A Recap Of Recent Posts On United Development Funding by Harvest
Also see United Development Funding UDF lawsuit
United Development Funding Kyle Bass short
Below you will find abstracts to the 5 referenced PDF attachments along with their original publish date on United Development Funding
Jim Chanos has a new short target in his sights. Earlier this week, the hedge fund manager disclosed that he is betting against "legacy" data centers that face growing competition from the trio of technology giants, which have previously been their biggest customers. The fund manager, who is best known for his winning bet against Read More
1 – A Texas Sized Scheme – Introduction to United Development Funding (Posted 12/10/15)
“Only when the tide goes out do you discover who’s been swimming naked.” Six years ago, the Federal Reserve set in motion one of the greatest financial experiments on record: setting interest rates at zero and seeing what happens. To this point, the result has been massive asset reflation. While what happens next is still the great unknown, low interest rates and rising asset values have provided great cover for many mistakes made over the past six years across all asset classes. The Fed has truly been the rising tide that has lifted almost all boats. Amid this rising tide, an asset class best known as public non?traded REITs emerged as a prominent retirement product sold almost exclusively to retail investors. When the tide goes out, public non?traded REITs will be exposed for the terribly flawed economics on which the $100 billion dollar business was built.
A public non?traded REIT is public because it has the minimum number of shareholders required to be public; it is non?traded because it is not listed or traded on a major stock exchange. This product is sold to retirees as a lowrisk, long?term income?producing asset that is not subject to stock market volatility – pedaled as a fixed?income product without exposure to interest rates. In reality, an investment in a public non?traded REIT is typically an investment in an illiquid ”start?up” real estate company that must accumulate assets quickly and is subject to the same market risks (or greater market risks) as its publicly traded, more liquid peers which benefit from lower costs of capital.
When boiled down to the least common denominator, public non?traded REITs exist because of high upfront commissions that provide the incentive for financial advisers to sacrifice their client’s best interest for their own personal greed. Prior to a non?traded REIT ever purchasing an asset which may or may not generate future positive returns, ten to fifteen percent of an investor’s capital is consumed by upfront offering fees, broker commissions and asset origination fees. While the high upfront fee load incents “investment advisers” to push the product and is a primary reason why public non?traded REITs exist, it is also why so many are set to fail from the beginning.
See full United Development Funding PDF below.
2 – Letter Sent to United Development Funding Auditor (Posted 12/10/15)
December 4, 2015
Mr. Larry Autrey
Whitley Penn LLP
8343 Douglas Avenue, Suite 400
Dallas, Texas 75225
Mr. James Penn
Mr. B. Glen Whitley
1400 West 7th Street, Suite 400
Fort Worth, Texas 76102
On November 24, 2015, United Development Funding III, L.P. (“UDF III”), United Development Funding IV (“UDF IV”), United Development Funding Income Fund V (“UDF V”), and United Mortgage Trust (“UMT”) (collectively, the “Companies”) each filed an 8?K with the Securities and Exchange Commission (“SEC”) stating that Whitley Penn, LLP “has declined to stand for reappointment as the Company’s independent registered public accounting firm,” and its declination was “accepted by the Company’s audit committee.” These 8?Ks further state that
(i) there were no disagreements between the [Companies] and Whitley Penn on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Whitley Penn, would have caused Whitley Penn to make reference to the subject matter of the disagreement in its report on the [Company]’s consolidated financial statements, and (ii) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S?K.
Whitley Penn acknowledged the filings and agreed “with the statements concerning our firm contained therein.”
As you know, the Companies are affiliates of each other, externally managed or advised by the same principal group of related individuals, and generally engage in the business of unregulated lending to residential real estate developers, primarily in North Texas and to the same, small group of developers. A review of the Companies’ periodic filings (Forms 10?K, 10?Q, 8?K, proxy statements and offering documents, collectively, the “Filings”) filed with the SEC, a review of county property records (central appraisal districts and deed recordings) and visits to numerous project and development sites raises a number of serious questions about (i) the legitimacy of the financial and other relationships between affiliated entities and individuals and (ii) apparent accounting irregularities. In addition to potentially significant issues regarding the adequacy of the disclosures in the Filings, it also appears that there may be material misstatements in the audited financial statements for the fiscal years ending 2012, 2013 and 2014, as well as the interim quarterly filings for the same periods. These issues raise serious concerns about Whitley Penn’s prior audit work, but, more importantly, Whitley Penn’s specific representations to shareholders and the public market that there were no “disagreements between the [Companies] and Whitley Penn” and no “reportable events.” As discussed below, there are a number of apparent irregularities that give rise to questions as to (i) whether Whitley Penn had a reasonable basis for making the representations contained in the Companies’ Forms 8?K (which shareholders and the market have clearly relied upon) and (ii) whether Whitley Penn intentionally, recklessly or negligently ignored obvious red flags.
See full United Development Funding letter below.
3 – How the Scheme Works – United Development Funding Shahan Prairie Case Study (Posted 12/11/15)
But First….United Development Funding Company Response – Huh?
United Development Funding s statement DOES NOT refute any allegations and instead discloses the SHOCKING REVELATION that UDF has been under investigation by the SEC since April 2014.
While the Company attempts to down play the seriousness of the investigation, we note that Enron, Madoff, and Stanford all started as non?public SEC fact?finding investigations
Now How it Works…Disclosure About Not Lending to Affiliates
- UDF V, the newest fund in the UDF family of funds, “will not participate in any investments with our advisor entities or any of their affiliates, including any prior program sponsored by affiliates of UDFH”
- Unlike UDF III or UDF IV, UDF V will not directly loan money to affiliates nor will it acquire participation interests in related party / affiliate originated loans, according to its prospectus.
- While UDF V, technically, has not lent to an affiliated program, it indirectly and effectively has by lending to an entity that previously received had a 2nd lien loan from an affiliate (UDF III); this entity used the loan from UDF V to repay the loan issued 8 years ago by UDF III.
See full United Development Funding PDF below.
4 – Lawsuit Referenced in Letter to UDF Auditor and Commentary (Posted 12/14/15)
COMES NOW, Hanna/Magee LP. #1 (“Plaintiff”), and files this its Original Petition complaining of BHM Highpointe Ltd., BHM Highpointe Management, LLC, Buffington Land, Group Ltd., United Development Funding IV, Thomas Buffington and Patrick Starley (“Defendants”) and in support of their complaint would respectfully show the Court the following:
1. Plaintiff intends to conduct discovery in this case under Level 2 of TEXAS RULE OF CIVIL PROCEDURE 190.4.
2. The Plaintiff is a limited partnership registered to do business in the State of Texas.
3. Defendant BHM Highpointe Ltd. (“BHM Highpointe” or “BHM”) is a limited partnership registered to do business in the State of Texas, and may be served with a citation through CT Corporation, 1999 Bryan St., Suite 900, Dallas, TX 75201-3136.
4. Defendant BHM Highpointe Management LLC (the “BHM General Partner”) is a limited liability company registered to do business in the State of Texas, and is the general partner of Defendant BHM Highpointe) and may be served with a citation through CT Corporation, 1999 Bryan St., Suite 900, Dallas, TX 75201-3136.
5. Defendant Buflington Land Group, Ltd. (“Buffington Land”) is a limited partnership registered to do business in the State of Texas. Defendant Buffington Land may be served with citation through CT Corporation, 1999 Bryan St., Suite 900, Dallas, TX 75201-3136.
6. United Development Funding IV (“UDF”) is a Maryland investment trust doing business in Texas. It may be served with process by serving its registered agent, Corporation Service Company d/b/a CSC – Lawyers Incorporating Service Company, at 211 East 7th Street, Suite 620, Austin, Texas 78701.
7. Thomas Buffington (“Buffington”) is an individual resident of Travis County, Texas, who may be served at 3600 N. Capital of Texas Hwy, B-170, Austin, TX 78746-3314.
8. Patrick Starley (“Starlcy”) is an individual resident of Travis County, Texas, who maybe served at 4720 Rockcliff Rd, Unit 5, Austin, TX 78746-1254.
III. Jurisdiction and Venue
9. This Court has jurisdiction over the subject matter complained of in this Petition because the amounts at issue exceed the minimal jurisdictional limits of this Court. Venue is proper in this Court pursuant to §15.001, et. seq. of the TEXAS CIVIL PRACTICE AND REMEDIES CODE, inasmuch as all of the events and property giving rise to the claims alleged occurred in Travis County, Texas and because one of the Defendants has its principal office and place of business or residence in Travis County, Texas. Plaintiff claims monetary damages in excess of $1,000,000.
See full PDF below.
5 – Bankruptcy Petition Referenced in Letter to UDF Auditor and Commentary (Posted 12/14/15)
Attached is the involuntary bankruptcy petition filed in the United States Bankruptcy Court for the Western District of Texas (W.D. Texas 15?11548?hcm) by UDF III related to UDF III and UDF IV’s, second largest “non?affiliated” borrower, a private real?estate developer based in Austin, Texas, whose principal executive is Thomas Buffington (“Buffington”). Buffington accounts for 25% of the outstanding loans issued by UDF III and 11% of the outstanding loans issued by UDF IV, and accordingly Buffington is material to both UDF III and UDF IV.
On November 30, 2015, UDF III, as the petitioning creditor, filed an involuntary bankruptcy petition listing Lennar Buffington Stonewall Ranch, L.P. as the debtor, an affiliate and entity controlled by Buffington. The amount of the claim is $106.5 million, which represents approximately 25% of UDF III’s total assets. It does not appear that UDF III has sufficiently reserved against the Buffington Loans given that (i) only $5.3 million of allowances for loan losses on “loans individually evaluated for impairment” had been accrued as of the Form 10?Q filed for the quarter ended September 30, 2015, and (ii) only $36.0 million of loans were classified as level 2 loans which indicates “full collectability of loans [is] more likely than not, but not probable” as opposed to level 1 which indicates “full collectability of loans […] is considered probable”. Either a housing crisis hit the greater Austin?Round Rock MSA following the filing of the Form 10?Q on November 16, 2015, or there appear to be issues with financial disclosures.
In a Form 8?K filed with the SEC on December 14, 2015, management feebly attempts to reassure its investors stating “[o]n November 30, 2015, UDF III filed an involuntary bankruptcy petition against a borrower that owns one specific development project in order to protect UDF III’s collateral position after an approximately $3 million senior lender posted the property for foreclosure. The value of the project is significantly greater than the amount of debt owed to the senior lender” and the involuntary bankruptcy filing by UDF III was “a strategic move.”
This “explanation” rings hollow. Management has essentially admitted that its second largest “nonaffiliated” borrower (Buffington) cannot meet its financial obligations. More telling is management’s glaring omission – management does not claim that the value of the project is greater than the amount of debt owed to both senior lender and UDF III. As the junior lender, UDF has the right, but not the obligation, to cure the default of the senior loan to protect its second lien. Based on UDF III’s Form 10?Q, UDF III only had $136,488 of cash at September 30, 2015, and could not cure the default with its cash position.
See full PDF below.