United Development Funding III, LP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - United Development Funding III, LP	v423461_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - United Development Funding III, LP	v423461_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - United Development Funding III, LP	v423461_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 000-53159

United Development Funding III, L.P.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-3269195
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1301 Municipal Way, Suite 100, Grapevine, Texas 76051

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (214) 370-8960

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 6, 2015, the Registrant had 19,937,511 units of limited partnership interest outstanding.

UNITED DEVELOPMENT FUNDING III, L.P.

FORM 10-Q

Quarter Ended September 30, 2015

	PART I
	FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Balance Sheets as of September 30, 2015 and December 31, 2014 (Unaudited)	3

	Statements of Income for the three and nine months ended September 30, 2015 and 2014 (Unaudited)	4

	Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (Unaudited)	5

	Notes to Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	45

Item 4.	Controls and Procedures.	46

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings.	47

Item 1A.	Risk Factors.	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	49

Item 3.	Defaults Upon Senior Securities.	50

Item 4.	Mine Safety Disclosures.	50

Item 5.	Other Information.	50

Item 6.	Exhibits.	50

Signatures.		51

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

UNITED DEVELOPMENT FUNDING III, L.P.

BALANCE SHEETS

(Unaudited)

	September 30, 2015			December 31, 2014
Assets:

Cash and cash equivalents	$	136,488		$	790,956
Restricted cash		1,389,503			1,383,282
Accrued interest receivable		13,556,411			9,544,825
Accrued interest receivable – related parties		2,257,618			349,657
Accounts receivable – related parties		349,021			347,060
Notes receivable, net		286,171,227			280,730,172
Notes receivable – related parties, net		16,416,706			16,403,160
Participation interest – related party, net		71,206,633			74,686,618
Other assets		89,689			184,876

Total assets	$	391,573,296		$	384,420,606

Liabilities and Partners’ Capital
Liabilities:
Accounts payable	$	206,574		$	247,886
Accrued liabilities		289,830			323,731
Accrued liabilities – related parties		3,072,060			2,470,050
Distributions payable		5,501,575			3,187,805
Lines-of-credit		10,000,000			11,250,000

Total liabilities		19,070,039			17,479,472

Commitments and contingencies

Partners’ Capital:
Limited partners’ capital: 22,500,000 units authorized; 19,898,766 units issued and outstanding at September 30, 2015 and 19,545,922 units issued and outstanding at December 31, 2014		372,651,513			366,472,837
General partner’s capital		(148,256	)		468,297

Total partners’ capital		372,503,257			366,941,134

Total liabilities and partners’ capital	$	391,573,296		$	384,420,606

See accompanying notes to financial statements (unaudited).

UNITED DEVELOPMENT FUNDING III, L.P.

STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015		2014			2015		2014
Revenues:
Interest income	$	10,936,312	$	10,383,913		$	32,234,725	$	30,025,917
Interest income – related parties		2,290,651		2,402,798			6,840,397		7,436,738
Mortgage and transaction service revenues		2,549		20,062			137,198		276,940
Mortgage and transaction service revenues – related parties		182,381		174,367			571,680		384,891
Total revenues		13,411,893		12,981,140			39,784,000		38,124,486

Expenses:
Interest expense		153,333		134,833			478,244		557,724
(Recapture) provision for loan loss		5,490,869		(73,316	)		5,490,869		199,191
General and administrative		408,035		356,853			1,355,766		910,587
General and administrative – related parties		433,455		430,030			1,301,328		1,252,672
Total expenses		6,485,692		848,400			8,626,207		2,920,174

Net income	$	6,926,201	$	12,132,740		$	31,157,793	$	35,204,312

Earnings allocated to limited partners	$	6,207,237	$	10,873,318		$	27,923,504	$	31,549,981

Earnings per weighted average limited partnership units outstanding, basic and diluted	$	0.31	$	0.56		$	1.42	$	1.64

Weighted average limited partnership units outstanding		19,830,555		19,355,841			19,714,903		19,262,962

Distributions per weighted average limited partnership units outstanding	$	0.49	$	0.49		$	1.46	$	1.46

See accompanying notes to financial statements (unaudited).

UNITED DEVELOPMENT FUNDING III, L.P.

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2015			2014
Operating Activities
Net income	$	31,157,793		$	35,204,312
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan loss		5,490,869			199,191
Amortization		117,680			158,202
Changes in operating assets and liabilities:
Accrued interest receivable		(4,530,026	)		(3,868,868	)
Accrued interest receivable – related parties		(1,907,961	)		622,055
Accounts receivable – related parties		(1,962	)		(98,413	)
Other assets		(22,492	)		(337,782	)
Accounts payable		(41,312	)		191,749
Accrued liabilities		(33,901	)		(21,639	)
Accrued liabilities – related parties		602,010			661,032
Net cash provided by operating activities		30,830,698			32,709,839

Investing Activities
Investments in notes receivable		(21,553,084	)		(22,702,602	)
Investments in notes receivable – related parties		(16,712	)		(437,948	)
Investments in participation interest – related party		(997,762	)		(5,287,415	)
Receipts from notes receivable		11,139,599			7,757,328
Receipts from notes receivable – related parties		3,167			8,675,244
Receipts from participation interest – related party		4,477,747			49,249
Restricted cash		(6,221	)		(6,527	)
Net cash used in investing activities		(6,953,266	)		(11,952,671	)

Financing Activities
Proceeds from line-of-credit		-			12,000,000
Payments on lines-of-credit		(1,250,000	)		(11,250,000	)
Limited partner distributions, net of limited partner distribution reinvestment		(21,648,129	)		(20,866,947	)
Limited partner redemptions		(96,700	)		(1,385,800	)
General partner distributions		(1,537,071	)		(876,173	)
Net cash used in financing activities		(24,531,900	)		(22,378,920	)

Net decrease in cash and cash equivalents		(654,468	)		(1,621,752	)
Cash and cash equivalents at beginning of period		790,956			1,966,735

Cash and cash equivalents at end of period	$	136,488		$	344,983

Supplemental Cash Flow Information
Cash paid for interest	$	470,000		$	569,197
Supplemental Cash Flow Information – non-cash activity
Limited partner distribution reinvestment	$	7,153,576		$	7,275,056
Distributions accrued but not paid	$	2,313,770		$	2,356,909
Assignment of loans	$	518,440		$	-

See accompanying notes to financial statements (unaudited).

UNITED DEVELOPMENT FUNDING III, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

A. Nature of Business

United Development Funding III, L.P. (which may be referred to as the “Partnership,” “we,” “us,” “our” or “UDF III”) was organized on June 13, 2005 as a Delaware limited partnership. Our principal business purpose is to originate, acquire, service, and otherwise manage, either alone or in association with others, a portfolio of mortgage loans that are secured by real property or equity interests that hold real property already subject to other mortgages (including mortgage loans that are not first in priority and participation interests in mortgage loans) and to issue or acquire an interest in credit enhancements for the benefit of borrowers, such as guarantees or letters of credit. Our offices are located in Grapevine, Texas.

Our general partner is UMTH Land Development, L.P. (“Land Development”), a Delaware limited partnership that is responsible for our overall management, conduct, and operation. Our general partner has authority to act on our behalf in all matters respecting us, our business and our property. Our limited partners take no part in the management of our business or transact any business for us and have no power to sign for or bind us; provided, however, that our limited partners, by a majority vote and without the concurrence of our general partner, have the right to: (a) amend the Second Amended and Restated Agreement of Limited Partnership governing the Partnership, as amended (the “Partnership Agreement”), (b) dissolve the Partnership, (c) remove our general partner or any successor general partner, (d) elect a new general partner, and (e) approve or disapprove a transaction entailing the sale of all or substantially all of the real properties acquired by the Partnership.

UMT Holdings, L.P. (“UMT Holdings”), a Delaware limited partnership, holds 99.9% of the limited partnership interests in our general partner. UMT Services, Inc. (“UMT Services”), a Delaware corporation, owns the remaining 0.1% of the limited partnership interests in our general partner and serves as its general partner. Land Development has been engaged to provide asset management services for four investment partnerships (United Development Funding, L.P. and its subsidiaries (“UDF I”), United Development Funding II, L.P., United Development Funding Land Opportunity Fund, L.P. (“UDF LOF”), all Delaware limited partnerships, and UDF TX Two, L.P., a Texas limited partnership), and United Development Funding IV, a Maryland real estate investment trust (“UDF IV”). Land Development also holds a 99.9% partnership interest in UMTHLD FLF I, L.P. and UMTHLD FLF II, L.P., both Texas limited partnerships, and United Development Funding X, L.P., a Delaware limited partnership, with the remaining 0.1% interest owned by UMT Services. In addition, Land Development owns 100% of the interests in UDF Land GP, LLC, which serves as the general partner of the general partner of UDF LOF. See Note K for discussion of related party transactions.

B. Summary of Significant Accounting Policies

A summary of our significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:

Basis of Presentation

The accompanying unaudited financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, with the instructions to Form 10-Q and with Regulation S-X. They do not include all information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, there has been no material change to the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the United States Securities and Exchange Commission (the “SEC”) on March 31, 2015 (the “Annual Report”). The accompanying interim unaudited financial statements should be read in conjunction with the financial statements filed in our Annual Report. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting solely of normal recurring adjustments, considered necessary to present fairly our financial position as of September 30, 2015, operating results for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014. Operating results and cash flows for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Notes Receivable and Notes Receivable – Related Parties

Notes receivable and notes receivable – related parties are recorded at the lower of cost or estimated net realizable value. The notes are collateralized by one or more of the following: first or second lien deeds of trust, a pledge of ownership interests in the borrower, assignments of lot sale contracts or reimbursements of development costs due to the borrower under contracts with districts and municipalities, and agreements to pledge future-acquired assets. Currently, the notes receivable and notes receivable – related parties have terms ranging from 11 to 36 months. None of such mortgages are insured or guaranteed by a federally owned or guaranteed mortgage agency. We originate and/or acquire all notes receivable and intend to hold the notes receivable for the life of the notes.

Participation Interest – Related Party

Participation interest – related party is recorded at the lower of cost or net realizable value. Participation interest – related party represents a Loan Participation Agreement with United Mortgage Trust, a real estate investment trust organized under the laws of the state of Maryland (“UMT”), pursuant to which we purchased (i) an economic interest in an $82 million revolving credit facility (the “UMT Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the UMT Loan. See Note K, “Related Party Transactions” for further details. Our general partner serves as the asset manager for UDF I. An affiliate of our general partner serves as the advisor to UMT.

Allowance for Loan Losses

The allowance for loan losses is our estimate of incurred losses in our portfolio of notes receivable, notes receivable – related parties and participation interest – related party. We periodically perform a detailed review of our portfolio of mortgage notes and other loans to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses. Our review consists of evaluating economic conditions, the estimated value of the underlying collateral, current and future assets, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral, and other relevant factors. We also utilize a peer group analysis and a historical analysis to validate the overall adequacy of our allowance for loan losses. This review is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

In reviewing our portfolio, we consider cash flow estimates from current and future-acquired assets including the disposition of finished lots, paper lots (residential lots shown on a plat that has been accepted by the city or county) and undeveloped land as well as cash flow received from the issuance of bonds from municipal reimbursement and public improvement districts. These estimates are based on current market metrics, including, without limitation, the supply of finished lots, paper lots and undeveloped land, the supply of homes and the rate and price at which land and homes are sold, historic levels and trends, executed contracts, appraisals and discussions with third party market analysts and participants, including homebuilders. We base our valuations on current and historic market trends on our analysis of market events and conditions, including activity within our portfolio, and on the analysis of third-party services such as Metrostudy and Residential Strategies, Inc. Cash flow forecasts are also based on executed purchase contracts, which provide base prices, escalation rates, and absorption rates on an individual project basis. We also consider third-party appraisals that provide a valuation in accordance with guidelines set forth in the Uniform Standards of Professional Appraisal Practice. In addition to cash flows from the disposition of property, cost analysis is performed based on estimates of development and senior financing expenditures provided by developers and independent professionals on a project-by-project basis. These amounts are reconciled with our best estimates to establish the net realizable value of the portfolio.

We charge additions to the allowance for loan losses to current period earnings through a provision for loan loss. Amounts determined to be uncollectible are charged directly against and decrease the allowance for loan losses (“charged off”), while amounts recovered on previously charged off accounts increase the allowance.

Revenue Recognition

Interest income on notes receivable, notes receivable – related parties and participation interest – related party is recognized over the life of the loan and recorded on the accrual basis. Income recognition is suspended for loans at the date at which, in the opinion of management, a full recovery of income and principal becomes more likely than not, but is no longer probable, based upon our review of economic conditions, the estimated value of the underlying collateral, current and future-acquired assets, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Any payments received on loans classified as non-accrual status are typically applied first to outstanding loan amounts and then to the recovery of lost interest. As of September 30, 2015, we were suspending income recognition on 4 notes receivable with an aggregate unpaid principal balance of approximately $36.0 million, for which full collectability is considered more likely than not, but not probable, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million that was deemed as probable that we will be unable to collect all amounts due. As of December 31, 2014, we were suspending income recognition on 3 notes receivable with an aggregate unpaid principal balance of approximately $13.3 million, for which full collectability is considered more likely than not, but not probable, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million that was deemed as probable that we will be unable to collect all amounts due.

We generate mortgage and transaction service revenues and mortgage and transaction service revenues – related parties by originating and acquiring notes receivable and other loans. In accordance with GAAP, we defer recognition of income from non-refundable commitment fees paid by the borrowers and recognize such amount on a straight-line basis over the expected life of such notes. In addition, credit enhancement fee income is generated by fees charged to parties for credit enhancements provided to lenders by the Partnership on behalf of the parties. Income related to credit enhancements is earned as fees are paid, based on the terms of the credit enhancement agreement. As of September 30, 2015, the Partnership was providing 8 credit enhancements to related parties (see Note K for further discussion).

Cash Flow Distributions

Cash available for distributions represents the cash funds received by us from operations (other than net proceeds from a capital transaction) that produce proceeds from (1) the repayment of principal or prepayment of a mortgage to the extent classified as a return of capital for federal income tax purposes, (2) the foreclosure, sale, exchange, condemnation, eminent domain taking or other disposition of a mortgage loan or of a property subject to a mortgage, or (3) insurance or a guarantee with respect to a mortgage, including, without limitation, interest, points, revenue participations in property appreciation and interest or dividends from interim investments or proceeds from borrowings, if appropriate, less all cash used to pay Partnership expenses and debt payments and amounts set aside to create a retained earnings reserve (currently at 9.5% of our net income; the retained earnings reserve is intended to recover some of the organization and offering expenses incurred in connection with our public offering of our units of limited partnership interest). Our general partner receives a monthly distribution for promotional and carried interest from the cash available for distributions, in addition to the payments made to our general partner and related parties. See Note K for further discussion of related party transactions.

A “carried interest” is an equity interest in us to participate in all distributions, other than distributions attributable to our general partner’s promotional interest, of cash available for distribution and net proceeds from a capital transaction that are distributable under the distribution priority for net proceeds from a capital transaction described below. If our general partner enters into commitments to investments in mortgages in excess of 82% of the gross proceeds of our public offering of our units of limited partnership interest, our general partner will be entitled to a carried interest equal to (1) 1% for the first 2.5% of commitments to investments in mortgages above 82% of the gross proceeds of our initial public offering, as declared effective on May 15, 2006 pursuant to a Registration Statement on Form S-11 (File No. 333-127891) (the “Offering”) under the Securities Act of 1933, as amended (the “Securities Act”) (or if commitments to investments in mortgages are above 82% but no more than 84.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 82%), (2) 1% for the next 2% of additional commitments to investments in mortgages above 84.5% of the gross proceeds of the Offering (or if commitments to investments in mortgages are above 84.5% but no more than 86.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 84.5%) and (3) 1% for each additional 1% of additional commitments to investments in mortgages above 86.5% of the gross proceeds of the Offering (or a fractional percentage equal to the fractional amount of any 1% of additional commitments to investments in mortgages). By way of illustration, if 85.5% of the gross proceeds of the Offering are committed to investments in mortgages, then our general partner would be entitled to a carried interest of 1.5% (1% for the first 2.5% of commitments to investments in mortgages above 82% of the gross proceeds of the Offering and 0.5% for the next 1% of additional commitments to investments in mortgages above 84.5% of the gross proceeds of the Offering) of any amount otherwise distributable to the limited partners after deduction of any promotional interest payable to our general partner.

In order for proceeds to be considered “committed” for purposes of calculation and payment of a carried interest, we must be obligated by contract or other binding agreement to invest such proceeds in mortgages, to the exclusion of any other use for such proceeds or no use at all.

“Investments in mortgages” are the aggregate amount of capital contributions from investors used by us to make or invest in mortgage loans or the amount actually paid or allocated to the purchase of mortgages, working capital reserves (but excluding working capital reserves in excess of 3% of the aggregate capital contributions) and other cash payments such as interest and taxes but excluding our organization and offering expenses, selling commissions, wholesaling fees, marketing support fees, due diligence fees, acquisition and origination fees (“Placement Fees”), and any other front-end fees.

Our general partner’s “promotional interest” is our general partner’s right to receive:

prior to the return to the limited partners of all of their capital contributions plus an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, 10% of all cash available for distribution;

following the return to the limited partners of all of their capital contributions plus an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, 15% of all cash available for distribution; and

Monthly distributions are currently paid to our limited partners at a 9.75% annualized return, assuming a purchase price of $20.00 per unit, on a pro rata basis based on the number of days in the Partnership. Retained earnings would contain a surplus if the cash available for distributions less the 9.5% reserve exceeded the monthly distribution to the general and limited partners. Retained earnings would contain a deficit if cash available for distributions less the 9.5% reserve is less than the monthly distribution to general and limited partners. It is the intent of management to monitor and distribute such surplus, if any, on an annual basis.

The table below summarizes the approximate aggregate amount of distributions to our general partner and limited partners and the retained earnings deficit as of September 30, 2015 and December 31, 2014:

	As of September 30,			As of December 31,
	2015			2014
General Partner	$	32,347,000	(1)	$	28,497,000	(2)
Limited Partners		263,980,000	(3)		235,178,000	(4)
Retained Earnings Reserve		10,833,000			11,663,000
Retained Earnings Deficit		(18,636,000	)		(14,845,000	)

(1)

approximately $26.8 million paid in cash and $5.5 million has been declared, but not paid.

(2)

approximately $25.3 million paid in cash and $3.2 million has been declared, but not paid.

(3)

approximately $183.8 million paid in cash and approximately $80.1 million reinvested in 4,006,546 units of limited partnership interest under our DRIP and Secondary DRIP, each as defined in Note C below.

(4)

approximately $162.2 million paid in cash and approximately $73 million reinvested in 3,648,868 units of limited partnership interest under our DRIP and Secondary DRIP, each as defined in Note C below.

The table below summarizes the payment of related party fees and reimbursements associated with the Offering and origination and management of assets, including the distributions to our general partner described above, and general and administrative – related parties expenses for the nine months ended September 30, 2015 and 2014. We believe that these fees and reimbursements are reasonable and customary for comparable mortgage programs.

	For the Nine Months Ended September 30,
	2015		2014
Payments to General Partner and Related Parties	$	2,186,000	$	1,525,000
Total General and Administrative Expenses to General Partner and Related Parties		1,301,000		1,253,000

Fair Value of Financial Instruments

In accordance with the reporting requirements of GAAP, we calculate the fair value of our assets and liabilities that qualify as financial instruments under this statement and include this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of restricted cash, accrued interest receivable, accrued interest receivable – related parties, accounts receivable – related parties, accounts payable, accrued liabilities, and accrued liabilities – related parties approximates the carrying amounts due to the relatively short maturity of these instruments. The estimated fair value of notes receivable, notes receivable – related parties, participation interest – related party, and lines-of-credit approximates the carrying amount since they bear interest at the market rate.

Guarantees

The Partnership from time to time enters into guarantees of debtors’ or affiliates’ borrowings and provides credit enhancements for the benefit of senior lenders in connection with the Partnership’s debtors and investments in partnerships (collectively referred to as “guarantees”), and accounts for such guarantees in accordance with GAAP.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of ASU 2014-09 is that an entity should recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. The standard shall be adopted using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This new guidance is a change from the current treatment of recording debt issuance costs as an asset representing a deferred charge, and is consistent with the accounting treatment for debt discounts. In August 2015, the FASB sought to clarify questions that arose after ASU 2015-03 was issued by issuing ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). The update clarifies that debt issuance costs related to securing a revolving line of credit may be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Both ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, and are to be applied retrospectively, with early adoption permitted. We do not expect the adoption of ASU 2015-03 and ASU 2015-15 to have a material impact on our financial statements.

C. Registration Statement

On May 15, 2006, the Offering was declared effective under the Securities Act. The Offering, at the time of such effectiveness, covered up to 12,500,000 units of limited partnership interest at a price of $20.00 per unit (the “Primary Offering”) and up to 5,000,000 units of limited partnership interest to be issued pursuant to our distribution reinvestment plan (the “DRIP”) at a price of $20.00 per unit. We had the right to reallocate the units of limited partnership interest we were offering between the Primary Offering and the DRIP, and we therefore reallocated the units being offered such that 16,500,000 units were offered pursuant to the Primary Offering and 1,000,000 units were offered pursuant to the DRIP. The Primary Offering was terminated on April 23, 2009. We extended the offering of our units of limited partnership interest pursuant to our DRIP until the earlier of the sale of all units of limited partnership interest being offered pursuant to our DRIP or May 15, 2010; provided, however, that our general partner was permitted to terminate the offering of units pursuant to our DRIP at any earlier time.

On June 12, 2009, we registered 5,000,000 additional units to be offered at the Estimated Unit Value (as defined in Note H below) pursuant to an Amended and Restated Distribution Reinvestment Plan in a Registration Statement on Form S-3 (File No. 333-159939) (the “Secondary DRIP”). As such, we ceased offering units under the DRIP as of July 21, 2009 and concurrently commenced our offering of units pursuant to the Secondary DRIP, which is currently ongoing. The aggregate offering price for the units being offered pursuant to the Secondary DRIP is $100,000,000. The Secondary DRIP will continue until we sell all $100,000,000 worth of units being offered; provided, however, that our general partner may terminate the offering of units pursuant to the Secondary DRIP at any earlier time. Effective as of March 6, 2015, our general partner determined the most recent Estimated Unit Value to be $20.00 per unit, which will be used as the Estimated Unit Value until such time as our general partner provides a new estimated value of the Partnership’s units of limited partnership interest.

D. Loans and Allowance for Loan Losses

Our loan portfolio is comprised of notes receivable, net, notes receivable – related parties, net and participation interest – related party, net, and is recorded at the lower of cost or estimated net realizable value.

	September 30,		December 31,
	2015		2014
Notes receivable, net	$	286,171,000	$	280,730,000
Notes receivable - related parties, net		16,417,000		16,403,000
Participation interest - related party, net		71,207,000		74,687,000
Total	$	373,795,000	$	371,820,000

Our loans are classified as follows:

	September 30,			December 31,
	2015			2014
Real Estate:
Acquisition and land development	$	398,330,000		$	390,958,000
Allowance for loan losses		(24,531,000	)		(19,040,000	)
Unamortized commitment fees		(4,000	)		(98,000	)
Total	$	373,795,000		$	371,820,000

As of September 30, 2015, we had originated or purchased 62 loans, including 42 loans that have been repaid in full by the respective borrowers and 1 loan for which the remaining balance was written-off. For the three and nine months ended September 30, 2015, we did not originate or purchase any loans, sell any loan participations, or acquire any additional participation interests. Of the 19 loans outstanding as of September 30, 2015, the scheduled maturity dates are as follows as of September 30, 2015:

	Related							Non-Related							Total
Maturity Date	Amount		Loans		% of Total			Amount		Loans		% of Total			Amount		Loans		% of Total
Matured	$	-		-		-		$	139,869,000		6		45	%	$	139,869,000		6		35	%
2015		71,268,000		2		81	%		-		-		-			71,268,000		2		18	%
2016		16,355,000		1		19	%		164,482,000		9		53	%		180,837,000		10		45	%
2017		-		-		-			6,356,000		1		2	%		6,356,000		1		2	%
Total	$	87,623,000		3		100	%	$	310,707,000		16		100	%	$	398,330,000		19		100	%

As of December 31, 2014, we had originated or purchased 62 loans, including 40 loans that have been repaid in full by the respective borrowers and 1 loan for which the remaining balance was written-off. For the year ended December 31, 2014, we originated or purchased 1 loan and did not acquire any additional participation interests. Of the 21 loans outstanding as of December 31, 2014, the scheduled maturity dates are as follows as of December 31, 2014:

	Related							Non-Related							Total
Maturity Date	Amount		Loans		% of Total			Amount		Loans		% of Total			Amount		Loans		% of Total
Matured	$	-		-		-		$	36,942,000		6		12	%	$	36,942,000		6		9	%
2015		74,748,000		2		82	%		256,445,000		11		86	%		331,193,000		13		85	%
2016		16,342,000		1		18	%		-		-		-			16,342,000		1		4	%
2017		-		-		-			6,481,000		1		2	%		6,481,000		1		2	%
Total	$	91,090,000		3		100	%	$	299,868,000		18		100	%	$	390,958,000		21		100	%

The following table represents the maturity dates of loans that were matured as of September 30, 2015 and had not been repaid or extended as of September 30, 2015:

	Related						Non-Related							Total
Maturity Date	Amount		Loans		% of Total		Amount		Loans		% of Total			Amount		Loans		% of Total
2009	$	-		-		-	$	17,852,000		4		13	%	$	17,852,000		4		13	%
2010		-		-		-		22,614,000		1		16	%		22,613,000		1		16	%
2015		-		-		-		99,404,000		1		71	%		99,404,000		1		71	%
Total	$	-		-		-	$	139,870,000		6		100	%	$	139,869,000		6		100	%

Of these 6 loans, as of September 30, 2015, full collectability is considered probable for 2 loans with an aggregate unpaid principal balance of approximately $109.6 million, full collectability is considered more likely than not, but not probable, for 3 loans with an aggregate unpaid principal balance of approximately $25.0 million, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million was deemed as probable that we will be unable to collect all amounts due. In addition to the 6 loans considered impaired due to the loans remaining outstanding beyond the contractual terms of the loan agreements, we had one loan with an aggregate unpaid principal balance of approximately $11 million that was considered impaired due to the estimated value of the underlying collateral and as such, full collectability on this loan is considered more likely than not, but not probable, as of September 30, 2015.

The following table represents the maturity dates of loans that were matured as of December 31, 2014 and had not been repaid or extended as of December 31, 2014:

	Related						Non-Related							Total
Maturity Date	Amount		Loans		% of Total		Amount		Loans		% of Total			Amount		Loans		% of Total
2009	$	-		-		-	$	16,916,000		5		46	%	$	16,916,000		5		46	%
2010		-		-		-		20,026,000		1		54	%		20,026,000		1		54	%
Total	$	-		-		-	$	36,942,000		6		100	%	$	36,942,000		6		100	%

Of these 6 loans, as of December 31, 2014, full collectability is considered probable for 3 loans with an aggregate unpaid principal balance of approximately $29.3 million, full collectability is considered more likely than not, but not probable, for 2 loans with an aggregate unpaid principal balance of approximately $2.4 million, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million was deemed as probable that we will be unable to collect all amounts due. In addition to the 6 loans considered impaired due to the loans remaining outstanding beyond the contractual terms of the loan agreements, we had one loan with an aggregate unpaid principal balance of approximately $11 million that was considered impaired due to the estimated value of the underlying collateral and as such, full collectability on this loan is considered more likely than not, but not probable, as of December 31, 2014.

The following table describes the loans that were matured as of December 31, 2014, the activity with respect to such loans during the nine months ended September 30, 2015, and the loans that matured during the nine months ended September 30, 2015 and remained matured as of September 30, 2015:

Maturity Date	Amount		Loans		% of Total			Matured Loan Extensions During the Nine Months Ended September 30, 2015 on Loans Matured as of December 31, 2014 (1)		Net Activity During the Nine Months Ended September 30, 2015 on Loans Matured as of December 31, 2014 (2)		Loans Matured During the Nine Months Ended September 30, 2015 (3)		Amount		Loans		% of Total

	Non-Related
	Matured as of December 31, 2014							2015 Activity (4)						Matured as of September 30, 2015
2009	$	16,916,000		5		46	%	$	-	$	936,000	$	-	$	17,852,000		4		13	%
2010		20,026,000		1		54	%		-		2,587,000		-		22,613,000		1		16	%
2015		-		-		-			-		-		99,404,000		99,404,000		1		71	%
Total	$	36,942,000		6		100	%	$	-	$	3,523,000	$	99,404,000	$	139,869,000		6		100	%

(1)

Amounts represent aggregate unpaid principal balance as of December 31, 2014 of matured loans as of December 31, 2014 that were extended during the nine months ended September 30, 2015.

(2)

For loans matured as of December 31, 2014, net loan activity represents all activity on the loans during the nine months ended September 30, 2015, including accrued interest, payment of fees and expenses, charge-offs and/or repayments.

(3)

Amounts represent aggregate unpaid principal balance as of September 30, 2015 of loans that matured during the nine months ended September 30, 2015 and remained matured as of September 30, 2015.

(4)

The table does not reflect activity for loans that matured or were due to mature during the nine months ended September 30, 2015, but were extended prior to September 30, 2015.

A loan is placed on non-accrual status and income recognition is suspended on the date at which, in the opinion of management, a full recovery of income and principal becomes more likely than not, but is no longer probable, based upon our review of economic conditions, the estimated value of the underlying collateral, current and future-acquired assets, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Any payments received on loans classified as non-accrual status are typically applied first to outstanding loan amounts and then to the recovery of lost interest. As of September 30, 2015, we are suspending income recognition on 4 notes receivable with an aggregate unpaid principal balance of approximately $36.0 million for which full collectability is considered more likely than not, but not probable, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million that was deemed probable that we will be unable to collect all amounts due. As of December 31, 2014, we were suspending income recognition on 3 notes receivable with an aggregate unpaid principal balance of approximately $13.3 million for which full collectability is considered more likely than not, but not probable, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million that was deemed probable that we will be unable to collect all amounts due. As of December 31, 2014, we charged off the aggregate unpaid principal balance of approximately $491,000 of 1 matured loan receivable.

Loans are considered impaired when, in the opinion of management, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is generally evaluated on an individual loan basis for each loan in the portfolio. If an individual loan is considered impaired, a specific valuation allowance may be allocated, if necessary, so that the individual loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. Loans that are not individually considered impaired are collectively and qualitatively measured as a portfolio for general valuation allowance. In reviewing our portfolio for this valuation analysis, we consider cash flow estimates from current and future-acquired assets including the disposition of finished lots, paper lots (residential lots shown on a plat that has been accepted by the city or county) and undeveloped land as well as cash flow received from the issuance of bonds from municipal reimbursement and public utility districts. These estimates are based on current market metrics, including, without limitation, the supply of finished lots, paper lots and undeveloped land, the supply of homes and the rate and price at which land and homes are sold, historic levels and trends, executed contracts, appraisals and discussions with third party market analysts and participants, including homebuilders. We base our valuations on current and historic market trends on our analysis of market events and conditions, including activity within our portfolio, and on the analysis of third-party services such as Metrostudy and Residential Strategies, Inc. Cash flow forecasts are also based on executed purchase contracts, which provide base prices, escalation rates, and absorption rates on an individual project basis. We also consider third-party appraisals that provide a valuation in accordance with guidelines set forth in the Uniform Standards of Professional Appraisal Practice. In addition to cash flows from the disposition of property, cost analysis is performed based on estimates of development and senior financing expenditures provided by developers and independent professionals on a project-by-project basis. These amounts are reconciled with our best estimates to establish the net realizable value of the portfolio.

Interest is recognized on an accrual basis for impaired loans in which the collectability of the unpaid principal amount is deemed probable. Any payments received on such loans are first applied to outstanding accrued interest receivable and then to outstanding unpaid principal balance. Unpaid principal balance is materially the same as recorded investments. Any payments received on impaired loans in which the collectability of the unpaid principal amount is less than probable are typically applied to outstanding unpaid principal and then to the recovery of lost interest on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

As of September 30, 2015, we had 6 notes receivable with an aggregate unpaid principal balance of approximately $139.9 million that were considered impaired due to the loans remaining outstanding beyond the contractual terms of the loan agreements. Of these 6 loans, full collectability is considered probable for 2 loans with an aggregate unpaid principal balance of approximately $109.6 million, full collectability is considered more likely than not, but not probable, for 3 loans with an aggregate unpaid principal balance of approximately $25.0 million, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million was deemed probable that we will be unable to collect all amounts due. In addition to the 6 loans considered impaired as of September 30, 2015 due to the loans remaining outstanding beyond the contractual terms of the loan agreements, we had one loan with an aggregate unpaid principal balance of approximately $11 million that was considered impaired due to the estimated value of the underlying collateral and as such, full collectability on this loan is considered more likely than not, but not probable, as of September 30, 2015. As of December 31, 2014, we had 6 notes receivable with an aggregate unpaid principal balance of approximately $36.9 million that were considered impaired due to the loans remaining outstanding beyond the contractual terms of the loan agreements. Of these 6 loans, full collectability is considered probable for 3 loans with an aggregate unpaid principal balance of approximately $29.3 million, full collectability is considered more likely than not, but not probable, for 2 loans with an aggregate unpaid principal balance of approximately $2.4 million, and 1 note receivable with an aggregate unpaid principal balance of approximately $5.3 million was deemed probable that we will be unable to collect all amounts due. In addition to the 6 loans considered impaired as of December 31, 2014 due to the loans remaining outstanding beyond the contractual terms of the loan agreements, we had one loan with an aggregate unpaid principal balance of approximately $11 million that was considered impaired due to the estimated value of the underlying collateral and as such, full collectability on this loan is considered more likely than not, but not probable, as of December 31, 2014. As of September 30, 2015 and December 31, 2014, the average outstanding aggregate unpaid principal balance for impaired loans was approximately $125.0 million and $52.9 million, respectively. For the three months ended September 30, 2015, and 2014, we recognized approximately $5.1 million and $1.4 million of interest income, respectively, related to impaired loans. For each of the nine months ended September 30, 2015 and 2014, we recognized approximately $14.2 million and $4.1 million of interest income, respectively, related to impaired loans. For the three and nine months ended September 30, 2015 and 2014, we did not recognize any cash basis interest income related to impaired loans. We had approximately $5.3 million in the specific allowance for one impaired loan as of December 31, 2014. We charged-off approximately $491,000 against the allowance for loan losses associated with repayment of one impaired loan during the year ended December 31, 2014.

As part of the ongoing monitoring of the credit quality of the loan portfolio, we periodically, no less than quarterly, perform a detailed review of our portfolio of mortgage notes and other loans. The following is a general description of the credit levels used:

Level 1 – Full collectability of loans in this category is considered probable.

Level 2 – Full collectability of loans in this category is deemed more likely than not, but not probable, based upon our review of economic conditions, the estimated value of the underlying collateral, current and future-acquired assets, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. Interest income is suspended on Level 2 loans.

Level 3 – For loans in this category, it is probable that we will be unable to collect all amounts due. Interest income is suspended on Level 3 loans.

As of September 30, 2015 and December 31, 2014, our loans were classified as follows:

	September 30, 2015		December 31, 2014
Level 1	$	357,016,000	$	372,328,000
Level 2		36,004,000		13,320,000
Level 3		5,310,000		5,310,000
Total	$	398,330,000	$	390,958,000

The allowance for loan losses is our estimate of incurred losses in our portfolio of notes receivable, notes receivable – related parties and participation interest – related party. We periodically perform a detailed review of our portfolio of mortgage notes and other loans to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses. We charge additions to the allowance for loan losses to current period earnings through a provision for loan loss. Amounts determined to be uncollectible are charged off, while amounts recovered on previously charged off amounts increase the allowance for loan losses. The following table summarizes the change in the allowance for loan losses during the nine months ended September 30, 2015 and the year ended December 31, 2014, which is offset against notes receivable:

	For the Nine Months Ended September 30, 2015		For the Year Ended December 31, 2014
Allowance for loan losses:
Balance at beginning of period	$	19,040,000	$	19,715,000
(Recapture) provision charged to earnings		5,491,000		(184,000	)
Loan losses:
Charge-offs		-		(491,000	)
Recoveries		-		-
Net loan losses		-		(491,000	)
Balance at end of period	$	24,531,000	$	19,040,000
Ending balance, individually evaluated for impairment	$	5,310,000	$	5,310,000
Ending balance, collectively evaluated for impairment	$	19,221,000	$	13,730,000

Financing receivables:
Balance at end of period	$	398,330,000	$	390,958,000
Ending balance, individually evaluated for impairment	$	150,877,000	$	47,903,000
Ending balance, collectively evaluated for impairment	$	247,453,000	$	343,055,000

In accordance with GAAP, the restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. As of September 30, 2015 and December 31, 2014, we have no loan modifications that are classified as troubled debt restructurings.

E. Lines-of-Credit

LegacyTX Credit Facility

On March 21, 2014, the Partnership entered into a loan agreement with LegacyTexas Bank (“LegacyTexas”), pursuant to which LegacyTexas provided the Partnership with an aggregate credit facility of up to $15.0 million (the “LegacyTX Credit Facility”), consisting of a term loan in the original principal amount of $10.0 million (the “Term Loan”) and a revolving line of credit in the maximum principal amount of $5.0 million (the “Legacy Line of Credit”). The interest rate on the Term Loan is equal to 6% per annum, and the interest rate on the Legacy Line of Credit is equal to the greater of (1) the prime rate plus 1% per annum, or (2) 6% per annum (6% at September 30, 2015). Accrued interest on the outstanding principal amount of the LegacyTX Credit Facility is payable monthly. The LegacyTX Credit Facility is secured by a first priority lien on all of the Partnership’s existing and future assets.

The Term Loan matures on March 21, 2016. The Term Loan required the Partnership to make quarterly principal payments in the amount of $1.25 million on March 21, June 21, September 21 and December 21 of each year that the Term Loan is outstanding. On June 21, 2015, the Partnership entered into a loan extension and modification agreement with LegacyTexas pursuant to which LegacyTexas modified the payment date of the required quarterly principal payments to be March 10, June 10, September 10 and December 10 of each year that the Term Loan is outstanding. Additionally, LegacyTexas extended the due date of the June 21, 2015 quarterly principal payment to September 10, 2015. The Partnership has requested an extension of the September 10, 2015 required quarterly principal payment to January 1, 2016, and LegacyTexas is considering the request. The Term Loan is not in default.

The LegacyTX Credit Facility is secured by a first priority lien on all of the Partnership’s existing and future assets. The Term Loan matures on March 21, 2016. In consideration of LegacyTexas originating the Term Loan, the Partnership paid the bank a commitment fee in the amount of $100,000, which is being amortized over the life of the Term Loan. The Legacy Line of Credit, as amended, matures on January 1, 2016. In consideration of LegacyTexas originating the Legacy Line of Credit, the Partnership paid the bank a commitment fee in the amount of $50,000, which is being amortized over the life of the Legacy Line of Credit. In conjunction with the LegacyTX Credit Facility, the Partnership also paid UMTH General Services, L.P., a Delaware limited partnership (“General Services”), a debt placement fee equal to 1% ($150,000) of the LegacyTX Credit Facility, which will be amortized over the lives of the Term Loan and the Legacy Line of Credit. General Services and Land Development are each owned 99.9% by UMT Holdings and 0.1% by UMT Services, which serves as the general partner for both General Services and Land Development.

The Partnership utilized the LegacyTX Credit Facility to pay off the Brockhoeft Credit Facility (as defined below) and currently uses the LegacyTX Credit Facility as transitory indebtedness to provide liquidity and to reduce and avoid the need for large idle cash reserves, including usage to fund identified investments pending the receipt of proceeds from the partial or full repayment of loans. This allows the Partnership to keep funds invested in loans, instead of holding such loan repayment proceeds idle until new investments are identified. The Partnership intends to use the LegacyTX Credit Facility as a Partnership portfolio administration tool and not to provide long-term or permanent leverage on Partnership investments. Proceeds from the operations of the Partnership will be used to repay the LegacyTX Credit Facility. As of September 30, 2015 and December 31, 2014, approximately $10 million and $11.25 million in principal was outstanding under the LegacyTX Credit Facility, respectively. Interest expense associated with the LegacyTX Credit Facility was approximately $153,000 and $135,000 for the three months ended September 30, 2015 and 2014, respectively, and approximately $478,000 and $351,000 for the nine months ended September 30, 2015 and 2014, respectively.

The following table reflects approximate amounts due as of September 30, 2015, in connection with the LegacyTX Credit Facility based on its maturity date:

	Payments due by period
	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Line-of-credit	$	10,000,000	$	-	$	-	$	-	$	10,000,000
Total	$	10,000,000	$	-	$	-	$	-	$	10,000,000

Brockhoeft Credit Facility

On September 21, 2009, during the credit crisis in which financial institutions severely reduced the number of loans made to entities involved in real estate, the Partnership entered into a Loan and Security Agreement (the “Loan Agreement”) with Wesley J. Brockhoeft, an unaffiliated individual (the “Lender”), pursuant to which the Lender provided the Partnership with a revolving credit facility in the maximum principal amount of $15.0 million (the “Brockhoeft Credit Facility”). Effective March 2014, the Brockhoeft Credit Facility was paid in full in connection with the LegacyTX Credit Facility (as discussed above), and the Loan Agreement was terminated. The interest rate on the Brockhoeft Credit Facility was equal to 10% per annum. Accrued interest on the outstanding principal amount of the Brockhoeft Credit Facility was payable monthly. The Brockhoeft Credit Facility was secured by a first priority lien on all of the Partnership’s existing and future assets. In consideration of the Lender originating the Brockhoeft Credit Facility, the Partnership paid the Lender an origination fee in the amount of $300,000. On June 21, 2010, the Partnership entered into the First Amendment to Loan and Security Agreement (the “Amended Loan Agreement”), pursuant to which the maturity date on the Brockhoeft Credit Facility was extended from September 20, 2010 to June 21, 2012 and the Partnership’s existing and future assets were permitted to secure our guaranty of a $15.0 million loan (the “UDF I – Brockhoeft Loan”) from the Lender, as agent for a group of lenders, to UDF I. In consideration for amending the Brockhoeft Credit Facility, the Partnership paid the Lender an amendment fee in the amount of $150,000, which was amortized over the life of the Amended Loan Agreement. In connection with the guaranty, we received from UDF I a monthly fee equal to 3% per annum of the outstanding balance of the UDF I – Brockhoeft Loan. The Amended Loan Agreement also provided for cross-default of the Brockhoeft Credit Facility with the UDF I – Brockhoeft Loan. On June 21, 2012, the Partnership entered into the Second Amendment to Loan and Security Agreement (the “Second Amended Loan Agreement”), pursuant to which the maturity date on the Brockhoeft Credit Facility was extended from June 21, 2012 to June 21, 2014. Our guaranty of the UDF I – Brockhoeft Loan was also modified effective June 21, 2012, such that UDF I agreed to pay us a monthly fee equal to 1/12th of 1% of the outstanding principal balance of the UDF I – Brockhoeft Loan. In consideration for entering into the Second Amended Loan Agreement, the Partnership paid the Lender an additional amendment fee in the amount of $150,000, which was amortized over the life of the Second Amended Loan Agreement. UDF I paid off the UDF I – Brockhoeft Loan in December 2012, thus extinguishing the Partnership’s guaranty of the UDF I – Brockhoeft Loan and extinguishing the cross-default of the Brockhoeft Credit Facility with the UDF I – Brockhoeft Loan. We believe that the interest rate and terms of the Brockhoeft Credit Facility, the Amended Loan Agreement and the Second Amended Loan Agreement were consistent with those offered by financial institutions.

Effective as of June 21, 2012, the Partnership could not borrow any additional advances under the Second Amended Loan Agreement. The Partnership was required to repay the principal amount of the loan in equal installments of $1,250,000 on the 21st day of each March, June, September and December beginning on September 21, 2012. The Partnership obtained a waiver from the Lender of the December 2012 principal payment and resumed making the quarterly principal payments in accordance with the terms of the Second Amended Loan Agreement in March 2013.

The Partnership utilized the Brockhoeft Credit Facility as transitory indebtedness to provide liquidity and to reduce and avoid the need for large idle cash reserves, including usage to fund identified investments pending receipt of proceeds from the partial or full repayment of loans. This allowed the Partnership to keep funds invested in loans, instead of holding such loan repayment proceeds idle until new investments are identified. The Partnership used the Brockhoeft Credit Facility as a Partnership portfolio administration tool and not to provide long-term or permanent leverage on Partnership investments. The Brockhoeft Credit Facility was paid in full effective March 2014. Interest expense associated with the Brockhoeft Credit Facility was approximately $207,000 for the nine months ended September 30, 2014. There was no interest expense associated with the Brockhoeft Credit Facility for the three months ended September 30, 2014.

F. Partners’ Capital

As of September 30, 2015, we had issued an aggregate of 19,898,766 units of limited partnership interest in the Primary Offering, DRIP and Secondary DRIP, consisting of 16,499,994 units issued to our limited partners pursuant to the Primary Offering in exchange for gross proceeds of approximately $330.3 million (approximately $290.7 million, net of costs associated with the Primary Offering), 716,260 units of limited partnership interest issued to our limited partners pursuant to our DRIP in exchange for gross proceeds of approximately $14.3 million, and 3,290,286 units of limited partnership interest issued to our limited partners pursuant to our Secondary DRIP in exchange for gross proceeds of approximately $65.8 million, less 607,774 units of limited partnership interest that we had repurchased pursuant to our unit redemption program for approximately $12.2 million.

As of December 31, 2014, we had issued an aggregate of 19,545,922 units of limited partnership interest in the Primary Offering, DRIP and Secondary DRIP, consisting of 16,499,994 units issued to our limited partners pursuant to the Primary Offering in exchange for gross proceeds of approximately $330.3 million (approximately $290.7 million, net of costs associated with the Primary Offering), 716,260 units of limited partnership interest issued to our limited partners pursuant to our DRIP in exchange for gross proceeds of approximately $14.3 million, and 2,932,607 units of limited partnership interest issued to our limited partners pursuant to our Secondary DRIP in exchange for gross proceeds of approximately $58.7 million, less 602,939 units of limited partnership interest that we had repurchased pursuant to our unit redemption program for approximately $12.1 million.

For the nine months ended September 30, 2015, we have made the following distributions to our limited partners:

Period Ended	Date Paid	Distribution Amount
December 31, 2014	January 23, 2015	$	3,232,287
January 31, 2015	February 24, 2015		3,238,892
February 28, 2015	March 24, 2015		2,930,913
March 31, 2015	April 24, 2015		3,252,205
April 30, 2015	May 22, 2015		3,153,083
May 31, 2015	June 24, 2015		3,266,794
June 30, 2015	July 24, 2015		3,165,567
July 31, 2015	August 24, 2015		3,277,922
August 31, 2015	September 24, 2015		3,284,042
		$	28,801,705

For the nine months ended September 30, 2015, we paid distributions to our limited partners of $28,801,705 ($21,648,129 in cash and $7,153,576 in limited partnership units pursuant to our Secondary DRIP), as compared to cash flows from operations of $30,830,698. For the nine months ended September 30, 2014, we paid distributions to our limited partners of $28,142,003 ($20,866,947 in cash and $7,275,056 in limited partnership units pursuant to our Secondary DRIP), as compared to cash flows from operations of $32,709,839. For the period from our inception through September 30, 2015, we paid distributions to our limited partners of approximately $264 million (approximately $183.9 million in cash and approximately $80.1 million in limited partnership units pursuant to our DRIP and Secondary DRIP), as compared to cumulative cash flows from operations of approximately $320.6 million and cumulative net income of approximately $310.2 million.

The distributions to our limited partners paid during the nine months ended September 30, 2015 and 2014, along with the amount of distributions reinvested pursuant to our Secondary DRIP and the sources of our distributions were as follows:

	Nine Months Ended September 30,
	2015				2014
Distributions paid in cash	$	21,648,129			$	20,866,947
Distributions reinvested		7,153,576				7,275,056
Total distributions	$	28,801,705			$	28,142,003
Source of distributions:
Cash flows from operations	$	28,801,705	100	%	$	28,142,003	100	%
Total sources	$	28,801,705	100	%	$	28,142,003	100	%

G. Operational Compensation

The general partner receives Placement Fees of 3% of the net amount available for investment in mortgages for fees and expenses associated with the selection and origination of mortgages, including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, and title insurance funded by the Partnership. The general partner also receives mortgage servicing fees of 0.25% of the aggregate outstanding loan balance held by the Partnership (the “Mortgage Servicing Fee”) for services rendered in connection with the servicing of Partnership loans. The general partner also receives a carried interest and a promotional interest (see Note B for further discussion on fees paid to our general partner).

H. Unit Redemption Program and Net Capital Proceeds Distribution Program

Limited partners who have held their units for at least one year may request that the Partnership repurchase their units. A limited partner wishing to have units repurchased must mail or deliver in writing a request to the Partnership indicating such desire. As stated below, our general partner will determine from time to time whether the Partnership has sufficient excess cash from operations to repurchase units, and there is no guarantee that the Partnership will repurchase any additional units in the future. No units were redeemed from May 2010 through March 2012. In April and July 2012, our general partner determined that the Partnership had sufficient excess cash from operations to repurchase some units as a result of the deaths of limited partners.

As a result of the requirement to determine an estimated value of our units, the method for determining the purchase price for current and future redeemed units was revised as of October 15, 2010. Except as described below for redemptions upon the death of a limited partner and for redemptions because of involuntary exigent circumstances after May 16, 2013, the purchase price for the redeemed units, for the period beginning after a limited partner has held the units for a period of one year, was: (1) 92% of the Estimated Unit Value (as defined below) for any units held less than two years; (2) 94% of the Estimated Unit Value for any units held for at least two years but less than three years; (3) 96% of the Estimated Unit Value for any units held at least three years but less than four years; (4) 98% of the Estimated Unit Value for any units held at least four years but less than five years; and (5) 100% of the Estimated Unit Value for any units held at least five years. The price the Partnership paid for redeemed units was offset by any net proceeds from capital transactions previously distributed to the redeeming limited partner in respect of such units as a return of his or her capital contributions. In addition, the purchase price for units redeemed upon the death of a limited partner was 100% of the Estimated Unit Value, with the aggregate annual number of units redeemed upon death of a limited partner not to exceed 1% of units outstanding in the preceding 12-month period. The price the Partnership paid for units redeemed upon the death of a limited partner was offset by any net proceeds from capital transactions previously distributed to the deceased limited partner, or his or her estate, in respect of such units as a return of capital contributions. For purposes of establishing the redemption price per unit, “Estimated Unit Value” means the most recently disclosed reasonable estimated value of the Partnership’s units of limited partnership interest as determined by our general partner. Effective as of March 6, 2015, our general partner determined the most recent Estimated Unit Value to be $20.00 per unit, which will be used as the Estimated Unit Value until such time as our general partner provides a new estimated value of the Partnership’s units of limited partnership interest.

Effective May 16, 2013, the Partnership announced the following changes to the unit redemption program:

To the extent that the Partnership’s general partner determines that there are sufficient funds to redeem units, the Partnership will only redeem units upon the death, or other involuntary exigent circumstances, of a limited partner, subject to certain restrictions and limitations, and

A limited partner or his or her estate, heir or beneficiary must present all of the limited partner’s its units then-owned for redemption – no partial redemptions of a limited partner’s holdings will be permitted.

The purchase price for the units redeemed because of involuntary exigent circumstances, for the period beginning after a limited partner has held the units for a period of one year, will be (1) 92% of the purchase price actually paid for any units held less than two years, (2) 94% of the purchase price actually paid for any units held for at least two years but less than three years, (3) 96% of the purchase price actually paid for any units held at least three years but less than four years, (4) 98% of the purchase price actually paid for any units held at least four years but less than five years and (5) the lesser of the purchase price actually paid for any units held at least five years or the Estimated Unit Value. The purchase price for units redeemed upon the death of a limited partner will be the lesser of (1) the price the limited partner actually paid for the units or (2) the Estimated Unit Value. The purchase price for any redeemed units will be offset by any net proceeds from capital transactions previously distributed to the limited partner, or his or her estate, in respect of such units as a return of capital contributions. Once a limited partner’s outstanding units have been redeemed, the investor is no longer considered a limited partner.

The Partnership will not redeem in excess of 5% of the weighted average number of units outstanding during the 12-month period immediately prior to the date of redemption. Our general partner reserves the right in its sole discretion at any time and from time to time to (1) waive the one-year holding period in the event of the death or bankruptcy of a limited partner or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend and/or reestablish our unit redemption program. Our general partner will determine from time to time whether the Partnership has sufficient excess cash from operations to repurchase units. Generally, the cash available for redemption will be limited to 1% of the operating cash flow from the previous fiscal year, plus any net proceeds from the DRIP and Secondary DRIP. If the funds set aside for the unit redemption program are not sufficient to accommodate all requests, at such time, if any, when sufficient funds become available, pending requests will be honored among all requesting limited partners as follows: first, pro rata as to redemptions upon the death or disability of a limited partner; next, pro rata as to limited partners who demonstrate, in the discretion of our general partner, another involuntary exigent circumstance, such as bankruptcy; and, finally, pro rata as to all other redemption requests, if any, until all other requests for redemption have been met.

As stated above, effective May 16, 2013, the unit redemption program is limited only to the death or other involuntary exigent circumstances of a limited partner. Therefore, limited partners wishing to redeem their units after such date may do so only pursuant to Sections 9.6 and 11.3(f) of the Partnership Agreement. Under such sections of the Partnership Agreement, any limited partner (an “Electing Partner”) may provide written notice to the Partnership of its election to receive its share of any future net capital proceeds (the “Net Capital Proceeds Distribution Program”) received by the Partnership that the Partnership decides to reinvest in additional loans. If the Partnership ultimately decides to not reinvest net capital proceeds received by the Partnership in additional loans, such net capital proceeds shall not be eligible to be paid to Electing Partners pursuant to the Net Capital Proceeds Distribution Program, but shall be distributed in accordance with the other distribution provisions of the Partnership Agreement. The election to participate in the Net Capital Proceeds Distribution Program will automatically and immediately cause the withdrawal of all of the Electing Partner’s pending requests for redemption pursuant to the Partnership’s unit redemption program, and the Electing Partner shall not be eligible to make any further requests for redemption pursuant to the unit redemption program.

The Partnership complies with GAAP, which requires, among other things, that financial instruments that represent a mandatory obligation of the Partnership to repurchase limited partnership units be classified as liabilities and reported at settlement value. We believe that limited partnership units tendered for redemption by the unit holder under the Partnership’s unit redemption program do not represent a mandatory obligation until such redemptions are approved at the discretion of our general partner, and that limited partnership units tendered for redemption by the unit holder under the Net Capital Proceeds Distribution Program do not represent a mandatory obligation until our general partner determines, in its sole discretion, to reinvest net capital proceeds received by the Partnership in additional loans. At such time, we will reclassify such obligations from equity to an accrued liability based upon their respective settlement values. As of September 30, 2015, we did not have any approved redemption requests included in our liabilities.

The following table summarizes the redemption activity under the unit redemption program for the nine months ended September 30, 2015 and the year ended December 31, 2014. The amounts presented are in total units:

	Nine Months Ended September 30, 2015			Year Ended December 31, 2014
Balance, beginning of period		209,000			203,000
Redemption requests received		28,000			93,000
Redemption requests cancelled		(11,000	)		(24,000	)
Units redeemed		-			(63,000	)
Balance, end of period		226,000			209,000

The following table summarizes the redemption activity under the Net Capital Proceeds Distribution Program for the nine months ended September 30, 2015 and the year ended December 31, 2014. The amounts presented are in total units:

	Nine Months Ended September 30, 2015			Year Ended December 31, 2014
Balance, beginning of period		846,000			682,000
Redemption requests received		131,000			256,000
Redemption requests cancelled		(59,000	)		(83,000	)
Units redeemed		(5,000	)		(9,000	)
Balance, end of period		913,000			846,000

I. Commitments and Contingencies

From time to time, the Partnership enters into guarantees of debtors’ or affiliates’ borrowings and provides credit enhancements for the benefit of senior lenders in connection with the Partnership’s debtors and affiliates and investments in partnerships (collectively referred to as “guarantees”), and accounts for such guarantees in accordance with GAAP. Guarantees generally have fixed expiration dates or other termination clauses and may require payment of a fee by the debtor or affiliate. A guarantee involves, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Partnership’s exposure to credit loss in the event of non-performance by the other party to the instrument is represented by the contractual notional amount of the guarantee. In connection with related party guarantees, as required by the Partnership Agreement and the North American Securities Administrators Association Mortgage Program Guidelines (the “NASAA Mortgage Program Guidelines”), the Partnership obtained opinions from Jackson Claborn, Inc., an independent advisor (“Jackson Claborn”), stating that these guarantees are fair and at least as reasonable to the Partnership as guarantees to an unaffiliated borrower in similar circumstances.

In August 2009, the Partnership entered into a guaranty (the “UMT HF TCB Guaranty”) with Texas Capital Bank, National Association (“Texas Capital”), by which the Partnership guaranteed the repayment of up to $5.0 million owed to Texas Capital under a promissory note between UMT Home Finance, L.P., a Delaware limited partnership (“UMT Home Finance”), and Texas Capital. UMT Home Finance is a wholly-owned subsidiary of UMT. An affiliate of the Partnership’s general partner serves as the advisor to UMT. The Texas Capital note with UMT Home Finance, as amended, matures on September 5, 2016. In connection with the UMT HF TCB Guaranty, the Partnership entered into a letter agreement with UMT Home Finance which provided for UMT Home Finance to pay the Partnership annually, in advance, an amount equal to 1% of the Partnership’s maximum exposure under the UMT HF TCB Guaranty (i.e., $50,000 per annum) through August 2012. Effective August 28, 2012, the letter agreement was modified and UMT Home Finance agreed to pay the Partnership a monthly fee equal to 1/12^th of 1% of the outstanding principal balance of the Texas Capital loan. These fees are included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In April 2010, the Partnership entered into a guaranty (the “UDF IV HF Guaranty”) for the benefit of Community Trust Bank of Texas (“CTB”), pursuant to which the Partnership guaranteed the repayment of up to $6.0 million (subsequently increased to $30.0 million) owed to CTB with respect to a revolving line-of-credit loan between UDF IV Home Finance, L.P., a Delaware limited partnership (“UDF IV Home Finance”), and CTB. UDF IV Home Finance is a wholly-owned subsidiary of UDF IV. The Partnership’s general partner serves as the asset manager for UDF IV, and an affiliate of the Partnership’s general partner serves as the advisor for UDF IV. The CTB loan to UDF IV Home Finance, as amended, matures on July 30, 2016. In connection with the UDF IV HF Guaranty, the Partnership entered into a letter agreement with UDF IV Home Finance which provided for UDF IV Home Finance to pay the Partnership an annual credit enhancement fee equal to 1% of the maximum loan amount through July 2013. Effective July 31, 2013, the letter agreement was modified and UDF IV Home Finance agreed to pay the Partnership a monthly fee equal to 1/12^thof 1% of the outstanding principal balance of the CTB loan. These fees are included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In April 2010, the Partnership entered into a guaranty (the “UMT 15th Street Guaranty”) for the benefit of CTB, pursuant to which the Partnership guaranteed the repayment of up to $1.6 million owed to CTB with respect to a loan between UMT 15th Street, L.P., a Delaware limited partnership (“UMT 15th Street”), and CTB. UMT 15th Street is a wholly-owned subsidiary of UMT. An affiliate of the Partnership’s general partner serves as the advisor to UMT. The CTB loan to UMT 15th Street matures on July 30, 2016, as amended. In connection with the UMT 15th Street Guaranty, the Partnership entered into a letter agreement with UMT 15th Street which provides for UMT 15th Street to pay the Partnership a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In August 2010, the Partnership entered into a guaranty (the “UDF IV Acquisitions Guaranty”) for the benefit of CTB, pursuant to which the Partnership guaranteed the repayment of $8.0 million (subsequently increased to $25.0 million) owed to CTB with respect to a revolving line-of-credit loan between UDF IV Acquisitions, L.P., a Delaware limited partnership (“UDF IV Acquisitions”), and CTB. UDF IV Acquisitions is a wholly-owned subsidiary of UDF IV. The Partnership’s general partner serves as the asset manager for UDF IV, and an affiliate of the Partnership’s general partner serves as the advisor for UDF IV. The CTB loan to UDF IV Acquisitions, as amended, matures on July 30, 2016. The Partnership entered into a letter agreement with UDF IV Acquisitions which provides for UDF IV Acquisitions to pay the Partnership a monthly credit enhancement fee equal to 1/12^thof 1% of the outstanding principal balance on the revolving line-of-credit at the end of the month. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In December 2010, the Partnership entered into a guaranty (the “UDF IV Finance II Guaranty”) for the benefit of Prosperity Bank (“Prosperity”), pursuant to which the Partnership guaranteed the repayment of up to $5.0 million (subsequently increased to $15.0 million) owed to Prosperity with respect to a loan between UDF IV Finance II, L.P., a Delaware limited partnership (“UDF IV Finance II”), and Prosperity. UDF IV Finance II is a wholly-owned subsidiary of UDF IV. The Partnership’s general partner serves as the asset manager for UDF IV, and an affiliate of the Partnership’s general partner serves as the advisor for UDF IV. The Prosperity loan to UDF IV Finance II matures on December 14, 2016, as amended. In connection with the UDF IV Finance II Guaranty, the Partnership entered into a letter agreement with UDF IV Finance II which provides for UDF IV Finance II to pay the Partnership a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In May 2011, the Partnership entered into a guaranty (the “UMT HF III Guaranty”) for the benefit of Veritex Community Bank, National Association (“Veritex”), pursuant to which the Partnership guaranteed the repayment of up to $4.3 million (subsequently increased to $5.0 million) owed to Veritex with respect to a loan between UMT Home Finance III, L.P., a Delaware limited partnership (“UMT HF III”), and Veritex. UMT HF III is a wholly-owned subsidiary of UMT. An affiliate of the Partnership’s general partner serves as the advisor to UMT. The Veritex loan to UMT HF III, as amended, matures on May 27, 2017. In connection with the UMT HF III Guaranty, the Partnership entered into a letter agreement with UMT HF III which provides for UMT HF III to pay the Partnership a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In October 2011, the Partnership entered into a guaranty (the “UMT HF II Green Bank Guaranty”) for the benefit of Green Bank, N.A. (“Green Bank”), pursuant to which the Partnership guaranteed the repayment of up to $5.0 million owed to Green Bank with respect to a loan between UMT Home Finance II, L.P., a Delaware limited partnership (“UMT HF II”), and Green Bank. UMT HF II is a wholly-owned subsidiary of UMT. An affiliate of the Partnership’s general partner serves as the advisor to UMT. The Green Bank loan to UMT HF II matured on January 26, 2015. In connection with the UMT HF II Green Bank Guaranty, the Partnership entered into a letter agreement with UMT HF II which provides for UMT HF II to pay the Partnership a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month. The Green Bank loan was repaid in full by UMT HF II in May 2015 and the UMT HF II Green Bank Guaranty was extinguished. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In August 2013, the Partnership entered into a guaranty (the “UDF IV Finance VI Guaranty”) for the benefit of CTB, pursuant to which the Partnership guaranteed the repayment of up to $25.0 million (subsequently decreased to $15.0 million) owed to CTB with respect to a loan between UDF IV Finance VI, L.P., a Delaware limited partnership (“UDF IV Finance VI”), and CTB. UDF IV Finance VI is a wholly-owned subsidiary of UDF IV. The Partnership’s general partner serves as the asset manager for UDF IV, and an affiliate of the Partnership’s general partner serves as the advisor for UDF IV. The CTB loan to UDF IV Finance VI matures on July 30, 2016. The Partnership entered into a letter agreement with UDF IV Finance VI which provides for UDF IV Finance VI to pay the Partnership a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In November 2013, the Partnership deposited approximately $1.4 million into a deposit account (the “City Bank Deposit Account”) with City Bank for the purpose of providing collateral to City Bank for the benefit of REO Property Company, L.P., a Texas limited partnership (“REO PC”). UMT Services serves as the general partner for both REO PC and the Partnership’s general partner. The Partnership provided City Bank with a security interest in the City Bank Deposit Account as further collateral for a loan obtained by REO PC from City Bank (the “City Bank Loan”). The City Bank Deposit Account is included as restricted cash on the Partnership’s balance sheet. The City Bank Loan, as amended, matured on November 4, 2015, and approximately $1.4 million remains outstanding. In consideration of the Partnership providing the City Bank Deposit Account as collateral for the City Bank Loan, REO PC agreed to pay the Partnership a monthly fee equal to 1/12th of 1% of the outstanding principal balance of the City Bank Loan at the end of each month (the “REO PC Credit Enhancement”). These fees are included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

In November 2014, the Partnership entered into a guaranty (the “UDF, LP Guaranty”) for the benefit of City Bank, pursuant to which the Partnership guaranteed the repayment of up to $225,500 owed to City Bank, with respect to a loan between UDF I and City Bank. The loan is secured by a deed of trust on 8.2 acres of land owned by UDF Ash Creek, L.P., a wholly-owned subsidiary of UDF I. The Partnership’s general partner serves as the asset manager for UDF I. The City Bank loan to UDF I matured on November 3, 2015, and $225,500 remains outstanding. In connection with the guaranty, the Partnership entered into a letter agreement with UDF I, which provides for UDF I to pay the Partnership a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the loan at the end of the month. This fee is included in mortgage and transaction service revenues – related parties (see Note K for further discussion).

As of September 30, 2015, we had 8 outstanding guarantees benefitting related parties with total credit risk to us of approximately $96.8 million, of which approximately $70.9 million had been borrowed against by the debtor.

As of December 31, 2014, we had 9 outstanding guarantees benefitting related parties with total credit risk to us of approximately $101.8 million, of which approximately $76.8 million has been borrowed against by the debtor.

As of September 30, 2015, we had originated 62 loans, totaling approximately $724.5 million, including 42 loans that have been repaid in full by the respective borrowers and 1 loan for which the remaining balance was written-off. We had approximately $98.5 million of commitments to be funded, including approximately $9.6 million of commitments for notes receivable – related parties and $10.8 million for participation interest – related party. For the nine months ended September 30, 2015, we did not originate or purchase any loans, sell any loan participations, or acquire any additional participation interests.

As of December 31, 2014, we had originated 62 loans, totaling approximately $636.9 million, including 40 loans that have been repaid in full by the respective borrowers and 1 loan for which the remaining balance was written-off. We had approximately $27.4 million of commitments to be funded, including approximately $9.7 million of commitments for notes receivable – related parties and $7.3 million for participation interest – related party. For the year ended December 31, 2014, we originated or purchased 1 loan and did not acquire any additional participation interests.

To date, the Partnership has not incurred losses from guarantees entered into, and the debt that is guaranteed is also collateralized by real estate. The value of such real estate may or may not be sufficient to settle such obligations if liquidated.

J. General and Administrative Expenses

General and administrative expenses and general and administrative – related parties expenses of the Partnership are summarized in the following tables:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
General and administrative expenses	2015		2014		2015		2014

Investor relations	$	187,000	$	102,000	$	727,000	$	339,000
Professional fees		166,000		211,000		373,000		355,000
Other		55,000		44,000		255,000		217,000
Total general and administrative expenses	$	408,000	$	357,000	$	1,355,000	$	911,000

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
General and administrative – related parties expenses	2015		2014		2015		2014

Mortgage Servicing Fee	$	277,000	$	261,000	$	825,000	$	775,000
Amortization of debt financing fees		13,000		27,000		48,000		53,000
Operating Expense Reimbursement (1)		143,000		142,000		428,000		425,000
Total general and administrative – related parties expenses	$	433,000	$	430,000	$	1,301,000	$	1,253,000

(1)

As defined in Note K.

K. Related Party Transactions

As of September 30, 2015, we had approximately $16.4 million of notes receivable – related parties, net, consisting of 2 related party loans, and one participation interest – related party totaling approximately $71.2 million, net. Notes receivables – related parties and participation interest – related party represented approximately 22% of our total assets as of September 30, 2015. As of September 30, 2015, we had approximately $2.3 million of accrued interest receivable – related parties, and we had paid our general partner approximately $11.1 million since inception for acquisition and origination fee expenses associated with the notes receivable, notes receivable – related parties and participation interest – related party. For the three months ended September 30, 2015, we recognized approximately $2.3 million and $182,000 for interest income – related parties and mortgage and transaction service revenues – related parties, respectively. For the nine months ended September 30, 2015, we recognized approximately $6.8 million and $572,000 for interest income – related parties and mortgage and transaction service revenues – related parties, respectively. We also recognized approximately $433,000 and $1.3 million of general and administrative – related parties expenses for the three and nine months ended September 30, 2015, respectively. As of September 30, 2015, we had 8 outstanding limited repayment guarantees benefitting related parties with total credit risk to us of approximately $96.8 million, of which approximately $70.9 million had been borrowed against by the debtor.

As of December 31, 2014, we had approximately $16.4 million of notes receivable – related parties, consisting of 2 related party loans, and one participation interest – related party totaling approximately $74.7 million. Notes receivables – related parties and participation interest – related party represented approximately 24% of our total assets as of December 31, 2014. As of December 31, 2014, we had approximately $350,000 of accrued interest receivable – related parties, and we had paid our general partner approximately $10.9 million since inception for acquisition and origination fee expenses associated with the notes receivable, notes receivable – related parties and participation interest – related party. For the three months ended September 30, 2014, we recognized approximately $2.4 million and $174,000 for interest income – related parties and mortgage and transaction service revenues – related parties, respectively. For the nine months ended September 30, 2014, we recognized approximately $7.4 million and $385,000 for interest income – related parties and mortgage and transaction service revenues – related parties, respectively. We also recognized approximately $430,000 and $1.3 million of general and administrative – related parties expenses for the three and nine months ended September 30, 2014, respectively. As of December 31, 2014, we had 9 outstanding limited repayment guarantees benefitting related parties with total credit risk to us of approximately $101.8 million, of which approximately $76.8 million had been borrowed against by the debtor.

Land Development and certain of its affiliates receive fees in connection with the acquisition and management of the assets and reimbursement of costs of the Partnership.

We reimburse General Services for operating expenses incurred by General Services in assisting Land Development in our management (the “Operating Expense Reimbursement”). General Services and Land Development are each owned 99.9% by UMT Holdings and 0.1% by UMT Services, which serves as the general partner for both General Services and Land Development.

Our general partner receives Placement Fees of 3% of the net amount available for investment in mortgages payable to our general partner for processing and origination costs (including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, and title insurance funded by us) associated with notes receivable or participation interests that we have entered into. Such costs were amortized into expense on a straight-line basis. These fees were fully amortized into expense as of December 31, 2013.

Land Development currently receives an unsubordinated promotional interest equal to 10% of cash available for distribution prior to the return to our limited partners of all of their capital contributions and an 8% annual cumulative (non-compounded) return on their net capital contributions. After our limited partners receive a return of their net capital contributions and an 8% annual cumulative (non-compounded) return on their net capital contributions, Land Development will receive a subordinated promotional interest equal to 15% of remaining cash available for distribution, including net proceeds from capital transactions or a pro rata portion thereof.

Land Development receives a carried interest, which is an equity interest in us to participate in all distributions, other than distributions attributable to its promotional interest of cash available for distribution and net proceeds from capital transactions. If Land Development enters into commitments to investments in mortgages in excess of 82% of the gross offering proceeds, it will be entitled to a carried interest equal to (1) 1% for the first 2.5% of commitments to investments in mortgages above 82% of the gross offering proceeds (or if commitments to investments in mortgages are above 82% but no more than 84.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 82%), (2) 1% for the next 2% of additional commitments to investments in mortgages above 84.5% of the gross offering proceeds (or if commitments to investments in mortgages are above 84.5% but no more than 86.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 84.5%) and (3) 1% for each additional 1% of additional commitments to investments in mortgages above 86.5% of the gross offering proceeds (or a fractional percentage equal to the fractional amount of any 1% of additional commitments to investments in mortgages).

For services rendered in connection with the servicing of our loans, we incur a monthly Mortgage Servicing Fee payable to Land Development equal to one-twelfth of 0.25% of our aggregate outstanding development notes receivable balance as of the last day of the month. Such fees are included in general and administrative – related parties expenses. The unpaid portion of such fees is included in accrued liabilities – related parties on our balance sheet.

An affiliate of Land Development serves as the advisor to UMT and UDF IV. The general partner of UDF LOF is a wholly-owned subsidiary of Land Development. Land Development serves as the asset manager of UDF I, UDF IV and UDF LOF.

The table below summarizes the payment of related party fees and reimbursements associated with the origination and management of assets for the nine months ended September 30, 2015 and 2014. We believe that these fees and reimbursements are reasonable and customary for comparable mortgage programs.

		For the Nine Months Ended
		September 30,
Payee	Purpose	2015				2014
Land Development
	Placement Fees	$	97,000	4	%	$	120,000	8	%
	Promotional interest		1,369,000	63	%		398,000	26	%
	Carried interest		168,000	8	%		152,000	10	%
	Mortgage Servicing Fee		410,000	19	%		425,000	28	%
General Services
	Operating Expense Reimbursement		142,000	6	%		431,000	28	%
Total Payments		$	2,186,000	100	%	$	1,526,000	100	%

The table below summarizes general and administrative – related parties expenses for the three months ended September 30, 2015 and 2014. We believe that these expenses are reasonable and customary for comparable mortgage programs.

	For the Three Months Ended
	September 30,
General and administrative – related parties expenses	2015				2014

Mortgage Servicing Fee	$	277,000	64	%	$	261,000	61	%
Amortization of debt financing fees		13,000	3	%		27,000	6	%
Operating Expense Reimbursement		143,000	33	%		142,000	33	%
Total general and administrative – related parties expenses	$	433,000	100	%	$	430,000	100	%

The table below summarizes general and administrative – related parties expenses for the nine months ended September 30, 2015 and 2014. We believe that these expenses are reasonable and customary for comparable mortgage programs.

	For the Nine Months Ended
	September 30,
General and administrative – related parties expenses	2015				2014

Mortgage Servicing Fee	$	825,000	63	%	$	775,000	62	%
Amortization of debt financing fees		48,000	4	%		53,000	4	%
Operating Expense Reimbursement		428,000	33	%		425,000	34	%
Total general and administrative – related parties expenses	$	1,301,000	100	%	$	1,253,000	100	%

Notes Receivable – Related Parties

In connection with all notes receivable – related parties, participation interest – related party, and loan participations sold to related parties, as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, the Partnership obtained an opinion from Jackson Claborn stating that the transactions are fair and at least as reasonable to the Partnership as a transaction with an unaffiliated party in similar circumstances.

UDF PM Note

In September 2007, we originated a secured promissory note to UDF PM, LLC, a Texas limited liability company and wholly-owned subsidiary of UDF I (“UDF PM”), in the principal amount of approximately $6.4 million (the “UDF PM Note”). Our general partner serves as the asset manager for UDF I. The UDF PM Note, which bore an interest rate of 15% per annum, was initially collateralized by a second lien deed of trust on approximately 335 finished lots and 15 acres of land located in Texas. On October 23, 2014, the UDF PM Note was paid in full and terminated. In connection with the UDF PM Note, UDF PM paid us commitment fees equal to 3% of each advance on the note, or $187,500. We did not recognize any commitment fee income in connection with the UDF PM Note for the three and nine months ended September 30, 2015 and 2014.

UDF X Note

In November 2007, we originated a secured promissory note to United Development Funding X, L.P., a Delaware limited partnership and wholly-owned subsidiary of our general partner (“UDF X”), in the principal amount of approximately $70 million (the “UDF X Note”). The UDF X note, which bears interest at a rate of 15% per annum, is collateralized by a pledge of 100% of the ownership interests in UDF X and a security agreement. The payment and performance of UDF X’s obligations to the Partnership are guaranteed by UMT Holdings pursuant to a continuing unconditional guaranty. In August 2008, we amended the UDF X Note to reduce the commitment amount to $25 million. In November 2012, we amended the UDF X Note to increase the commitment amount to $26 million. The original maturity date of the UDF X Note was November 11, 2012. The UDF X Note has been extended four times, resulting in a current maturity date of November 11, 2016. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. In connection with the UDF X Note, UDF X agreed to pay us commitment fees equal to 3% of each advance on the note, or approximately $751,000. We did not recognize any commitment fee income in connection with the UDF X Note for the three and nine months ended September 30, 2015 and 2014.

UDF NP Loan

In December 2007, we originated a secured promissory note to UDF Northpointe, LLC, a Texas limited liability company which was a wholly-owned subsidiary of UDF I at the time of the note’s origination (“Northpointe LLC”), in the principal amount of approximately $6.0 million (the “UDF NP Loan”). Our general partner serves as the asset manager for UDF I. In December 2008, Northpointe LLC was purchased by an unrelated third party, which assumed the UDF NP Loan. In May 2009, Northpointe LLC assigned its obligations associated with the UDF NP Loan and its interests in the collateral by special warranty deed to UDF Northpointe II, L.P. (“Northpointe II”), a subsidiary of UDF I. Concurrent with this assignment, Northpointe LLC entered into a contract for deed with Northpointe II whereby Northpointe LLC agreed to make payments to Northpointe II for all debt service payments in consideration for Northpointe II transferring ownership and possession of the collateral back to Northpointe LLC. The secured promissory note, which bears interest at a rate of 12% per annum, was initially collateralized by a second lien deed of trust on 251 finished lots and 110 acres of land in Texas. In June 2011, we amended the UDF NP Loan to increase the commitment amount to $15 million. The original maturity date of the UDF NP Loan was December 28, 2010. The UDF NP Note has been extended four times, resulting in a current maturity date of December 28, 2015. As of September 30, 2015, the UDF NP Loan is secured by a first lien deed of trust on 1 finished lot in Collin County, Texas and a pledge of the equity interests in a non-related entity that owns 259 acres of residential land in Collin County, Texas. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

UDF LOF Note

In August 2008, we originated a secured revolving line-of-credit to UDF LOF in the principal amount of up to $25 million, pursuant to a Secured Line of Credit Promissory Note (the “UDF LOF Note”). The general partner of UDF LOF is a wholly-owned subsidiary of our general partner, and our general partner serves as the asset manager for UDF LOF. The UDF LOF Note, which bore interest at a base rate equal to 15% per annum, was secured by a security interest in all of UDF LOF’s existing and future acquired assets. In August 2011, we amended the UDF LOF Note to reduce the commitment amount to $10 million. The original maturity date of the UDF LOF Note was August 20, 2011. The UDF LOF Note was extended two times, resulting in a final maturity date of August 20, 2014. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. In January 2010, the balance of the UDF LOF Note was paid in full, although UDF LOF still had the ability to draw on the UDF LOF Note until it matured. The UDF LOF Note matured in August 2014, was paid in full and was not renewed. In connection with this note, UDF LOF agreed to pay us commitment fees equal to 3% of each advance on the note, or approximately $587,000. We did not recognize any commitment fee income or interest income – related parties related to the UDF LOF Note for the three and nine months ended September 30, 2015 and 2014.

BTC Note

In August 2008, we originated a secured promissory note with Buffington Texas Classic Homes, Ltd., a Texas limited partnership (“Buffington Classic”), in the principal amount of $2.0 million (the “BTC Note”). Our general partner had a minority partner interest in Buffington Classic. The secured note, which bore interest at 14% per annum, was secured by a first lien on finished lot inventory that was owned and controlled by Buffington Classic and was guaranteed by Buffington Land, Ltd., a Texas limited partnership. Pursuant to an Agreement and Plan of Merger dated November 30, 2009, Buffington Capital Homes, Ltd., a Texas limited partnership (“Buffington Capital”), merged into Buffington Texas Classic Homes, LLC (“BTC LLC”), which is ultimately owned and controlled by BHG. Our general partner has a minority limited partnership interest in BHG. As a result of the merger and pursuant to the Agreement and First Amendment to Loan Agreement dated December 8, 2009, BTC LLC succeeded to all the rights, responsibilities and obligations of Buffington Classic under the BTC Note. The original maturity date of the BTC Note was August 21, 2010. The BTC Note was extended four times, resulting in a final maturity date of August 21, 2014. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. The BTC Note terminated on August 21, 2014, at which time it was paid in full and was not renewed. We did not recognize any interest income – related parties related to the BTC Note for the three and nine months ended September 30, 2015 or 2014.

Ash Creek Note

In April 2011, we originated a promissory note to UDF Ash Creek, L.P. (the “Ash Creek Note”), a Delaware limited partnership and wholly-owned subsidiary of UDF I, in the principal amount of $50,000. Our general partner serves as the asset manager for UDF I. The Ash Creek Note, which bore interest at a base rate equal to 15% per annum, was originally secured by a subordinate deed of trust on 8 acres of land in Dallas County, Texas. In December 2012, we amended the Ash Creek Note to increase the commitment amount to $65,000. The original maturity date of the Ash Creek Note was December 5, 2011. The Ash Creek Note was extended four times, resulting in a final maturity date of December 21, 2014. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. On December 30, 2014, the Ash Creek Note was paid in full and terminated.

Summary Information

The chart below summarizes the approximate outstanding balance of the remaining outstanding loans included in notes receivable – related parties as of the date indicated:

Loan Name	September 30, 2015		December 31, 2014
UDF X Note	$	16,355,000	$	16,342,000
UDF NP Loan		61,000		61,000
Total	$	16,416,000	$	16,403,000

The chart below summarizes the approximate accrued interest included in accrued interest receivable – related parties associated with the remaining outstanding loans included in notes receivable – related parties as of the date indicated:

Loan Name	September 30, 2015		December 31, 2014
UDF X Note	$	2,145,000	$	311,000
UDF NP Loan		4,000		-
Total	$	2,149,000	$	311,000

The following table summarizes the approximate income included in interest income – related parties associated with the remaining outstanding loans included in notes receivable – related parties for the period indicated:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Loan Name	2015		2014		2015		2014
UDF PM Note	$	-	$	11,000	$	-	$	31,000
UDF X Note		618,000		605,000		1,834,000		1,930,000
UDF NP Loan		2,000		119,000		5,000		553,000
Ash Creek Note		-		3,000		-		8,000
Total	$	620,000	$	738,000	$	1,839,000	$	2,522,000

Participation Interest – Related Party

In September 2008, we entered into an Economic Interest Participation Agreement with UMT pursuant to which we purchased (i) an economic interest in the UMT Loan and (ii) a purchase option to acquire a full ownership participation interest in the UMT Loan (the “Option”). Our general partner serves as the asset manager for UDF I. An affiliate of our general partner serves as the advisor to UMT. As of December 31, 2010, the UMT Loan was a $60.0 million revolving line-of-credit facility evidenced by a Third Amended and Restated Secured Line of Credit Promissory Note dated as of August 17, 2009, which initially bore interest at 14% per annum and had an initial maturity date of December 31, 2009. On December 31, 2010, the UMT Loan was modified to increase the commitment amount to $75.0 million. In December 2012, the UMT Loan was modified to increase the commitment amount to $82 million. In October 2013, the UMT Loan was modified to reduce the interest rate from 14% to 9.25% per annum. In December 2014, the UMT Loan was modified to add a tangible net worth covenant of $15 million in replacement of borrowing base covenants, and to update certain reporting and other loan requirements. Following the Third Amended and Restated Secured Promissory Note’s initial maturity date of December 31, 2009, the UMT Loan has been extended six times, resulting in a current maturity date of December 31, 2015. Our participation had an initial maturity date of December 31, 2009 and, as amended, has a current maturity date of December 31, 2015. In determining whether to modify this participation, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral, and other relevant factors.

The UMT Loan is secured by a subordinate security interest in the assets of UDF I including UDF I’s land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF I in favor of UMT, as amended (the “Security Agreement”). The UMT Loan is subordinate to a senior secured loan from a regional bank to UDF I in the amount of $10,000,000, and all project-specific financing provided to UDF I or any of its subsidiaries.

Pursuant to the Economic Interest Participation Agreement, each time UDF I requests an advance of principal under the UMT Note, we will fund the required amount to UMT for application to its funding obligation to UDF I under the UMT Loan and our economic interest in the UMT Loan will increase proportionately. Our economic interest in the UMT Loan gives us the right to receive payment from UMT of principal and accrued interest relating to amounts funded by us to UMT that are applied towards UMT’s funding obligations to UDF I under the UMT Loan. Our economic interest will be repaid as UDF I repays the UMT Loan, unless we reinvest the proceeds in an additional participation interest. We may abate our funding obligations under the Economic Interest Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.

The Option gives us the right to convert our economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Note and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while we own an economic interest in the UMT Loan. If we exercise our Option and acquire a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UMT and we will participate in the control and management of the UMT Loan. The purpose of the UMT Loan is to finance UDF I’s investments in real estate development projects. UDF I may use the UMT Loan proceeds to acquire or leverage assets, to fund operations and to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code of 1986, as amended. The UMT Loan requires UDF I to comply with a tangible net worth covenant of no less than $15 million. On April 1, 2015, we entered into a loan participation agreement with UDF I, by which we exercised our Option to convert our economic interest into a full participation interest (the “UDF I Participation Agreement”). The UDF I Participation Agreement has a maturity date of December 31, 2015. The participation interest is subordinate to a senior secured loan from a regional bank to UDF I in the amount of $10,000,000, and all project-specific financing provided to UDF I or any of its subsidiaries. For both the three months ended September 30, 2015 and 2014, we recognized approximately $1.7 million of interest income – related parties related to the UDF I Participation Agreement. For the nine months ended September 30, 2015 and 2014, we recognized approximately $5 million and $4.9 million, respectively, of interest income – related parties related to the UDF I Participation Agreement. Approximately $108,000 and $38,000 is included in accrued interest receivable – related parties associated with the UDF I Participation Agreement as of September 30, 2015 and December 31, 2014, respectively.

As of September 30, 2015 and December 31, 2014, approximately $71.2 million and $74.7 million related to the UDF I Participation Agreement is included in participation interest – related party, respectively.

Loan Participations Sold to Related Parties

From inception through September 30, 2015, we have entered into 10 loan participation agreements with related parties whereby a related party has purchased a participation interest in a mortgage investment that we have originated. As of September 30, 2015, 4 of these agreements remain outstanding.

Our related parties participate in these mortgage investments by funding our lending obligations up to a maximum amount for each participation. Such participations entitle our related parties to receive payments of principal up to the amounts they have funded and interest from our borrower on the amounts they have funded, and to share in the proceeds of the collateral for the loan, including the land and related improvements to residential property owned by the borrowers and/or the ownership interests of the borrower that secure the original mortgage investment. The income earned by our related parties and the amounts our borrowers owe to our related parties for principal and interest earned with respect to these participation agreements are not reflected in our financial statements.

BTC Note

In August 2008, we originated the $2.0 million BTC Note with Buffington Classic. Effective March 2010, we entered into a participation agreement (“BTC Participation Agreement”) with UDF IV, pursuant to which UDF IV purchased a participation interest in the BTC Note. Our general partner serves as the asset manager of UDF IV. Pursuant to the BTC Participation Agreement, UDF IV participated in the BTC Note by funding our lending obligations under the BTC Note. The BTC Participation Agreement gave UDF IV the right to receive repayment of all principal and accrued interest relating to amounts funded by them under the BTC Participation Agreement. UDF IV’s participation interest was repaid as Buffington Classic repays the BTC Note. For each loan originated, Buffington Classic was required to pay interest monthly and to repay the principal advanced no later than 12 months following the origination of the loan. The BTC Note, as amended, matured on August 21, 2014.

We were required to purchase back from UDF IV the participation interest in the BTC Note (1) upon a foreclosure of our assets by our lenders, (2) upon the maturity of the BTC Note, or (3) at any time upon 30 days’ prior written notice from UDF IV. In such event, the purchase price paid to UDF IV was equal to the outstanding principal amount of the BTC Note on the date of termination, together with all accrued interest due thereon, plus any other amounts due to UDF IV under the BTC Participation Agreement.

On April 9, 2010, we entered into an Agent – Participant Agreement with UDF IV (the “Agent Agreement”). In accordance with the Agent Agreement, we continued to manage and control the BTC Note and UDF IV appointed us as its agent to act on its behalf with respect to all aspects of the BTC Note, provided that, pursuant to the Agent Agreement, UDF IV retained approval rights in connection with any material decisions pertaining to the administration and services of the loan and, with respect to any material modification to the loan and in the event that the loan becomes non-performing, UDF IV had effective control over the remedies relating to the enforcement of the loan, including ultimate control of the foreclosure process. The BTC Note and BTC Participation were paid in full in August 2014. The UDF IV participation interest is not included on our balance sheet.

TR II Finished Lot Note

In August 2009, we originated a $3.4 million secured promissory note (the “TR II Finished Lot Note”) with CTMGT Travis Ranch II, LLC, an unaffiliated Texas limited liability company. The TR II Finished Lot Note was secured by a subordinate, second lien deed of trust recorded against finished residential lots in the Travis Ranch residential subdivision located in Kaufman County, Texas. The TR II Finished Lot Note was guaranteed by the limited liability company owners of the borrower and by the principal of the borrower. The interest rate under the TR II Finished Lot Note was 15%. The borrower obtained a senior loan secured by a first lien deed of trust on the finished lots, which was paid in full in the first quarter of 2013. As a result, our deed of trust became a first lien. For so long as the senior loan was outstanding, proceeds from the sale of the residential lots securing the TR II Finished Lot Note were paid to the senior lender and were applied to reduce the outstanding balance of the senior loan. Following the payment of the senior lien in full, the proceeds from the sale of the residential lots securing the TR II Finished Lot Note were required to be used to repay the TR II Finished Lot Note.

Effective June 2010, we entered into a loan participation agreement with UDF IV pursuant to which UDF IV purchased a participation interest (the “TR II Finished Lot Participation”) in the TR II Finished Lot Note. Our general partner serves as the asset manager of UDF IV. Pursuant to the TR II Finished Lot Participation, UDF IV was entitled to receive repayment of its participation in the outstanding principal amount of the TR II Finished Lot Note, plus accrued interest thereon, over time as the borrower repaid the loan. The UDF IV participation interest is not included on our balance sheet.

The TR II Finished Lot Note and the TR II Finished Lot Participation were originally due and payable in full on August 28, 2012. The TR II Finished Lot Note was subsequently extended three times pursuant to three separate extension agreements, resulting in a maturity date of January 28, 2015. The TR Finished Lot Participation was also extended to January 28, 2015 in connection with these extensions. The TR II Finished Lot Note was also increased to $3.8 million pursuant to a Borrower’s Certificate effective as of December 31, 2012. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors. On December 17, 2014, we sold our interest in the TR II Finished Lot Loan to an unrelated third party, and the TR II Finished Lot Loan and the TR II Finished Lot Participation were paid in full.

TR Paper Lot Note

In September 2009, we originated an $8.1 million secured promissory note (the “TR Paper Lot Note”) to CTMGT Travis Ranch, LLC, an unaffiliated Texas limited liability company. The borrower owns paper lots (residential lots shown on a plat that has been accepted by the city or county) in the Travis Ranch residential subdivision of Kaufman County, Texas. A “paper” lot is a residential lot shown on a plat that has been accepted by the city or county, but which is currently undeveloped or under development. As of September 30, 2015, the TR Paper Lot Note is secured by a pledge of the equity interests in the borrower instead of a real property lien, effectively subordinating the TR Paper Lot Note to all real property liens. The TR Paper Lot Note is guaranteed by the limited liability company owners of the borrower and by the principal of the borrower. The interest rate under the TR Paper Lot Note is 15%. The borrower has obtained a senior loan secured by a first lien deed of trust on the paper lots. For so long as the senior loan is outstanding, proceeds from the sale of the paper lots will be paid to the senior lender and will be applied to reduce the outstanding balance of the senior loan. After the senior loan is paid in full, the proceeds from the sale of the paper lots are required to be used to repay the TR Paper Lot Note.

Effective June 2010, we entered into a loan participation agreement with UDF IV pursuant to which UDF IV purchased a participation interest (the “TR Paper Lot Participation”) in the TR Paper Lot Note. Our general partner serves as the asset manager of UDF IV. Pursuant to the TR Paper Lot Participation, UDF IV is entitled to receive repayment of its participation in the outstanding principal amount of the TR Paper Lot Note, plus its proportionate share of accrued interest thereon, over time as the borrower repays the TR Paper Lot Note. The UDF IV participation interest is not included on our balance sheet.

The TR Paper Lot Note and the TR Paper Lot Participation were originally due and payable in full on September 24, 2012. The TR Paper Lot Note has subsequently been amended four times pursuant to four separate extension agreements, resulting in a current maturity date of January 28, 2016. The TR Paper Lot Participation has also been extended to January 28, 2016 in connection with these modifications. The TR Paper Lot Note was increased to $11 million pursuant to a Borrower’s Confirmation Certificate effective as of December 31, 2012. The TR Paper Lot Note was further increased to $16 million under a Loan Modification Agreement dated as of June 30, 2015. The TR Paper Lot Note was increased to $17.8 million pursuant to a Borrower’s Confirmation Certificate effective as of September 30, 2015. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

CTMGT Note

In December 2007, we originated a secured promissory note (the “CTMGT Note”) with CTMGT, LLC, an unaffiliated Texas limited liability company and its subsidiaries, who are co-borrowers of the CTMGT Note. The CTMGT Note was originally $25 million, and was subsequently increased to $50 million in July 2008, to $64.5 million in November 2011, to $65.7 million in December 2014 and to $112.9 million in July 2015. The CTMGT Note is a co-investment loan secured by multiple investments including current and future-acquired assets. These investments are cross-collateralized and are secured by collateral-sharing arrangements in subordinate liens covering finished lots and entitled land, pledges of the ownership interests in the borrowing entities, and guarantees. The collateral-sharing arrangements allocate the proceeds of the co-investment collateral between us and UDF I. Under these collateral-sharing arrangements for the CTMGT Note, we are entitled to receive 75% of collateral proceeds. In the event of a borrower’s bankruptcy, we are entitled to receive 100% of the collateral proceeds after payment of the senior lenders (including UDF IV and UDF V), but ahead of payment to UDF I. The CTMGT collateral is located in multiple counties in the greater Dallas-Fort Worth area and surrounding counties. The interest rate on the CTMGT Note was modified to 15% as of July 2015.

Effective July 2011, we entered into a loan participation agreement with UDF LOF pursuant to which UDF LOF purchased a participation interest (the “CTMGT Participation”) in the CTMGT Note. The general partner of UDF LOF is a wholly-owned subsidiary of our general partner and our general partner serves as the asset manager for UDF LOF. Pursuant to the CTMGT Participation, UDF LOF is entitled to receive repayment of its participation in the outstanding principal amount of the CTMGT Note, plus its proportionate share of accrued interest thereon, over time as the borrower repays the note. The UDF LOF participation interest is not included on our balance sheet.

The original maturity date of the CTMGT Note was December 21, 2010. The CTMGT Note was subsequently extended six times pursuant to six separate modification agreements, resulting in a current maturity date of July 1, 2016. The CTMGT Participation has also been extended to July 1, 2016 in connection with these extensions. In addition, we increased the amount of the CTMGT Note from its original amount of $25 million to $50 million in July 2008 and to $64.5 million in November 2011, pursuant to two separate modification agreements, to $65.7 million in December 2014 pursuant to a Borrower’s Certificate and to $112.9 million in July 2015. Effective May 1, 2015, we entered into the Joinder Agreement to First Amended and Restated Secured Promissory Note with CTMGT, LLC and Mehrdad Moayedi, an individual, that all parties assume all obligations of the borrower. Effective July 1, 2015, we entered into a Fifth Loan Modification Agreement with CTMGT, LLC, pursuant to which the maturity date of the CTMGT Note was further extended to July 1, 2016, the amount of the CTMGT Note was modified to $112.9 million and the collateral-sharing arrangements with UDF I were modified to permit us, at our option, to defer some or all of our 75% payment preference from time to time to permit the borrower to pay UDF I. In determining whether to modify this loan, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

Northpointe LLC Note

In December 2008, we originated a $4.2 million secured promissory note (the “Northpointe LLC Note”) with Northpointe LLC. The Northpointe LLC Note was initially collateralized by a first lien deed of trust on 303 finished lots in Texas and assignments of distributions from Northpointe LLC. As of September 30, 2015, the Northpointe LLC Note is secured by a pledge of the equity interests in a borrower affiliate that owns 394 acres of undeveloped land in Denton County, Texas, effectively subordinating this pledge to all real property liens. The interest rate under the Northpointe LLC Note is 12%.

Effective June 2012, we entered into a loan participation agreement with UDF IV pursuant to which UDF IV purchased a participation interest (the “Northpointe LLC Participation”) in the Northpointe LLC Note. Our general partner serves as the asset manager of UDF IV. Pursuant to the Northpointe LLC Participation, UDF IV is entitled to receive repayment of its participation in the outstanding principal amount of the Northpointe LLC Note, plus its proportionate share of accrued interest thereon, over time as the borrower repays the UDF Northpointe Note. The UDF IV participation interest is not included on our balance sheet.

The original maturity date of the Northpointe LLC Note was December 4, 2011. The Northpointe LLC Note was subsequently extended five times pursuant to five separate modification agreements, resulting in a current maturity date of June 4, 2016. The Northpointe LLC Participation has also been extended to June 4, 2016 in connection with these extensions. In determining whether to modify the Northpointe LLC Note, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

UDF NP Note

In December 2007, we originated a $6.0 million UDF NP Loan to Northpointe LLC. In December 2008, Northpointe LLC was purchased by an unrelated third party which assumed the UDF NP Loan. In May 2009, Northpointe LLC assigned its obligations associated with the UDF NP Loan and its interests in the collateral by special warranty deed to Northpointe II, a subsidiary of UDF I. Concurrent with this assignment, Northpointe LLC entered into a contract for deed with Northpointe II whereby Northpointe LLC agreed to make payments to Northpointe II for all debt service payments in consideration for Northpointe II transferring ownership and possession of the collateral back to Northpointe LLC. The UDF NP Loan bears interest at a rate of 12% per annum and was initially collateralized by a second lien deed of trust on 251 finished lots and 110 acres of land in Texas. As of September 30, 2015, the UDF NP Loan is secured by a first lien deed of trust on 1 finished lot in Collin County, Texas and a pledge of equity interests in a non-related entity that owns 259 acres of residential land in Collin County, Texas.

Effective May 2013, we entered into a loan participation agreement with UDF IV pursuant to which UDF IV purchased a participation interest (the “Northpointe II LP Participation”) in the UDF NP Loan. Our general partner serves as the asset manager of UDF IV. Pursuant to the Northpointe II LP Participation, UDF IV is entitled to receive repayment of its participation in the outstanding principal amount of the UDF NP Loan, plus its proportionate share of accrued interest thereon, payable first in priority ahead of the Partnership, over time as the borrower repays the UDF NP Loan. The UDF IV participation interest is not included on our balance sheet.

The original maturity date of the UDF NP Loan was December 28, 2010. The UDF NP Note has been extended four times, resulting in a current maturity date of December 28, 2015. The Northpointe II LP Participation has also been extended to December 28, 2015 in connection with these extensions. In June 2011, we amended the UDF NP Loan to increase the commitment amount to $15 million. In determining whether to modify this promissory note, we evaluated the economic conditions, the estimated value and performance of the underlying collateral, the guarantor, adverse situations that may affect the borrower’s ability to pay or the value of the collateral and other relevant factors.

Summary Information

The table below summarizes the approximate outstanding balance of each of our loans included in notes receivable and notes receivable – related parties as of the date indicated:

Loan Name	September 30, 2015		December 31, 2014
Related
BTC Participation Agreement	$	-	$	-
Northpointe II LP Participation		61,000		61,000
Total	$	61,000	$	61,000
Non-Related
TR II Finished Lot Participation	$	-	$	-
TR Paper Lot Participation		-		-
CTMGT Participation		48,573,000		49,786,000
Northpointe LLC Participation		45,000		44,000
Total	$	48,618,000	$	49,830,000

The table below summarizes the approximate accrued interest included in accrued interest receivable and accrued interest receivable – related parties associated with each of our loans included in loan participation interest – related parties as of the date indicated:

Loan Name	September 30, 2015		December 31, 2014
Related
BTC Participation Agreement	$	-	$	-
Northpointe II LP Participation		4,000		-
Total	$	4,000	$	-
Non-Related
TR II Finished Lot Participation	$	-	$	-
TR Paper Lot Participation		-		-
CTMGT Participation		4,054,000		244,000
Northpointe LLC Participation		4,000		400
Total	$	4,058,000	$	244,400

The following table summarizes the approximate income included in interest income and interest income – related parties associated with each of our loans included in loan participation interest – related parties for the periods indicated:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Loan Name	2015		2014		2015		2014
Related
BTC Participation Agreement	$	-	$	-	$	-	$	-
Northpointe II LP Participation		2,000		119,000		5,000		553,000
Total	$	2,000	$	119,000	$	5,000	$	553,000
Non-Related
TR II Finished Lot Participation	$	-	$	-	$	-	$	-
TR Paper Lot Participation		-		-		-		-
CTMGT Participation		1,836,000		1,803,000		5,784,000		5,378,000
Northpointe LLC Participation		1,000		1,000		4,000		4,000
Total	$	1,837,000	$	1,804,000	$	5,788,000	$	5,382,000

The table below summarizes the approximate outstanding balance of the participation interest associated with each respective participation agreement as of the date indicated:

Loan Name	September 30, 2015		December 31, 2014
Related
BTC Participation Agreement	$	-	$	-
Northpointe II LP Participation		10,204,000		10,754,000
Total	$	10,204,000	$	10,754,000
Non-Related
TR II Finished Lot Participation	$	-	$	-
TR Paper Lot Participation		17,762,000		15,014,000
CTMGT Participation		17,143,000		15,928,000
Northpointe LLC Participation		1,216,000		1,216,000
Total	$	36,121,000	$	32,158,000

Credit Enhancement Fees – Related Parties

From time to time, the Partnership enters into guarantees of affiliates’ borrowings and provides credit enhancements for the benefit of senior lenders in connection with the Partnership’s affiliates and investments in partnerships (collectively referred to as “guarantees”). In connection with related party guarantees, as required by the Partnership Agreement and the NASAA Mortgage Program Guidelines, the Partnership obtained opinions from Jackson Claborn stating that these guarantees are fair and at least as reasonable to the Partnership as guarantees to an unaffiliated borrower in similar circumstances.

The following table represents the approximate amount included in mortgage and transaction service revenues – related parties income for the periods indicated associated with fees paid to the Partnership on related party guarantees, as discussed in Note I:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Guarantee	2015		2014		2015		2014
REO PC Credit Enhancement	$	3,000	$	3,000	$	10,000	$	10,000
UMT HF TCB Guaranty		9,000		13,000		32,000		37,000
UDF IV HF Guaranty		44,000		42,000		150,000		97,000
UMT 15^th Street Guaranty		1,000		1,000		4,000		4,000
UDF IV Acquisitions Guaranty		53,000		47,000		150,000		119,000
UDF IV Finance II Guaranty		31,000		34,000		99,000		53,000
UMT HF III Guaranty		8,000		6,000		24,000		11,500
UMT HF II Green Bank Guaranty		-		2,000		1,000		5,500
UDF IV Finance VI Guaranty		33,000		26,000		99,000		48,000
UDF, LP Guaranty		1,000		-		2,000		-
Total	$	183,000	$	174,000	$	571,000	$	385,000

As of September 30, 2015 and December 31, 2014, approximately $349,000 and $347,000, respectively, is included in accounts receivable – related parties associated with fees paid to the Partnership on related party guarantees.

L. Concentration of Credit Risk

Financial instruments that potentially expose the Partnership to concentrations of credit risk are primarily notes receivable, notes receivable – related parties and participation interest – related party. The Partnership maintains deposits in financial institutions that may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Partnership has not experienced any losses related to amounts in excess of FDIC limits.

At September 30, 2015, approximately 96% of the outstanding aggregate principal amount of mortgage notes and other loans originated by us as of September 30, 2015 are secured by properties located throughout Texas, approximately 3% are secured by properties located in Colorado and approximately 1% are secured by properties located in Arizona. At December 31, 2014, approximately 95% of the outstanding aggregate principal amount of mortgage notes and other loans originated by the Partnership are secured by properties located throughout Texas, approximately 3% are secured by properties located in Colorado and approximately 2% are secured by properties located in Arizona. All of the Partnership’s mortgage investments are in the United States.

We may invest in multiple secured loans that share a common borrower. The bankruptcy, insolvency or other inability of any borrower that is the subject of multiple loans to pay interest or repay principal on its loans would have adverse consequences on our income and reduce the amount of funds available for distribution to investors. In addition, we expect to be dependent on a limited number of borrowers for a large portion of our business. The more concentrated our portfolio is with one or a few borrowers, the greater credit risk we face. The loss of any one of these borrowers would have a material adverse effect on our financial condition and results of operations. As of September 30, 2015, we have invested 50% of our offering proceeds in 11 loans to our largest group of related borrowers.

Our investments in loans to or from any one borrower will not exceed an amount greater than 20% of the total capital contributions raised in the Offering, and as of September 30, 2015, our largest investment in a loan to or from any one borrower was equal to 7% of the total capital contributions raised in the Offering.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes thereto:

Forward-Looking Statements

This section of the Quarterly Report contains forward-looking statements, including discussion and analysis of us, our financial condition, amounts of anticipated cash distributions to our limited partners in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution you not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Form 10-Q include changes in general economic conditions, changes in real estate conditions, development costs that may exceed estimates, development delays, increases in interest rates, residential lot take down or purchase rates or our borrowers’ inability to sell residential lots, and the potential need to fund development costs not completed by the initial borrower or other capital expenditures out of operating cash flows. The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” sections of this Quarterly Report on Form 10-Q and our Annual Report for the year ended December 31, 2014, which was filed with the SEC, and the discussion of material trends affecting our business elsewhere in this report.

Overview

On May 15, 2006, our Registration Statement covering the Offering of our units of limited partnership interest was declared effective under the Securities Act. The aggregate offering price for the units under the Offering was $350 million. At the time of effectiveness, the Registration Statement covered up to 12,500,000 units of limited partnership interest at a price of $20.00 per unit pursuant to the Primary Offering and up to 5,000,000 units of limited partnership interest to be issued pursuant to our DRIP for $20.00 per unit. On July 3, 2006, we accepted our initial public subscribers as limited partners. We had the right to reallocate the units of limited partnership interest we were offering between the Primary Offering and our DRIP, and we therefore reallocated the units being offered such that 16,500,000 units were offered pursuant to the Primary Offering and 1,000,000 units were offered pursuant to the DRIP. The Primary Offering was terminated on April 23, 2009. We extended the offering of our units of limited partnership interest pursuant to our DRIP until the earlier of the sale of all units of limited partnership interest being offered pursuant to our DRIP or May 15, 2010; provided, however, that our general partner was permitted to terminate the offering of units pursuant to our DRIP at any earlier time.

On June 9, 2009, we held a special meeting of our limited partners as of April 13, 2009, at which our limited partners approved three proposals to amend certain provisions of our Partnership Agreement for the purpose of making available additional units of limited partnership interest for sale pursuant to the Secondary DRIP. On June 12, 2009, we registered 5,000,000 additional units to be offered pursuant to our Secondary DRIP at our estimated unit value, as determined by our general partner, in a Registration Statement on Form S-3 (File No. 333-159939). As such, we ceased offering units under the DRIP as of July 21, 2009 and concurrently commenced our current offering of units pursuant to the Secondary DRIP. The aggregate offering price for the units being offered pursuant to the Secondary DRIP is $100 million. The Secondary DRIP will be available until we sell all $100 million worth of units being offered; provided, however, that our general partner may terminate the offering of units pursuant to the Secondary DRIP at any earlier time. Effective as of March 6, 2015, our general partner determined our estimated unit value to be $20.00 per unit. Accordingly, $20.00 is the price per unit used for the purchases of units pursuant to the Secondary DRIP until such time as the general partner provides a new estimated unit value.

Our loan portfolio, consisting of notes receivable, notes receivable – related parties and participation interest – related party, increased from approximately $371.8 million as of December 31, 2014 to approximately $373.8 million as of September 30, 2015. With the increase in our portfolio, our revenues, the majority of which is from recognizing interest income associated with our loan portfolio, also slightly increased.

In September 2009, we entered into the Brockhoeft Credit Facility. Effective March 2014, we paid off the Brockhoeft Credit Facility in full in connection with the LegacyTX Credit Facility, of which $10 million and $11.25 million was included in line-of-credit as of September 30, 2015 and December 31, 2014, respectively. We utilize the revolving credit facilities as transitory indebtedness to provide liquidity and to reduce and avoid the need for large idle cash reserves. As a result of the credit facilities and our desire to avoid the need for large idle cash reserves, our cash balances were approximately $136,000 and $791,000 as of September 30, 2015 and December 31, 2014, respectively. Our interest expense associated with the revolving credit facilities was approximately $153,000 and $478,000 for the three and nine months ended September 30, 2015, respectively, and was approximately $135,000 and $558,000 for the three and nine months ended September 30, 2014, respectively.

Net income was approximately $6.9 million and $31.2 million for the three and nine months ended September 30, 2015, respectively, and approximately $12.1 million and $35.2 million for the three and nine months ended September 30, 2014, respectively. Earnings per limited partnership unit, basic and diluted, were $0.31 and $1.42 for the three and nine months ended September 30, 2015, respectively, and approximately $0.56 and $1.64 for the three and nine months ended September 30, 2014, respectively. Our earnings per limited partnership unit, basic and diluted, are calculated based on earnings allocated to the limited partners divided by the weighted average limited partnership units outstanding. Such earnings per limited partnership unit, basic and diluted, will fluctuate commensurate with the size and performance of our loan portfolio.

As of September 30, 2015, we had originated 62 loans, totaling approximately $724.5 million, including 42 loans that have been repaid in full by the respective borrowers and 1 loan for which the remaining balance was written-off. Of the 19 loans outstanding as of September 30, 2015, 2 of the loans totaling approximately $16.4 million and 1 loan totaling approximately $71.2 million are included in notes receivable – related parties and participation interest – related party, respectively, on our balance sheet.

Approximately 96% of the outstanding aggregate principal amount of mortgage notes and other loans originated by us as of September 30, 2015 are secured by properties located throughout Texas, approximately 3% are secured by properties located in Colorado and approximately 1% are secured by properties located in Arizona. Approximately 59% of the outstanding aggregate principal amount of mortgage notes and other loans originated by us as of September 30, 2015 are secured by properties located in the Dallas, Texas area; approximately 25% are secured by properties located in the Austin, Texas area; approximately 6% are secured by properties located in the Houston, Texas area; approximately 5% are secured by properties located in the Lubbock, Texas area; approximately 1% are secured by properties located in the San Antonio, Texas area; approximately 3% are secured by properties located in the Denver, Colorado area; and approximately 1% are secured by properties located in the Kingman, Arizona area.

We intend to invest in markets that demonstrate economic stability and sound demand fundamentals. In order to gauge economic health and demand, we closely observe job creation, wage inflation, home and rental prices, demographic trends, and other economic indicators, both in the markets in which we currently make loans, and in markets where we may expand our operations in the future. In addition, we track significant changes in new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, foreclosures, absorption, land prices, and changes in the levels of sales incentives or discounts in a given market. We also monitor market disruption activity that may affect home pricing in these markets, such as investor or speculator activity.

Each of our outstanding loans may be secured by multiple forms of collateral and, as of September 30, 2015, our loans include the following forms of security:

7 loans, representing approximately 14% of the aggregate principal amount of the outstanding loans, include a first lien on the parcels of land under development or to be developed as security for the loan;

2 loans, representing approximately 4% of the aggregate principal amount of the outstanding loans, include a second lien on the parcels of land under development or to be developed as security for the loan;

11 loans, representing approximately 32% of the aggregate principal amount of the outstanding loans, include a pledge of some or all of the equity interests in the developer entity or other parent entity that owns the borrower entity as security for the loan;

3 loans, representing approximately 56% of the aggregate principal amount of the outstanding loans, are secured by a co-investment (which are secured by current and future-acquired assets and multiple properties through second liens, pledges of ownership interests and guarantees, as described below);

8 loans, representing approximately 65% of the aggregate principal amount of the outstanding loans, include personal guarantees of the principals of the developer entity or corporate guarantees as security for the loan;

11 loans, representing approximately 88% of the aggregate principal amount of the outstanding loans, include reimbursements of development costs due to the developer under contracts with districts and municipalities as security for the loan;

As of September 30, 2015, we have 19 outstanding loans. Of these, 13 loans, representing approximately 91% of the aggregate principal amount of the outstanding loans, relate to projects that sold finished lots to national or regional homebuilders or projects in which one or more homebuilders hold an option to purchase finished lots and have made a forfeitable earnest money deposit; 14 loans, representing approximately 90% of the aggregate principal amount of the outstanding loans, are made to developer entities whose principals hold ownership interests in projects other than the projects funded by us; and 7 loans, representing approximately 63% of the aggregate principal amount of the outstanding loans, are secured by multiple single-family residential communities.

As of September 30, 2015, three entities and their affiliates were included in our notes receivable (including related party transactions) and participation interest – related party that accounted for over 10% of the outstanding balance of our portfolio. These entities include (i) CTMGT LLC, an unaffiliated Texas limited liability company, which comprises approximately 31% of the outstanding balance of our portfolio, and certain of its affiliated entities, which comprise an additional 12% of the outstanding balance; (ii) Buffington Land, Ltd., an unaffiliated Texas limited partnership, which comprises approximately 25% of the outstanding balance of our portfolio, including additional loans to its affiliated entities; and (iii) UDF I, an affiliated Delaware limited partnership, which comprises approximately 18% of the outstanding balance of our portfolio, and additional loans to its affiliated entities, which comprise an additional 4% of the outstanding balance. Our general partner is the asset manager for UDF I.

As the national economy continues to strengthen, we believe that the housing recovery will vary by region, led by markets and submarkets with strong demand fundamentals and balanced supplies of land and housing inventory. We believe the continued strengthening of the recovery is contingent upon two major factors: growth in consumer confidence, and the ability of developers and homebuilders to keep up with reviving demand for finished lot and housing inventory. In our view, potential buyers remain cautious due to the uncertainty still present in many economic indicators, such as the high number of marginally-employed and under-employed individuals, low wage growth and slow economic growth. As the national economy continues to improve at a slow but steady pace, we anticipate growing demand for new homes on the part of the consumer. We believe this demand is already growing in our core markets, and will begin to manifest itself more noticeably in markets we are evaluating for future investment.

We believe that the Partnership will continue to grow revenue and improve financial performance through strategic expansion within its established markets. We expect demand in our target markets to rise at a moderate rate over an extended period of time, driven by economic improvement, job creation, historically low interest rates, attractive housing affordability levels, relaxation of the mortgage underwriting environment, low production of single-family homes and an expected rise in the number of household formations. It should be noted, however, that the pace of the housing recovery and our future results could be negatively affected by weakening economic conditions. These include negative changes in employment levels, underemployment, lack of affordable housing, significant increases in mortgage interest rates or tightening of mortgage lending standards. Another risk to our future results is the gradual reengagement of the banks in the residential lending sphere. In some instances, the loans we make will be junior in the right of repayment to senior lenders. As senior lenders reengage or become willing to lend to our borrowers at higher loan-to-value ratios than are currently available, demand for our mortgage loans may decrease.

The average interest rate payable with respect to the 19 loans outstanding as of September 30, 2015 is 13%, and the average term of the loans is approximately 71 months, as amended.

We face a risk of loss resulting from adverse changes in interest rates. Changes in interest rates may impact demand for our real estate finance products, the rate of interest we receive on our loans receivable and the rate of interest we pay on outstanding loans. If interest rates increase or if mortgage financing underwriting criteria become more restrictive, demand for single-family residences may decrease, and developers and builders may be unable to generate sufficient cash flow from the sale of land parcels, finished lots or homes to repay loans from us.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP consists of a set of standards issued by the FASB and other authoritative bodies in the form of FASB Statements, Interpretations, FASB Staff Positions, Emerging Issues Task Force consensuses and American Institute of Certified Public Accountants Statements of Position, among others. The FASB recognized the complexity of its standard-setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009 of the FASB Accounting Standards Codification (“ASC”). The FASB ASC does not change how the Partnership accounts for its transactions or the nature of related disclosures made. Rather, the FASB ASC results in changes to how the Partnership references accounting standards within its reports. This change was made effective by the FASB for periods ending on or after September 15, 2009. The Partnership has updated references to GAAP in this Quarterly Report on Form 10-Q to reflect the guidance in the FASB ASC. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on management’s historical industry experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates.

There have been no significant changes in our critical accounting policies from those disclosed in our Annual Report for the year ended December 31, 2014.

Recent Accounting Updates

Recent accounting updates are included in Note B to our accompanying consolidated financial statements.

Results of Operations

The three months ended September 30, 2015 as compared to the three months ended September 30, 2014

Revenues

Interest income (including interest income – related parties) for the three months ended September 30, 2015 and 2014 was approximately $13.2 million and $12.8 million, respectively. Our average outstanding notes receivable (including related party transactions) and participation interest – related party increased from approximately $359.4 million as of September 30, 2014 to approximately $372.8 million as of September 30, 2015. Our revenues, the majority of which are from recognizing interest income associated with our loan portfolio, increased primarily due to an increase in the average outstanding balance of our portfolio.

Mortgage and transaction service revenues (including mortgage and transaction service revenues – related parties) for the three months ended September 30, 2015 and 2014 were approximately $185,000 and $194,000, respectively. The Partnership generates mortgage and transaction service revenues by originating and acquiring notes receivable and other loans. In accordance with GAAP, we defer recognition of income from non-refundable commitment fees and recognize such income on a straight-line basis over the expected life of such notes. The decrease was primarily the result of decreased commitment fee income on notes receivable.

We expect revenues to fluctuate commensurate with the size and performance of our loan portfolio.

Expenses

Interest expense for the three months ended September 30, 2015 and 2014 was approximately $153,000 and $135,000, respectively. Interest expense represents interest associated with our credit facilities discussed in Note E to the accompanying financial statements, which were approximately $10.8 million as of September 30, 2014 and $10 million as of September 30, 2015. The increase in interest expense is primarily due to an interest expense adjustment related to the LegacyTX Credit Facility for the three months ended September 30, 2014, which leveled out on a year to date basis as of September 30, 2014.

We recorded approximately $5.5 million in loan loss reserve expense for the three months ended September 30, 2015, compared to approximately $73,000 as a recapture in the provision for loan loss for the three months ended September 30, 2014. The increase in loan loss reserve expense results from our decision to apply additional qualitative factors regarding execution and timing risk to multi-project loans in our investment portfolio.

General and administrative expense was approximately $408,000 and $357,000 for the three months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expense was primarily the result of an increase in consulting, investor relations, bank charges and postage expense, offset by a decrease in printed materials and amortization expenses.

General and administrative – related parties expense was approximately $433,000 and $430,000 for the three months ended September 30, 2015 and 2014, respectively. The slight increase was the result of increased monthly management fees paid to our general partner.

We expect interest expense, the provision for loan loss, and general and administrative expense to fluctuate commensurate with the size and performance of our loan portfolio.

The table below summarizes the payment of related party fees and reimbursements associated with the Offering and origination and management of assets for the three months ended September 30, 2015 and 2014. We believe that these fees and reimbursements are reasonable and customary for comparable mortgage programs.

		For the Three Months Ended
		September 30,
Payee	Purpose	2015				2014
Land Development
	Placement Fees	$	48,000	11	%	$	-	-
	Promotional interest		93,000	21	%		-	-
	Carried interest		14,000	3	%		-	-
	Mortgage Servicing Fee		149,000	33	%		-	-
General Services
	Operating Expense Reimbursement		141,000	32	%		121,000	100	%
Total Payments		$	445,000	100	%	$	121,000	100	%

	For the Three Months Ended
	September 30,
General and administrative – related parties expenses	2015				2014

Mortgage Servicing Fee	$	277,000	64	%	$	261,000	61	%
Amortization of debt financing fees		13,000	3	%		27,000	6	%
Operating Expense Reimbursement		143,000	33	%		142,000	33	%
Total general and administrative – related parties expenses	$	433,000	100	%	$	430,000	100	%

The nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014

Revenues

Interest income (including interest income – related parties) for each of the nine months ended September 30, 2015 and 2014 was approximately $39.1 million and $37.5 million, respectively. Our average outstanding notes receivable (including related party transactions) and participation interest – related party portfolios increased from approximately $359.4 million as of September 30, 2014 to approximately $372.8 million as of September 30, 2015. Our revenues, the majority of which are from recognizing interest income associated with our loan portfolio, increased primarily due to an increase in the average outstanding balance of our portfolio.

Mortgage and transaction service revenues (including mortgage and transaction service revenues – related parties) for each of the nine months ended September 30, 2015 and 2014 were approximately $709,000 and $662,000, respectively. The Partnership generates mortgage and transaction service revenues by originating and acquiring notes receivable and other loans. In accordance with FASB ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, we defer recognition of income from non-refundable commitment fees and recognize such income on a straight-line basis over the expected life of such notes. The increase was primarily the result of increased commitment fee income on notes receivable.

We expect revenues to fluctuate commensurate with the size and performance of our loan portfolio.

Expenses

Interest expense for the nine months ended September 30, 2015 and 2014 was approximately $478,000 and $558,000, respectively. Interest expense represents interest associated with our credit facilities discussed in Note E to the accompanying financial statements, which were approximately $10.8 million as of September 30, 2014 and $10 million as of September 30, 2015. The decrease in interest expense is primarily due to the decrease in interest rates on the credit facilities, which decreased from 10% on the Brockhoeft Credit Facility to 6% on the Legacy TX Credit Facility as of September 30, 2014.

We recorded approximately $5.5 million in loan loss reserve expense for the nine months ended September 30, 2015, compared to approximately $199,000 for the nine months ended September 30, 2014. The increase in loan loss reserve expense results from our decision to apply additional qualitative factors regarding execution and timing risk to multi-project loans in our investment portfolio.

General and administrative expense was approximately $1.4 million and $911,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expense was primarily the result of an increase in legal, consulting, investor relations, bank charges and postage expense offset by an decrease in printed material and amortization expenses.

General and administrative – related parties expense was approximately $1.3 million for both the nine months ended September 30, 2015 and 2014.

We expect interest expense, loan loss reserve expense, and general and administrative expense to fluctuate commensurate with the size and performance of our loan portfolio.

The table below summarizes the payment of related party fees and reimbursements associated with the Offering and origination and management of assets for the nine months ended September 30, 2015 and 2014. We believe that these fees and reimbursements are reasonable and customary for comparable mortgage programs.

		For the Nine Months Ended
		September 30,
Payee	Purpose	2015				2014
Land Development
	Placement Fees	$	97,000	4	%	$	120,000	8	%
	Promotional interest		1,369,000	63	%		398,000	26	%
	Carried interest		168,000	8	%		152,000	10	%
	Mortgage Servicing Fee		410,000	19	%		425,000	28	%
General Services
	Operating Expense Reimbursement		142,000	6	%		431,000	28	%
Total Payments		$	2,186,000	100	%	$	1,526,000	100	%

	For the Nine Months Ended
	September 30,
General and administrative – related parties expenses	2015				2014

Mortgage Servicing Fee	$	825,000	63	%	$	775,000	62	%
Amortization of debt financing fees		48,000	4	%		53,000	4	%
Operating Expense Reimbursement		428,000	33	%		425,000	34	%
Total general and administrative – related parties expenses	$	1,301,000	100	%	$	1,253,000	100	%

Cash Flow Analysis

Cash flows provided by operating activities for the nine months ended September 30, 2015 were approximately $30.8 million and were comprised primarily of net income adjusted for provision for loan loses and accrued liabilities – related parties, offset by accrued interest receivable (including related parties) and accrued liabilities. Cash flows provided by operating activities for the nine months ended September 30, 2014 were approximately $32.7 million and were comprised primarily of net income adjusted for the provision for loan losses, accrued interest receivable – related parties and accrued liabilities – related parties, offset by accrued interest receivable, accounts receivable – related parties and other assets.

Cash flows used in investing activities for the nine months ended September 30, 2015 and 2014 were approximately $7 million and approximately $12 million, respectively, resulting primarily from investments in notes receivable, offset by receipts from notes receivable (including related parties), and receipts from participation interests – related party.

Cash flows used in financing activities for the nine months ended September 30, 2015 and 2014 were approximately $24.5 million and $22.4 million, respectively, and were primarily the result of distributions and redemptions to partners.

Our cash and cash equivalents were approximately $136,000 and $345,000 as of September 30, 2015 and 2014, respectively.

Liquidity and Capital Resources

Our liquidity requirements will be affected by (1) outstanding loan funding obligations, (2) our administrative expenses, (3) distributions and redemptions to unit holders (including redemptions under the Net Capital Proceeds Distribution Program), (4) debt service on our indebtedness, and (5) acquisitions of senior indebtedness required to preserve our collateral position. We expect that our liquidity will be provided by (1) loan interest, transaction fees and credit enhancement fee payments, (2) loan principal payments, (3) sale of finished single-family residential lots, and (4) credit lines available to us.

In certain cases, loan interest payments will be accrued under an interest reserve. Interest reserve accounts are intended to provide interest accrual in lieu of cash for monthly interest payments until such time that revenue from the sale of land or developed lots is sufficient to meet the debt service obligations. In the event that interest reserves are exhausted prior to realization of sufficient cash from land or lot sales, a loan default may occur. If the loan agreement does not include interest reserve provisions, interest payments may accrue or may be due and payable monthly. Payment defaults and decreasing land and lot sales may result in less liquidity and affect our ability to meet our obligations and make distributions. Limited credit facilities may impact our ability to meet our obligations or expand our loan portfolio when other sources of cash are not sufficient.

Increased liquidity needs could result in the liquidation of loans to raise cash, thereby reducing the number and amount of loans outstanding and the resultant earnings realized. We have secured the LegacyTX Credit Facility, which is utilized as transitory indebtedness to provide liquidity and to reduce the need for large idle cash reserves.

We expect our liquidity and capital resources to fluctuate and that we will experience a relative decrease in liquidity as available funds are expended in connection with the funding and acquisition of mortgage loans as well as distributions and redemptions under the Net Capital Proceeds Distribution Program and as amounts that are drawn under the LegacyTX Credit Facility are repaid.

We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than the sources described above within the next 12 months.

Off-Balance Sheet Arrangements

From time to time, we enter into guarantees of debtors’ or affiliates’ borrowings and provide credit enhancements for the benefit of senior lenders in connection with our debtors and affiliates and investments in partnerships (collectively referred to as “guarantees”), and account for such guarantees in accordance with GAAP. Guarantees generally have fixed expiration dates or other termination clauses and may require payment of a fee by the debtor or affiliate. A guarantee involves, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the instrument is represented by the contractual notional amount of the guarantee. In connection with related party guarantees, as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from Jackson Claborn stating that these guarantees are fair and at least as reasonable to us as a guarantee to an unaffiliated borrower in similar circumstances.

In August 2009, we entered into the UMT HF TCB Guaranty with Texas Capital, by which we guaranteed the repayment of up to $5.0 million owed to Texas Capital with respect to that certain promissory note between UMT Home Finance and Texas Capital. UMT Home Finance is a wholly-owned subsidiary of UMT. An affiliate of our general partner serves as the advisor to UMT. The Texas Capital note to UMT Home Finance, as amended, matures on September 5, 2016. In connection with the UMT HF TCB Guaranty, we entered into a letter agreement with UMT Home Finance, which provided for UMT Home Finance to pay us annually, in advance, an amount equal to 1% of our maximum exposure under the UMT HF TCB Guaranty (i.e., $50,000 per annum) through August 2012. Effective August 28, 2012, the letter agreement was modified and UMT Home Finance agreed to pay us a monthly fee equal to 1/12^th of 1% of the outstanding principal balance of the Texas Capital loan.

In April 2010, we entered into the UDF IV HF Guaranty for the benefit of CTB, pursuant to which we guaranteed the repayment of up to $6.0 million (subsequently increased to $30.0 million) owed to CTB with respect to a revolving line-of-credit loan between UDF IV Home Finance and CTB. UDF IV Home Finance is a wholly-owned subsidiary of UDF IV. Our general partner serves as the asset manager for UDF IV, and an affiliate of the Partnership’s general partner serves as the advisor for UDF IV. The CTB loan to UDF IV Home Finance, as amended, matures on July 30, 2016. In connection with the UDF IV HF Guaranty, we entered into a letter agreement with UDF IV Home Finance which provided for UDF IV Home Finance to pay us an annual credit enhancement fee equal to 1% of the maximum loan amount through July 2013. Effective July 31, 2013, the agreement was modified and UDF IV Home Finance agreed to pay us a monthly fee equal to 1/12th of 1% of the outstanding principal balance of the CTB loan.

In April 2010, we entered into the UMT 15th Street Guaranty for the benefit of CTB, pursuant to which we guaranteed the repayment of up to $1.6 million owed to CTB with respect to a loan between UMT 15th Street and CTB. UMT 15th Street is a wholly-owned subsidiary of UMT. An affiliate of our general partner serves as the advisor to UMT. The CTB loan to UMT 15th Street, as amended, matures on July 30, 2016. In connection with the UMT 15th Street Guaranty, we entered into a letter agreement with UMT 15th Street which provides for UMT 15th Street to pay us a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month.

In August 2010, we entered into the UDF IV Acquisitions Guaranty for the benefit of CTB, pursuant to which we guaranteed the repayment of up to $8.0 million (subsequently increased to $25.0 million) owed to CTB with respect to a revolving line-of-credit loan between UDF IV Acquisitions and CTB. UDF IV Acquisitions is a wholly-owned subsidiary of UDF IV. Our general partner serves as the asset manager for UDF IV, and an affiliate of our general partner serves as the advisor for UDF IV. The CTB loan to UDF IV Acquisitions, as amended, matures on July 30, 2016. In connection with the UDF IV Acquisitions Guaranty, we entered into a letter agreement with UDF IV Acquisitions which provides for UDF IV Acquisitions to pay us a monthly credit enhancement fee equal to 1/12^thof 1% of the outstanding principal balance on the revolving line-of-credit at the end of the month.

In December 2010, we entered into the UDF IV Finance II Guaranty for the benefit of Prosperity, pursuant to which we guaranteed the repayment of up to $5.0 million (subsequently increased to $15.0 million) owed to Prosperity with respect to a loan between UDF IV Finance II and Prosperity. UDF IV Finance II is a wholly-owned subsidiary of UDF IV. Our general partner serves as the asset manager for UDF IV and an affiliate of our general partner serves as the advisor for UDF IV. The Prosperity loan to UDF IV Finance II, as amended, matures on December 14, 2016. In connection with the UDF IV Finance II Guaranty, we entered into a letter agreement with UDF IV Finance II which provides for UDF IV Finance II to pay us a monthly credit enhancement fee equal to 1/12^th of 1% of the outstanding principal balance on the loan at the end of the month.

In May 2011, we entered into the UMT HF III Guaranty for the benefit of Veritex, pursuant to which we guaranteed the repayment of up to $4.3 million (subsequently increased to $5.0 million) owed to Veritex with respect to a loan between UMT HF III and Veritex. UMT HF III is a wholly-owned subsidiary of UMT. An affiliate of our general partner serves as the advisor to UMT. The Veritex loan to UMT HF III, as amended, matures on May 27, 2017. In connection with the UMT HF III Guaranty, we entered into a letter agreement with UMT HF III which provides for UMT HF III to pay us a monthly credit enhancement fee equal to 1/12^thof 1% of the outstanding principal balance on the loan at the end of the month.

In October 2011, we entered into the UMT HF II Green Bank Guaranty for the benefit of Green Bank, pursuant to which we guaranteed the repayment of up to $5.0 million owed to Green Bank with respect to a loan between UMT HF II and Green Bank. UMT HF II is a wholly-owned subsidiary of UMT. An affiliate of our general partner serves as the advisor to UMT. The Green Bank loan to UMT HF II matured on January 26, 2015. In connection with the UMT HF II Green Bank Guaranty, we entered into a letter agreement with UMT HF II which provides for UMT HF II to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the loan at the end of the month. The Green Bank loan was repaid in full by UMT HF II in May 2015 and the UMT HF II Green Bank Guaranty was extinguished.

In August 2013, we entered into the UDF IV Finance VI Guaranty for the benefit of CTB, pursuant to which we guaranteed the repayment of up to $25.0 million (subsequently decreased to $15.0 million) owed to CTB with respect to a loan between UDF IV Finance VI and CTB. UDF IV Finance VI is a wholly-owned subsidiary of UDF IV. Our general partner serves as the asset manager for UDF IV, and an affiliate of the Partnership’s general partner serves as the advisor for UDF IV. The CTB loan to UDF IV Finance VI matures on July 30, 2016. In connection with the UDF IV Finance VI Guaranty, we entered into a letter agreement with UDF IV Finance VI which provides for UDF IV Finance VI to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the loan at the end of the month.

In November 2014, we entered into the UDF, LP Guaranty for the benefit of City Bank, pursuant to which we guaranteed the repayment of up to $225,500 owed to City Bank, with respect to a loan between UDF I and City Bank. The loan is secured by a deed of trust on 8.2 acres of land owned by UDF Ash Creek, L.P., a wholly-owned subsidiary of UDF I. The Partnership’s general partner serves as the asset manager for UDF I. The City Bank loan to UDF I matured on November 3, 2015, and $225,500 remains outstanding. In connection with the guaranty, we entered into a letter agreement with UDF I, which provides for UDF I to pay us a monthly credit enhancement fee equal to 1/12th of 1% of the outstanding principal balance on the loan at the end of the month.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Guarantee	2015		2014		2015		2014
REO PC Credit Enhancement	$	3,000	$	3,000	$	10,000	$	10,000
UMT HF TCB Guaranty		9,000		13,000		32,000		37,000
UDF IV HF Guaranty		44,000		42,000		150,000		97,000
UMT 15^th Street Guaranty		1,000		1,000		4,000		4,000
UDF IV Acquisitions Guaranty		53,000		47,000		150,000		119,000
UDF IV Finance II Guaranty		31,000		34,000		99,000		53,000
UMT HF III Guaranty		8,000		6,000		24,000		11,500
UMT HF II Green Bank Guaranty		-		2,000		1,000		5,500
UDF IV Finance VI Guaranty		33,000		26,000		99,000		48,000
UDF, LP Guaranty		1,000		-		2,000		-
Total	$	183,000	$	174,000	$	571,000	$	385,000

To date, we have not incurred losses from the guarantees we entered into, and the debt that is guaranteed is also collateralized by real estate. The value of such real estate may or may not be sufficient to settle such obligations if liquidated.

Contractual Obligations

As of September 30, 2015, we had originated 62 loans, totaling approximately $724.5 million, including 42 loans that have been repaid in full by the respective borrowers and 1 loan for which the remaining balance was written-off. We had approximately $98.5 million of commitments to be funded, including approximately $9.6 million of commitments for notes receivable – related parties and $10.8 million for participation interest – related party. For the three and nine months ended September 30, 2015, we did not originate or purchase any loans, sell any loan participations, or acquire any additional participation interests.

In addition, we have entered into the LegacyTX Credit Facility as discussed in Note E to the accompanying financial statements. The Partnership requested an extension of the September 10, 2015 required quarterly principal payment to January 1, 2016, and LegacyTexas is considering the request. The LegacyTX Credit Facility is not in default. The following table reflects approximate amounts due associated with the LegacyTX Credit Facility as of September 30, 2015:

	Payments due by period
	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Line-of-credit	$	10,000,000	$	-	$	-	$	-	$	10,000,000
Total	$	10,000,000	$	-	$	-	$	-	$	10,000,000

The Partnership has no other outstanding debt or contingent payment obligations, other than approximately $96.8 million of certain loan guarantees discussed above in “Off-Balance Sheet Arrangements,” that we may be obligated to make to or for the benefit of third-party lenders.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the exposure to loss resulting from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. A significant market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. Another significant market risk is the market price of finished lots. The market price of finished lots is driven by the demand for new single-family homes and the supply of unsold homes and finished lots in a market. The change in one or both of these factors can have a material impact on the cash realized by our borrowers and resulting collectability of our loans and interest.

Demand for our mortgage loans and the amount of interest we collect with respect to such loans depends on the ability of borrowers of real estate development loans to sell single-family lots acquired with the proceeds of the loans to homebuilders.

The single-family lot and residential homebuilding market is highly sensitive to changes in interest rate levels. As interest rates available to borrowers increase, demand for mortgage loans decreases, and vice versa. Housing demand is also adversely affected by increases in housing prices and unemployment and by decreases in the availability of mortgage financing. In addition, from time to time, there are various proposals for changes in the federal income tax laws, some of which would remove or limit the deduction for home mortgage interest. If effective mortgage interest rates increase and/or the ability or willingness of prospective buyers to purchase new homes is adversely affected, the demand for new homes may also be negatively affected. As a consequence, demand for and the performance of our real estate finance products may also be adversely impacted.

As of September 30, 2015 and December 31, 2014, our notes receivable, net, of approximately $286.2 million and $280.7 million, respectively, notes receivable – related parties, net, of approximately $16.4 million for both periods, and participation interest – related party of approximately $71.2 million and $74.7 million, respectively, were all at fixed interest rates, and thus, such assets are not subject to change in future earnings, fair values or cash flows.

We seek to mitigate our single-family lot and residential homebuilding market risk by closely monitoring economic, project market, and homebuilding fundamentals. We review a variety of data and forecast sources, including public reports of homebuilders, mortgage originators and real estate finance companies; financial statements of developers; project appraisals; proprietary reports on primary and secondary housing market data, including land, finished lot, and new home inventory and prices and concessions, if any; and information provided by government agencies, the Federal Reserve Bank, the National Association of Home Builders, the National Association of Realtors, public and private universities, corporate debt rating agencies, and institutional investment banks regarding the homebuilding industry and the prices of and supply and demand for single-family residential homes.

In addition, we further seek to mitigate our single-family lot and residential homebuilding market risk by assigning an asset manager to each mortgage note. This asset manager is responsible for monitoring the progress and performance of the developer and the project as well as assessing the status of the marketplace and value of our collateral securing repayment of our mortgage loan.

See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q for further discussion regarding our exposure to market risks.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including the chief executive officer and chief financial officer of Land Development, our general partner, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, the management of our general partner, including its principal executive officer and principal financial officer, evaluated, as of September 30, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the principal executive officer and the principal financial officer of our general partner concluded that our disclosure controls and procedures, as of September 30, 2015, were effective to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the principal executive officer and the principal financial officer of our general partner, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to, and none of our assets are subject to, any material pending legal proceedings.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report for the year ended December 31, 2014, as filed with the SEC, except as noted below.

We will face risks relating to joint ventures with our affiliates and third parties that are not present with other methods of investing in mortgage loans.

We may enter into joint ventures with certain of our affiliates, as well as third parties, for the funding of loans. We may also purchase loans in joint ventures or in partnerships or other co-ownership arrangements with our affiliates, the sellers of the loans, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other methods of investment in mortgages, including, for example:

the possibility that our co-venturer or partner in an investment might become bankrupt, in which case our investment might become subject to the rights of the co-venturer or partner’s creditors and we may be forced to liquidate our investment before we otherwise would choose to do so;

that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals, which may cause us to disagree with our co-venturer or partner as to the best course of action with respect to the investment and which disagreements may not be resolved to our satisfaction;

that such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, which may cause us not to realize the return anticipated from our investment; or

that it may be difficult for us to sell our interest in any such co-venture or partnership.

Moreover, in the event we determine to foreclose on the collateral underlying a non-performing loan, we may be required to obtain the cooperation of our co-venturer or partner to do so. We anticipate that we will co-invest with our affiliates in certain loans, in which case we expect to enter into an inter-creditor agreement that will define our rights and priority with respect to the underlying collateral. Our inability to foreclose on a property acting alone may cause significant delay in the foreclosure process, in which time the value of the property may decline.

As of September 30, 2015, we have not entered into any joint ventures. As of September 30, 2015, we have co-invested in 1 loan originated by an affiliate, UMT, with an outstanding balance of approximately $71.2 million. In addition, as of September 30, 2015, one affiliate, UDF IV, is participating in three loans we have originated for approximately $29.2 million, and another affiliate, UDF LOF, is participating in one loan we have originated for approximately $17.1 million.

Investments in land development loans present additional risks compared to loans secured by operating properties.

We may invest up to 25% of the gross offering proceeds in loans to purchase unimproved land, and as of September 30, 2015, we have invested 2% of the gross offering proceeds in such loans. For purposes of this limitation, “unimproved real property” is defined as real property which has the following three characteristics: (1) an equity interest in real property which was not acquired for the purpose of producing rental or other income; (2) has no development or construction in process on such land; and (3) no development or construction on such land is planned in good faith to commence within one year. Land development mortgage loans may be riskier than loans secured by improved properties, because:

the application of the loan proceeds to the development project must be assured;

during development, the property does not generate income for the borrower to make loan payments;

the completion of the planned development may require additional development financing by the borrower and may not be available;

depending on the sale of lots to homebuilders, demand for lots may decrease, causing the price of the lots to decrease;

there is no assurance that we will be able to sell unimproved land promptly if we are forced to foreclose upon it; and

lot sale contracts are generally not “specific performance” contracts, and the developer may have no recourse if a homebuilder elects not to purchase lots.

Investments in subordinate, mezzanine and wraparound mortgage loans present additional risks compared to loans secured by first deeds of trust.

We expect that we will be the junior lender with respect to many of our loans. We may invest in (1) subordinate mortgage loans (some of which are also secured by pledges), which investments represent 3% of the gross offering proceeds as of September 30, 2015; (2) co-investment loans (which are secured by pledges and collateral-sharing arrangements covering current and future-acquired assets permitting us to share in the proceeds of subordinate liens held by affiliates), which investments represent 65% of the gross offering proceeds as of September 30, 2015; (3) mezzanine loans (which are secured by pledges), which investments represent 32% of the gross offering proceeds as of September 30, 2015; and (4) wraparound mortgage loans, which investments represent 0% of the gross offering proceeds as of September 30, 2015. A wraparound, or all-inclusive, mortgage loan is a loan in which the lender combines the remainder of an old loan with a new loan at an interest rate that blends the rate charged on the old loan with the current market rate. In a subordinate mortgage loan and in a mezzanine loan, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the prior mortgage lender. In a wraparound mortgage loan, our rights will be similarly subject to the rights of any prior mortgage lender, but the aggregate indebtedness evidenced by our loan documentation will be the prior mortgage loans in addition to the new funds we invest. Under a wraparound mortgage loan, we would receive all payments from the borrower and forward to any senior lender its portion of the payments we receive. Because all of these types of loans are subject to the prior mortgage lender’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans.

Substantially all of our loans will require balloon payments or payments tied to net cash, which are riskier than loans with fully amortized payments.

We anticipate that substantially all of our loans will have balloon payments or payments tied to net cash from the sale of land or developed lots and the release formula created by the senior lender (i.e., the conditions under which principal is repaid to the senior lender, if any), and as of September 30, 2015, 100% of our loans have balloon payments or payments tied to net cash. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. Loans with balloon payments or payments tied to net cash are riskier than loans with even payments of principal over an extended time period, such as 15 or 30 years, because the borrower’s repayment often depends on its ability to refinance the loan or sell the land or developed lots profitably when the loan comes due. There are no specific criteria used in evaluating the credit quality of borrowers for mortgage loans requiring balloon payments or payments tied to net cash. Furthermore, a substantial period of time may elapse before a balloon payment or a payment tied to net cash becomes due. If the value of the underlying property declines due to market or other factors, it is likely that the borrower would hold a property that is worth less than the mortgage balance on the property. Thus, there may be greater risk of default by borrowers who enter into loans with balloon payments or payments tied to net cash. In addition, our loans typically include an interest reserve in the loan amount. If such reserve is insufficient, the loan-to-value ratio for that loan could increase above generally acceptable levels. In the event of a defaulted loan, the underlying collateral may have declined in value. In addition, there are significant costs and delays associated with the foreclosure process. Any of these factors may result in losses to us.

Larger loans result in less diversity and may increase risk.

We intend to invest in loans that individually constitute an average amount equal to the lesser of (a) 1% to 5% of the total amount raised in the Offering, or (b) $2.5 million to $12.5 million. However, we may invest in larger loans depending on such factors as our performance and the value of the collateral. These larger loans are riskier because they may reduce our ability to diversify our loan portfolio. Our investments in loans to or from any one borrower will not exceed an amount greater than 20% of the total capital contributions raised in the Offering, and as of September 30, 2015, our largest investment in a loan to or from any one borrower was equal to 7% of the total capital contributions raised in the Offering. Our investments in loans to or from any one borrower are calculated based on the aggregate amount of capital contributions raised in the Offering actually used to make or invest in loans with such borrower.

The concentration of loans with a common borrower may increase our risks.

We may invest in multiple mortgage loans that share a common borrower or loans to related borrowers. As of September 30, 2015, we have invested 50% of our offering proceeds in 11 loans to our largest group of related borrowers. The bankruptcy, insolvency or other inability of any borrower that is the subject of multiple loans to pay interest or repay principal on its loans would have adverse consequences on our income and reduce the amount of funds available for distribution to investors. In addition, we expect to be dependent on a limited number of borrowers for a large portion of our business. The more concentrated our portfolio is with one or a few borrowers, the greater credit risk we face. The loss of any one of these borrowers would have a material adverse effect on our financial condition and results of operations.

If we were found to have violated applicable usury laws, we would be subject to penalties and other possible risks.

Usury laws generally regulate the amount of interest that may lawfully be charged on indebtedness. Each state has its own distinct usury laws. We believe that our loans will not violate applicable usury laws (as September 30, 2015, the highest interest rate we have charged on an annualized basis does not exceed 18%). There is a risk, however, that a court could determine that our loans do violate applicable usury laws. If we were found to have violated applicable usury laws, we could be subject to penalties, including fines equal to three times the amount of usurious interest collected and restitution to the borrower. Additionally, usury laws often provide that a loan that violates usury laws is unenforceable. If we are subject to penalties or restitution or if our loan agreements are adjudged unenforceable by a court, it would have a material, adverse effect on our business, financial condition and results of operations and we would have difficulty making distributions to our limited partners.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

During the nine months ended September 30, 2015, we did not sell any equity securities that were not registered or otherwise exempt under the Securities Act.

Purchases of Equity Securities by the Partnership and Affiliated Purchasers

For the three months ended September 30, 2015, we received valid redemption requests pursuant to our Net Capital Proceeds Distribution Program relating to approximately 39,000 units. We redeemed approximately 3,000 units pursuant to our Net Capital Proceeds Distribution Program during the three months ended September 30, 2015 for approximately $61,000 (an average repurchase price of approximately $20.00 per unit). For the three months ended September 30, 2015, we received valid redemption requests pursuant to our unit redemption program relating to approximately 21,000 units. We did not redeem any units pursuant to our unit redemption program during the three months ended September 30, 2015.

2015	Total number of units repurchased		Average price paid per unit		Total number of units repurchased as part of publicly announced plans		Maximum number of units that may yet be purchased under the plans
July		-	$	-		-	N/A
August		3,000		20.00		3,000	(1)
September		-		-		-	N/A
		3,000	$	20.00		3,000

(1)

A description of the maximum number of units that may be purchased under our redemption programs is included under “Unit Redemption Program and Net Capital Proceeds Distribution Program” as discussed in Note H to the accompanying financial statements.

For the nine months ended September 30, 2015, we received valid redemption requests pursuant to our unit redemption program relating to approximately 28,000 units. We did not redeem any units pursuant to our unit redemption program during the nine months ended September 30, 2015. For the nine months ended September 30, 2015, we received valid redemption requests pursuant to our Net Capital Proceeds Distribution Program relating to approximately 131,000 units. For the nine months ended September 30, 2015, we redeemed approximately 5,000 units pursuant to our Net Capital Proceeds Distribution Program for $97,000 (an average repurchase price of approximately $20.00 per unit).

For the year ended December 31, 2014, we received valid redemption requests pursuant to our unit redemption program relating to approximately 93,000 units. For the year ended December 31, 2014, we redeemed approximately 63,000 units relating to death redemptions for $1.3 million (an average repurchase price of approximately $20.00 per unit). We did not redeem any units as a result of involuntary exigent circumstances. For the year ended December 31, 2014, we received valid redemption requests pursuant to our Net Capital Proceeds Distribution Program relating to approximately 256,000 units. For the year ended December 31, 2014, we redeemed approximately 9,000 units pursuant to our Net Capital Proceeds Distribution Program for $178,000 (an average repurchase price of approximately $20.00 per unit).

We funded these unit redemptions with cash flows from operations. A valid redemption request is one that complies with the applicable requirements and guidelines of our current unit redemption program set forth in the prospectus related to the Offering and/or the Net Capital Proceeds Distribution Program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Index to Exhibits attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	United Development Funding III, L.P.

	By:	UMTH Land Development, L.P.
		Its General Partner


Dated: November 16, 2015		By:	/s/ Hollis M. Greenlaw
			Hollis M. Greenlaw
			Chief Executive Officer, and President and Chief Executive Officer of UMT Services, Inc., sole general partner of UMTH Land Development, L.P.
			(Principal Executive Officer)


Dated: November 16, 2015		By:	/s/ Cara D. Obert
			Cara D. Obert
			Chief Financial Officer
			(Principal Financial Officer)

Index to Exhibits

Exhibit Number

Description

3.1

Second Amended and Restated Agreement of Limited Partnership of Registrant (previously filed in and incorporated by reference to Exhibit B to prospectus dated May 15, 2006, Commission File No. 333-127891, filed pursuant to Rule 424(b)(3) on May 18, 2006)

3.2

Certificate of Limited Partnership of Registrant (previously filed in and incorporated by reference to Registrant’s Registration Statement on Form S-11, Commission File No. 333-127891, filed on August 26, 2005)

3.3

First Amendment to Second Amended and Restated Agreement of Limited Partnership of Registrant (previously filed in and incorporated by reference to Exhibit B to Supplement No. 12 to prospectus dated May 15, 2006, contained within Post-Effective Amendment No. 4 to Registrant’s Registration Statement on Form S-11, Commission File No. 333-127891, filed on May 12, 2009)

3.4

Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Registrant (previously filed in and incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, Commission File No. 000-53159, filed on June 10, 2009)

4.1

Subscription Agreement (previously filed in and incorporated by reference to Exhibit C to Supplement No. 12 to prospectus dated May 15, 2006, contained within Post-Effective Amendment No. 4 to Registrant’s Registration Statement on Form S-11, Commission File No. 333-127891, filed on May 12, 2009)

4.2

Amended and Restated Distribution Reinvestment Plan (previously filed in and incorporated by reference to Registrant’s Registration Statement on Form S-3, Commission File No. 333-159939, filed on June 12, 2009)

31.1*

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2*

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.1**

Section 1350 Certifications

101.SCH*

XBRL Taxonomy Extension Schema Document

101.INS*

XBRL Instance Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

United Development Funding III, LP - FORM 10-Q - November 16, 2015

Attached files

United Development Funding III, LP Reports