Washington, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
No shares of common stock were held by non-affiliates as of June 30, 2009. As of March 22, 2010, there were approximately 670,113 common shares of beneficial interest of United Development Funding IV outstanding.
The registrant incorporates by reference portions of its Definitive Proxy Statement for the 2010 annual meeting of shareholders, which is expected to be filed no later than April 30, 2009, into Part III of this Form 10-K to the extent stated herein.
This annual report contains forward-looking statements, including discussion and analysis of United Development Funding IV (which may be referred to as the “Trust,” “we,” “us,” “our,” or “UDF IV”) and our subsidiaries, our financial condition, our investment objectives, amounts of anticipated cash distributions to our common shareholders 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 the business and industry. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would, 221; “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guaranties of the 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 Form 10-K. 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. The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of this Annual Report on Form 10-K.
Item 1. Business.
United Development Funding IV was organized on May 28, 2008 (“Inception”) as a Maryland real estate investment trust that intends to qualify as a real estate investment trust (a “REIT”) under federal income tax laws. The Trust is the sole general partner of and owns a 99.999% partnership interest in United Development Funding IV Operating Partnership, L.P. (“UDF IV OP”), a Delaware limited partnership. UMTH Land Development, L.P. (“UMTH LD”), a Delaware limited partnership and the affiliated asset manager of the Trust, is the sole limited partner and owner of 0.001% (minority interest) of the partnership interests in UDF IV OP.
The Trust intends to originate, purchase, participate in and hold for investment secured loans made directly by the Trust or indirectly through its affiliates to persons and entities for the acquisition and development of parcels of real property as single-family residential lots, and the construction of model and new single-family homes, including development of mixed-use master planned residential communities. The Trust also intends to make direct investments in land for development into single-family lots, new and model homes and portfolios of finished lots and homes; provide credit enhancements to real estate developers, home builders, land bankers and other real estate investors; and purchase participations in, or finance for other real estate investors the purchase of, securitized real estate loan pools and discounted cash flows secured by state, county, municipal or other similar assessments levied on real property. The Trust also may enter into joint ventures with unaffiliated real estate developers, home builders, land bankers and other real estate investors, or with other United Development Funding-sponsored programs, to originate or acquire, as the case may be, the same kind of secured loans or real estate investments the Trust may originate or acquire directly.
UMTH General Services, L.P., a Delaware limited partnership (“UMTH GS” or the “Advisor”), is the Trust’s advisor and is responsible for managing the Trust’s affairs on a day-to-day basis. UMTH GS has engaged UMTH LD as the Trust’s asset manager. The asset manager will oversee the investing and financing activities of the affiliated programs managed and advised by the Advisor and UMTH LD as well as oversee and provide the Trust’s board of trustees recommendations regarding investments and finance transactions, management, policies and guidelines and will review investment transaction structure and terms, investment underwriting, investment collateral, investment performance, investment risk management, and the Trust’s capital structure at both the entity and as set level.
On November 12, 2009, the Trust’s Registration Statement on Form S-11, covering an initial public offering (the “Offering”) of up to 25,000,000 common shares of beneficial interest at a price of $20 per share, was declared effective under the Securities Act of 1933, as amended. The Offering also covers up to 10,000,000 common shares of beneficial interest to be issued pursuant to our distribution reinvestment plan (the “DRIP”) for $20 per share. We reserve the right to reallocate the common shares of beneficial interest registered in the Offering between the primary offering and the DRIP. The shares are being offered to investors on a reasonable best efforts basis, which means the dealer manager will use its reasonable best efforts to sell the shares offered, but is not re quired to sell any specific number or dollar amount of shares and does not have a firm commitment or obligation to purchase any of the offered shares. Until we received and accepted subscriptions for at least $1 million, subscription proceeds were placed in an escrow account. On December 18, 2009, the Trust satisfied this minimum offering amount. As a result, the Trust’s initial public subscribers were accepted as shareholders and the subscription proceeds from such initial public subscribers were released to the Trust from escrow, provided that residents of New York, Nebraska and Pennsylvania will not be admitted until the Trust has received and accepted subscriptions aggregating at least $2,500,000, $5,000,000 and $35,000,000, respectively. As of December 31, 2009, we had issued 119,729 common shares of beneficial interest in exchange for gross proceeds of approximately $2.4 million.
We will offer our shares until the earlier of November 12, 2011 or the date we sell all $500 million worth of shares in our primary offering; provided, however, the amount of shares registered pursuant to the Offering is the amount which we reasonably expect to be offered and sold within two years from November 12, 2009, and we may extend the Offering for an additional year or as otherwise permitted by applicable law; provided, further, that notwithstanding the foregoing, our board of trustees may terminate the Offering at any time. Our board of trustees also may elect to extend the offering period for the shares sold pursuant to DRIP, in which case participants in the plan will be notified.
The outstanding aggregate principal amount of mortgage notes originated by us as of December 31, 2009 are secured by properties located in the Austin, Texas area. Security for such loans takes the form of either a direct security interest represented by a first or second lien on the respective property and/or an indirect security interest represented by a pledge of the ownership interests of the entity which holds title to the property. The participation agreements outstanding as of December 31, 2009 are made to developer entities which hold ownership interests in projects in addition to the project funded by us, are secured by multiple single-family residential communities and are secured by a personal guarantee of the developer in addition to a lien on the real property or the equity interests in the entity tha t holds the real property.
The average interest rate payable with respect to the outstanding loans as of December 31, 2009 is 13%, and the average term of the loans is approximately 12 months.
The U.S. housing market has suffered declines over the past four years, particularly in geographic areas that had previously experienced rapid growth, steep increases in property values and speculation. In 2009, the homebuilding industry was focused on further reducing supply and inventory overhang of new single-family homes. To that end, publicly traded national homebuilders continued to reduce the number of homes constructed in 2009 from the number constructed in 2008. We believe that while demand for new homes has been affected across the country by the general decline of the housing industry, the housing markets in the geographic areas in which we intend to invest have not been impacted as greatly. Further, we believe that, as a result of the inventory reductions and corresponding lack of development over the past few years, the supply of new homes and finished lots have generally aligned with market demand in most real estate markets; more homes will be started in 2010 than in 2009; and we will likely see continued demand for our products in 2010.
We have no employees; however, our advisor and affiliates of our advisor have a staff of employees who perform a range of services for us, including originations, acquisitions, asset management, accounting, legal and investor relations.
Our current business consists only of originating, acquiring, servicing and managing mortgage loans on real property and issuing or acquiring an interest in credit enhancements to borrowers. We internally evaluate our activities as one industry segment, and, accordingly, we do not report segment information.
Item 1A. Risk Factors.
The factors described below represent our principal risks. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.
There is no public trading market for our shares; therefore, it will be difficult for shareholders to sell their shares. If a shareholder is able to sell their shares, the shareholder may have to sell them at a substantial discount from the public offering price. In addition, we do not have a fixed liquidation date, and the shareholder may have to hold their shares indefinitely.
Shareholders will not have the opportunity to evaluate our investments before they are made.
For these and other reasons, we cannot assure our shareholders that we will be profitable or that we will realize growth in the amount of income we receive from our investments.
We expect to borrow money to make loans or purchase some of our real estate assets. If we fail to obtain or renew sufficient funding on favorable terms or at all, we will be limited in our ability to make loans or purchase assets, which will harm our results of operations. Furthermore, if we borrow money, our shareholders’ risks will increase if defaults occur.
We may incur substantial debt. We intend, when appropriate, to incur debt at the asset level. Asset level leverage will be determined by the anticipated term of the investment and the cash flow expected by the investment. Asset level leverage is expected to range from 0% to 90% of the asset value. In addition, we intend to incur debt at the fund level. Our board of trustees has adopted a policy to generally limit our fund level borrowings to 50% of the aggregate fair market value of our real estate properties or secured loans once we have invested a majority of the net proceeds of the Offering and subsequent offerings, if any. However, we are permitted by our declaration of trust to borrow up to 300% of our net assets, and may borrow in excess of such amount if such excess borrowing is approved by a majority of our independent trustee s and disclosed in our next quarterly report to shareholders, along with justification for such excess. Loans we obtain will likely be secured with recourse to all of our assets, which will put those assets at risk of forfeiture if we are unable to pay our debts.
Our ability to achieve our investment objectives depends, in part, on our ability to borrow money in sufficient amounts and on favorable terms. We expect to depend on a few lenders to provide the primary credit facilities for our investments, although we currently do not have any established financing sources. In addition, our existing indebtedness may limit our ability to make additional borrowings. If our lenders do not allow us to renew our borrowings or we cannot replace maturing borrowings on favorable terms or at all, we might have to sell our investment assets under adverse market conditions, which would harm our results of operations and may result in permanent losses. In addition, loans we obtain may be secured by all of our assets, which will put those assets at risk of forfeiture if we are unable to pay our debts.
Dislocations in the credit markets and real estate markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to our shareholders.
Domestic and international financial markets currently are experiencing significant dislocations which have been brought about in large part by failures in the U.S. banking system. These dislocations have severely impacted the availability of credit and have contributed to rising costs associated with obtaining credit. If debt financing is not available on terms and conditions we find acceptable, we may not be able to obtain financing for investments. If this dislocation in the credit markets persists, our ability to borrow monies to finance investments in real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of real estate investments we ca n make, and the return on the investments we do make likely will be lower. All of these events could have an adverse effect on our results of operations, financial condition and ability to pay distributions.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
We may provide financing for borrowers that will develop and construct improvements to land at a fixed contract price. We will be subject to risks relating to uncertainties associated with re-zoning for development and environmental concerns of governmental entities and/or community groups and our developer’s ability to control land development costs or to build infrastructure in conformity with plans, specifications and timetables deemed necessary by builders. The developer’s failure to perform may necessitate legal action by us to compel performance. Performance may also be affected or delayed by conditions beyond the developer’s control. Delays in completion of construction could also give builders the right to terminate preconstruction lot purchase contracts. These and other such factors can result in increased c osts to the borrower that may make it difficult for the borrower to make payments to us. Furthermore, we must rely upon projections of lot take downs, expenses and estimates of the fair market value of property when evaluating whether to make loans. If our projections are inaccurate, and we are forced to foreclose on a property, our return on our investment could suffer.
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws, ordinances and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Under limited circumstances, a secured lender, in addition to the owner of real estate, may be liable for clean-up costs or have the obligation to take remedial actions under environmental laws, including, but not limited to, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or CE RCLA. Some of these laws and regulations may impose joint and several liability for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell such property or to use the property as collateral for future borrowing.
If we foreclose on a defaulted loan to recover our investment, we may become subject to environmental liabilities associated with that property if we participate in the management of that property or do not divest ourselves of the property at the earliest practicable time on commercially reasonable terms. Environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. It is possible that property on which we foreclose may contain hazardous substances, wastes, contaminants or pollutants that we may be required to remove or remediate in order to clean up the property. If we foreclose on a contaminated property, we may also incur liability to tenants or other users of neighboring properties. We cannot assure our shareholders that we will not incur full recourse liability for the entire cost of removal and cleanup, that the cost of such removal and cleanup will not exceed the value of the property, or that we will recover any of these costs from any other party. It may be difficult or impossible to sell a property following discovery of hazardous substances or wastes on the property. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our shareholders.
Terrorist attacks or other acts of violence or war may affect the industry in which we operate, our operations and our profitability.
Terrorist attacks may harm our results of operations and our shareholders’ investments. We cannot assure our shareholders that there will not be further terrorist attacks against the United States or U.S. businesses. These attacks or armed conflicts may directly or indirectly impact the value of the property we own or the property underlying our loans. Losses resulting from these types of events are generally uninsurable. Moreover, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets. They could also result in economic uncertainty in the United States or abroad. Adverse economic conditions resulting from terrorist activities could negatively impact borrowers’ ability to repay loans we make to them or harm the value of the property underlying our investments, both of which would impair the value of our investments and decrease our ability to make distributions to our shareholders.
We will be subject to risks related to the geographic concentration of the properties securing the loans and equity investments we make.
Although we may purchase loans and make investments throughout the contiguous United States, initially we expect the majority of investments will be in the Southeastern and Southwestern United States, with a near term concentration of substantially all of our investing and lending (90% or more) in the major Texas submarkets. However, if the residential real estate market or general economic conditions in these geographic areas decline to an extent greater than we forecast, or recover to a lesser extent than we forecast, our and our borrowers’ ability to sell homes, lots and land located in these areas may be impaired, we may experience a greater rate of default on the loans or other investments we make with respect to real estate in these areas, and the value of the homes and parcels in which we invest and that are underlying ou r investments in these areas could decline. Any of these events could materially adversely affect our business, financial condition or results of operations.
We will be subject to a number of legal and regulatory requirements, including regulations regarding interest rates, mortgage laws, securities laws and the taxation of REITs or business trusts, which may adversely affect our operations.
Federal and state lending laws and regulations generally regulate interest rates and many other aspects of real estate loans and contracts. Violations of those laws and regulations could materially adversely affect our business, financial condition and results of operations. We cannot predict the extent to which any law or regulation that may be enacted or enforced in the future may affect our operations. In addition, the costs to comply with these laws and regulations may adversely affect our profitability. Future changes to the laws and regulations affecting us, including changes to mortgage laws and securities laws and changes to the Internal Revenue Code applicable to the taxation of REITs or business trusts, could make it more difficult or expensive for us to comply with such laws or otherwise harm our business.
Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions.
We have not yet elected to be taxed as a REIT. In order for us to qualify as a REIT, we must satisfy certain requirements set forth in the Internal Revenue Code and treasury regulations promulgated thereunder and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the Internal Revenue Service, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we may be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to shareholders because of the additional tax liability. In addition, distributions to shareholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to qualify as a REIT would adversely affect our shareholders’ returns on their investments.
Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell properties through taxable REIT subsidiaries, each of which would diminish the return to our shareholders.
In light of our investment strategy, it is possible that one or more sales of our properties may be “prohibited transactions” under provisions of the Internal Revenue Code. If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all income that we derive from such sale would be subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax. A principal requirement of the safe harbor is that the REIT must hold the applicable property for not less than two years prior to its sale. Given our investment strategy, it is entirely possible, if not likely, that the sale of one or more of our properties will not fall within the prohibited transaction safe harbor.
If we desire to sell a property pursuant to a transaction that does not fall within the safe harbor, we may be able to avoid the 100% penalty tax if we acquired the property through a taxable REIT subsidiary (“TRS”) or acquired the property and transferred it to a TRS for a non-tax business purpose prior to the sale (i.e , for a reason other than the avoidance of taxes). However, there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor. Additionally, even if it is possible to effect a property disposition through a TRS, we may decide to forego the use of a TRS in a transaction that does not meet the safe harbor based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors that the disposition will not be subject to the 100% penalty tax. In cases where a property disposition is not effected through a TRS, the Internal Revenue Service could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net income from the sale of such property will be payable as a tax and none of the proceeds from such sale will be distributable by us to our shareholders or available for investment by us.
If we acquire a property that we anticipate will not fall within the safe harbor from the 100% penalty tax upon disposition, then we may acquire such property through a TRS in order to avoid the possibility that the sale of such property will be a prohibited transaction and subject to the 100% penalty tax. If we already own such a property directly or indirectly through an entity other than a TRS, we may contribute the property to a TRS if there is another, non-tax related business purpose for the contribution of such property to the TRS. Following the transfer of the property to a TRS, the TRS will operate the property and may sell such property and distribute the net proceeds from such sale to us, and we may distribute the net proceeds distributed to us by the TRS to our shareholders. Though a sale of the property by a TRS may elimi nate the danger of the application of the 100% penalty tax, the TRS itself would be subject to a tax at the federal level, and potentially at the state and local levels, on the gain realized by it from the sale of the property as well as on the income earned while the property is operated by the TRS. This tax obligation would diminish the amount of the proceeds from the sale of such property that would be distributable to our shareholders. As a result, the amount available for distribution to our shareholders would be substantially less than if the REIT had not operated and sold such property through the TRS and such transaction was not successfully characterized as a prohibited transaction. The maximum federal corporate income tax rate currently is 35%. Federal, state and local corporate income tax rates may be increased in the future, and any such increase would reduce the amount of the net proceeds available for distribution by us to our shareholders from the sale of property through a TRS after the effec tive date of any increase in such tax rates.
If we own too many properties through one or more of our TRSs, then we may lose our status as a REIT. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we may be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to shareholders because of the additional tax liability. In addition, distributions to shareholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. As a REIT, the value of the securities w e hold in all of our TRSs may not exceed 25% of the value of all of our assets at the end of any calendar quarter. If the Internal Revenue Service were to determine that the value of our interests in all of our TRSs exceeded 25% of the value of total assets at the end of any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interests to own a substantial number of our properties through one or more TRSs, then it is possible that the Internal Revenue Service may conclude that the value of our interests in our TRSs exceeds 25% of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income with respect to any year may be from sources other than real estate. Distributions paid to us from a TRS are considered to be non-real estate income. Therefore, we may fail to qualify as a REIT if distributions from all of our TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year. We will use all reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT. Our failure to qualify as a REIT would adversely affect our shareholders’ returns on their investments.
Certain fees paid to us may affect our REIT status.
Certain fees and income we receive could be characterized by the Internal Revenue Service as non-qualifying income for purposes of satisfying the “income tests” required for REIT qualification. If this fee income were, in fact, treated as non-qualifying, and if the aggregate of such fee income and any other non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year, we could lose our REIT status for that taxable year and the four ensuing taxable years. We will use all reasonable efforts to structure our activities in a manner intended to satisfy the requirements for our continued qualification as a REIT. Our failure to qualify as a REIT would adversely affect our shareholders’ returns on their investments.
Shareholders may have tax liability on distributions they elect to reinvest in our common shares of beneficial interest, and they may have to use funds from other sources to pay such tax liability.
If shareholders elect to have their distributions reinvested in our common shares of beneficial interest pursuant to our distribution reinvestment plan, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested that does not represent a return of capital. As a result, unless a shareholder is a tax-exempt entity, a shareholder may have to use funds from other sources to pay their tax liability on the value of the shares received.
If our operating partnership fails to maintain its status as a partnership, its income may be subject to taxation, which would reduce our cash available for distribution to our shareholders.
We intend to maintain the status of the operating partnership as a partnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the operating partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This would also result in our losing REIT status, and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to make distributions and the return on our shareholders’ investments. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal inco me tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
In certain circumstances, we may be subject to federal and state taxes on income as a REIT, which would reduce our cash available for distribution to our shareholders.
Even if we qualify and maintain our status as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a “prohibited transaction,” such income will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the interest on our secured loans or the sale or other disposition of our property and pay income tax directly on such income. In that event, our shareholders would be treated as if they earned that income and paid the tax on it directly. However, shareholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the operating partnership or at the level of the other companies through which we indirectly make secured loans or own our assets. Any federal or state taxes paid by us will reduce our cash available for distribution to our shareholders.
Legislative or regulatory action could adversely affect the returns to our investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in our common shares of beneficial interest. Additional changes to the tax laws are likely to continue to occur, and we cannot assure investors that any such changes will not adversely affect the taxation of a shareholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Investors are urged to consult with their own tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
Congress passed major federal tax legislation in 2003, with modifications to that legislation in 2005. One of the changes effected by that legislation generally reduced the tax rate on dividends paid by companies to individuals to a maximum of 15% prior to 2011. REIT distributions generally do not qualify for this reduced rate. The tax changes did not, however, reduce the corporate tax rates. Therefore, the maximum corporate tax rate of 35% has not been affected. However, as a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our shareholders, and we thus expect to avoid the “double taxation” to which other companies are typically subject.
Although REITs continue to receive substantially better tax treatment than entities taxed as corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for federal income tax purposes as a corporation. As a result, our declaration of trust provides our board of trustees with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our shareholders. Our board of trustees has fiduciary duties to us and our shareholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our shareholders.
Equity participation in secured loans may result in taxable income and gains from these properties, which could adversely impact our REIT status.
If we participate under a secured loan in any appreciation of the properties securing the secured loan or its cash flow and the Internal Revenue Service characterizes this participation as “equity,” we might have to recognize income, gains and other items from the property. This could affect our ability to qualify as a REIT.
Distributions to tax-exempt investors may be classified as UBTI and tax-exempt investors would be required to pay tax on such income and to file income tax returns.
Neither ordinary nor capital gain distributions with respect to our common shares of beneficial interest nor gain from the sale of shares should generally constitute UBTI to a tax-exempt investor. However, there are certain exceptions to this rule, including:
| · | under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our shares may be treated as UBTI if our shares are predominately held by qualified employee pension trusts, such that we are a “pension-held” REIT (which we do not expect to be the case); |
| · | part of the income and gain recognized by a tax-exempt investor with respect to our shares would constitute UBTI if such investor incurs debt in order to acquire the common shares of beneficial interest; and |
| · | part or all of the income or gain recognized with respect to our common shares of beneficial interest held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from U.S. federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Internal Revenue Code may be treated as UBTI. |
Distributions to foreign investors may be treated as ordinary income distributions to the extent that they are made out of current or accumulated earnings and profits.
In general, foreign investors will be subject to regular U.S. federal income tax with respect to their investment in our shares if the income derived therefrom is “effectively connected” with the foreign investor’s conduct of a trade or business in the United States. A distribution to a foreign investor that is not attributable to gain realized by us from the sale or exchange of a “U.S. real property interest” within the meaning of the Foreign Investment in Real Property Tax Act of 1980, as amended, or FIRPTA, and that we do not designate as a capital gain dividend, will be treated as an ordinary income distribution to the extent that it is made out of current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Generally, any ordinary income distributio n will be subject to a U.S. federal income tax equal to 30% of the gross amount of the distribution, unless this tax is reduced by the provisions of an applicable treaty.
Foreign investors may be subject to FIRPTA tax upon the sale of their shares.
A foreign investor disposing of a U.S. real property interest, including shares of a U.S. entity whose assets consist principally of U.S. real property interests, is generally subject to FIRPTA tax on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of shares in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s shares, by value, have been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. While we intend to qualify as “domestically controlled,” we cannot assure shareholders that we will. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless the shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of our outstanding common shares of beneficial interest.
Foreign investors may be subject to FIRPTA tax upon the payment of a capital gain distribution.
A foreign investor also may be subject to FIRPTA tax upon the payment of any capital gain distribution by us, which distribution is attributable to gain from sales or exchanges of U.S. real property interests. Additionally, capital gain distributions paid to foreign investors, if attributable to gain from sales or exchanges of U.S. real property interests, would not be exempt from FIRPTA and would be subject to FIRPTA tax.
We encourage investors to consult their own tax advisor to determine the tax consequences applicable to them if they are a foreign investor.
Risks Related to Investments by Tax-Exempt Entities and Benefit Plans Subject to ERISA
If our shareholders fail to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our common shares of beneficial interest, they could be subject to criminal and civil penalties.
There are special considerations that apply to tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans described in Section 3(3) of ERISA and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as IRAs or annuities described in Sections 408 or 408A of the Internal Revenue Code, annuities described in Sections 403(a) or (b) of the Internal Revenue Code, Archer MSAs described in Section 220(d) of the Internal Revenue Code, health savings accounts described in Section 223(d) of the Internal Revenue Code, or Coverdell education savings accounts described in Section 530 of the Internal Revenue Code) that are investing in our shares. If investors are investing the assets of a plan or IRA in our common shares of beneficial interest, t hey should satisfy themselves that, among other things:
| · | their investment is consistent with their fiduciary obligations under ERISA and the Internal Revenue Code applicable to their plan or IRA; |
| · | their investment is made in accordance with the documents and instruments governing their plan or IRA (including their plan’s investment policy, if applicable); |
| · | their investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code that may apply to their plan or IRA; |
| · | their investment will not impair the liquidity of the plan or IRA; |
| · | their investment will not produce UBTI for the plan or IRA; |
| · | they will be able to value the assets of the plan or IRA annually or more frequently in accordance with ERISA and Internal Revenue Code requirements and any applicable provisions of the plan or IRA; and |
| · | their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code. |
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil or criminal penalties and could subject the responsible fiduciaries to liability and equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the “party-in-interest” or “disqualified person” who engaged in the prohibited transaction may be subject to the imposition of excise taxes with respect to the amount involved.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We do not maintain any physical properties.
Item 3. Legal Proceedings.
None.
Item 4. (Removed and Reserved).
Part II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
Unless and until our shares are listed on a national securities exchange, we do not expect that a public market for our shares will develop. This illiquidity creates a risk that a shareholder may not be able to sell shares at a time or price acceptable to the shareholder. Until eighteen months after the termination of the Offering or the termination of any subsequent offering of our shares, we intend to use the offering price of shares in our most recent offering as the per share value (unless we have made a special distribution to shareholders of net proceeds from our investments prior to the date of determination of the per share value, in which case we will use the offering price less the per share amount of the special distribution). Beginning eighteen months after the last offering of our shares, our board of trustees will determine the value of our properties and other assets based on such information as our board determines appropriate, which may include independent valuations of our investments or of our enterprise as a whole.
There can be no assurance, however, with respect to any estimate of value that we prepare, that:
| · | the estimated value per share would actually be realized by our shareholders upon liquidation, because these estimates do not necessarily indicate that all loans will be paid in full or the price at which properties can be sold; |
| · | our shareholders would be able to realize estimated net asset values if they were to attempt to sell their shares, because no public market for our shares exists or is likely to develop; |
| · | the estimated value per share would be related to any individual or aggregated value estimates or appraisals of our assets; or |
| · | that the value, or method used to establish value, would comply with ERISA or Internal Revenue Code requirements. |
We have adopted a share redemption program that enables our shareholders to sell their shares back to us in limited circumstances. This program permits our shareholders to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations described below.
Our shareholders who have held their shares for at least one year may receive the benefit of limited liquidity by presenting for redemption all or portion of their shares to us at any time in accordance with the procedures outlined herein. At that time, we may, subject to the conditions and limitations described below, redeem the shares presented for redemption for cash to the extent that we have sufficient funds from operations available to us to fund such redemption.
Except as described below for redemptions upon the death of a shareholder (in which case we may waive the minimum holding periods), the purchase price for the redeemed shares, for the period beginning after a shareholder has held the shares for a period of one year, will be (1) 92% of the purchase price actually paid for any shares held less than two years, (2) 94% of the purchase price actually paid for any shares held for at least two years but less than three years, (3) 96% of the purchase price actually paid for any shares held at least three years but less than four years, (4) 98% of the purchase price actually paid for any shares held at least four years but less than five years and (5) for any shares held at least five years, the lesser of the purchase price actually paid or the then-current fair market value of the shareholder’s shares as determined by the most recent annual valuation of our shares. However, at any time we are engaged in an offering of our shares, the per share price for shares purchased under our redemption program will always be equal to or less than the applicable per share offering price. The price we will pay for redeemed shares will be offset by any net proceeds from capital transactions previously distributed to the redeeming shareholder in respect of such shares as a return of capital. In no event will the total amount paid for redeemed shares, including any net proceeds from capital transactions previously distributed to the redeeming shareholder in respect of the redeemed shares as a return of capital, exceed the then-current offering price. Distributions of cash available for distribution from our operations will not effect the price we will pay in respect of our redeemed shares. Although we do not intend to make distributions in excess of available cash, we are not precl uded from doing so. Any such distributions would be a return of capital to shareholders and would offset the price we will pay for redeemed shares.
We reserve the right in our 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 shareholder 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 share redemption program. In the event that we change the purchase price for redemption or terminate or suspend the program, we will send our shareholders written notice of such changes, termination or suspension at least 30 days prior to the date the change, termination or suspension will become effective.
In addition, and subject to the conditions and limitations described below, we will redeem shares, upon the death of a shareholder, including shares held by such shareholder through an IRA or other retirement or profit-sharing plan, after receiving written notice from the estate of the shareholder or the recipient of the shares through bequest or inheritance. We must receive such written notice within 180 days after the death of the shareholder. If spouses are joint registered holders of shares, the request to redeem the shares may be made if either of the registered holders dies. If the shareholder is not a natural person, such as a trust, partnership, corporation or other similar entity, the right of redemption upon death does not apply.
The purchase price for shares redeemed upon the death of a shareholder will be the lesser of (1) the purchase price the shareholder actually paid for the shares or (2) $20.00 per share. The price we will pay for shares redeemed upon the death of a shareholder will be offset by any net proceeds from capital transactions previously distributed to the deceased shareholder, or his or her estate, in respect of such shares as a return of capital contributions. In no event will the total amount paid for redeemed shares, including any net proceeds from capital transactions previously distributed to the deceased shareholder, or his or her estate, in respect of the redeemed shares as a return of capital, exceed the then-current offering price. Distributions of cash available for distribution from our operations will not affect the pri ce we will pay in respect of our redeemed shares. Although we do not intend to make distributions in excess of available cash, we are not precluded from doing so. Any such distributions would be a return of capital to shareholders and would offset the price we will pay for redeemed shares.
We will redeem shares upon the death or bankruptcy of a shareholder only to the extent that we decide to waive any applicable holding period requirements and have sufficient funds available to us to fund such redemption.
Our share redemption program, including the redemption upon the death of a shareholder, is available only for shareholders who purchase their shares directly from us (including shares purchased through the dealer manager and soliciting dealers) or certain transferees, and is not intended to provide liquidity to any shareholder who acquired his or her shares by purchase from another shareholder. In connection with a request for redemption, the shareholder or his or her estate, heir or beneficiary will be required to certify to us that the shareholder either (1) acquired the shares to be repurchased directly from us (including shares purchased through the dealer manager and soliciting dealers) or (2) acquired such shares from the original subscriber by way of a bona fide gift not for value to, or for the benefit of, a member o f the subscriber’s immediate or extended family (including the subscriber’s spouse, parents, siblings, children or grandchildren and including relatives by marriage) or through a transfer to a custodian, trustee or other fiduciary for the account of the subscriber or members of the subscriber’s immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or operation of law.
We intend to redeem shares monthly under the program. In respect of shares redeemed upon the death of a shareholder, we will not redeem in excess of 1% of the weighted average number of shares outstanding during the prior twelve-month period immediately prior to the date of redemption, and the total number of shares we may redeem at any time will not exceed 5% of the weighted average number of shares outstanding during the trailing twelve-month period prior to the redemption date. Our board of trustees will determine from time to time whether we have sufficient excess cash from operations to repurchase shares. 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 our distribution reinvestment plan.
We cannot guarantee that the funds set aside for the share redemption program will be sufficient to accommodate all requests made in any year. If we do not have such funds available at the time when redemption is requested, the shareholder or his or her estate, heir or beneficiary can (1) withdraw the request for redemption, (2) ask that we redeem their shares for an amount equal to the then-current net asset value of the shares, as determined by our board of trustees in its sole discretion, if the then-current net asset value of the shares is less than the repurchase price that otherwise would be paid for the shares under the redemption program, or (3) ask that we honor the original request at such time, if any, when sufficient funds become available. Such pending requests will be honored among all requesting sharehold ers in any given redemption period, as follows: first, pro rata as to redemptions upon the death of a shareholder; next, pro rata to shareholders who have requested redemption of their shares at the then-current net asset value as determined by our board of trustees in its sole discretion; next, pro rata to shareholders who demonstrate to our satisfaction another involuntary exigent circumstance, such as bankruptcy; and, finally, pro rata as to other redemption requests in the order, by month, in which such requests are received by us. With respect to this last category of pending requests, each pending request will be sorted according to the month in which such request was received by us. Future funds available for redemptions will then be allocated pro rata among the redemption requests received by us in the earliest month for which redemption requests have not been fulfilled, until all redemption requests received by us for such month have been fulfilled.
A shareholder or his or her estate, heir or beneficiary may present to us fewer than all of its shares then-owned for redemption, provided, however, that the minimum number of shares that must be presented for redemption shall be at least 25% of the holder’s shares. In the event a shareholder tenders all of his or her shares for redemption, our board of trustees, in its sole discretion, may waive the one-year holding period for shares purchased pursuant to our distribution reinvestment plan. A shareholder who wishes to have shares redeemed must mail or deliver to us a written request on a form provided by us and executed by the shareholder, its trustee or authorized agent. An estate, heir or beneficiary that wishes to have shares redeemed following the death of a shareholder must mail or deliver to us a written request on a form provided by us, including evidence acceptable to us of the death of the shareholder, and executed by the executor or executrix of the estate, the heir or beneficiary, or their trustee or authorized agent. If the shares are to be redeemed under the conditions outlined herein, we will forward the documents necessary to affect the redemption, including any signature guaranty we may require. Shareholders may withdraw a redemption request at any time prior to the date for redemption.
Through the fifth year following the termination of our primary offering, we intend to reinvest the principal repayments we receive on loans to create or invest in new loans. Following the fifth anniversary of the termination of our primary offering, we will not reinvest such proceeds in order to provide our shareholders with increased distributions and provide increased cash flow from which we may repurchase shares from shareholders wishing to sell their shares (subject to all applicable regulatory requirements and restrictions). We currently intend to redeem shares at that time for a purchase price equal to or less than the then-current net asset value of our shares as determined by our board of trustees in its sole discretion.
Our share redemption program is only intended to provide limited interim liquidity for our shareholders until our liquidation, since there is no public trading market for our shares and we do not expect that any public market for our shares will ever develop. Our board of trustees, in its sole discretion, may choose to terminate or suspend our share redemption program at any time it determines that such termination or suspension is in our best interest, or to reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions upon the death of a shareholder. We will terminate our share redemption program during the distribution of our common shares of beneficial interest in the event that our shares become listed on a national securities exchange or in the event that a secondary market for our shares develops. Shares owned by our sponsor or its affiliates will not be redeemed pursuant to our share redemption program. Neither our advisor nor any of its affiliates will receive any fee on the repurchase of shares by us pursuant to the share redemption program.
We will cancel the shares we purchase under the share redemption program and will not reissue the shares unless they are first registered with the SEC under the Securities Act and under appropriate state securities laws or otherwise issued in compliance with such laws and our declaration of trust.
The foregoing provisions regarding the share redemption program in no way limit our ability to repurchase shares from shareholders by any other legally available means for any reason that our board of trustees, in its discretion, deem to be in our best interest.
As of December 31, 2009, no shares of beneficial interest have been redeemed.
As of March 22, 2010, we had approximately 670,113 common shares of beneficial interest outstanding that were held by a total number of approximately 479 shareholders.
Distribution Reinvestment Plan
Our DRIP will allow our shareholders, and, subject to certain conditions set forth in the plan, any shareholder or partner of any other publicly offered limited partnership, real estate investment trust or other United Development Funding-sponsored real estate program, to elect to purchase our common shares with our distributions or distributions from such other programs. We are offering 10,000,000 shares for sale pursuant to our DRIP at $20 per share until the earliest to occur of: (1) the issuance of all shares authorized and reserved for issuance pursuant to the DRIP; (2) the termination of the Offering (which is anticipated to be November 12, 2011, unless extended for an additional year by our board of trustees or as otherwise permitted b y applicable law; provided, however, that our board of trustees may elect to extend the offering period for the shares sold pursuant to our DRIP, in which case participants in the plan will be notified) and any subsequent offering of DRIP shares pursuant to an effective registration statement; or (3) the determination by our board of trustees that the number of our shares traded in a secondary market is more than a de minimis amount. If shares authorized and reserved for issuance pursuant to the DRIP remain available for issuance, shares are being offered to the public pursuant to the Offering or a subsequent offering, and our shares are being traded in a secondary market and the amount of such shares traded is more than a de minimis amount, we will invest distributions in shares at a price equal to the most recent per share price at which our shares were traded in the secondary market prior to the close of business on the last business day prior to the date of the distribution.
Distributions will be authorized at the discretion of our board of trustees, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Internal Revenue Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
| · | the amount of time required for us to invest the funds received in the Offering; |
| · | our operating and interest expenses; |
| · | the ability of borrowers to meet their obligations under the loans; |
| · | the amount of distributions or dividends received by us from our indirect real estate investments; |
| · | the ability of our clients to sell finished lots to homebuilders and the ability of homebuilders to sell new homes to home buyers; |
| · | capital expenditures and reserves for such expenditures; |
| · | the issuance of additional shares; and |
| · | financings and refinancings. |
We must distribute to our shareholders at least 90% of our taxable income each year in order to meet the requirements for being treated as a REIT under the Internal Revenue Code.
Our board of trustees authorized a distribution to our shareholders of record beginning as of the close of business on each day of the period commencing on December 18, 2009 and ending on March 31, 2010. The distributions will be calculated based on the number of days each shareholder has been a shareholder of record based on 365 days in the calendar year, and will be equal to $0.0043836 per common share of beneficial interest, which is equal to an annualized distribution rate of 8.0%, assuming a purchase price of $20.00 per share. These distributions will be aggregated and paid in cash monthly in arrears. Therefore, the distributions declared for each record date in the December 2009, January 2010, February 2010 and March 2010 periods will be paid in January 60;2010, February 2010, March 2010 and April 2010, respectively. Distributions will be paid on or about the 25th day of the respective month or, if the 25th day of the month falls on a weekend or bank holiday, on the next business day following the 25th day of the month. Distributions for shareholders participating in our DRIP will be reinvested into our shares on the payment date of each distribution.
As of December 31, 2009, no distributions to shareholders had been made, but total distributions payable of approximately $4,000 had been declared and were paid on January 25, 2010.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Registered Securities
On November 12, 2009, the Trust’s Registration Statement (Registration No. 333-152760), covering the Offering of up to 25,000,000 common shares of beneficial interest to be offered at a price of $20 per share, was declared effective under the Securities Act of 1933, as amended. The Offering also covers up to 10,000,000 common shares of beneficial interest to be issued pursuant to our DRIP for $20 per share. We reserve the right to reallocate the common shares of beneficial interest registered in the Offering between the primary offering and the DRIP, provided that the aggregate amount of the Offering may not exceed $700,000,000.
The shares are being offered by our dealer manager, Realty Capital Securities, LLC, and select members of the Financial Industry Regulatory Authority (“FINRA”) on a “best efforts” basis, which means the dealer manager and soliciting dealers will only be required to use their best efforts to sell the shares and have no firm commitment or obligation to purchase any of the shares.
On December 18, 2009, we satisfied the minimum offering of 50,000 common shares of beneficial interest for gross offering proceeds of $1.0 million in connection with the Offering. As a result, our initial public subscribers were accepted as shareholders and the subscription proceeds from such initial public subscribers were released to us from escrow, provided that residents of New York and Nebraska were not admitted until we received and accepted subscriptions aggregating at least $2,500,000 and $5,000,000, respectively (the New York minimum offering amount was satisfied on January 8, 2010 and the Nebraska minimum offering amount was satisfied on January 27, 2010), and provided further, that residents of Pennsylvania will not be admitted until we receive and accept subscriptions aggregating at least $35,000,000. ; Since such time, we have admitted and intend to continue to admit, new investors at least monthly. As of December 31, 2009, we had issued an aggregate of 119,729 shares of beneficial interest in the Offering, in exchange for gross proceeds of approximately $2.4 million (approximately $2.1 million, net of approximately $285,000 in costs associated with the Offering). Of the Offering costs paid as of December 31, 2009, approximately $66,000 was paid to our Advisor or affiliates of our Advisor for organizational and offering expense and approximately $219,000 was paid to our dealer manager.
As of December 31, 2009, we had funded/participated in two participation agreements. These participation agreements totaled approximately $1.4 million and are included in loan participation interest – related party on our balance sheets. We paid our asset manager, an affiliate of our Advisor, approximately $40,000 for acquisition and origination fee expenses associated with such loan.
Item 6. Selected Financial Data.
We present below selected financial information. We encourage you to read the financial statements and the notes accompanying the financial statements included in this Annual Report. This information is not intended to be a replacement for the financial statements.
| | Year Ended December 31, 2009 | | Period from May 28, 2008 (Inception) through December 31, 2008 |
| OPERATING DATA | | | |
| Revenues | $ 4,247 | | $ 619 |
| Expenses | 25,959 | | 240 |
| Net Income (loss) | $ (21,712) | | $ 379 |
| Net income (loss) per share | $ (1.63) | | $ 0.04 |
| | December 31, |
| | 2009 | | 2008 |
| BALANCE SHEET DATA | | | |
| Loan participation interest – related party | $ 1,380,757 | | $ - |
| Deferred offering costs | 5,684,106 | | 1,455,788 |
| Other assets | 1,243,893 | | 23,629 |
| Total assets | $ 8,308,756 | | $ 1,479,417 |
| | | | |
| Accrued liabilities – related party | $ 5,516,613 | | $ 1,279,038 |
| Other liabilities | 708,171 | | - |
| Total liabilities | 6,224,784 | | 1,279,038 |
| Shareholders’ equity | 2,083,972 | | 200,379 |
| Total liabilities and shareholders’ equity | $ 8,308,756 | | $ 1,479,417 |
Item 7. 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:
Overview
On November 12, 2009, the Trust’s Registration Statement on Form S-11, covering the Offering of up to 25,000,000 common shares of beneficial interest to be offered at a price of $20 per share, was declared effective under the Securities Act of 1933, as amended. The Offering also covers up to 10,000,000 common shares of beneficial interest to be issued pursuant to our DRIP for $20 per share. We reserve the right to reallocate the common shares of beneficial interest registered in the Offering between the primary offering and the DRIP. On December 18, 2009, we satisfied the minimum offering of 50,000 common shares of beneficial interest for gross offering proceeds of $1.0 million in connection with the Offering. As a result, our initial public subscribers were accepted as sharehold ers and the subscription proceeds from such initial public subscribers were released to us from escrow, provided that residents of New York and Nebraska were not admitted until we received and accepted subscriptions aggregating at least $2,500,000 and $5,000,000, respectively (the New York minimum offering amount was satisfied on January 8, 2010 and the Nebraska minimum offering amount was satisfied on January 27, 2010), and provided further, that residents of Pennsylvania will not be admitted until we receive and accept subscriptions aggregating at least $35,000,000.
We will experience a relative increase in liquidity as additional subscriptions for common shares are received and a relative decrease in liquidity as offering proceeds are expended in connection with the origination, purchase or participation in secured loans or other investments, as well as the payment or reimbursement of selling commissions and other organizational and offering expenses.
The Trust intends to use substantially all of the net proceeds from the Offering to originate, purchase, participate in and hold for investment secured loans made directly by the Trust or indirectly through its affiliates to persons and entities for the acquisition and development of parcels of real property as single-family residential lots, and the construction of model and new single-family homes, including development of mixed-use master planned residential communities. The Trust also intends to make direct investments in land for development into single-family lots, new and model homes and portfolios of finished lots and homes; provide credit enhancements to real estate developers, home builders, land bankers and other real estate investors; and purchase participations in, or finance for other real estate investors the purchase o f, securitized real estate loan pools and discounted cash flows secured by state, county, municipal or other similar assessments levied on real property. The Trust also may enter into joint ventures with unaffiliated real estate developers, home builders, land bankers and other real estate investors, or with other United Development Funding-sponsored programs, to originate or acquire, as the case may be, the same kind of secured loans or real estate investments the Trust may originate or acquire directly.
Until required in connection with the funding of loans or other investments, substantially all of the net proceeds of the Offering and, thereafter, our working capital reserves, may be invested in short-term, highly-liquid investments including, but not limited to, government obligations, bank certificates of deposit, short-term debt obligations and interest-bearing accounts.
We intend to make an election under Section 856(c) of the Internal Revenue Code to be taxed as a REIT, beginning with the taxable year ending December 31, 2010, which will be the first year in which we have material operations. If we qualify as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our shareholders. If we make an election to be taxed as a REIT and later fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and may not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied unless we are entitled to relief under certain statutory provisions. Such an event could ma terially and adversely affect our net income. However, we believe that we are organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes during the year ended December 31, 2010, the first year in which we will have material operations, and we intend to continue to operate so as to remain qualified as a REIT for federal income tax purposes.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform with generally accepted accounting principles (“GAAP”) in the United States. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is po ssible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.
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 Financial Accounting Standards Board (“FASB”) and other authoritative bodies in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses and AICPA 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 Accounting Standards Codification (“ASC”). The ASC does not change how the Trust accounts for its transactions or the nature of related disclosures made. Rather, the ASC results in change s to how the Trust references accounting standards within its reports. This change was made effective by the FASB for periods ending on or after September 15, 2009. The Trust has updated references to GAAP in this Annual Report on Form 10-K to reflect the guidance in the 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 are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Revenue Recognition
Interest income on loan participation interest – related party is recognized over the life of the participation agreement and recorded on the accrual basis. Income recognition is suspended for participation agreements at either the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. As of December 31, 2009, we were accruing interest on the loan participation interest – related party.
Loan Participation Interest – Related Party
Loan participation interest – related party represents two participation agreements with UMT Home Finance, L.P., a Delaware limited partnership (“UMTHF”), to participate in certain of UMTHF’s interim construction loan facilities (the “Construction Loans”). Pursuant to the participation agreements, UDF IV will participate in the Construction Loans up to a maximum amount of $3.5 million by funding the lending obligations of UMT; UMT owns 100% of the interests in UMTHF and its advisor also serves as the Trust’s Advisor.
Cash Flow Distributions
Our board of trustees authorized a distribution to our shareholders of record beginning as of the close of business on each day of the period commencing on December 18, 2009 and ending on March 31, 2010. The distributions will be calculated based on the number of days each shareholder has been a shareholder of record based on 365 days in the calendar year, and will be equal to $0.0043836 per common share of beneficial interest, which is equal to an annualized distribution rate of 8.0%, assuming a purchase price of $20.00 per share. These distributions will be aggregated and paid in cash monthly in arrears. Therefore, the distributions declared for each record date in the December 2009, January 2010, February 2010 and March 2010 periods will be paid in January 2010, February 2010, March 2010 and April 2010, respectively. Distribut ions will be paid on or about the 25th day of the respective month or, if the 25th day of the month falls on a weekend or bank holiday, on the next business day following the 25th day of the month. Distributions for shareholders participating in our DRIP will be reinvested into our shares on the payment date of each distribution.
Results of Operations
We commenced active operations December 18, 2009, after the Trust satisfied the minimum offering of 50,000 common shares of beneficial interest for gross offering proceeds of $1.0 million in connection with the Offering. As a result, our initial public subscribers were accepted as shareholders and the subscription proceeds from such initial public subscribers were released to us from escrow, provided that residents of New York and Nebraska were not admitted until we received and accepted subscriptions aggregating at least $2,500,000 and $5,000,000, respectively (the New York minimum offering amount was satisfied on January 8, 2010 and the Nebraska minimum offering amount was satisfied on January 27, 2010), and provided further, that residents of Pennsylvania will not be admitted until we receive and accept subscriptio ns aggregating at least $35,000,000. As a result, our operations for the year ended December 31, 2009 are not comparable to the results of operations for the period from May 28, 2008 (Inception) through December 31, 2008. As there was no operational activity during the period from May 28, 2008 (Inception) through December 31, 2008, the only results presented are for the year ended December 31, 2009.
Revenues
Interest income for the year ended December 31, 2009 was approximately $4,000. On December 18, 2009, we accepted our initial public subscribers as shareholders, resulting in the Trust having funds available to enter into two participation agreements. We expect revenues to increase in 2010 as we continue to raise proceeds from the Offering and invest proceeds in revenue-generating real-estate investments.
Expenses
General and administrative and advisory fee – related party expenses for the year ended December 31, 2009 were approximately $24,000 and $2,000, respectively.
We intend to grow our portfolio in conjunction with the increase in proceeds raised in the Offering. We intend to deploy such proceeds in a diversified manner to the borrowers and markets in which we have experience and as markets dictate in accordance with the economic factors conducive for a stable residential market. We expect general and administrative and advisory fee – related party expenses to increase commensurate with the growth of our portfolio.
Cash Flow Analysis
We commenced active operations December 18, 2009, after the Trust satisfied the minimum offering amount. The Trust’s initial public subscribers were accepted as shareholders and the subscription proceeds from such initial public subscribers were released to the Trust from escrow, provided that residents of New York and Nebraska were not admitted until we received and accepted subscriptions aggregating at least $2,500,000 and $5,000,000, respectively (the New York minimum offering amount was satisfied on January 8, 2010 and the Nebraska minimum offering amount was satisfied on January 27, 2010), and provided further, that residents of Pennsylvania will not be admitted until we receive and accept subscriptions aggregating at least $35,000,000. As a result, our cash flows for the years ended December 31, 2009 are not comparable to the cash flows from the period from May 28, 2008 (Inception) through December 31, 2008. As there were no active operations from the period from May 28, 2008 to December 31, 2008, the only cash flows presented are for the year ended December 31, 2009.
Cash flows used in operating activities for the year ended December 31, 2009 were approximately $208,000 and were comprised primarily of other assets, which include subscriptions being processed by our transfer agent, offset slightly by a net loss.
Cash flows used in investing activities for the year ended December 31, 2009 were approximately $1.4 million and resulted from investments in participation agreements – related party.
Cash flows provided by financing activities for the year ended December 31, 2009 were approximately $2.1 million and were primarily the result of funds received from the issuance of common shares of beneficial interest pursuant to the Offering.
Our cash and cash equivalents were approximately $520,000 as of December 31, 2009.
Liquidity and Capital Resources
Our principal demands for funds will be for real estate-related investments, for the payment of operating expenses, and for the payment of interest on our outstanding indebtedness. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations, and we expect to meet cash needs for investments from the net proceeds of the Offering and from financings.
There may be a delay between the sale of our shares and the making of real estate-related investments, which could result in a delay in our ability to make distributions to our shareholders. We expect to have little, if any, cash flow from operations available for distribution until we make investments. However, we have not established any limit on the amount of proceeds from the Offering that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT. In addition , to the extent our investments are in development projects or in other properties that have significant capital requirements and/or delays in their ability to generate income, our ability to make distributions may be negatively impacted, especially during our early periods of operation.
We intend to use debt as a means of providing additional funds for the acquisition or origination of secured loans, acquisition of properties and the diversification of our portfolio. There is no limitation on the amount we may borrow for the purchase or origination of a single secured loan, the purchase of any individual property or other investment. Under our declaration of trust, the maximum amount of our indebtedness shall not exceed 300% of our net assets as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent trustees and disclosed in our next quarterly report to shareholders, along with justification for such excess. In addition to our declaration of trust limitation, our board of trustees has adopted a policy to generally limit our fund level borrowings to 50% of the aggr egate fair market value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. We also intend, when appropriate, to incur debt at the asset level. Asset level leverage will be determined by the anticipated term of the investment and the cash flow expected by the investment. Asset level leverage is expected to range from 0% to 90% of the asset value.
We intend to utilize leverage at both the asset level and the entity level. Although we may acquire investments free and clear of indebtedness, we intend to encumber investments using land acquisition, development, home and lot indebtedness. We expect that the asset level indebtedness will be either interest only or be amortized over the expected life of the asset. We expect this asset indebtedness may be from a senior commercial lender between 50% and 90% of the fair market value of the asset. We expect that the entity-level indebtedness will be a revolving credit facility permitting us to borrow up to an agreed-upon outstanding principal amount. We also expect that the entity-level indebtedness will be secured by a first priority lien upon all of our existing and future acquired assets.
Our advisor may, but is not required to, establish capital reserves from gross offering proceeds, out of cash flow generated from interest income from loans and income from other investments or out of non-liquidating net sale proceeds from the sale of our loans, properties and other investments. Alternatively, a lender may require its own formula for escrow of capital reserves.
Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the repayment of loans, sale of assets and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.
Material Trends Affecting Our Business
We are a newly organized Maryland real estate investment trust that intends to qualify as a REIT under federal tax law and derive a significant portion of our income by originating, purchasing, participating in and holding for investment secured loans made directly by us or indirectly through our affiliates to persons and entities for the acquisition and development of parcels of real property as single-family residential lots, and the construction of model and new single-family homes, including development of mixed-use master planned residential communities. We intend to concentrate our investments on single-family lot developers who sell their lots to national, regional, and local homebuilders for the acquisition of property and the development of r esidential lots, as well as homebuilders for the construction of single-family homes.
We believe that the housing market has reached a bottom in its four year decline and has begun to recover. New single-family home permits, starts, and sales have all risen from their lows experienced in January 2009, reflecting a slow return of demand for new homes. However, concerns remain regarding the shape and scope of the broader economic recovery. The consumer confidence index, which fell to record lows during the downturn, has risen but continues to be generally depressed as unemployment remains high, and the availability of conventional bank financing remains limited. These concerns continue to pose significant obstacles to a robust recovery.
Ongoing credit constriction and disruption of mortgage markets and price correction have made potential new home purchasers and real estate lenders very cautious. As a result of these factors, the national housing market experienced a protracted decline, and the time necessary to correct the market may mean a corresponding slow recovery for the housing industry.
Capital constraints at the heart of the credit crisis have reduced the number of real estate lenders able or willing to finance development, construction and the purchase of homes and have increased the number of undercapitalized or failed builders and developers. With credit less available and stricter underwriting standards, mortgages to purchase homes have become harder to obtain. The number of new homes developed also has decreased, which may result in a shortage of new homes and developed lots in select real estate markets in 2010 and 2011. Further, the liquidity provided in the secondary market by Fannie Mae and Freddie Mac (“Government Sponsored Enterprises” or “GSEs”) to the mortgage industry is ve ry important to the housing market and has been constricted as these entities have suffered significant losses as a result of depressed housing and credit market conditions. These losses have reduced their equity and prompted the U.S. government to guarantee the backing of all losses suffered by the GSEs. Limitations or restrictions on the availability of financing or on the liquidity provided by such enterprises could adversely affect interest rates and mortgage availability and could cause the number of homebuyers to decrease, which would increase the likelihood of defaults on our loans and, consequently, reduce our ability to pay distributions to our shareholders.
In the midst of the credit crisis, the federal government passed the Economic Stabilization Act of 2008, which was intended to inject emergency capital into financial institutions, ease accounting rules that require such institutions to show the deflated value of assets on their balance sheets, and ultimately help restore a measure of public confidence to enable financial institutions to raise capital. With the necessary capital, lenders will again be able to lend money for the development, construction and purchase of homes. However, the Economic Stabilization Act was just the beginning of a much larger task, and we anticipate that Congress will further overhaul housing policy and financial regulation in a 2010 legislative effort.
Nationally, new single-family home inventory continued to improve in the fourth quarter of 2009 from the third quarter while new home sales slowed. Since the holiday season is not typically a high volume season in terms of the number of home purchases, we believe this suggests that the housing market may be following seasonal buying patterns. The U.S. Census Bureau reports that the sales of new single-family residential homes in December 2009 were at a seasonally adjusted annual rate of 342,000 units. This number is down from the third quarter figure of 402,000 and approximately 8.6% below the December 2008 estimate of 374,000, though up 3.95% from its bottom in January 2009. The seasonally adjusted estimate of new houses for sal e at the end of December 2009 was 231,000 – a supply of 8.1 months at the current sales rate – which is a reduction of approximately 20,000 homes from the third quarter supply of 251,000. We believe that this drop in the number of new houses for sale by approximately 119,000 units year-over-year reflects the homebuilding industry’s extensive efforts to bring the new home market back to equilibrium by reducing new housing starts and selling existing new home inventory.
According to the source identified above, new single-family residential home permits and starts fell nationally from 2006 through 2008, as a result and in anticipation of an elevated supply of and decreased demand for new single-family residential homes in that period. Since January 2009, however, single-family permits and starts have risen significantly. Single-family homes authorized by building permits in December 2009 were at a seasonally adjusted annual rate of 508,000 units. This is 48.5% above the January 2009 low and a 37.3% year-over-year increase from the December 2008 estimate of 370,000 units. Single-family home starts for December 2009 were at a seasonally adjusted annual rate of 456,000 units. This is 27.7% above the January 2009 low and 16.0% higher than the December 2008 estimate of 393,000 units. We believe that, with these reductions, new home inventory levels have reached equilibrium in most markets, even at relatively low levels of demand, and that what is necessary to regain prosperity in housing markets is the return of healthy levels of demand. The primary factors affecting new home sales are housing prices, home affordability, and housing demand. Housing supply may affect both new home prices and demand for new homes. When new home supplies exceed new home demand, new home prices may generally be expected to decline. Declining new home prices may result in diminished new home demand as people postpone a new home purchase until such time as they are comfortable that stable price levels have been reached.
Long-term demand will be fueled by a growing population, household formation, population migration, immigration and job growth. The U.S. Census Bureau forecasts that California, Florida and Texas will account for nearly one-half of the total U.S. population growth between 2000 and 2030 and that the total population of Arizona and Nevada will double during that period. The U.S. Census Bureau projects that between 2000 and 2030 the total populations of Arizona and Nevada will grow from approximately 5,000,000 to more than 10,700,000 and from approximately 2,000,000 to nearly 4,300,000, respectively; Florida’s population will grow nearly 80% between 2000 and 2030, from nearly 16,000,000 to nearly 28,700,000; Texas’ population will increase 60% between 2000 and 2030 from nearly 2 1,000,000 to approximately 33,300,000; and California’s population will grow 37% between 2000 and 2030, from approximately 34,000,000 to nearly 46,500,000.
The Homeownership Alliance, a joint project undertaken by the chief economists of Fannie Mae, Freddie Mac, the Independent Community Bankers of America, the National Association of Home Builders, and the National Association of Realtors, has projected that 1.3 million new households will be formed per year over the next decade. Similarly, the National Association of Home Builders forecasts average annual new single-family home starts over the ten-year period 2008-2017 to be 1,267,000, ranging from a low of 650,000 to a high of 1,550,000, and the average annual new single-family home sales during that same period to be 1,067,000, ranging between 542,000 and 1,406,000 units per year.
While housing woes have beleaguered the national economy, Texas housing markets have held up as some of the best in the country. We intend to focus much of our initial investment portfolio in Texas as we believe Texas markets, though weakened from their highs in 2007, have remained fairly healthy due to strong demographics and economies and high housing affordability ratios. Further, Texas did not experience the dramatic price appreciation (and subsequent depreciation) that states such as California, Florida, Arizona, and Nevada experienced. The graph below, created with data from the Federal Housing Finance Agency’s Purchase Only Index, illustrates the recent declines in home price appreciation nationally, as well as in California, Florida, Arizona, and Nevad a, though price declines have begun to moderate in those states too. Further, the graph illustrates how Texas has maintained home price stability and not experienced such pronounced declines.
According to numbers publicly released by Residential Strategies, Inc. or Metrostudy, leading providers of primary and secondary market information, the median new home prices for December 2009 in the metropolitan areas of Austin, Houston, Dallas, and San Antonio are $201,481, $188,178, $201,779 and $179,301, respectively. These amounts are all below the December 2009 national median sales price of new homes sold of $221,300, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development.
Using the Department of Housing and Urban Development’s estimated 2009 median family income for the respective metropolitan areas of Austin, Houston, Dallas, and San Antonio, the median income earner in those areas has 1.50 times, 1.39 times, 1.38 times, and 1.31 times the income required to qualify for a mortgage to purchase the median priced new home in the respective metropolitan area. These numbers illustrate the high affordability of Texas homes. Our measurement of housing affordability, as referenced above, is determined as the ratio of median family income to the income required to qualify for a 90 percent, 30-year fixed-rate mortgage to purchase the median-priced new home, assuming an annual mortgage insurance premium of 50 ba sis points for private mortgage insurance and a cost that includes estimated property taxes and insurance for the home. Using the U.S. Census Bureau’s 2009 income data to project an estimated median income for the United States of $64,000 and the December 2009 national median sales prices of new homes sold of $221,300, we conclude that the national median income earner has 1.19 times the income required to qualify for a mortgage loan to purchase the median-priced new home in the United States. This estimation reflects the increase in home affordability in housing markets outside of Texas over the past 36 months, as new home prices in housing markets outside of Texas generally have fallen. Recently, however, such price declines have begun to stabilize. The December 2009 national median new home price of $221,300 fell by just 3.61% from the December 2008 median new home sales price of $229,600, according to the Department of Housing and Urban Development. As a result of fallin g home prices, we believe that affordability has been restored to the national housing market.
Due to the national and global recession, the Texas employment market slowed in the fourth quarter of 2008 through the first three quarters of 2009 until adding 7,100 jobs in the fourth quarter of 2009. Over the twelve month period ending December 2009, the United States Department of Labor reported that Texas lost approximately 354,200 jobs and the unemployment rate increased to 8.2% from 6.1% in December 2008. However, the same source states that, nationally, the United States lost approximately 4,740,000 jobs, and the unemployment rate rose to 10.0% from 7.4% in December 2008. In spite of the job losses in 2009, we believe that the long term employment fundamentals remain sound in Texas. The Texas Workforce Commission report s that Texas has added more than half a million new jobs over the past five years, and the Federal Reserve Bank of Dallas has recently forecasted that Texas may add between 100,000 and 200,000 jobs in 2010.
The Texas Workforce Commission reports that as of December 2009, the unemployment rate for Austin-Round Rock, Texas was 7.0%, up from 5.2% in December 2008; Dallas-Fort Worth-Arlington, Texas was 8.0%, up from 5.9%; Houston-Sugar Land-Baytown, Texas was 8.2%, up from 5.6%; and San Antonio, Texas was 6.9%, up from 5.3%. Austin experienced a net loss of 18,400 jobs year-over-year for the calendar year of 2009. During those same 12 months, Houston, Dallas-Fort Worth, and San Antonio experienced net losses of 98,600, 89,600, and 20,600 jobs, respectively. However, these cities have added an estimated net total of 464,400 jobs over the past five years: Austin added 76,500 jobs; Dallas-Fort Worth added 123,800 jobs; Houston added 197,900 jobs; and San Antonio added 66,200 jobs.
As stated above, the Texas economy slowed and suffered a net loss of jobs in 2009 due to the national and global recession. The National Bureau of Economic Research has concluded that the U.S. economy entered into a recession in December 2007, ending an economic expansion that began in November 2001. We believe that the transition from month-over-month and year-over-year job gains in Texas, to year-over-year and month-over-month job losses indicates that the Texas economy slowed significantly and followed the nation into recession in the fourth quarter of 2008. However, we also believe that the Texas economy will continue to outperform the natio nal economy. According to the Texas Workforce Commission, Texas tends to enter into recessions after the national economy has entered a recession and usually leads among states in the economic recovery. In the current downturn, Texas’ recession trailed the national recession by nearly a year, and the state’s economy now appears to be entering the early stages of recovery. Dallas Federal Reserve’s Index of Texas leading indicators has steadily improved since reaching a low in March 2009; the Texas Comptroller of Public Accounts projects that the Texas economy will grow by 2.6% in 2010; and a number of independent reports and forecasts are now forecasting that Texas cities will be among the first to recover based on employment figures, gross metropolitan product, and home prices.
The United States Census Bureau reported in its 2009 Estimate of Population Change July 1, 2008 to July 1, 2009 that Texas led the country in population growth during that period. The estimate concluded that Texas grew by 478,012 people, or 2.00%, a number which was 1.25 times greater than the next closest state in terms of raw population growth, California, and more than 3.57 times the second closest state in terms of raw population growth, North Carolina. The United States Census Bureau also reported that among the 15 counties that added the largest number of residents between July 1, 2007 and July 1, 2008, six were in Texas: Harris (Houston), Tarrant (Fort Worth), Bexar (San Antonio), Collin (North Dallas), Dallas (Dallas) and Travis (Austin). In March 2009, the United States Census Bureau reported that Texas’ five major cities – Austin, Houston, San Antonio, Dallas and Fort Worth – were among the top 15 in the nation for population growth from 2007 to 2008. Dallas-Fort Worth-Arlington led the nation in numerical population growth with a combined estimated population increase of 146,532, with Dallas-Plano-Irving having an estimated increase of 97,036 and Fort Worth-Arlington having an estimated increase of 49,496. Houston-Sugarland-Baytown was second in the nation with a population increase of 130,185 from July 1, 2007 to July 1, 2008. Austin-Round Rock had an estimated population growth of 60,012 and San Antonio had an estimated population growth of 46,524 over the same period. The percentage increase in population for each of these major Texas cities ranged from 2.34% to 3.77%.
The Third Quarter 2009 U.S. Market Risk Index, a study prepared by PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc., which ranks the nation’s 50 largest metropolitan areas through the third quarter of 2009 according to the likelihood that home prices will be lower in two years, reported that Texas cities are among the nation’s best for home price stability. This index analyzes housing price trends, the impact of foreclosure rates, and the consequence of excess housing supply on home prices. The quarterly report projects that there is less than a 36% chance that Dallas/Fort Worth-area home prices will fall during the next two years; a 40.5% chance that Houston-area home prices will fall during the next two years; a 17.5% chance that San Antonio-area home prices will fall during the next two years; and a 63.6% chance that Austin-area home prices will fall during the next two years. Except for the Austin area, all Texas metropolitan areas included in the report are among the nation’s top ten least-likely areas to experience a decline in home prices in two years. The Austin area is ranked the twentieth least-likely area to experience a decline. Dallas-Plano-Irving, Texas is the nation’s eighth least-likely metropolitan area, Fort Worth-Arlington, Texas is sixth least-likely, Houston-Sugar Land-Baytown, Texas is tenth least-likely, and San Antonio, Texas is third least-likely.
In their fourth quarter purchase only price index, the Federal Housing Finance Agency (“FHFA”) reports that Texas had a home price appreciation of 0.83% between the fourth quarter of 2008 and the fourth quarter of 2009. The FHFA’s all-transaction price index report provides that existing home price appreciation between the fourth quarter of 2008 and the fourth quarter of 2009 for (a) Austin was -1.66%; (b) Houston was 0.44%; (c) Dallas was -1.27%; (d) Fort Worth was -1.05%; (e) San Antonio was -0.72%; and (f) Lubbock was 1.38%. However, every city remains well above the national average in the same index, which was -4.66% between the fourth quarter of 2008 and the fourth quarter 2009. Besides sales prices, the all-transaction price index report also tracks average house price cha nges in refinancings of the same single-family properties utilizing conventional, conforming mortgage transactions.
The Texas Comptroller of Public Accounts notes that the rate of foreclosures and defaults in Texas has remained generally stable for the past three years and well below the national average. Likewise, the Federal Reserve Bank of Dallas anticipates, in its economic letter for the fourth quarter of 2009, that the Texas foreclosure rate will continue to remain below the national average in 2010. Homebuilding and residential construction employment are likely to remain generally weak for some time, but Texas again will likely continue to outperform the national standards. We believe that Texas’ housing sector is in better shape, the cost of living and doing business is lower, and its economy is more dynamic and diverse than the national average.
In contrast to the conditions of many homebuilding markets in the country, new home sales are greater than new home starts in Texas markets, indicating that home builders in Texas continue to focus on preserving a balance between new home demand and new home supply. Home builders and developers in Texas have remained disciplined on new home construction and project development. New home starts have been declining year-over-year and are outpaced by new home sales in all four major Texas markets where such data is available. Inventories of finished new homes and total new housing (finished vacant, under construction, and model homes) remain healthy and balanced in all four major Texas markets: Austin, Dallas-Fort Worth, Houston, and San Antonio. Each major Texas market has e xperienced a rise in the number of months of finished lot inventories as homebuilders reduced the number of new home starts in 2008, causing each major Texas market to reach elevated levels. Houston has an estimated inventory of finished lots of approximately 41.1 months, Austin has an estimated inventory of finished lots of approximately 48.3 months, San Antonio has an estimated inventory of finished lots of approximately 61.5 months, and Dallas-Fort Worth has an estimated inventory of finished lots of approximately 75.3 months. A 24-28 month supply is considered equilibrium for finished lot supplies.
The elevation in month’s supply of finished lot inventory in Texas markets owes itself principally to the decrease in the pace of annual starts rather than an increase in the raw number of developed lots. Indeed, the number of finished lots dropped by more than 1,100 lots in Austin, more than 900 in San Antonio, more than 2,400 lots in Houston, and more than 3,400 lots in Dallas-Fort Worth in the fourth quarter of 2009. In the calendar year 2009, the total lot count in the four Texas markets dropped by nearly 21,900, from 233,345 to 211,563. Annual starts in each of the Austin, San Antonio, Houston, and Dallas-Fort Worth markets are outpacing lot deliveries. With the discipline evident in these markets, we expect to see a continued decline in raw numbers of finished lot inventories i n coming quarters as new projects have been significantly reduced.
Texas markets continue to be some of the strongest homebuilding markets in the country, though home building in Texas has weakened over the past year as a result of the national economic downturn. While the decline in housing starts has caused the month supply of vacant lot inventory to become elevated from its previously balanced position, it has also preserved a balance in housing inventory. Annual new home sales in Austin outpace starts 7,910 versus 6,788, with annual new home sales declining year-over-year by approximately 27.74%. Finished housing inventory rose to a slightly elevated level of 3.1 months, while total new housing inventory (finished vacant, under construction and model homes) fell to a relatively healthy 6.4 months. The generally accepted equilibrium levels for finished housing inventory and total new housing inventory are a 2-to-2.5 month supply and a 6.0 month supply, respectively. Like Austin, San Antonio is also a relatively healthy homebuilding market. Annual new home sales in San Antonio outpace starts 8,104 versus 7,252, with annual new home sales declining year-over-year by approximately 24.63%. Finished housing inventory remained at a generally healthy level with a 2.6 month supply. Total new housing inventory rose slightly but remained healthy at a 6.2 month supply. Houston, too, is a relatively healthy homebuilding market. Annual new home sales there outpace starts 21,697 versus 18,094, with annual new home sales declining year-over-year by approximately 25.56%. Finished housing inventory and total new housing inventory are generally healthy at a 2.8 month supply and a 6.1 month supply, respectively. Dallas-Fort Worth is a relatively healthy homebuilding market as well. Annua l new home sales in Dallas-Fort Worth outpace starts 17,235 versus 13,501, with annual new home sales declining year-over-year by approximately 32.20%. Finished housing inventory declined slightly to a 3.0 month supply, while total new housing inventory fell to a 6.5 month supply, respectively, each measurement slightly above the considered equilibrium level. All numbers are as publicly released by Residential Strategies, Inc. or Metrostudy, leading providers of primary and secondary market information.
The Real Estate Center at Texas A&M University has reported that inventory levels and sales of existing homes remain relatively healthy in Texas markets, as well. Though the year-over-year sales pace has fallen between 4% and 10% in each of the four largest Texas markets, inventory levels have decreased. In December, the number of months of home inventory for sale in Austin, Houston, Dallas, Fort Worth, and Lubbock was 5.4 months, 6.0 months, 5.3 months, 6.2 months, and 4.9 months, respectively. San Antonio’s inventory is more elevated with a 7.2 month supply of homes for sale. Like new home inventory, a 6-month supply of inventory is considered a balanced market with more than 6 months of inventory generally being considered a buyer’s market and less than 6 months of inven tory generally being considered a seller’s market. In 2009, the number of existing homes sold in (a) Austin was 20,871, down 7% year-over-year; (b) San Antonio was 18,649, down 4% year-over-year; (c) Houston was 59,984, down 8% year-over-year, (d) Dallas was 45,544, down 10% year-over-year, (e) Fort Worth was 8,428, down 14% year-over-year, and (f) Lubbock was 3,189, down 2% year-over-year.
In managing and understanding the markets and submarkets in which we intend to make loans, we will monitor the fundamentals of supply and demand. We will monitor the economic fundamentals in each of the markets in which we make loans by analyzing demographics, household formation, population growth, job growth, migration, immigration and housing affordability. We also will monitor movements in home prices and the presence of market disruption activity, such as investor or speculator activity that can create false demand and an oversupply of homes in a market. Further, we will study new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, existing home prices, foreclosures, absorption, prices with respect to new and existing home sales, finished lot s and land, and the presence of sales incentives, discounts, or both, in a market.
We will face a risk of loss resulting from adverse changes in interest rates. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. In some instances, the loans we make will be junior in the right of repayment to senior lenders, who will provide loans representing 60% to 75% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.
Developers and homebuilders to whom we intend to make loans and with whom we intend to enter into subordinate debt positions will use the proceeds of our loans and investments to develop raw real estate into residential home lots and construct homes. The developers obtain the money to repay our development loans by reselling the residential home lots to homebuilders or individuals who build single-family residences on the lots or by obtaining replacement financing from other lenders. Homebuilders obtain the money to repay our loans by selling the homes they construct or by obtaining replacement financing from other lenders. If interest rates increase, the demand for single-family residences may decrease. Also, if mor tgage financing underwriting criteria become stricter, demand for single-family residences may decrease. In such an interest rate and/or mortgage financing climate, developers and builders may be unable to generate sufficient income from the resale of single-family residential lots and homes to repay loans from us, and developers’ and builders’ costs of funds obtained from lenders in addition to us may increase, as well. Accordingly, increases in single-family mortgage interest rates or decreases in the availability of mortgage financing could increase the number of defaults on loans made by us.
We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that we reasonably anticipate to have a material impact on either the income to be derived from our investments in mortgage loans or entities that make mortgage loans, other than those referred to in this Annual Report on Form 10-K. The disruption of mortgage markets, in combination with a significant amount of negative national press discussing turmoil in mortgage markets and the poor condition of the national housing industry, including declining home prices, have made potential new home purchasers and real estate lenders very cautious. The economic downturn, the failure of highly respected financial institutions, significant decline in equity markets around the world, unprecedented administrative and legislative actions in the United States, and actions taken by central banks around the globe to stabilize the economy have further caused many prospective home purchasers to postpone their purchases. In summary, we believe there is a general lack of urgency to purchase homes in these times of economic uncertainty. We believe that this has further slowed the sales of new homes and finished lots developed in certain markets; however, we do not anticipate the prices of those lots changing greatly. We also expect that the decrease in the availability of replacement financing may increase the number of defaults on development loans made by us or extend the time period anticipated for the repayment of our loans.
Off-Balance Sheet Arrangements
In connection with the funding of some of the Trust’s organization costs, on June 26, 2009, UMTH LD entered into a $6.3 million line of credit from Community Trust Bank of Texas. As a condition to such line of credit, the Trust has guaranteed UMTH LD’s obligations to Community Trust Bank of Texas under the line of credit in an amount equal to the amount of the Trust’s organization costs funded by UMTH LD. This guaranty includes pledges of the Trust’s assets to Community Trust Bank of Texas. However, the amount of the Trust’s guaranty is reduced to the extent that the Trust reimburses UMTH LD for any of the Trust’s organization costs it has funded, and the guaranty is subject to the overall limit on the Trust’s reimbursement of organization and offering expenses, which is set at 3% of the gross offering proceeds.
Contractual Obligations
As of December 31, 2009, we had originated two participation agreements with related parties totaling approximately $3.5 million. We have approximately $2.1 million of commitments to be funded under the terms of the loan participation interest – related party.
The Partnership has no other outstanding debt or contingent payment obligations, other than certain loan guaranties or letters of credit, that we may make to or for the benefit of third-party lenders.
Subsequent Events
Effective January 8, 2010, we entered into a Loan Participation Agreement (the “UDF III Participation Agreement”) with UDF III, pursuant to which we purchased a participation interest in a finished lot loan (the “BL Loan”) from UDF III, as the lender, to Buffington Land, Ltd., an unaffiliated Texas limited partnership, and Len-Buf Land Acquisitions of Texas, L.P., an unaffiliated Texas limited partnership, as co-borrowers (collectively, “Buffington”). The BL Loan is evidenced and secured by a first lien deed of trust recorded against approximately 67 finished residential lots in the Bridges at Bear Creek residential subdivision in the City of Austin, Travis County, Texas, a promissory note, assignments of certain lot sa le contracts and earnest money, and other loan documents.
Pursuant to the UDF III Participation Agreement, we are entitled to receive repayment of 94.74163% of the $5,007,144 outstanding principal amount of the BL Loan, plus its proportionate share of accrued interest thereon (the “BL Participation Interest”). The purchase price for the BL Participation Interest is $4,743,850. We have no obligations to advance funds to Buffington under the BL Loan or to increase our BL Participation Interest in the BL Loan. The interest rate under the BL Loan is the lower of 14% or the highest rate allowed by law. Our BL Participation Interest is repaid as Buffington repays the BL Loan. Buffington is required to pay interest monthly and to repay a portion of principal upon the sale of residential lots covered by the deed of trust. The BL Loan is due and payable in full on June 30, 2011. UMT also owns a participation interest in the Loan.
UDF III will continue to manage and control the BL Loan. Pursuant to the UDF III Participation Agreement, we have appointed UDF III as our agent to act on our behalf with respect to all aspects of the BL Loan, including the control and management of the BL Loan and the enforcement of rights and remedies available to the lender under the BL Loan.
A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the UDF III Participation Agreement as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
Effective January 18, 2010, we made a $1,793,500 finished lot loan (the “HLL Loan”) to HLL Land Acquisitions of Texas, L.P., a Texas limited partnership (“HLL”). HLL is a wholly owned subsidiary of UDF I. The HLL Loan is evidenced and secured by a first lien deed of trust recorded against approximately 71 finished residential lots in The Preserve at Indian Springs, a residential subdivision in the City of San Antonio, Bexar County, Texas, as well as a promissory note, assignments of certain lot sale contracts and earnest money, and other loan documents. The interest rate under the HLL Loan is the lower of 13% or the highest rate allowed by law. The HLL Loan matures and becomes due and payable in full on July 18, 2011. The HLL Loan provides HLL with a $289 ,440 interest reserve, pursuant to which we will fund HLL’s monthly interest payments and add the payments to the outstanding principal balance of the HLL Loan.
In connection with the HLL Loan, HLL agreed to pay a $17,935 origination fee to UMTH LD, which was charged to HLL and funded by us at the closing of the HLL Loan. A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the HLL Loan as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
On February 5, 2010, we obtained an $8 million revolving credit facility in the maximum principal amount of $8 million (the “Raley Credit Facility”) from Raley Holdings, LLC (the “Lender”). The interest rate on the Raley Credit Facility is equal to 8.5% per annum. Accrued interest on the outstanding principal amount of the Raley Credit Facility is payable monthly. The Raley Credit Facility matures and becomes due and payable in full on February 5, 2011. As of March 31, 2010, $7.5 million in principal was outstanding under the Raley Credit Facility.
The Raley Credit Facility is secured by a first priority collateral assignment and lien on certain of our investments. Initially, the Lender has taken collateral assignment of two of our investment loans as security for the Raley Credit Facility, which are a finished lot loan secured by a first lien deed of trust on certain lots in the Indian Springs residential subdivision of San Antonio, Texas, and a participation in a finished lot loan secured by a first lien deed of trust on certain finished lots in the Bridges at Bear Creek residential subdivision in Austin, Texas.
The Lender may, in its discretion, decide to advance additional principal to us under the Raley Credit Facility. The Lender may require us to provide additional collateral as a condition of funding additional advances of principal under the Raley Credit Facility. From time to time, we may request the Lender to release collateral, and the Lender may require a release price to be paid as a condition of granting its release of collateral.
If a default occurs under the Raley Credit Facility, the Lender may declare the Raley Credit Facility to be due and payable immediately, after giving effect to any notice and cure periods provided for in the loan documents. A default may occur under the Raley Credit Facility in various circumstances including, without limitation, if (i) we fail to pay amounts due to the Lender when due, (ii) we fail to comply with our representations, warranties, covenants and agreements with the Lender, (iii) a bankruptcy action is filled with respect to us, (iv) we are liquidated or wind up our affairs, (v) the sale or liquidation of all or substantially all of our assets occurs without the Lender’s prior written consent, or (vi) any loan document becomes invalid, unbinding or unenforceable for any reason other than its release by the Lender. In such event, the Lender may exercise any rights or remedies it may have, including, without limitation, increasing the interest rate to 10.5% per annum, or a foreclosure of the collateral. A foreclosure of collateral may materially impair our ability to conduct our business.
On March 22, 2010, our board of trustees authorized a distribution of our earnings to our shareholders of record beginning as of the close of business on each day of the period commencing on April 1, 2010 and ending on June 30, 2010. The distributions will be calculated based on the number of days each shareholder has been a shareholder of record based on 365 days in the calendar year, and will be equal to $0.0043836 per common share of beneficial interest, which is equal to an annualized distribution rate of 8.0%, assuming a purchase price of $20.00 per share. These distributions of net income will be aggregated and paid in cash monthly in arrears. Therefore, the distributions declared for each record date in the April 2010, May 2010 and June 2010 periods will be paid in May 2010, June 2010 and July 2010, respectively. Distributions will be paid on or about the 25th day of the respective month or, if the 25th day of the month falls on a weekend or bank holiday, on the next business day following the 25th day of the month. Distributions for shareholders participating in our DRIP will be reinvested into our shares on the payment date of each distribution.
On March 24, 2010, we entered into two participation agreements (collectively, the “Buffington Participation Agreements”) with UDF III, pursuant to which we purchased a 100% participation interest in UDF III’s lot inventory line of credit loan facilities (the “Lot Inventory Loans”) to Buffington Texas Classic Homes, LLC, an affiliated Texas limited liability company and Buffington Signature Homes, LLC, an affiliated Texas limited liability company (collectively, “Buff Homes”). The purchase price for the participation interest is equal to the sum of $734,259, which is the outstanding balance of the Lot Inventory Loans on the purchase date, plus our assumption of all funding obligations of UDF III under the Lot Inventory Loans. UMTH LD has a partner interest in Buffin gton Homebuilding Group, Ltd., a Texas limited partnership, which owns all of the limited liability company interests in Buff Homes.
The Lot Inventory Loans provide Buff Homes, a homebuilding group, with financing for the acquisition of residential lots which are held as inventory to facilitate Buff Homes' new home construction business in the greater Austin, Texas area. The Lot Inventory Loans are evidenced by promissory notes, are secured by first lien deeds of trust on the lots financed under the Lot Inventory Loans, and are guaranteed by Buff Homes' parent company and an affiliate company of Buff Homes. When a lot is slated for residential construction, Buff Homes obtains an interim construction loan and the principal advanced for the acquisition of the lot is repaid under the Lot Inventory Loans.
Pursuant to the Buffington Participation Agreements, we will participate in the Lot Inventory Loans by funding UDF III’s lending obligations under the Lot Inventory Loans up to an aggregate maximum amount of $4,500,000. The Buffington Participation Agreements give us the right to receive repayment of all principal and accrued interest relating to amounts funded by us under the Buffington Participation Agreements. The interest rate for the Lot Inventory Loans is the lower of 14% or the highest rate allowed by law. Our participation interest is repaid as Buff Homes repays the Lot Inventory Loans. For each loan originated to it, Buff Homes is required to pay interest monthly and to repay the principal advanced to it no later than 12 months following the origination of the loan. 60;The Lot Inventory Loans mature in August 2010.
UDF III is required to purchase back our participation interest in the Lot Inventory Loans (i) upon a foreclosure of UDF III’s assets by its lenders, (ii) upon the maturity of the Lot Inventory Loans, or (iii) at any time upon 30 days prior written notice from us. In such event, the purchase price paid to us will be equal to the outstanding principal amount of the Lot Inventory Loans on the date of termination, together with all accrued interest due thereon, plus any other amounts due to us under the Buffington Participation Agreements.
UDF III will continue to manage and control the Lot Inventory Loans while we own a participation interest in the Lot Inventory Loans. Pursuant to the Buffington Participation Agreements, we have appointed UDF III as our agent to act on our behalf with respect to all aspects of the Lot Inventory Loans; however, UDF III must obtain our consent to any modification or amendment of the Lot Inventory Loans, the acceleration of the Lot Inventory Loans and the enforcement of the rights and remedies available to the holder of the Lot Inventory Loans.
A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the Buffington Participation Agreements as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
Effective March 29, 2010, we made a $5,250,000 loan (the “Pine Trace Loan”) to Pine Trace Village, LLC, an unaffilated Texas limited liability company (“Pine Trace”). The Pine Trace Loan is evidenced and secured by a first lien deed of trust to be recorded against approximately 118 finished residential lots and undeveloped land in Pine Trace Village, a residential subdivision in Harris County, Texas.
The Pine Trace Loan is evidenced and secured by a first lien deed of trust, a promissory note, an assignment of a builder lot sale contract, an assignment of receivables from a municipal utility district, and other loan documents. The Pine Trace Loan is guaranteed by the parent company of Pine Trace. The interest rate under the Pine Trace Loan is the lower of 13% or the highest rate allowed by law. The Pine Trace Loan matures and becomes due and payable in full on March 29, 2012. The Pine Trace Loan provides Pine Trace with a $450,000 interest reserve, pursuant to which we will fund Pine Trace’s monthly interest payments and add the payments to the outstanding principal balance of the Pine Trace Loan. During the Pine Trace Loan term, Pine Trace is required to pay down the Pine Trace Loan by paying over to us all proceeds of lot sales and other property sales and all reimbursements and other payments received from the municipal utility district. In connection with the Pine Trace Loan, Pine Trace agreed to pay a $52,500 origination fee to our asset manager, UMTH LD, which was charged to Pine Trace and funded by us at the closing of the Pine Trace Loan.
Item 7A. 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 will be 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 homes and lots. The market price of finished homes or 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 fa ctors can have a material impact on the cash realized by our borrowers and resulting collectibility of our loans and interest.
Demand for our secured loans and the amount of interest we collect with respect to such loans depends on the ability of borrowers of real estate construction and development loans to sell single-family lots to homebuilders and the ability of homebuilders to sell homes to homebuyers.
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 secured 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 a lso be adversely impacted.
We will seek to mitigate our single-family lot and residential homebuilding market risk by closely monitoring economic, project market, and homebuilding fundamentals. We will 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 will seek to mitigate our single-family lot and residential homebuilding market risk by having our asset manager assign an individual asset manager to each secured note or equity investment. This individual asset manager will be responsible for monitoring the progress and performance of the builder or developer and the project as well as assessing the status of the marketplace and value of our collateral securing repayment of our secured loan or equity investment.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedure
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2009, 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of December 31, 2009, 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 our management, including our Chi ef Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Management’s Annual Report on Internal Control Over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Changes in Internal Controls over Financial Reporting
This annual report does not include disclosure of changes in internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Item 9B. Other Information.
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item will be presented in our definitive proxy statement for our 2010 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission on or about April 30, 2010, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be presented in our definitive proxy statement for our 2010 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission on or about April 30, 2010, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be presented in our definitive proxy statement for our 2010 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission on or about April 30, 2010, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be presented in our definitive proxy statement for our 2010 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission on or about April 30, 2010, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be presented in our definitive proxy statement for our 2010 annual meeting of shareholders, which is expected to be filed with the Securities and Exchange Commission on or about April 30, 2010, and is incorporated herein by reference.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
| | (a) | List of Documents Filed. |
The list of the financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.
| | 2. | Financial Statement Schedules. |
None.
The list of exhibits filed as part of this Annual Report on Form 10-K is submitted in the Exhibit Index following the financial statements in response to Item 601 of Regulation S-K.
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.
| | (c) | Financial Statement Schedules. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 IV
Dated: March 31, 2010 By: /s/ Hollis M. Greenlaw
Hollis M. Greenlaw
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature | | Title | | Date |
| | | | | |
| Principal Executive Officer: | | | | |
| /s/ Hollis M. Greenlaw | | | | |
| Hollis M. Greenlaw | | Chief Executive Officer and | | March 31, 2010 |
| | | Chairman of the Board of Trustees | | |
| | | | | |
| Principal Financial Officer: | | | | |
| /s/ Cara D. Obert | | | | |
| Cara D. Obert | | Chief Financial Officer | | March 31, 2010 |
| | | | | |
| Principal Accounting Officer: | | | | |
| /s/ David A. Hanson | | | | |
| David A. Hanson | | Chief Operating Officer and Chief Accounting Officer | | March 31, 2010 |
| | | | | |
| /s/ Scot W. O’Brien | | | | |
| Scot W. O’Brien | | Trustee | | March 31, 2010 |
| | | | | |
| /s/ Phillip K. Marshall | | | | |
| Phillip K. Marshall | | Trustee | | March 31, 2010 |
| | | | | |
| /s/ J. Heath Malone | | | | |
| J. Heath Malone | | Trustee | | March 31, 2010 |
| | | | | |
| /s/ Steven J. Finkle | | | | |
| Steven J. Finkle | | Trustee | | March 31, 2010 |
INDEX TO FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm | F-2 |
| | | |
| Audited Financial Statements: | |
| | | |
Balance Sheets as of December 31, 2009 and December 31, 2008 | F-3 |
| | | |
Statements of Operations for the Year Ended December 31, 2009 | |
| | and the Period from May 28, 2008 (Inception) through December 31, 2008 | F-4 |
| | |
Statements of Changes in Shareholders' Equity for the Year Ended December 31, 2009 | |
| | and the Period from May 28, 2008 (Inception) through December 31, 2008 | F-5 |
| | | |
Statements of Cash Flows for the Year Ended December 31, 2009 | |
| | and the Period from May 28, 2008 (Inception) Through December 31, 2008 | F-6 |
| | | |
Notes to Financial Statements | F-7 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of
United Development Funding IV
We have audited the accompanying balance sheets of United Development Funding IV (the “Trust”) as of December 31, 2009 and 2008 and the related statements of operations, changes in shareholders’ equity and cash flows for the year ended December 31, 2009 and for the period from May 28, 2008 (Inception) through December 31, 2008. These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosu res in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Development Funding IV as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the year ended December 31, 2009 and for the period from May 28, 2008 (Inception) through December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
Dallas, Texas
March 31, 2010
UNITED DEVELOPMENT FUNDING IV
| | | December 31, 2009 | | | December 31, 2008 | |
| Assets | | | | | | |
| Cash and cash equivalents | | $ | 520,311 | | | $ | 23,629 | |
| Restricted cash | | | 525,400 | | | | - | |
| Accrued receivable – related party | | | 21,280 | | | | - | |
| Loan participation interest – related party | | | 1,380,757 | | | | - | |
| Deferred offering costs | | | 5,684,106 | | | | 1,455,788 | |
| Other assets | | | 176,902 | | | | - | |
| | | | | | | | | |
| Total assets | | $ | 8,308,756 | | | $ | 1,479,417 | |
| | | | | | | | | |
| Liabilities and Shareholders’ Equity | | | | | | | | |
| Liabilities: | | | | | | | | |
| Accrued liabilities | | $ | 11,875 | | | $ | - | |
| Accrued liabilities – related party | | | 5,516,613 | | | | 1,279,038 | |
| Dividends payable | | | 3,996 | | | | - | |
| Escrow payable | | | 692,300 | | | | - | |
| | | | | | | | | |
| Total liabilities | | | 6,224,784 | | | | 1,279,038 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Shares of beneficial interest; $0.01 par value; | | | | | | | | |
| 400,000,000 shares authorized; 119,729 and 10,000 | | | | | | | | |
| shares issued and outstanding at | | | | | | | | |
| December 31, 2009 and 2008, respectively | | | 1,197 | | | | 100 | |
| Additional paid-in-capital | | | 2,108,104 | | | | 199,900 | |
| Retained earnings (accumulated deficit) | | | (25,329 | ) | | | 379 | |
| | | | | | | | | |
| Total shareholders’ equity | | | 2,083,972 | | | | 200,379 | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 8,308,756 | | | $ | 1,479,417 | |
| | See accompanying notes to financial statements. |
UNITED DEVELOPMENT FUNDING IV
STATEMENTS OF OPERATIONS
| | | | | | Period from | |
| | | | | | May 28, 2008 (Inception) | |
| | | Year Ended | | | Through | |
| | | December 31, 2009 | | | December 31, 2008 | |
| Revenues: | | | | | | |
| Interest income – related party | | $ | 4,247 | | | $ | 619 | |
| | | | | | | | | |
| Total revenues | | | 4,247 | | | | 619 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| Advisory fee – related party | | | 2,234 | | | | - | |
| General and administrative | | | 23,725 | | | | 240 | |
| | | | | | | | | |
| Total expenses | | | 25,959 | | | | 240 | |
| | | | | | | | | |
| Net income (loss) | | $ | (21,712 | ) | | $ | 379 | |
| | | | | | | | | |
| Net income (loss) per share of beneficial interest | | $ | (1.63 | ) | | $ | 0.04 | |
| | | | | | | | | |
| Weighted average shares outstanding | | | 13,285 | | | | 10,000 | |
| | | | | | | | | |
| | See accompanying notes to financial statements. |
UNITED DEVELOPMENT FUNDING IV
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Period from May 28, 2008 (Inception) through December 31, 2008 and
the Year Ended December 31, 2009
| | | | | | | | Retained | | |
| | Shares of | | Additional | | Earnings | | |
| | Beneficial Interest | | Paid-in | | (Accumulated | | |
| | Shares | | Amount | | Capital | | Deficit) | | Total |
| | | | | | | | | | |
| Balance at May 28, 2008 (Inception) | - | | $ - | | $ - | | $ - | | $ - |
| | | | | | | | | | |
| Proceeds from shares issued | 10,000 | | 100 | | 199,900 | | - | | 200,000 |
| | | | | | | | | | |
| Net income | - | | - | | - | | 379 | | 379 |
| | | | | | | | | | |
| Balance at December 31, 2008 | 10,000 | | 100 | | 199,900 | | 379 | | 200,379 |
| | | | | | | | | | |
| Proceeds from shares issued | 109,729 | | 1,097 | | 2,193,478 | | - | | 2,194,575 |
| | | | | | | | | | |
| Net loss | - | | - | | - | | (21,712) | | (21,712) |
| | | | | | | | | | |
| Cash dividends declared | - | | - | | - | | (3,996) | | (3,996) |
| | | | | | | | | | |
| Shares issuance costs | - | | - | | (285,274) | | - | | (285,274) |
| | | | | | | | | | |
| Balance at December 31, 2009 | 119,729 | | $ 1,197 | | $ 2,108,104 | | $ (25,329) | | $ 2,083,972 |
| | | | | | | | | | |
| | | | | | | | | | |
See accompanying notes to financial statements.
UNITED DEVELOPMENT FUNDING IV
| | | | | | Period from | |
| | | | | | May 28, 2008 | |
| | | Year Ended | | | (Inception) | |
| | | Ended | | | Through | |
| | | December 31, | | | December 31, | |
| | | 2009 | | | 2008 | |
| Operating Activities | | | | | | |
| Net income (loss) | | $ | (21,712 | ) | | $ | 379 | |
| Changes in assets and liabilities: | | | | | | | | |
| Accrued receivable – related party | | | (21,280 | ) | | | - | |
| Other assets | | | (176,902 | ) | | | - | |
| Accrued liabilities | | | 11,875 | | | | - | |
| Net cash provided by (used in) operating activities | | | (208,019 | ) | | | 379 | |
| | | | | | | | | |
| Investing Activities | | | | | | | | |
| Investments in loan participation interests – related party | | | (1,380,757 | ) | | | - | |
| Net cash used in investing activities | | | (1,380,757 | ) | | | - | |
| | | | | | | | | |
| Financing Activities | | | | | | | | |
| Proceeds from issuance of shares of beneficial interest | | | 2,194,575 | | | | 200,000 | |
| Escrow payable | | | 692,300 | | | | - | |
| Restricted cash | | | (525,400 | ) | | | - | |
| Payments of offering costs | | | (285,274 | ) | | | - | |
| Deferred offering costs | | | (4,228,318 | ) | | | (1,455,788 | ) |
| Accrued liabilities – related party | | | 4,237,575 | | | | 1,279,038 | |
| Net cash provided by financing activities | | | 2,085,458 | | | | 23,250 | |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 496,682 | | | | 23,629 | |
| Cash and cash equivalents at beginning of period | | | 23,629 | | | | - | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 520,311 | | | $ | 23,629 | |
See accompanying notes to financial statements.
UNITED DEVELOPMENT FUNDING IV
NOTES TO FINANCIAL STATEMENTS
A. Nature of Business
United Development Funding IV (which may be referred to as the “Trust,” “we,” “our,” or “UDF IV”) was organized on May 28, 2008 (“Inception”) as a Maryland real estate investment trust that intends to qualify as a real estate investment trust (a “REIT”) under federal income tax laws. The Trust is the sole general partner of and owns a 99.999% partnership interest in United Development Funding IV Operating Partnership, L.P. (“UDF IV OP”), a Delaware limited partnership. UMTH Land Development, L.P. (“UMTH LD”), a Delaware limited partnership and the affiliated asset manager of the Trust, is the sole limited partner and owner of 0.001% (minority interest) of the partnership interests in UDF IV OP. As of Decembe r 31, 2009 and 2008, UDF IV OP had no assets, liabilities or equity.
The Trust intends to use substantially all of the net proceeds from the Offering (as such term is defined in note C – “Registration Statement,” below) to originate, purchase, participate in and hold for investment secured loans made directly by the Trust or indirectly through its affiliates to persons and entities for the acquisition and development of parcels of real property as single-family residential lots, and the construction of model and new single-family homes, including development of mixed-use master planned residential communities. The Trust also intends to make direct investments in land for development into single-family lots, new and model homes and portfolios of finished lots and homes; provide credit enhancements to real estate developers, hom e builders, land bankers and other real estate investors; and purchase participations in, or finance for other real estate investors the purchase of, securitized real estate loan pools and discounted cash flows secured by state, county, municipal or other similar assessments levied on real property. The Trust also may enter into joint ventures with unaffiliated real estate developers, home builders, land bankers and other real estate investors, or with other United Development Funding-sponsored programs, to originate or acquire, as the case may be, the same kind of secured loans or real estate investments the Trust may originate or acquire directly.
UMTH General Services, L.P., a Delaware limited partnership (“UMTH GS” or “Advisor”), is the Trust’s advisor and is responsible for managing the Trust’s affairs on a day-to-day basis. UMTH GS has engaged UMTH LD as the Trust’s asset manager. The asset manager oversees the investing and financing activities of the affiliated programs managed and advised by the Advisor and UMTH LD as well as oversees and provides the Trust’s board of trustees recommendations regarding investments and finance transactions, management, policies and guidelines and reviews investment transaction structure and terms, investment underwriting, investment collateral, investment performance, investment risk management, and the Trust’s capital structure at both the entity and asset leve l.
The Trust has no employees. The Trust’s offices are located in Grapevine, Texas.
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 Accounting
The accounts are maintained and the financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2009 and 2008, there were no such amounts included in cash and cash equivalents.
Restricted Cash
Restricted cash includes monies held in escrow with respect to subscriptions for shares of beneficial interest.
Loan Participation Interest – Related Party
Loan participation interest – related party represents two participation agreements with UMT Home Finance, L.P., a Delaware limited partnership (“UMTHF”), to participate in certain of UMTHF’s interim construction loan facilities. Pursuant to the participation agreement, we will participate in these interim construction loan facilities up to a maximum amount of $3.5 million. United Mortgage Trust, a Maryland real estate investment trust (“UMT”), owns 100% of the interests in UMTHF and its advisor also serves as the Trust’s Advisor.
Organization and Offering Expenses
Organization costs are expensed as incurred in accordance with Statement of Position 98-5, Reporting on the Costs of Start-up Activities, currently within the scope of Accounting Standards Code (“ASC”) 720-15. Offering costs related to raising capital from debt will be capitalized and amortized over the term of such debt. Offering costs related to raising capital from equity will be offset as a reduction of capital raised in shareholders’ equity.
Revenue Recognition
Interest income on loan participation interest – related party is recognized over the life of the participation agreement and recorded on the accrual basis. Income recognition is suspended for participation agreements at either the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. As of December 31, 2009, we were accruing interest on all loan participation interest – related party.
The Trust intends to make an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 2010, as it is the first year in which the Trust will have material operations. If the Trust qualifies for taxation as a REIT, the Trust generally will not be subject to federal corporate income tax to the extent it distributes its REIT taxable income to its shareholders, so long as it distributes at least 90% of its REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if the Trust qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and p roperty, and federal income and excise taxes on its undistributed income.
Impact of Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, currently within the scope of ASC 825-10. ASC 825-10 permits entities to choose to measure eligible financial instruments at fair value at specified election dates. The entity will report unrealized gains and losses on the items on which it has elected the fair value option in earnings. The Trust’s adoption of this guidance did not have a material impact on the Trust’s results of operations or financial condition.
In December 2007, the FASB issued SFAS 141 (revised 2007) “Business Combinations,” currently within the scope of ASC 805-10. ASC 805-10 modifies the accounting and disclosure requirements for business combinations and broadens the scope of the previous standard to apply to all transactions in which one entity obtains control over another business. In addition, it establishes new accounting and reporting standards for non-controlling interests in subsidiaries. The Trust’s adoption of this guidance on January 1, 2009 has not had a material impact on the Trust’s financial condition or results of operations.
In February 2008, the FASB issued FASB Staff Position FSP 157-2, “Effective Date of FASB Statement No. 157,” currently within the scope of ASC 820-10. The effective date of ASC 820-10 for all nonfinancial assets and nonfinancial liabilities, except for items recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), was delayed until the beginning of the first quarter 2009. Application of ASC 820-10 did not have a material impact on the Trust’s results of operations and financial condition upon adoption on January 1, 2009.
In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” currently within the scope of ASC 105-10. ASC 105-10 identifies the ASC as the authoritative source of generally accepted accounting principles (“GAAP”) in the United States. The ASC did not change GAAP, but reorganizes the literature. Rules and interpretive releases of the Securities and Exchange Commission under federal securities laws are also sources of authoritative GAAP for Securities and Exchange Commission registrants. This guidance is effective for financial statements issued for interim and annual periods ending after Se ptember 15, 2009 and the Trust adopted the provisions of this guidance as of September 30, 2009. The Trust’s adoption of this guidance did not have a material impact on its financial statements.
C. Registration Statement
On November 12, 2009, the Trust’s Registration Statement on Form S-11, covering an initial public offering (the “Offering”) of up to 25,000,000 common shares of beneficial interest at a price of $20 per share, was declared effective under the Securities Act of 1933, as amended. The Offering also covers up to 10,000,000 common shares of beneficial interest to be issued pursuant to our distribution reinvestment plan (the “DRIP”) for $20 per share. We reserve the right to reallocate the common shares of beneficial interest registered in the Offering between the primary offering and the DRIP. The shares are being offered to investors on a reasonable best efforts basis, which means the dealer manager will use its reasonable best efforts to sell the shares offered, but is not required to sell any specific number or dollar amount of shares and does not have a firm commitment or obligation to purchase any of the offered shares. Until we received and accepted subscriptions for at least $1 million, subscription proceeds were placed in an escrow account. On December 18, 2009, the Trust satisfied this minimum offering amount. As a result, the Trust’s initial public subscribers were accepted as shareholders and the subscription proceeds from such initial public subscribers were released to the Trust from escrow, provided that residents of New York, Nebraska and Pennsylvania will not be admitted until the Trust has received and accepted subscriptions aggregating at least $2,500,000, $5,000,000 and $35,000,000, respectively.
D. Shareholders’ Equity
From inception until July 31, 2008, the Trust was authorized to issue 1,000 common shares of beneficial interest, par value $.01 per share. On June 13, 2008, the Trust sold 1,000 common shares of beneficial interest at $200 per share to the parent of the Advisor, UMT Holdings, L.P. (“UMTH”), a Delaware limited partnership. On August 1, 2008, the Trust filed Articles of Amendment and Restatement with the Department of Assessments and Taxation of the State of Maryland, which increased to 400,000,000 the number of shares authorized for issuance. Effective as of August 1, 2008, the Trust effected a 10-for-1 split of its common shares of beneficial interest, whereby every common share of beneficial interest was converted and reclassified into 10 common shares of beneficial interest, resu lting in UMTH holding 10,000 common shares of beneficial interest. The increase in the number of authorized shares and the 10-for-1 split have been retroactively reflected in these financial statements of the Trust.
On December 18, 2009, the Trust’s initial public subscribers were accepted as shareholders pursuant to the Offering and the subscription proceeds from such initial public subscribers were released to the Trust from escrow, provided that residents of New York, Nebraska and Pennsylvania will not be admitted until the Trust has received and accepted subscriptions aggregating at least $2,500,000, $5,000,000 and $35,000,000, respectively. As of December 31, 2009, the Trust had issued an aggregate of 119,729 common shares of beneficial interest pursuant to the Offering in exchange for gross proceeds of approximately $2.4 million (approximately $285,000, net of costs associated with the Offering).
Our board of trustees authorized a distribution to our shareholders of record beginning as of the close of business on each day of the period commencing on December 18, 2009 and ending on March 31, 2010. The distributions will be calculated based on the number of days each shareholder has been a shareholder of record based on 365 days in the calendar year, and will be equal to $0.0043836 per common share of beneficial interest, which is equal to an annualized distribution rate of 8.0%, assuming a purchase price of $20.00 per share. These distributions will be aggregated and paid in cash monthly in arrears. Therefore, the distributions declared for each record date in the December 2009, January 2010, February 2010 and March 2010 periods will be paid in January 2010, February 2010, March 2010 and April 2010, respectively. Distrib utions will be paid on or about the 25th day of the respective month or, if the 25th day of the month falls on a weekend or bank holiday, on the next business day following the 25th day of the month. Distributions for shareholders participating in our DRIP will be reinvested into our shares on the payment date of each distribution.
As of December 31, 2009, no distributions to shareholders had been made, but total dividends of approximately $4,000, or approximately $0.41 per weighted average share of beneficial interest, had been declared and are payable.
E. Deferred Offering Costs
Various parties will receive compensation as a result of the Offering, including the Advisor, affiliates of the Advisor, the dealer manager and soliciting dealers. The Advisor funds organization and offering costs on the Trust’s behalf and will be paid by the Trust for such costs in an amount equal to 3% of the gross offering proceeds raised by the Trust in the Offering, less any offering costs paid by the Trust directly (except that no organization and offering expenses will be reimbursed with respect to sales under the DRIP). Payments to the dealer manager include selling commissions (6.5% of gross offering proceeds, except that no commissions will be paid with respect to sales under the DRIP) and dealer manager fees (up to 3.5% of gross offering proceeds, except that no dealer manager fees will be paid with respect to sales under the DRIP).
F. Operational Compensation
The Advisor or its affiliates will receive acquisition and origination fees and expenses of 3% of the net amount available for investment in secured loans and other real estate investment assets (after payment of selling commissions, dealer manager fees and organization and offering expenses) in connection with the origination, making or investing in secured loans or the purchase, development or construction of a real estate asset, including, without limitation, real estate commissions, selection fees, non-recurring management fees, loan fees, points or any other fees of a similar nature.
The Advisor will receive advisory fees of 2% per annum of the average of the aggregate book value of the Trust’s real estate investment assets, including secured loan assets, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during a certain period.
The Advisor will receive 1% of the amount made available to the Trust pursuant to the origination of any line of credit or other debt financing, provided that the Advisor has provided a substantial amount of services as determined by the Trust’s independent trustees. On each anniversary date of the origination of any such line of credit or other debt financing, an additional fee of 0.25% of the primary loan amount will be paid if such line of credit or other debt financing continues to be outstanding on such date, or a pro rated portion of such additional fee will be paid for the portion of such year that the financing was outstanding.
The Trust will reimburse the expenses incurred by the Advisor in connection with its provision of services to the Trust, including the Trust’s allocable share of the Advisor’s overhead, such as rent, personnel costs, utilities and IT costs. The Trust will not reimburse the Advisor for personnel costs in connection with services for which the Advisor or its affiliates receive other fees.
The Advisor will receive 15% of the amount by which the Trust’s net income for the immediately preceding year exceeds a 10% per annum return on aggregate capital contributions, as adjusted to reflect prior cash distributions to shareholders which constitute a return of capital. This fee will be paid annually and upon termination of the advisory agreement.
G. Disposition/Liquidation Compensation
Upon successful sales by the Trust of securitized loan pool interests, the Advisor will be paid a securitized loan pool placement fee equal to 2% of the net proceeds realized by the Trust, provided the Advisor or an affiliate of the Advisor has provided a substantial amount of services as determined by the Trust’s independent trustees.
For substantial assistance in connection with the sale of properties, the Trust will pay the Advisor or its affiliates disposition fees of the lesser of one-half of the reasonable and customary real estate or brokerage commission or 2% of the contract sales price of each property sold; provided, however, in no event may the disposition fees paid to the Advisor, its affiliates and unaffiliated third parties exceed 6% of the contract sales price. The Trust���s independent trustees will determine whether the Advisor or its affiliate has provided substantial assistance to the Trust in connection with the sale of a property. Substantial assistance in connection with the sale of a property includes the Advisor’s preparation of an investment package for the property (including a new investment analysis, rent rolls, tenant informa tion regarding credit, a property title report, an environmental report, a structural report and exhibits) or such other substantial services performed by the Advisor in connection with a sale.
Upon listing the Trust’s common shares of beneficial interest on a national securities exchange, the Advisor will be entitled to a fee equal to 15% of the amount, if any, by which (1) the market value of the Trust’s outstanding shares plus distributions paid by the Trust prior to listing, exceeds (2) the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate a 10% annual cumulative, non-compounded return to investors.
H. Commitments and Contingencies
On December 18, 2009, the Trust entered into two participation agreements (collectively, the “Participation Agreements”) with UMTHF, pursuant to which the Trust purchased a participation interest in UMTHF’s interim construction loan facilities (the “Construction Loans”) to Buffington Texas Classic Homes, LLC, an affiliated Texas limited liability company, and Buffington Signature Homes, LLC, an affiliated Texas limited liability company (collectively, “Buff Homes”). UMTH LD has a partner interest in Buffington Homebuilding Group, Ltd., a Texas limited partnership, which owns all of the limited liabiltiy company interests in Buff Homes. As of December 31, 2009, there were approximately $2.1 million of commitments to be funded. See Note K for further discussion.
Litigation
In the ordinary course of business, the Trust may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against the Trust.
Off-Balance Sheet Arrangements
In connection with the funding of some of the Trust’s organization costs, on June 26, 2009, UMTH LD entered into a $6.3 million line of credit from Community Trust Bank of Texas. As a condition to such line of credit, the Trust has guaranteed UMTH LD’s obligations to Community Trust Bank of Texas under the line of credit in an amount equal to the amount of the Trust’s organization costs funded by UMTH LD. This guaranty includes pledges of the Trust’s assets to Community Trust Bank of Texas. However, the amount of the Trust’s guaranty is reduced to the extent that the Trust reimburses UMTH LD for any of the Trust’s organization costs it has funded, and the guaranty is subject to the overall limit on the Trust’s reimbursement of organization and offering expenses, which is set at 3% of the gross offering proceeds.
I. Economic Dependency
Under various agreements, the Trust has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Trust, including asset management services, asset acquisition and disposition decisions, the sale of the Trust’s common shares of beneficial interest available for issue, as well as other administrative responsibilities for the Trust. As a result of these relationships, the Trust is dependent upon the Advisor and its affiliates. In the event that these entities were unable to provide the Trust with the respective services, the Trust would be required to find alternative providers of these services.
J. General and Administrative Expenses
General and administrative expenses of the Trust are summarized in the following chart:
| | | | | | Period from | |
| | | For the Year | | | May 28, 2008 (Inception) | |
| | | Ended December 31, | | | Through December 31, | |
| | | 2009 | | | 2008 | |
| Professional fees | | $ | 23,250 | | | $ | - | |
| Other | | | 475 | | | | 240 | |
| Total | | $ | 23,725 | | | $ | 240 | |
K. Related Party Transactions
Our Advisor and certain of its affiliates receive fees in connection with the Offering and in connection with the acquisition and management of the assets and reimbursement of costs of the Trust.
Our Advisor receives 3% of the gross offering proceeds (excluding proceeds from the DRIP) for reimbursement of organization and offering expenses. The Trust has a related party payable to our Advisor of approximately $5.5 million and $1.3 million as of December 31, 2009 and 2008, respectively, for organization and offering costs paid by UMTH LD related to the Offering. As of December 31, 2009, the Trust had reimbursed our Advisor approximately $66,000 related to Organization and Offering costs. No reimbursement was made in 2008.
Our Advisor receives advisory fees of 2% per annum of the average of the aggregate book value of the Trust’s real estate investment assets, including secured loan assets, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during a certain period. During 2009, our Advisor received approximately $2,200 for advisory fees. No fees were paid during 2008.
UMTH LD, our asset manager, is paid 3% of the net amount available for investment in secured loans and other real estate assets. Such costs are amortized into interest income over the life of the secured note. During 2009, UMTH LD received approximately $57,000. No such fees were paid during 2008.
On December 18, 2009, the Trust entered into two Participation Agreements with UMTHF, pursuant to which the Trust purchased a participation interest in UMTHF’s Construction Loans to Buff Homes.
The Construction Loans provide Buff Homes, which is a homebuilding group, with residential interim construction financing for the construction of new homes in the greater Austin, Texas area. The Construction Loans are evidenced by promissory notes, are secured by first lien deeds of trust on the homes financed under the Construction Loans, and are guaranteed by the parent company and the principals of Buff Homes.
Pursuant to the Participation Agreements, the Trust will participate in the Construction Loans by funding the lending obligations of UMT under the Construction Loans up to a maximum amount of $3,500,000. The Participation Agreements give the Trust the right to receive payment from UMTHF of principal and accrued interest relating to amounts funded by the Trust under the Participation Agreements. The interest rate under the Construction Loans is the lower of 13% or the highest rate allowed by law. The Trust’s participation interest is repaid as Buff Homes repays the Construction Loans. For each loan originated to it, Buff Homes is required to pay interest monthly and to repay the principal advanced to it upon the sale of the home or in any event no later than 12 months following the or igination of the loan. The Participation Agreements provide for a one-year term commencing on December 18, 2009.
UMTHF will continue to manage and control the Construction Loans while the Trust owns a participation interest in the Construction Loans. Pursuant to the Participation Agreements, the Trust has appointed UMTHF as its agent to act on its behalf with respect to all aspects of the Construction Loans, including the control and management of the Construction Loans and the enforcement of rights and remedies available to the lender under the Construction Loans. During 2009, we recognized approximately $4,200 of interest income related to this note. As of December 31, 2009, these Participation Agreements totaled approximately $1.4 million and are included in loan participation interest – related party.
The Trust’s Advisor also serves as the advisor for UMT, which owns 100% of the interests in UMTHF.
A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the Participation Agreements as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
L. Concentration of Credit Risk
Financial instruments that potentially expose the Trust to concentrations of credit risk are primarily temporary cash equivalent and loan participation interest – related party. The Trust 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 Trust has not experienced any losses related to amounts in excess of FDIC limits.
At December 31, 2009, the Trust’s real estate investments were secured by property located in Texas.
M. Subsequent Events
The conditions of our minimum offering in New York and Nebraska were satisfied on January 8, 2010 and January 27, 2010, respectively, and we admitted our initial New York and Nebraska subscribers as shareholders as of such dates.
Effective January 8, 2010, we entered into a Loan Participation Agreement (the “UDF III Participation Agreement”) with United Development Funding III, L.P. (“UDF III”), a Delaware limited partnership, pursuant to which we purchased a participation interest in a finished lot loan (the “BL Loan”) from UDF III, as the lender, to Buffington Land, Ltd., an unaffiliated Texas limited partnership, and Len-Buf Land Acquisitions of Texas, L.P., an unaffiliated Texas limited partnership, as co-borrowers (collectively, “Buffington”). The BL Loan is evidenced and secured by a first lien deed of trust recorded against approximately 67 finished residential lots in the Bridges at Bear Creek residential subdivision in the City of Austin, Travis County, Texas, a promissory note, assignments of certain lot sale contracts and earnest money, and other loan documents.
Pursuant to the UDF III Participation Agreement, we are entitled to receive repayment of 94.74163% of the $5,007,144 outstanding principal amount of the BL Loan, plus its proportionate share of accrued interest thereon (the “BL Participation Interest”). The purchase price for the BL Participation Interest is $4,743,850. We have no obligations to advance funds to Buffington under the BL Loan or to increase our BL Participation Interest in the BL Loan. The interest rate under the BL Loan is the lower of 14% or the highest rate allowed by law. Our BL Participation Interest is repaid as Buffington repays the BL Loan. Buffington is required to pay interest monthly and to repay a portion of principal upon the sale of residential lots covered by the deed of trust. The BL Loan is due and payable in full on June 30, 2011. UMT also owns a participation interest in the BL Loan.
UDF III will continue to manage and control the BL Loan. Pursuant to the UDF III Participation Agreement, we have appointed UDF III as our agent to act on our behalf with respect to all aspects of the BL Loan, including the control and management of the BL Loan and the enforcement of rights and remedies available to the lender under the BL Loan.
Our Advisor also serves as the advisor for UMT. A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the UDF III Participation Agreement as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
Effective January 18, 2010, we made a $1,793,500 finished lot loan (the “HLL Loan”) to HLL Land Acquisitions of Texas, L.P., a Texas limited partnership (“HLL”). HLL is a wholly owned subsidiary of United Development Funding, L.P. (“UDF I”), a Delaware limited partnership. The HLL Loan is evidenced and secured by a first lien deed of trust recorded against approximately 71 finished residential lots in The Preserve at Indian Springs, a residential subdivision in the City of San Antonio, Bexar County, Texas, as well as a promissory note, assignments of certain lot sale contracts and earnest money, and other loan documents. The interest rate under the HLL Loan is the lower of 13% or the highest rate allowed by law. The HLL Loan matures and becomes due and p ayable in full on July 18, 2011. The HLL Loan provides HLL with a $289,440 interest reserve, pursuant to which we will fund HLL’s monthly interest payments and add the payments to the outstanding principal balance of the HLL Loan.
In connection with the HLL Loan, HLL agreed to pay a $17,935 origination fee to UMTH LD, which was charged to HLL and funded by us at the closing of the HLL Loan. A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the HLL Loan as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
On February 5, 2010, we obtained an $8 million revolving credit facility in the maximum principal amount of $8 million (the “Raley Credit Facility”) from Raley Holdings, LLC (the “Lender”). The interest rate on the Raley Credit Facility is equal to 8.5% per annum. Accrued interest on the outstanding principal amount of the Raley Credit Facility is payable monthly. The Raley Credit Facility matures and becomes due and payable in full on February 5, 2011. As of March 31, 2010, $7.5 million in principal was outstanding under the Raley Credit Facility.
The Raley Credit Facility is secured by a first priority collateral assignment and lien on certain of our investments. Initially, the Lender has taken collateral assignment of two of our investment loans as security for the Raley Credit Facility, which are a finished lot loan secured by a first lien deed of trust on certain lots in the Indian Springs residential subdivision of San Antonio, Texas, and a participation in a finished lot loan secured by a first lien deed of trust on certain finished lots in the Bridges at Bear Creek residential subdivision in Austin, Texas.
The Lender may, in its discretion, decide to advance additional principal to us under the Raley Credit Facility. The Lender may require us to provide additional collateral as a condition of funding additional advances of principal under the Raley Credit Facility. From time to time, we may request the Lender to release collateral, and the Lender may require a release price to be paid as a condition of granting its release of collateral.
If a default occurs under the Raley Credit Facility, the Lender may declare the Raley Credit Facility to be due and payable immediately, after giving effect to any notice and cure periods provided for in the loan documents. A default may occur under the Raley Credit Facility in various circumstances including, without limitation, if (i) we fail to pay amounts due to the Lender when due, (ii) we fail to comply with our representations, warranties, covenants and agreements with the Lender, (iii) a bankruptcy action is filled with respect to us, (iv) we are liquidated or wind up our affairs, (v) the sale or liquidation of all or substantially all of our assets occurs without the Lender’s prior written consent, or (vi) any loan document becomes invalid, unbinding or unenforceable for any reason other than its release by the Lender. In such event, the Lender may exercise any rights or remedies it may have, including, without limitation, increasing the interest rate to 10.5% per annum, or a foreclosure of the collateral. A foreclosure of collateral may materially impair our ability to conduct our business.
On March 22, 2010, our board of trustees authorized a distribution of our earnings to our shareholders of record beginning as of the close of business on each day of the period commencing on April 1, 2010 and ending on June 30, 2010. The distributions will be calculated based on the number of days each shareholder has been a shareholder of record based on 365 days in the calendar year, and will be equal to $0.0043836 per common share of beneficial interest, which is equal to an annualized distribution rate of 8.0%, assuming a purchase price of $20.00 per share. These distributions of net income will be aggregated and paid in cash monthly in arrears. Therefore, the distributions declared for each record date in the April 2010, May 2010 and June 2010 periods will be paid in May 2010, June 2010 and July 2 010, respectively. Distributions will be paid on or about the 25th day of the respective month or, if the 25th day of the month falls on a weekend or bank holiday, on the next business day following the 25th day of the month. Distributions for shareholders participating in our DRIP will be reinvested into our shares on the payment date of each distribution.
On March 24, 2010, we entered into two participation agreements (collectively, the “Buffington Participation Agreements”) with UDF III pursuant to which we purchased a 100% participation interest in UDF III’s lot inventory line of credit loan facilities (the “Lot Inventory Loans”) to Buff Homes. The purchase price for the participation interest is equal to the sum of $734,259, which is the outstanding balance of the Lot Inventory Loans on the purchase date, plus our assumption of all funding obligations of UDF III under the Lot Inventory Loans.
The Lot Inventory Loans provide Buff Homes, a homebuilding group, with financing for the acquisition of residential lots which are held as inventory to facilitate Buff Homes' new home construction business in the greater Austin, Texas area. The Lot Inventory Loans are evidenced by promissory notes, are secured by first lien deeds of trust on the lots financed under the Lot Inventory Loans, and are guaranteed by Buff Homes' parent company and an affiliate company of Buff Homes. When a lot is slated for residential construction, Buff Homes obtains an interim construction loan and the principal advanced for the acquisition of the lot is repaid under the Lot Inventory Loans.
Pursuant to the Buffington Participation Agreements, we will participate in the Lot Inventory Loans by funding UDF III’s lending obligations under the Lot Inventory Loans up to an aggregate maximum amount of $4,500,000. The Buffington Participation Agreements give us the right to receive repayment of all principal and accrued interest relating to amounts funded by us under the Buffington Participation Agreements. The interest rate for the Lot Inventory Loans is the lower of 14% or the highest rate allowed by law. Our participation interest is repaid as Buff Homes repays the Lot Inventory Loans. For each loan originated to it, Buff Homes is required to pay interest monthly and to repay the principal advanced to it no later than 12 months following the origination of the loan. 60;The Lot Inventory Loans mature in August 2010.
UDF III is required to purchase back our participation interest in the Lot Inventory Loans (i) upon a foreclosure of UDF III’s assets by its lenders, (ii) upon the maturity of the Lot Inventory Loans, or (iii) at any time upon 30 days prior written notice from us. In such event, the purchase price paid to us will be equal to the outstanding principal amount of the Lot Inventory Loans on the date of termination, together with all accrued interest due thereon, plus any other amounts due to us under the Buffington Participation Agreements.
UDF III will continue to manage and control the Lot Inventory Loans while we own a participation interest in the Lot Inventory Loans. Pursuant to the Buffington Participation Agreements, we have appointed UDF III as our agent to act on our behalf with respect to all aspects of the Lot Inventory Loans; however, UDF III must obtain our consent to any modification or amendment of the Lot Inventory Loans, the acceleration of the Lot Inventory Loans and the enforcement of the rights and remedies available to the holder of the Lot Inventory Loans.
A majority of our trustees, including a majority of our independent trustees, who are not otherwise interested in this transaction approved the Buffington Participation Agreements as being fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
Effective March 29, 2010, we made a $5,250,000 loan (the “Pine Trace Loan”) to Pine Trace Village, LLC, an unaffilated Texas limited liability company (“Pine Trace”). The Pine Trace Loan is evidenced and secured by a first lien deed of trust to be recorded against approximately 118 finished residential lots and undeveloped land in Pine Trace Village, a residential subdivision in Harris County, Texas.
The Pine Trace Loan is evidenced and secured by a first lien deed of trust, a promissory note, an assignment of a builder lot sale contract, an assignment of receivables from a municipal utility district, and other loan documents. The Pine Trace Loan is guaranteed by the parent company of Pine Trace. The interest rate under the Pine Trace Loan is the lower of 13% or the highest rate allowed by law. The Pine Trace Loan matures and becomes due and payable in full on March 29, 2012. The Pine Trace Loan provides Pine Trace with a $450,000 interest reserve, pursuant to which we will fund Pine Trace’s monthly interest payments and add the payments to the outstanding principal balance of the Pine Trace Loan. During the Pine Trace Loan term, Pine Trace is required to pay down the Pine Trace Loan by paying over to us all proceeds of lot sales and other property sales and all reimbursements and other payments received from the municipal utility district. In connection with the Pine Trace Loan, Pine Trace agreed to pay a $52,500 origination fee to our asset manager, UMTH LD, which was charged to Pine Trace and funded by us at the closing of the Pine Trace Loan.
N. Quarterly Financial Data (Unaudited)
Selected quarterly financial data (unaudited) for the year ended December 31, 2009 and for the period from May 28, 2008 (Inception) through December 31, 2008 is set forth below:
| | | | | | | Net Income | | Weighted |
| | | | | | | (Loss) Per | | Average |
| | | | | | | Share | | Shares |
| | | Revenues | | Net Income | | Basic/Diluted | | Outstanding |
| 2009 | | | | | | | | |
| First quarter | | $ - | | $ - | | $ - | | 10,000 |
| Second quarter | | - | | - | | - | | 10,000 |
| Third quarter | | | | (100) | | (0.01) | | 10,000 |
| Fourth quarter | | 4,200 | | (21,600) | | (0.94) | | 23,034 |
| For the year | | $ 4,200 | | $ (21,700) | | $ (1.63) | | 13,285 |
| | | | | | | | | |
| 2008 | | | | | | | | |
| First quarter | | $ - | | $ - | | $ - | | - |
| Second quarter | | 200 | | 200 | | 0.02 | | 10,000 |
| Third quarter | | 400 | | 200 | | 0.02 | | 10,000 |
| Fourth quarter | | - | | - | | - | | 10,000 |
| For the year | | $ 600 | | $ 400 | | $ 0.04 | | 10,000 |
| | | | | | | | | |
| | | | | | | | | |
Index to Exhibits
Exhibit Number Description
| 3.1 | Second Articles of Amendment and Restatement of United Development Funding IV (previously filed in and incorporated by reference to Registrant’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-11, Commission File No. 333-152760, filed on December 16, 2008) |
| 3.2 | Bylaws of United Development Funding IV (previously filed in and incorporated by reference to Registrant’s Registration Statement on Form S-11, Commission File No. 333-152760, filed on August 5, 2008) |
| 4.1 | Form of Subscription Agreement (previously filed in and incorporated by reference to Exhibit B to Supplement No. 2 to prospectus dated November 16, 2009 filed pursuant to Rule 424(b)(3) (Commission File No. 333-152760) filed on February 17, 2010 and incorporated herein by reference) |
| 4.2 | Distribution Reinvestment Plan (included as Exhibit C to prospectus filed pursuant to Rule 424(b)(3) (Commission File No. 333-152760) filed on November 16, 2009 and incorporated herein by reference) |
| 4.3 | Share Redemption Program (incorporated by reference from the description under “Description of Shares – Share Redemption Program” in the prospectus filed pursuant to Rule 424(b)(3) (Commission File No. 333-152760) filed on November 16, 2009 and incorporated herein by reference) |
| 10.1 | Advisory Agreement by and between United Development Funding IV and UMTH General Services, L.P. (previously filed in and incorporated by reference to Exhibit 10.1 to Form 10-Q filed on December 22, 2009) |
| 10.2 | Agreement of Limited Partnership of United Development Funding IV Operating Partnership, L.P. (previously filed in and incorporated by reference to Exhibit 10.2 to Form 10-Q filed on December 22, 2009) |
| 10.3 | Third Amended and Restated Escrow Agreement by and among United Development Funding IV, Realty Capital Securities, LLC, and LegacyTexas Bank (previously filed in and incorporated by reference to Registrant’s Pre-Effective Amendment No. 7 to Registration Statement on Form S-11, Commission File No. 333-152760, filed on November 12, 2009) |
| 10.4 | Participation Agreement by and between United Development Funding IV, United Development Funding, L.P., United Development Funding II, L.P., United Development Funding III, L.P. and UMTH Land Development, L.P. (previously filed in and incorporated by reference to Exhibit 10.4 to Form 10-Q filed on December 22, 2009) |
| 10.5 | Guaranty Agreement (Limited) by United Development Funding IV for the benefit of Community Trust Bank of Texas (previously filed in and incorporated by reference to Registrant’s Pre-Effective Amendment No. 5 to Registration Statement on Form S-11, Commission File No. 333-152760, filed on August 24, 2009) |
| 10.6 | Loan Participation Agreement – Buffington Texas Classic Homes, LLC between UMT Home Finance L.P. and United Development Funding IV (filed herewith) |
| 10.7 | Loan Participation Agreement – Buffington Signature Homes, LLC between UMT Home Finance, L.P. and United Development Funding IV (filed herewith) |
| 21.1 | List of Subsidiaries (previously filed in and incorporated by reference to Registrant’s Registration Statement on Form S-11, Commission File No. 333-152760, filed on August 5, 2008) |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (filed herewith) |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer (filed herewith) |
| 32.1* | Section 1350 Certifications (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, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
