HOW THE SCHEME WORKS, FROM ONE UDF FUND TO THE NEXT

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1 ONE EXAMPLE OF MANY: HOW THE SCHEME WORKS, FROM ONE UDF FUND TO THE NEXT Draft for comment, January 10, 2016 January 2016 Only when the tide goes out do you discover who s been swimming naked. Warren Buffet

2 HOW CAPITAL IS FUNNELED TO REPAY EXISTING INVESTORS UDF raises new capital and funnels it to repay existing investors in FOUR primary ways: Later UDF funds acquire loans from earlier UDF funds Later UDF funds make loans directly to earlier UDF funds that are unable to repay their loans Later UDF funds make loans to third-parties that owe loans to earlier UDF funds >> EXAMPLE UDF uses primary equity and debt proceeds to pay distributions to existing investors in the same UDF fund THE CASE AGAINST UDF IV 2

3 UDF DISCLOSES THAT ITS LATEST FUND WILL NOT PROVIDE LIQUIDITY TO AFFILIATES UDF V, the newest fund in the UDF family of funds, will not participate in any investments with our advisor entities or any of their affiliates, including any prior program sponsored by affiliates of UDFH Unlike UDF III or UDF IV, UDF V will not directly loan money to affiliates nor will it acquire participation interests in related party / affiliate originated loans, according to its prospectus - UDF V Prospectus Form S-11 (February 26, 2014). While this is what UDF V represents to shareholders, it actually has engaged in providing liquidity to its affiliates and has used capital invested by new investors in UDF V to repay existing investors in UDF III; the case study to follow highlights how UDF used its largest borrower, Centurion American, as an intermediary to facilitate the transfer of money between funds. 3

4 SHAHAN PRAIRIE A CENTURION AMERICAN DEVELOPMENT SHAHAN PRAIRIE UDF I originally lent to Shahan Prairie LP ( Shahan Prairie ), an entity controlled by Mehrdad Moayedi doing business as Centurion American (Moayedi and Centurion American are collectively Centurion ), as a junior lender in 2004; UDF III entered the picture in 2007, extending and increasing its loan through the financial and housing crisis (the latest increase coming in 2014); UDF V is the latest to enter the picture, issuing a $18.1 million subordinate development loan on June 9, 2015 Source: 4

5 A REAL DEVELOPMENT AND DIRECT COMPETITOR WILDRIDGE The land adjacent to Centurion s Shahan Prairie Estates is owned through a partnership between Crescent Communities (North Carolina-based) and Taylor Duncan Interests (Dallasbased); construction is currently underway for the 385-acre, master-planned community of ~1,200 single family homes called Wildridge The primary piece of land (250 acres) was acquired in 2012, with additional acreage acquired later; there was a groundbreaking ceremony on July 9, 2014, and the first finished lots were delivered in Summer/Fall 2015 (during site visit in November 2015, there were roads in place and model homes were being built) Centurion has owned the adjacent land, via Shahan Prairie, for over 10 years and there is no sign of development activity Shahan Prairie Estates [ 2014 ] 5

6 SHAHAN PRAIRIE A CENTURION AMERICAN DEVELOPMENT This is the land that has served as collateral for multiple UDF loans issued by various UDF entities; these pictures of the land acquired by Centurion in 2004 were taken in November 2015 If you were a developer borrowing at interest rates of 13%, wouldn t you be developing real estate as fast as possible? 6

7 SUMMARY OF SHAHAN PRAIRIE LOAN TIMELINE This timeline was pieced together by reviewing Denton County, Texas deed records (supporting records provided in appendix) SHAHAN PRAIRIE LP LOAN PROGRESSION August 2004 UDF I loans $1.55mm to Shahan Prairie (SP); this loan is junior to a $1.15mm seller s note April 2005 UDF I lien is released, acknowledging full repayment of loan June 2005 Sovereign Bank issues $1.65mm loan to SP; loan given in part as extension and renewal of seller s note September 6 th, 2007 First National Bank issues loan in original principal amount of $3.2 million. Deed referenced no prior lien. This loan is later assigned to Plains Capital Bank UDF I, UDF III and UDF V have all loaned to SP; UDF III lent through the financial crisis, increasing the loan balance along the way June 9 th 2015 Nov 2014 Feb 2014 April 2012 Sept 2009 May 2008 September 20 th 2007 UDF V issues $18.1 million development loan which is subordinate to Trez Capital; UDF V proceeds used to repay UDF III this was a backdoor refinancing of a UDF III loan Trez Capital issues $2.55 million loan to SP; Plains Capital Bank lien is released 1 month later; UDF III is subordinate to Trez Capital UDF III increases loan from $3.4 million to $4.8 million UDF III increases loan from $2.5 million to $3.4 million UDF III increases loan from $1.9 million to $2.5 million on September 20, 2009 UDF I assigns $15mm loan to Centurion & 12 subsidiaries, including SP, to Textron; UDF I defaulted on Textron loan in June 2009 UDF III issues $1.9 million loan to SP Financial / Housing Crisis Source: Denton County Records; United Mortgage Trust and UDF III SEC Filings. 7

8 UDF V ENTERS THE PICTURE IN JUNE 2015 UDF I issued a loan to Shahan Prairie in 2004 and UDF III later issued a loan to Shahan Prairie in 2007, which nearly tripled from 2007 to On June 9, 2015, UDF V entered into a loan agreement with Shahan Prairie, LP to provide a $18.1 million subordinate development loan on the same piece of property that previously served as the collateral for prior loans issued by both UDF I and UDF III, the same 102 acres of land in Oak Point, Denton County, Texas Source: UDF V 8-K A third-party loan remains senior to UDF V s land development loan Source: Denton County Records 8

9 BORROWER'S STATEMENT CONFIRMS UDF V FUNDS REPAY UDF III This borrower s statement confirms that the loan issued by UDF V to Shahan Prairie LP was used to payoff a previous loan from UDF III UDF V s external manager also received an origination fee to re-underwrite the same piece of land that had still not been developed a decade after the initial UDF loan was issued Source: Denton County Records 9

10 UDF V UPDATE FROM SEPTEMBER 2015 When the loan was issued on June 9, 2015, only $2.3 million was funded. As of September 8, 2015, $4.9 million had been funded, an incremental $2.6 million. As of a November 1, 2015 site visit, there still was no apparent development activity. Source: UDF V 424B3 10

11 PROVIDING LIQUIDITY TO AFFILIATES IN SUMMARY UDF III, UDF IV and UDF V s largest borrower, Centurion, was issued a 2nd lien loan (via Shahan Prairie) by UDF I in 2004 to acquire undeveloped land The same borrower, Centurion, and same entity, Shahan Prairie, received a loan from UDF III in 2007; this loan was modified, extended and increased at least 3 times over the next 7 years, with UDF III s lien on the land tripling over the period The same borrower, Centurion, and entity, Shahan Prairie, received a loan from UDF V in 2015 Proceeds from the UDF V loan were partially used to repay UDF III; the collateral is still undeveloped land 11 years after the initial acquisition UDF V specifically states that it will not lend to affiliates or participate in loans issued by its affiliates UDF V has done explicitly what it said it would not do; it has just done it in a very opaque way at the asset level rather than directly buying loans from its affiliates, a practice which its predecessors actively engaged Over half of UDF V s loans to date have been issued to UDF III and UDF IV s largest borrower, Centurion, with most, specifically to entities that previously (and at the time of issuance) had loans outstanding due to UDF III and UDF IV This is not disclosed, likely because it appears to be engaging in activities that it claimed it would not and because it appears UDF V is the latest mechanism by which liquidity is being provided to affiliates, UDF III & UDF IV Many other examples just like Shahan Prairie exist within the UDF structure (UDF III, UDF IV and UDF V); this case study was chosen as an illustrative example to highlight how capital from later UDF vintages (and new investors) is used to provide liquidity to older UDF vintages (and older investors) 11

12 APPENDIX I Deed History Sourced from Denton County Land Records aspx Draft for comment, January 5, 2016

13 UDF I LOAN ISSUED TO SHAHAN PRAIRIE 2004 UDF I issued a second lien to Shahan Prairie in August 2004 for $1.55 million; this was a second lien subordinate to a seller s note of $1.15 million The land that was acquired was acres in Oak Point, Texas which is located in Denton County Source: Denton County Records 13

14 UDF I LOAN TO SHAHAN PRAIRIE ASSIGNED TO TEXTRON 2008 On May 1st 2008, UDF I issued a secured promissory note in the amount of $15 million to CTMGT and 12 CTMGT subsidiaries, including Shahan Prairie, LP On May 7th 2008, this loan was assigned to Textron Financial Corporation On June 14th 2009, UDF defaulted on its loan to Textron Source: Denton County Records Source: United Mortgage Trust 10-K ( ) 14

15 UDF III DEED OF TRUST ISSUED 2007, INCREASED 2009 On September 20th 2007, UDF III issued a secured promissory note in the amount of $1.9 million to Shahan Prairie, LP. On September 20th 2009, this loan was increased to $2.5 million The land that secured the loan was acres tract being a part of a called acre tract of land Source: Denton County Records 15

16 UDF III DEED OF TRUST FURTHER INCREASED 2012 On April 1, 2012, UDF III s loan to Shahan Prairie was further increased from $2.5 million to $3.37 million Source: Denton County Records 16

17 UDF III DEED OF TRUST FURTHER INCREASED 2014 On February 27, 2014, UDF III issued a second junior loan to Shahan Prairie in the amount of $1.39 million, the Supplemental Junior Note Including the Original Junior Note in the amount of $3.37 million, the total amount of promissory notes from UDF III to Shahan Prairie was $4.76 million as of February 2014 The loan was also extended to March 6, 2015 Source: Denton County Records 17

18 TREZ CAPITAL ENTERS THE PICTURE LATER IN 2014 On November 4, 2014, Trez Capital issued a promissory note in the amount of $2.55 million to Shahan Prairie, LP on the same piece of property Trez Capital s loan is senior to UDF III s notes (the Junior Notes) On December 5, 2014, PlainsCapital Bank released a lien with an original principal amount of $3.2 million (theoretically refinanced by Trez Capital) Source: Denton County Records 18

19 UDF V ENTERS THE PICTURE JUNE 2015 On June 9, 2015, UDF V entered into a loan agreement with Shahan Prairie, LP to provide a $18.1 million subordinate development loan on the same piece of property, 102 acres of land in Oak Point, Denton County, Texas Trez Capital s loan remains senior to UDF V s land development loan Source: UDF V 8-K 19

20 UDF III RELEASES LIEN JUNE 2015 UDF III released its lien on the Shahan Prairie land on the same date that UDF V issued a loan to Shahan Prairie, June 9, 2015 Source: Denton County Records 20