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December4,2015
Mr.LarryAutrey
ManagingPartner
WhitleyPennLLP
8343DouglasAvenue,Suite400
Dallas,Texas
75225
Mr.JamesPenn
Mr.B.GlenWhitley
1400West7thStreet,Suite400
FortWorth,Texas76102
Gentlemen:
OnNovember24,2015,UnitedDevelopmentFundingIII,L.P.(UDFIII),UnitedDevelopmentFundingIV(UDFIV),United
DevelopmentFundingIncomeFundV(UDFV),andUnitedMortgageTrust(UMT)(collectively,theCompanies)each
filedan8KwiththeSecuritiesandExchangeCommission(SEC)statingthatWhitleyPenn,LLPhasdeclinedtostandfor
reappointmentas
the
Companys
independent
registered
public
accounting
firm,
and
its
declination
was
accepted
by
the
Companysauditcommittee. These8Ksfurtherstatethat
(i) there were no disagreements between the [Companies] and
Whitley Penn on any matters of
accountingprinciplesorpractices,
financialstatementdisclosureorauditingscopeorprocedure,which
disagreements, ifnotresolved to
thesatisfactionofWhitleyPenn,wouldhavecausedWhitleyPenn to
makereferencetothesubjectmatterofthedisagreement in
itsreportonthe[Company]sconsolidated
financial statements, and (ii) there were no reportable events
as that term is defined in Item
304(a)(1)(v)ofRegulationSK.
WhitleyPennacknowledged
thefilingsandagreedwiththestatementsconcerningourfirmcontainedtherein.
Asyouknow,
theCompaniesareaffiliatesofeachother,externallymanagedoradvisedby
thesameprincipalgroupof
related individuals, and generally engage in the business of
unregulated lending to residential real estate developers,
primarilyinNorthTexasandtothesame,smallgroupofdevelopers.
AreviewoftheCompaniesperiodicfilings(Forms10
K,10Q,8K,proxystatementsandofferingdocuments,collectively,
theFilings) filedwith theSEC,areviewofcounty
property records (centralappraisaldistrictsanddeed
recordings)andvisits tonumerousprojectanddevelopment sites
raisesanumberof seriousquestionsabout (i) the legitimacyof the
financialandother relationshipsbetweenaffiliated
entitiesandindividualsand(ii)apparentaccountingirregularities.
Inadditiontopotentiallysignificantissuesregardingthe
adequacyofthedisclosuresintheFilings,italsoappearsthattheremaybematerialmisstatementsintheauditedfinancial
statementsforthe fiscalyearsending2012,2013and2014,aswellasthe
interimquarterlyfilings forthesameperiods.
These
issuesraiseseriousconcernsaboutWhitleyPennspriorauditwork,but,moreimportantly,WhitleyPennsspecific
representationstoshareholdersandthepublicmarketthattherewerenodisagreementsbetweenthe[Companies]and
WhitleyPennandnoreportableevents.
Asdiscussedbelow,thereareanumberofapparentirregularitiesthatgiverise
to questions as to (i)whetherWhitley Penn had a reasonable basis
formaking the representations contained in the
Companies Forms 8K (which shareholders and themarket have
clearly relied upon) and (ii) whetherWhitley Penn
intentionally,recklesslyornegligentlyignoredobviousredflags.
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Entities:
Entity CommissionFile
Number
Corporate
Address
TotalAssets
(BookValue)
UnitedMortgage
Trust
000
32409
1301MunicipalWay,Suite220
Grapevine,Texas76051 $182.3million
UnitedDevelopmentFundingIII,L.P.
000531591301MunicipalWay,Suite100
Grapevine,Texas76051$391.6million
UnitedDevelopmentFundingIV 001364721301MunicipalWay,Suite100
Grapevine,Texas76051$684.1million
UnitedDevelopmentFundingIncomeFundV
3331941621301MunicipalWay,Suite100
Grapevine,Texas76051
$55.6
million
TotalAssets $1.3billion
RedFlags:
TheprimaryassetsoftheCompaniesareloans,andthebookvalueofassetsappeartobemateriallyoverstated,
eitherbecausetheloanshaveinsufficientreservesorhaveinadequatecollateralsupportingthem.
Loans appear to accrue larger and larger balances for years
(more thandoubling in some cases)without ever
generatinganycash receipts,which leadtoquestionsabout
theaccounting treatmentof these loans, including
howincome
is
recognized
and
later
capitalized
to
long
term
asset
accounts.
This
raises
serious
questions
about
thecarryingvalueoftheloansandthepotentialformateriallyoverstatedbookvalueofassets.
Managementfeesareassessedonthevalueofassetsundermanagement.
IfthebookvalueoftheCompanies
assetsismateriallyoverstated,theexternalmanagermayhaveimproperlyreceivedinflatedmanagementfees.
UDFIVisnotaccruinganyprovisionforloanlossesdespiteamaterialoutstandingbalanceofpastdueloans(loans
thathavematuredwithoutbeingrepaidorextended).
UDFIII,UDFIVandUMTarenotreservingagainstcertainloansthathaveahighprobabilityofbeingimpaired(e.g.
loansthatremainoutstandingbutthathavenotmatured).
UDFIVs
largest
borrower
is
aprivate
real
estate
developer
based
in
Farmers
Branch,
Texas
which
does
business
underthenameofCenturionAmericanthroughacomplexwebofaffiliatedentities,whicharecontrolledbyDallas
businessman, Mehrdad Moayedi (Moayedi) (Moayedi, Centurion
American entities and their affiliates are
collectivelyreferredtoasCenturion).
LoanstoUDFIVslargestborrower,Centurion,donotappeartobearms
lengthtransactions.
Theseloansdonotappeartoberepaiduponmaturity,andUDFIVdoesnotappeartoreceive
anycompensationforsuchextensions.
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ThelargestborrowerofUDFIIIrepresents43%ofloans.
ThelargestborrowerofUDFIVrepresents67%ofloans.
ThelargestborrowerofUDFVrepresents62%ofloans.
Whilethisloanconcentrationisdisclosedindividuallyfor
eachoftheCompanies,itisnotdisclosedthatthelargestborrowerofeachofUDFIII,UDFIVandUDFVisoneand
thesameCenturionandthatthereexistsan
inherentdefaultriskacrosstheCompaniesassociatedwiththis
concentration inasingleborrower.
Asaconsequence,eachoftheCompaniesfinancialconditionappearstobe
affectedby,anddependenton,oneanother,whichalsodoesnotappeartobedisclosed.
The largestborrowerofeachofUDF III,UDF IVandUDFVmaybe insolvent.
Thisconcern isbasedon,among
other information,thefactthat(i)over95%ofthe loans
issuedtoCenturionbyUDFIVarenotrepaidwhenthe
loansmatureandbecomedue;(ii)Centurionrecentlydefaultedonafirstlienloanduetoathirdpartylenderand
asecond lien loanduetoUDF IVthatwassecuredby land
inDentonCounty,Texas; (iii)severalmechanicsand
materialmans lienshavebeen filed related toCenturion
invariousNorthTexascounties,and (iv) theapparent
inabilityofthisborrowertoservice$585millionindebt(outstandingprincipalbalance)owedtoUDFIIIandUDFIV
(exclusive of any other debts owed to other entities) as well as
approximately $75 million of contractually
obligatedannualinterestexpense.
100%ofUDF IV loansareclassifiedasfullycollectable,which is
likelyamaterialmisrepresentation ifthe largest
borrower
is
insolvent.
Material conflicts exist between executives/officers and
Centurion, which appear to be negatively affecting
shareholders.
UDFIII,UDFIVandUDFVfailtofullydisclosethebusinessrelationshipsbetweentheirofficersand
directorsandCenturionasrequiredbyAuditingStandardNo.18RelatedParties.
UDF IIIandUDF IVssecond largestnonaffiliatedborrower
isaprivaterealestatedeveloperbased inAustin,
Texas,whoseprincipalexecutiveisThomasBuffington(Buffington).
SixUDFIVloansrelatedtoBuffingtonhave
maturedwithoutbeing extendedor repaidbasedondisclosures in the
Form10Q filed for thequarter ended
September30,2015.
Buffingtonappearstoaccountforapproximately10%ofUDFIVstotal
loanassetsandhas
past due loans owed to UDF III that represent approximately 25%
of UDF IIIs portfolio. The impact of this
borrowerappearstobematerialasitisthesecondlargestnonaffiliatedborrowerofbothUDFIIIandUDFIV.
OnoraboutOctober30,2015,alawsuitwasfiledinTravisCounty,Texas,against,amongothers,UDFIV,several
BuffingtonentitiesandBuffington, individually.
SeeHanna/MageeL.P.#1v.BHMHighpointe Ltd.,etal. (Cause
No.D1GN15004985).
Thecomplaintcontainsallegationsoffraud,breachofcontract,tortiousinterferenceand
fraudulenttransferandalsoincludesspecificclaimsthatmultipleBuffingtonentities(thathavereceivedloansand
currentlyhaveoutstandingbalancesowedtoUDFIV)areinsolvent.
OnNovember30,2015,UDFIIIfiledaninvoluntarybankruptcypetitionagainstanentitycontrolledbyBuffington
in theUnitedStatesBankruptcyCourt for theWesternDistrictofTexas.
See In re Lennar Buffington Stonewall
Ranch, L.P. (W.D. Texas 1511548hcm). The amount of the claim
byUDF III against the entity controlled by
Buffingtonwas$106.5million,whichrepresentsapproximately25%ofUDFIIIstotalassets.
Buffingtonand/orhis
affiliateshavehad,andcontinuetohave,amaterialamountofloanspastdueowedtobothUDFIIIandUDFIV.
It
appearsthat
neither
UDF
III,
nor
UDF
IV
have
disclosed
(i)
the
litigation,
(ii)
the
reality
of
the
poor
financial
conditionofitssecondlargestnonaffiliatedborroweror(iii)thematerialaffectthisbankruptcyfilingmayhave
onthefinancialconditionsofUDFIIIandUDFIV.
There are disclosure issues regarding the percentage of loans
that appear to be secured by unimproved real
property. UDF IIIandUDF IVs largestborrower,Centurion,has
receivedover75acquisitionanddevelopment
loansthattypicallybearinterestat13%orhigher.Innumerousinstances,Centurionhasnotbrokengroundonthe
developmentfor2,3,5and10yearsafterhavingreceivedthe13%loan.Thisleadstoquestionsabouttheuseof
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the loanproceeds(andpotentialmisappropriation
ifnotusedfordevelopments)andthevalueoftheunderlying
collateral.
UDFVsprincipalbusinessactivityappearstoinvolveissuingloanstospecificCenturionentitiesthathave(orhad)
loansduetoUDF IIIandUDF IV. UDFVfundsappeartobeusedtorepay
loansowedtoUDF IIIandUDF IVby
Centurion,whichisnotdisclosedtoUDFVshareholders.
SimilartoaPonzischeme,itappearsthatUDFVinvestor
capitalis
being
used
to
return
capital
to
UDF
III
and
UDF
IV
investors.
UDFV loansarebeing issuedtoUDF IIIandUDF IVs
largestborrower,Centurion,andtherelationshipbetween
CenturionandUDFVsaffiliatesisnotdisclosed.
UDFVsFilingsincludeexpressstatementsthat itwillnotmake
loansto,orparticipateinloanswith,affiliates.However,itappearsthatUDFVsbusinessactivitycontradictsthese
statementsor,at the very least, contradicts the spiritof
thedisclosures asUDFV is indirectly,buteffectively,
refinancingpastUDFIIIandUDFIVloanswhilenotdirectlyacquiringtheloansfromUDFIIIandUDFIV.
Insidershavemade loans to themselvesthroughaffiliatesofUMTat
interest ratesbelow the10YrUS treasury
rate in the formofunsecureddeficiencynotes and
recourseobligations totaling$73million asof thequarter
ended September 30, 2015. Insiders lend to themselves at an
interest rate of 1.75% to the detriment of
shareholderswhile the same form of unsecured deficiency notes
issued to nonaffiliated parties bear interest
at14%.
UDFIIIhad$392millionofassetsand$10millionofdebtasofthequarterendedSeptember30,2015.
Despite
having a nominal amount of debt relative to its assets (which
are principally interest bearing loans), UDF III
consistentlydisclosesthat
ithasnotmadepaymentsonitsdebtinatimelymanner,includinginthemostrecent
quarter.
ThisleadstoobviousquestionsaboutthefinancialconditionofUDFIII.
OnNovember30,2015,UDFVreleasedaForm8KdisclosingthatWilliamKahane,adirectorofUDFVsBoardof
Directors,hadresigned. Kahanes
resignationwaseffectiveasofNovember24,2015,whichwasthesameday
thatUDFVandtheotherCompanieseachreleasedaForms8KdisclosingthatWhitleyPennwouldno
longerbe
theCompaniesauditor. ItappearsthatKahane
isaffiliatedwithARCapital,RCSCapitalandNickSchorsch. AR
Capital
is
or
was
a
co
sponsor
and
external
advisor
of
UDF
V.
RCS
Capital
raised
capital
as
the
dealer
manager
for
UDFIVandisraisingorwasraisingcapitalasthedealermanagerofUDFV.
LikeWhitleyPenn,UDFVsForm8K
disclosingKahanesresignationclaimedthattheresignationwasnotaresultofanydisagreementwiththeBoard
ortheTrustonanymatterrelatingtotheTrustsoperations,policiesorpractices.
ThetimingofWhitleyPenns
resignationandKahanesdoesnotappear tobecoincidentaland further
raisesquestionsabout theveracityof
WhitleyPennsrepresentationstoshareholdersandthemarket.
Insummary,thesered flagsraisesignificantquestionsabout (i)the
legitimacyoftheUDFstructure, (ii)the financial
conditionoftheCompanies,(iii)WhitleyPennspriorauditworkand(iv)theaccuracyoftheCompaniesclaimsand
Whitley Penns acknowledgement regarding there not being any
disagreements betweenWhitley Penn and the
Companiesandtherenotbeinganyreportableevents.
Furtherquestionsarealsoraisedaboutwhethertheseorother
red flagsmay have beenwillfully or otherwise ignored,whether
deficient auditsmay have been conducted, and
whetherprofessional
audit
standards
may
have
been
violated.
In
the
absence
of
any
disagreements
between
the
CompaniesandWhitleyPennoranyreportableevents,especially in
lightoftheobservationsdetailedabove, itbegs
thequestionastowhyWhitelyPennisnotcontinuingastheauditoroftheCompanies.
