as holder of
the security interest created hereby, subject to the priority rights, if any, of the holders

4

 

of the Senior Liens. Each such policy shall in addition (i) contain the agreement (if
available) by the insurer that any loss thereunder shall be payable to Lender
notwithstanding any action, inaction or breach of representation or warranty by Debtors,
subject to the priority rights, if any, of the holders of the Senior Liens, (ii) provide
that there shall be no recourse against Lender for payment of premiums or other amounts with
respect thereto, and (iii) provide that at least 10 days prior written notice of
cancellation or of lapse shall be given to Lender by the insurer. Debtors shall, if so
requested by Lender, deliver to Lender original or duplicate policies of such insurance and,
as often as Lender may reasonably request, a report of a reputable insurance broker selected
by Debtors with respect to such insurance. Further, Debtors shall, at the request of
Lender, duly execute and deliver instruments of assignment of such insurance policies to
comply with the foregoing requirements and cause the respective insurers to acknowledge
notice of such assignment.

     (b) Reimbursement under any liability insurance maintained by Debtors may be paid
directly to the person who shall have incurred liability covered by such insurance. All
insurance payments to Lender in respect of Collateral shall be applied by Lender as
specified in the Note.

     8. Transfers and Other Liens. Debtors shall not sell, assign (by operation of law or
otherwise) or otherwise dispose of any of the Collateral, other than obsolete or worn out property
and sales of inventory in the ordinary course of business or as otherwise permitted by the Note, or
create or suffer to exist any Lien upon or with respect to any of the Collateral to secure debt of
any person, except for Permitted Liens.

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

     (a) to obtain insurance required to be maintained by Debtors and to settle and adjust
claims under any insurance policy;

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

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

     (d) to commence and prosecute any actions in any court for the purposes of collecting
amounts owed to Debtors and enforcing any other rights in respect thereof, and

5

 

to defend, settle or compromise any action brought and, in connection therewith, and to give
such discharge or release as Lender may deem appropriate;

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

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

     (g) to execute Financing Statements or any other documents or writing deemed necessary
by Lender to evidence or perfect Lender’s security interest in the Collateral; provided
that Lender agrees to furnish copies of any document executed hereunder to the appropriate
Debtor, as applicable, upon request; and

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

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

     10. Rights Prior to Event of Default; Termination.

     (a) Rights Prior to Event of Default. So long as no Event of Default shall
have occurred and be continuing, Debtors shall be entitled to exercise any and all rights
and powers relating or pertaining to the Collateral for any purpose not inconsistent with
the terms of this Agreement.

     (b) Termination of Rights. Debtors understand and agree that during any period
when an Event of Default shall have occurred and be continuing, and after Lender has given
written notice to Debtors that Lender has exercised its rights hereunder, all rights of
Debtors to exercise power with respect to the Collateral, which Debtors were previously
entitled to exercise shall cease and all such rights shall become vested in Lender, which
shall have the sole and exclusive right and authority to exercise such power immediately
upon such written notice. All amounts, if any, representing principal prepayment or payoffs
and all amounts, if any, collected by Debtors after the occurrence of any Event of Default
represents trust funds which are assigned and belong to Lender and which are to be
immediately delivered to Lender, and any retention of such funds by Lender before and after
the occurrence of an Event of Default shall be deemed to be a conversion of Lender’s
property, ipso facto. The obligor making any payment to Lender under this
Agreement shall be fully protected in relying on the written statement of Lender that it
then holds a security interest which entitles Lender to receive such payments. Any and all
money and other property paid over to or received by Lender

6

 

pursuant to the provisions hereof shall be retained by Lender as additional Collateral under
this Agreement.

     11. Lender May Perform. If any Debtor fails to perform any covenant or agreement
contained in this Agreement, Lender may itself perform, or cause performance of, such covenant or
agreement, and the expenses of Lender incurred in connection therewith shall be payable by Debtor
and/or payable under the Note as a Discretionary Advance.

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

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

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

     (b) All cash proceeds received by Lender in respect of any sale of, collection from, or
other realization upon all or any part of the Collateral may, in the discretion of

7

 

Lender, be held by Lender as Collateral for, and/or then or at any time thereafter applied
in whole or in part by Lender against all or any part of the Obligations in such order as
Lender shall elect, subject to any mandatory provisions of this Agreement or applicable law.
Any surplus of such cash or cash proceeds held by Lender and remaining after payment in
full of all the Obligations shall be paid over to Debtors or to whomsoever may be lawfully
entitled to receive such surplus.

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

     15. Indemnity and Expenses.

     (a) Each Debtor agrees to indemnify Lender from and against any and all claims, losses
and liabilities growing out of or resulting from this Agreement (including, without
limitation, enforcement of this Agreement), except claims, losses or liabilities resulting
from Lender’s gross negligence or willful misconduct.

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

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

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

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

8

 

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

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

     17. Notice. Any notice, request, demand or other communication required or permitted
hereunder, will be in writing and will be mailed by registered or certified mail, postage prepaid,
sent by facsimile, delivered personally by hand, or delivered by nationally recognized overnight
delivery service addressed to Debtors at 340 North Sam Houston Parkway East, #100, Houston, Texas
77060, Facsimile No. (281) 260-9798, or to Lender at 1812 Cindy Lane, Suite 200, Bedford, Texas
76021, Facsimile No. (817) 835-0383 or with respect to any party, to such other address as a party
may have delivered to the other parties for purposes of notice. Each notice or other communication
will be treated as effective and as having been given and received (a) if sent by mail, at the
earlier of its receipt or three (3) business days after such notice or other communication has been
deposited in a regularly maintained receptacle for deposit of United States mail, (b) if sent by
facsimile, upon written or electronic confirmation of facsimile transfer, (c) if delivered
personally by hand, upon written or electronic confirmation of delivery from the person delivering
such notice or other communication, or (d) if sent by nationally recognized overnight delivery
service, upon written or electronic confirmation of delivery from such service.

     18. Continuing Security Interest. This Agreement shall create a continuing security
interest in the Collateral. Upon the payment in full of the Obligations as determined by Lender in
its sole discretion, the security interest granted hereby shall terminate. Upon any such
termination, Lender will, at Debtors’ expense, execute and deliver to Debtors such documents as
Debtors shall reasonably request to evidence such termination.

     19. Mutual Understanding. Each Debtor represents and warrants to Lender that such
Debtor has read and fully understands the terms and provisions hereof, has had an opportunity to
review this Agreement with legal counsel and has executed this Agreement based on such Debtor’s own
judgment and advice of counsel. If an ambiguity or question of intent or interpretation arises,
this Agreement will be construed as if drafted jointly by the parties and no presumption or burden
of proof will arise favoring or disfavoring any party because of authorship of any provision of
this Agreement.

     20. Further Assurances. Each Debtor at such Debtor’s expense will promptly execute
and deliver to Lender on Lender’s request, all such other and further documents, agreements and
instruments, and shall deliver all such supplementary information, in compliance with or
accomplishment of the agreements of such Debtor under this Agreement.

     21. Cumulative Remedies. Each Debtor hereby agrees that all rights and remedies that
Lender is afforded by reason of the Loan Documents are separate and cumulative with respect to
Debtors and otherwise and may be pursued separately, successively, or concurrently, as Lender deems
advisable. In addition, all such rights and remedies of Lender are non-

9

 

exclusive and shall in no way limit or prejudice Lender’s ability to pursue any other legal or
equitable rights or remedies that may be available to Lender.

     22. Enforcement and Waiver by Lender. Lender shall have the right at all times to
enforce the provisions of this Agreement in strict accordance with their respective terms,
notwithstanding any conduct or custom on the part of Lender in refraining from so doing at any time
or times. The failure of Lender at any time or times to enforce its rights under such provisions,
strictly in accordance with the same, shall not be construed as having created a custom or in any
way or manner modified or waived the same. All rights and remedies of Lender are cumulative and
concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any
other right or remedy.

     23. CHOICE OF LAW; JURISDICTION; VENUE. EXCEPT TO THE EXTENT THAT 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 AGREEMENT 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 AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE EXCLUSIVELY IN THE STATE AND FEDERAL
COURTS SITTING IN DALLAS COUNTY, TEXAS, AND EACH DEBTOR HEREBY IRREVOCABLY SUBMITS 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.

     24. Counterparts. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of them together shall constitute one and the
same agreement.

     25. Severability. If any provision of this Agreement shall be held invalid under any
applicable laws, then all other terms and provisions of this Agreement shall nevertheless remain
effective and shall be enforced to the fullest extent permitted by applicable law.

     26. Amendments; Waivers. No amendment or waiver of any provision of this Agreement
nor consent to any departure herefrom, shall in any event be effective unless the same shall be in
writing and signed by the affected party, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given. Debtors may not be released
from their obligations hereunder, except pursuant to a written instrument executed by Lender.

     27. Binding Effect; Assignment. This Agreement shall be binding on Debtors and their
respective successors and assigns, including, without limitation, any receiver, trustee or

10

 

debtor in possession of or for any Debtor, and shall inure to the benefit of Lender and its
successors and assigns. Debtors shall not be entitled to transfer or assign this Agreement in
whole or in part without the prior written consent of Lender. This Agreement is freely assignable
and transferable by Lender without the consent of Debtors. Should the status, composition,
structure or name of any Debtor change, this Agreement shall continue and also cover such Debtor
under the new status composition, structure or name according to the terms of this Agreement.

     28. Captions. The captions in this Agreement are for the convenience of reference
only and shall not limit or otherwise affect any of the terms or provisions hereof.

     29. Number of Gender of Words. Except where the context indicates otherwise, words in
the singular number will include the plural and words in the masculine gender will include the
feminine and neutral, and vice versa, when they should so apply.

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

     31. ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS TOGETHER
CONSTITUTE THE ENTIRE AGREEMENT AMONG THE PARTIES CONCERNING THE SUBJECT MATTER HEREOF, AND ALL
PRIOR DISCUSSIONS, AGREEMENTS AND STATEMENTS, WHETHER ORAL OR WRITTEN, ARE MERGED INTO THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
AND THIS AGREEMENT AND THE OTHER

11

 

LOAN DOCUMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.

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

12

 

     IN WITNESS WHEREOF, each Debtor has caused this Agreement to be duly executed and delivered on
the ___ day of September, 2006, effective for all purposes as of the Effective Date.

	 	 	 	 	 	 	 
	 	 	ARETE REAL ESTATE	 	 
	 	 	AND DEVELOPMENT COMPANY,	 	 
	 	 	a Texas corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joe Fogarty	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Joe Fogarty	 	 
	 

	 	Its:
	 	President	 	 
	 
	 	 	 	 	 	 
	 	 	CREATIVE MODULAR HOUSING, INC.,	 	 
	 	 	a Texas corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joe Fogarty	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Joe Fogarty	 	 
	 

	 	Its:
	 	President	 	 
	 
	 	 	 	 	 	 
	 	 	MODERN MODULAR HOME RENTAL CORP.,	 	 
	 	 	a Texas corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joe Fogarty	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Joe Fogarty	 	 
	 

	 	Its:
	 	President	 	 

13

 

Schedule 1

Senior Liens

14

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