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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-127891
PROSPECTUS
(UNITED DEVELOPMENT FUNDING LOGO)
Up to 17,500,000 units offered to the public
50,000 units minimum
 
     United Development Funding III, L.P. is a newly organized Delaware limited partnership formed primarily to generate current interest income by investing in mortgage loans.
     We are offering and selling to the public a maximum of 12,500,000 units of limited partnership interest and a minimum of 50,000 units of limited partnership interest for $20 per unit. We are also offering up to 5,000,000 units of limited partnership interest to be issued pursuant to our distribution reinvestment plan for $20 per unit. The net proceeds of our offering will be invested in mortgage loans and other real estate assets. You must purchase at least 150 units for $3,000 if you are purchasing through an IRA or other qualified account. If you are not purchasing through a qualified account, you must purchase at least 250 units for $5,000.
 
The Offering:
                                   
            Wholesaling    
        Selling Commissions   and   Proceeds to United
        and   Marketing   Development
    Price to Public   Due Diligence Fees   Support Fees   Funding III, L.P.
                 
Primary Offering
                               
 
Per Unit
  $ 20.00     $ 1.50     $ 0.60     $ 17.90  
 
Total Minimum
  $ 1,000,000     $ 75,000     $ 30,000     $ 895,000  
 
Total Maximum
  $ 250,000,000     $ 18,750,000     $ 7,500,000     $ 223,750,000  
Distribution Reinvestment Plan
                               
 
Per Unit
  $ 20.00     $ 0.20     $     $ 19.80  
 
Total Minimum
  $     $     $     $  
 
Total Maximum
  $ 100,000,000     $ 1,000,000     $     $ 99,000,000  
     The units will be offered to investors on a best efforts basis. Selling commissions will be reduced to $0.20 per unit and no due diligence fees, wholesaling fees or marketing support fees will be paid for units sold pursuant to our distribution reinvestment plan. We expect that at least 85.44% of the gross offering proceeds raised will be available for our use in mortgage loans and other real estate assets. This offering will terminate on or before May 15, 2008 (unless extended with respect to the units offered under the distribution reinvestment plan).
      Investing in our units involves a high degree of risk. You should purchase our units only if you can afford a complete loss of your investment. See “Risk Factors” beginning on page 21. The most significant risks relating to your investment include the following:
  •  No public market currently exists for our units of limited partnership interest. Our units cannot be readily sold and, if you are able to sell your units, you would likely have to sell them at a substantial discount.
 
  •  We have no operating history nor established financing sources. We are a “blind pool” because we do not currently own any mortgage loans and we have not identified any mortgage loans to acquire with proceeds from this offering. You will not have the opportunity to evaluate our loans prior to their origination or purchase. You must rely totally upon our general partner’s ability to select our investments.
 
  •  If we raise substantially less than the maximum offering, we may not be able to invest in a diverse portfolio of mortgage loans and the value of your investment may fluctuate more widely with the performance of specific investments.
 
  •  We will rely on our general partner to select mortgage loans in which to invest and to conduct our operations, and our general partner does not have any prior experience sponsoring a public real estate limited partnership.
 
  •  We are obligated to pay substantial fees to our general partner and its affiliates, some of which are payable based upon factors other than the quality of services provided to us and regardless of our profitability.
 
  •  Our general partner and its affiliates will face conflicts of interest such as competing demands upon their time, their involvement with other entities and the allocation of opportunities among affiliated entities and us.
 
  •  We may incur substantial debt, which could hinder our ability to pay distributions to our limited partners. Should we decide to use leverage to fund loans, we expect that the total amount of indebtedness we will incur at any given time will not exceed 50% of our total invested capital. However, we are permitted by our partnership agreement to borrow up to 70% of the aggregate fair market value of all of our mortgage loans.
 
     Neither the Securities and Exchange Commission, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. No one is authorized to make any statement about this offering different from those that appear in this prospectus. The use of projections or forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence that may flow from an investment in this offering is not permitted.
     The units are being offered by select members of the National Association of Securities Dealers, Inc. (NASD) on a “best efforts” basis. These selling group members are not required to sell any specific number or dollar amount of units but will use their best efforts to sell the units offered hereby. Your subscription payments will be placed in an account held by the escrow agent, Coppermark Bank, and will be held in trust for your benefit, pending release to us. If we do not sell at least $1.0 million of units by May 15, 2007, which is one year from the date of this prospectus, we will stop selling units and your funds in the escrow account (including interest if your funds have been held at least 35 days) will be returned to you within ten days after termination of the offering.
The date of this prospectus is May 15, 2006


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SUITABILITY STANDARDS
General
      An investment in United Development Funding III, L.P. involves significant risk. An investment in our units is only suitable for persons who have adequate financial means, desire a long-term investment and who will not need immediate liquidity from their investment. Persons who meet this standard and seek to diversify their personal portfolios with a mortgage-based investment, receive current interest income and who are able to hold their investment for a time period consistent with our liquidity plans are most likely to benefit from an investment in our partnership. On the other hand, because we cannot guarantee you current interest income, we caution persons who require guaranteed income or immediate liquidity not to consider an investment in our partnership as meeting these needs.
      In consideration of these factors, we have established suitability standards for initial limited partners and subsequent purchasers of units from our investors. These suitability standards require that a purchaser of units have, excluding the value of a purchaser’s home, furnishings and automobiles, a gross annual income of at least $60,000 and a net worth of at least $225,000.
      You must purchase at least 150 units for $3,000 if you are purchasing through an IRA or other qualified account. If you are not purchasing through a qualified account, you must purchase at least 250 units for $5,000. You may not transfer units in an amount less than the minimum purchase requirement. In addition, you may not transfer, fractionalize or subdivide your units so as to retain less than the number of units required for the minimum purchase. In order to satisfy the minimum purchase requirements for retirement plans, unless otherwise prohibited by state law, a husband and wife may jointly contribute funds from their separate IRAs, provided that each such contribution is made in increments of $20. You should note that an investment in our units will not, in itself, create a retirement plan and that, in order to create a retirement plan, you must comply with all applicable provisions of the Internal Revenue Code of 1986, as amended (Internal Revenue Code). Any retirement plan trustee or individual considering purchasing units for a retirement plan or an IRA should read carefully the section of this prospectus captioned “Investment by Tax-Exempt Entities and ERISA Considerations.”
      After you have purchased the minimum investment, all additional purchases must be in increments of at least 50 units ($1,000), except for purchases of units pursuant to our distribution reinvestment plan, which may be in lesser amounts.
      Several states have established suitability requirements that are more stringent than the standards that we have established and described above. Investors in New Jersey and Ohio must have, excluding the value of such investor’s home, furnishings and automobiles, a gross annual income of at least $85,000 and a net worth of at least $330,000. Furthermore, in addition to our standard suitability requirements, investors in California, Iowa, Kansas, Missouri, Nebraska, New Jersey and Ohio must have a liquid net worth of at least ten times their investment in our units. Net worth is to be determined excluding the value of a purchaser’s home, furnishings and automobiles. For purposes of determining whether investors in Kansas meet the more stringent suitability standards established by that state, net worth is defined as the excess of (1) the sum of unencumbered (a) cash and cash equivalents and (b) readily marketable securities over (2) total liabilities, each as determined in accordance with generally accepted accounting principles.
      In the case of sales to fiduciary accounts, the suitability standards must be met by one of the following: (1) the fiduciary account, (2) the person who directly or indirectly supplied the funds for the purchase of the units or (3) the beneficiary of the account. These suitability standards are intended to help ensure that an investment in our units is an appropriate investment, given the long-term nature of an investment in our units, our investment objectives and the relative illiquidity of our units.

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      Each participating broker-dealer, authorized representative or any other person selling units on our behalf is required to:
  •  make every reasonable effort to determine that the purchase of units is a suitable and appropriate investment for each investor based on information provided by such investor to the broker-dealer, including such investor’s age, investment objectives, investment experience, income, net worth, financial situation and other investments held by such investor; and
 
  •  maintain records for at least six years of the information used to determine that an investment in our units is suitable and appropriate for each investor.
In making this determination, your participating broker-dealer, authorized representative or other person selling units on our behalf will, based on a review of the information provided by you, consider whether you:
  •  meet the minimum income and net worth standards established by us;
 
  •  can reasonably benefit from an investment in our units based on your overall investment objectives and portfolio structure;
 
  •  are able to bear the economic risk of the investment based on your overall financial situation; and
 
  •  have an apparent understanding of:
  —  the fundamental risks of an investment in our units;
 
  —  the risk that you may lose your entire investment;
 
  —  the lack of liquidity of our units;
 
  —  the restrictions on transferability of our units;
 
  —  the background and qualifications of our general partner; and
 
  —  the tax consequences of an investment in our units.
Restrictions Imposed by the USA PATRIOT Act and Related Acts
      In accordance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act), the units offered hereby may not be offered, sold, transferred or delivered, directly or indirectly, to any “Unacceptable Investor,” which means anyone who is:
  •  a “designated national,” “specially designated national,” “specially designated terrorist,” “specially designated global terrorist,” “foreign terrorist organization,” or “blocked person” within the definitions set forth in the Foreign Assets Control Regulations of the U.S. Treasury Department;
 
  •  acting on behalf of, or an entity owned or controlled by, any government against whom the U.S. maintains economic sanctions or embargoes under the Regulations of the U.S. Treasury Department;
 
  •  within the scope of Executive Order 13224 — Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism, effective September 24, 2001;
 
  •  subject to additional restrictions imposed by the following statutes or regulations and executive orders issued thereunder: the Trading with the Enemy Act, the Iraq Sanctions Act, the National Emergencies Act, the Antiterrorism and Effective Death Penalty Act of 1996, the International Emergency Economic Powers Act, the United Nations Participation Act, the International Security

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  and Development Cooperation Act, the Nuclear Proliferation Prevent Act of 1994, the Foreign Narcotics Kingpin Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the Foreign Operations, Export Financing and Related Programs Appropriations Act or any other law of similar import as to any non-U.S.  country, as each such act or law has been or may be amended, adjusted, modified or reviewed from time to time; or
 
  •  designated or blocked, associated or involved in terrorism, or subject to restrictions under laws, regulations, or executive orders as may apply in the future similar to those set forth above.
CAUTIONARY STATEMENT REGARDING EXHIBITS
      The representations, warranties and covenants made by us in any agreement that is filed as an exhibit to this prospectus or any amendment or supplement hereto are made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you and should not be relied on as accurately representing the current state of our affairs.

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PROSPECTUS SUMMARY
      This prospectus summary highlights selected information contained elsewhere in this prospectus. See also the “Questions and Answers About this Offering” section immediately following this summary. This section and the “Questions and Answers About this Offering” section do not contain all of the information that is important to your decision whether to invest in our units of limited partnership interest. To understand this offering fully, you should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements.
United Development Funding III, L.P.
      United Development Funding III, L.P. is a newly organized Delaware limited partnership that intends to generate income by investing in mortgage loans. Our office is located at 1702 N. Collins Boulevard, Suite 100, Richardson, Texas 75080. Our telephone number is (214) 370-8960 or (800) 859-9338, and our fax number is (469) 916-0695. We sometimes refer to United Development Funding III, L.P. as UDF III in this prospectus.
      A website is also maintained for our affiliates and us at www.udfonline.com that contains information about us and our affiliates. The contents of that website are not incorporated by reference in or otherwise made a part of this prospectus.
General Partner
      UMTH Land Development, L.P., a Delaware limited partnership (UMTHLD), is the general partner of UDF III and will make all investment decisions for the partnership. Our general partner will also be responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf.
      UMT Holdings, L.P., a Delaware limited partnership (UMT Holdings), holds 99.9% of the limited partnership interests in our general partner. UMT Services, Inc., a Delaware corporation (UMT Services), owns the remaining 0.1% of the limited partnership interests in our general partner and serves as its general partner. Todd F. Etter and Hollis M. Greenlaw own 100% of the equity interests in UMT Services.
      Our general partner was organized in March 2003 and serves as the asset manager for United Development Funding, L.P. (UDF I) and United Development Funding II, L.P. (UDF II). Financial statements of our general partner are included in this prospectus beginning on page F-8. As of December 31, 2005, the net worth of our general partner was approximately $3.71 million. However, the net worth of our general partner consists primarily of its interest in UDF I and UDF II and, therefore, does not represent liquid assets. See “Risk Factors — Risks Related to an Investment in United Development Funding III, L.P. — Our general partner has a limited net worth consisting of assets that are not liquid, which may adversely affect the ability of our general partner to fulfill its financial obligations to us.”
      From time to time in this prospectus we refer to “affiliates” of our general partner. The term “affiliate” includes any entity in which our general partner owns 10% or more or otherwise controls, and any person owning, directly or indirectly, 10% or more of our general partner and any officer, director or partner of our general partner or any such affiliated entity.
      The address of our general partner is 1702 N. Collins Boulevard, Suite 100, Richardson, Texas 75080, its telephone number is (214) 370-8960 or (800) 859-9338 and its fax number is (469) 916-0695. For information regarding the previous experience of our general partner and its affiliates in the management of mortgage and real estate programs, see “Prior Performance Summary.”
Terms of the Offering
      We are offering to the public up to 12,500,000 units of limited partnership interest at $20 per unit. We are also offering up to 5,000,000 units pursuant to our distribution reinvestment plan at $20 per unit.

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We will offer units until the earlier of May 15, 2008 or the date we sell all $250 million worth of units in our primary offering; provided, however, that our general partner may terminate this offering at any time. Our general partner also may elect to extend the offering period up to May 15, 2010 solely for the units reserved for issuance pursuant to our distribution reinvestment plan if all of those units are not sold prior to the termination date. This offering must be registered, or exempt from registration, in every state in which we offer or sell units. Generally, such registrations are effective for one year. Therefore, we may have to stop selling units in any state in which the registration is not renewed annually.
      The units are being offered by select members of the NASD on a “best efforts” basis, which means our selling group members will only be required to use their best efforts to sell the units and have no firm commitment or obligation to purchase any of the units. Your subscription payments will be placed in an account held by the escrow agent and will be held in trust for your benefit, pending release to us. Subscribers may not withdraw funds from the escrow account. If the minimum offering of $1.0 million has not been received and accepted by May 15, 2007 (a date which is one year from the date of this prospectus), this offering will terminate and investors’ funds, plus interest, will be returned within ten days after termination of the offering. However, we may terminate this offering at any time prior to the termination date.
      After the initial 50,000 units are sold, we will hold all subscription proceeds in escrow until investors are admitted as limited partners. We intend to admit new investors at least monthly. Each time new investors are admitted, we will hold their investment proceeds in our account until we withdraw the funds for the acquisition of mortgage loans, to make other investments or for the payment of fees and expenses.
Summary Risk Factors
      An investment in our units is subject to significant risks that are described in more detail in the “Risk Factors” and “Conflicts of Interest” sections of this prospectus, which begin on pages 21 and 70, respectively. If we are unable to effectively manage the impact of these risks, we may not meet our investment objectives and, therefore, you may lose some or all of your investment. The following is a summary of the risks that we believe are most relevant to an investment in our units:
  •  There is no public trading market for the units, and we do not expect one to develop; therefore, it will be difficult for you to sell your units. In addition, our partnership agreement imposes substantial restrictions on the transfer of units, and even if you are able to sell your units, you will likely have to sell them at a substantial discount.
 
  •  We have no prior operating history or established financing sources, and the prior performance of real estate programs sponsored by affiliates of our general partner may not be an indication of our future results.
 
  •  This is a “blind pool” offering because we have not yet identified any loans that we intend to originate or purchase. You will not have the opportunity to evaluate our loans prior to their origination or purchase. You must rely totally upon our general partner’s ability to select our investments.
 
  •  We intend to make loans and provide credit enhancements to affiliates of our general partner. Our general partner will have a conflict of interest in determining whether any such loan or credit enhancement transaction is in our best interests. Moreover, so long as it determines that it is advisable to do so in the exercise of its fiduciary duties to us, our general partner may cause us to make a loan or provide a credit enhancement to one of its affiliates in connection with a development in which such affiliates of our general partner hold an interest instead of another development in which affiliates of the general partner do not hold an interest. See “Risk Factors — Risks Related to Conflicts of Interest — Our general partner will have equity interests and/or profit participations in developments we finance and may have a greater incentive to make loans, which may or may not be subordinate to our mortgage loans and/or make loans with respect to such development to preserve and/or enhance its economic interest in such development.”

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  •  The diversification of our investments will be reduced to the extent that we sell less than all of the 12,500,000 units. There is a greater risk that you will lose money in your investment if we cannot diversify our investments.
 
  •  Our ability to achieve our investment objectives and pay distributions depends on the performance of our general partner in the day-to-day management of our business and the identification of real estate loans and the determination of any financing arrangements. We cannot be sure that our general partner will be successful in obtaining suitable investments on financially attractive terms or that, if it makes investments on our behalf, our objectives will be achieved.
 
  •  We will pay significant fees to our general partner and its affiliates, some of which are payable based upon the success of this offering and are not affected by the quality of services provided to us or whether or not our investments become profitable.
 
  •  Our general partner and its affiliates will face various conflicts of interest resulting from their activities with affiliated entities, such as conflicts related to allocating investments between us and other United Development Funding programs, conflicts related to any joint ventures between us and any such other programs and conflicts arising from time demands placed on our general partner or its affiliates in serving other United Development Funding programs. Such conflicts may not be resolved in our favor, which could cause our operating results to suffer.
 
  •  Our general partner is responsible for the management of our partnership. Although it is not required to do so, we anticipate that our general partner will fund our operations until we have made our initial investments and for a period of time thereafter. Our general partner has a net worth that is limited in amount, substantially illiquid and not readily marketable. Accordingly, we cannot guarantee that our general partner will have sufficient cash to make any payments required to support us.
 
  •  Real estate-related investments are subject to general downturns in the industry as well as downturns in specific geographic areas. Because most of our assets will be mortgage loans, the failure of a borrower to pay interest or repay a loan will have adverse consequences on our income. Increases in single-family mortgage interest rates could cause the number of homebuyers to decrease which would increase the likelihood of defaults on our development loans and, consequently, reduce our ability to pay distributions to our limited partners. If the value of the underlying property declines due to market or other factors, it is likely that the borrower would hold a property that is worth less than the mortgage balance on the property. As such, there may be greater risk of default by borrowers who enter into interest-only loans. In the event of a default, we would acquire the underlying collateral, which may have declined in value. In addition, there are significant costs and delays associated with the foreclosure process. Accordingly, we cannot guarantee that your investment will appreciate or that you will receive any cash distributions.
 
  •  We may incur substantial debt. Should we decide to use leverage to fund loans, we expect that the total amount of indebtedness we will incur at any given time will not exceed 50% of our total invested capital. However, we are permitted by our partnership agreement to borrow up to 70% of the aggregate fair market value of all of our mortgage loans. Loans we obtain will likely be secured with recourse by the lending bank to all of our assets, which will put those assets at risk of forfeiture if we are unable to pay our debts.
 
  •  Rules of taxation of partnerships such as our partnership are complex and uncertain. We do not intend to request or to obtain a ruling from the Internal Revenue Service as to any of the material tax consequences of an investment in our units and will rely on an opinion of counsel as to certain tax consequences. Counsel will give an opinion as to some, but not all, of the material tax consequences, and we will not have an opinion or a ruling with respect to some of the material tax consequences of an investment in us.
 
  •  The vote of limited partners owning at least a majority of our units will bind all of the limited partners as to certain matters such as the removal of our general partner and the amendment of our

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  limited partnership agreement. You will be bound by the majority vote on matters requiring approval of a majority of the units of limited partnership interest even if you do not vote with the majority on any such matter. Therefore, you will have little to no control over our day-to-day operations.
Description of Investments
      As of the date of this prospectus, we have neither acquired nor contracted to acquire any investments, nor has our general partner identified any assets in which there is a reasonable probability that we will invest. We expect to derive a substantial portion of our income by originating, purchasing, participating in and holding for investment mortgage loans made to persons and entities for the acquisition of parcels of real property to be developed as single-family residential lots that will be marketed and sold to home builders. Such mortgage loans generally will be made directly by us or indirectly through our affiliates. We will seek to originate loans bearing interest at rates ranging from 10% to 15% per annum. We may make loans or participate in loans made to entities affiliated with our general partner. We intend to concentrate on making development loans to single-family lot developers who sell their lots to national and large regional home builders and to the home builders themselves, including entities created by home builders in conjunction with our general partner or its affiliates. We intend to seek to make or acquire loans primarily with respect to projects where the completed subdivision will consist of homes at or below the median price of the U.S. housing market. We anticipate that the developments that secure our loans will consist of both single phase and, where larger parcels of land are involved, multi-phase projects and will be subject to third-party land acquisition and development loans representing approximately 70% to 80% of total project costs. These loans will have priority over the loans that we originate or buy which we expect will represent approximately 10% to 20% of total project costs. We anticipate that in each instance the borrower will cover at least 10% of the total project costs with its own equity investment. We will subordinate our loans if required to comply with the terms of debt from the developer to third-party lenders, thus allowing developers to avail themselves of additional development funding at a lower cost to the developer than our loan. In addition, we may offer credit enhancements to developers in the form of loan guarantees to third-party lenders, letters of credit issued for the benefit of third-party lenders and similar credit enhancements. In the typical credit enhancement transaction, we expect to charge 3% to 7% of the projected maximum amount of our outstanding credit enhancement obligation for each 12-month period such obligation is outstanding as a credit enhancement fee in addition to any costs that we may incur in providing the credit enhancement. We are likely to enter into one or more joint ventures for the acquisition and origination of loans with certain of our affiliates and other third parties.
Possible Leverage
      We may borrow money to fund loans or participations and to make equity investments when our general partner determines that it is advantageous to us. We do not have any current intention to use leverage to fund loans, however if our general partner determines to do so in the future, we expect that at any time the total amount of indebtedness we will incur will not exceed 50% of our total invested capital, although we are permitted by our partnership agreement to borrow up to 70% of the aggregate fair market value of all of our mortgage loans. By operating on a leveraged basis, we expect that we would have more funds available to fund loans and other investments. This will allow us to make more loans and investments than would otherwise be possible, resulting in a more diversified portfolio. Our use of leverage increases our risk of loss, however, because defaults on indebtedness secured by our assets may result in lenders initiating foreclosure of our assets. We do not currently have any established financing sources, but we intend to pursue securing a credit facility for future use, should we deem it necessary. For a more detailed description of our borrowing policy, see “Investment Objectives and Criteria — Borrowing Policies.”

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Estimated Use of Proceeds
      We expect to invest at least 85.44% of the proceeds from this offering, including proceeds from the sale of units pursuant to our distribution reinvestment plan, in mortgage loans and other real estate-related assets.
      The remaining proceeds will be used to pay fees and expenses of this offering, and fees and expenses related to the selection, acquisition and servicing of investments. A summary of the anticipated use of proceeds is set forth in the table below. For a more detailed discussion of our estimated use of proceeds, see “Estimated Use of Proceeds.”
                                                 
    Minimum Offering   Maximum Primary Offering   Maximum Total Offering
    (50,000 units)(1)   (12,500,000 units)(1)   (17,500,000 units)(1)
             
    Amount   Percent   Amount   Percent   Amount   Percent
                         
Gross offering proceeds
  $ 1,000,000       100.00 %   $ 250,000,000       100.00 %   $ 350,000,000       100.00 %
Selling commissions
    70,000       7.00       17,500,000       7.00       18,500,000       5.29  
Wholesaling fees
    12,000       1.20       3,000,000       1.20       3,000,000       0.86  
Marketing support fees(2)
    18,000       1.80       4,500,000       1.80       4,500,000       1.29  
Due diligence fees
    5,000       0.50       1,250,000       0.50       1,250,000       0.36  
Organization and offering expenses(3)
    15,000       1.50       3,750,000       1.50       3,750,000       1.07  
Acquisition and origination expenses and fees
    25,631       2.56       6,407,767       2.56       9,262,427       2.65  
                                     
Amount estimated to be invested(4)
  $ 854,369       85.44 %   $ 213,592,233       85.44 %   $ 309,737,573       88.50 %
                                     
 
(1)  For purposes of this table, the minimum offering and maximum primary offering amounts assume that no purchases are made under our distribution reinvestment plan, and the maximum total offering amounts assume the sale of all 5,000,000 units being offered under our distribution reinvestment plan.
 
(2)  Includes a 0.8% marketing support fee to be paid to UMTH Funding Services, LP (UMTH Funding) (a portion of which may be reallowed to participating selected dealers for direct marketing support) and an additional marketing support fee to be paid directly to participating selected dealers in an amount to be determined in the sole discretion of our general partner, but which shall not exceed 1.0% of the gross offering proceeds.
 
(3)  We currently estimate that approximately $350,000 of organization and offering expenses will be incurred if only the minimum offering of 50,000 units ($1.0 million) is sold. However, we will pay only $15,000 of those expenses and the balance will be paid by our general partner. Our general partner will pay any amount exceeding 1.5% of the gross offering proceeds, excluding proceeds from sales under our distribution reinvestment plan. Organization and offering expenses will necessarily increase as the volume of units sold in the offering increases, in order to pay the increased expenses of marketing and distributing the additional units and qualifying the additional investors.
 
(4)  Includes amounts we expect to invest in loans net of fees and expenses. We estimate that at least 85.44% of the gross proceeds received from the sale of units will be used to acquire mortgage loans and other investments. The percentage of gross offering proceeds available to be invested may increase to 88.50% if our distribution reinvestment plan is fully subscribed.
Investment Objectives
      Our investment objectives are:
  •  to make, originate or acquire a participation interest in mortgage loans (first priority and junior priority) typically in the range of $500,000 to $10,000,000, and to provide credit enhancements to real estate developers and regional and national homebuilders who acquire real property, subdivide

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  such real property into single-family residential lots and sell such lots to homebuilders or build homes on such lots;
 
  •  to produce net interest income from the interest on mortgage loans that we originate or purchase or in which we acquire a participation interest;
 
  •  to produce a profitable fee from our credit enhancement transactions;
 
  •  to produce income through origination fees charged to borrowers;
 
  •  to maximize distributable cash to investors; and
 
  •  to preserve, protect and return capital contributions.
      See “Investment Objectives and Criteria” for a more complete description of our business and investment objectives.
Distribution Policy
      Until the limited partners have received distributions in an amount equal to all of their capital contributions plus an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, cash available for distribution will be distributed 90% to the limited partners and 10% to our general partner, assuming our general partner is not entitled to a carried interest.
      A “carried interest” is an equity interest in UDF III to participate in all distributions, other than distributions attributable to our general partner’s promotional interest, of cash available for distribution and net proceeds from a capital transaction such as a borrower’s repayment of the principal amount of one of our loans. If our General Partner enters into commitments to investments in mortgages that exceed 82% of the gross offering proceeds, our general partner will be entitled to a carried interest equal to (a) 1% of cash available for distribution (or a pro rata portion thereof) for the first 2.5% of commitments to investments that we make in mortgages that exceed 82% of the gross offering proceeds, (b) an additional 1% of cash available for distribution (or a pro rata portion thereof) for the next 2% of additional commitments to investments in mortgages above 84.5% of the gross offering proceeds, and (c) an additional 1% of cash available for distribution (or a pro rata portion thereof) for each additional 1% of additional commitments to investments in mortgages above 86.5% of the gross offering proceeds. Because we expect that we will invest at least 85.44% of our gross offering proceeds in mortgage loans and other real estate assets, we estimate that our general partner will be entitled to a carried interest equal to 1.47% of cash available for distribution. Any carried interest will be distributed to our general partner at the same time we make distributions to our limited partners and will have the effect of reducing the limited partners’ distribution to an amount that is less than 90% of cash available for distribution. For example, if our general partner is entitled to a 1.47% carried interest, then cash available for distribution will be distributed 88.53% to the limited partners and 11.47% to our general partner.
      Following the return to the limited partners of their capital contributions and an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, cash available for distribution shall be distributed 85% less any carried interest to the limited partners and 15% plus any carried interest to our general partner.
      Provided we have cash available to make distributions, we intend to pay distributions to our limited partners on a monthly basis. However, because we have not identified any probable investments, we cannot provide any assurances as to when we will begin to generate sufficient cash flow from operations to make distributions to our limited partners. We do not expect to have any cash available for distribution before we make our initial investments. However, we expect that such distributions will begin no later than the end of the first full quarter after we have begun making investments. For more information about our distribution policy, see “Distributions and Allocations.”
      We intend to create a reserve from our net interest income, in addition to our working capital reserves and reserves for our unit redemption program, to recover some of the organization and offering expenses,

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including selling commissions and marketing support fees, we will incur in connection with this offering. By recovering some of such organization and offering expenses, such reserve is intended to cause the net asset value of the partnership to be on parity with or greater than the amount that we may pay for units under our unit redemption program, so that investors that do not elect or are unable to have some or all of their units redeemed under our unit redemption program hold units that have a value approximately equal to or greater than the price payable or paid for units that are redeemed. This reserve, however, will reduce the amount of cash available for distribution. See “Distributions and Allocations — Distributions of Cash Available for Distribution” for a more detailed discussion of this reserve.
Conflicts of Interest
      Our general partner and its affiliates have legal and financial obligations with respect to other programs that are similar to their obligations to us. We rely on our general partner and its affiliates for the day-to-day operation of our business. As a result of their interests in other mortgage programs and the fact that they have also engaged, and will continue to engage, in other business activities, our general partner and its affiliates will have conflicts of interest in allocating their time between us and other mortgage programs and other activities in which they are involved, including the following:
  •  our general partner and its affiliates will have to allocate their time between us and the other United Development Funding programs and activities in which they are involved, and our partnership agreement does not specify any minimum amount of time or level of attention that our general partner must devote to us;
 
  •  our general partner and its affiliates must determine which United Development Funding program or other affiliated entity should make any investment;
 
  •  our general partner and its affiliates are affiliated with other mortgage programs similar to ours and receive fees and distributions from such programs. We expect that they will organize other such programs in the future, and we intend to make loans and provide credit enhancements to affiliates of our general partner;
 
  •  we may make loans to affiliates of our general partner if our general partner or its affiliate is participating in a joint venture with a developer or homebuilder and the conditions described in the section of this prospectus under the heading “Investment Objectives and Criteria — Loans to Our General Partner and Its Affiliates” are satisfied; and
 
  •  our general partner and its affiliates will receive fees in connection with transactions involving the purchase, management and sale of our investments regardless of the quality of the services provided to us.
      For a detailed discussion of the various conflicts of interest relating to your investment, as well as the procedures that we have established to resolve a number of these potential conflicts, see “Conflicts of Interest.”

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      The chart below indicates the relationships between our general partner and its affiliates that will be providing services to us. The address of each entity shown on the chart is 1702 N. Collins Boulevard, Suite 100, Richardson, Texas 75080.
(FLOW CHART)
 
(1)  Messrs. Etter and Greenlaw each own one-half of the equity interests in UMT Services. Messrs. Etter and Greenlaw are our promoters and directors of our general partner.
 
(2)  UMT Services is the general partner and owns 0.1% of the limited partnership interests in UMT Holdings. The remaining 99.9% of the limited partnership interests in UMT Holdings are held as follows: Todd F. Etter (37.1%), Hollis M. Greenlaw (7.6%), Craig A. Pettit (24.2%), Christine A. Griffin (8.1%), Timothy J. Kopacka (9.7%) and William E. Lowe (7.4%). The remaining 5.8% interest is held by UMT Holdings pending reissuance or cancellation.
 
(3)  UMT Services is the general partner and owns 0.1% of the limited partnership interests in UMTHLD, our general partner. UMT Holdings owns the remaining 99.9% of the limited partnership interests in UMTHLD.
 
(4)  UMTHLD is the asset manager for both UDF I and UDF II. United Development Funding, Inc. owns a 0.02% general partnership interest, UMTHLD owns a 49.99% profits interest, and unaffiliated limited partners own the remaining 49.99% of the interests in UDF I. United Development Funding, Inc. is owned 45% by Mr. Greenlaw, 22.5% by each of Messrs. Etter and Kopacka, and 10% by Ms. Griffin. United Development Funding II, Inc. owns a 0.1% general partnership interest, UMTHLD owns a 49.95% profits interest, and unaffiliated limited partners own the remaining 49.95% of the interests in UDF II. United Development Funding II, Inc. is owned 50% by each of Messrs. Etter and Greenlaw.

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(5)  UMTHLD is our general partner. 99.9% of the interests in our general partner are held by UMT Holdings, L.P., and the remaining 0.1% interest is held by UMT Services, Inc. The public limited partners who purchase units in this offering will own over 99% of our limited partnership units following this offering, regardless of whether the minimum or maximum number of units are sold.
Prior Offering Summary
      In addition to this offering, our general partner and its affiliates have served as sponsors, officers, directors and advisors to three prior real estate programs over the last ten years. As of December 31, 2005, approximately 3,500 investors invested an aggregate of approximately $176.0 million in these real estate programs. The “Prior Performance Summary” section of this prospectus contains a discussion of the programs sponsored by our general partner and its affiliates over the last ten years. Certain statistical data relating to such programs with investment objectives similar to ours also is provided in the “Prior Performance Tables” included as Exhibit A to this prospectus. The prior performance of the programs previously sponsored by our general partner and its affiliates is not necessarily indicative of the results that we will achieve. Therefore, you should not assume that you will experience returns, if any, comparable to those experienced by investors in such prior real estate programs.
Compensation to Selling Group Members, General Partner and Affiliates of Our General Partner
      Selling group members, our general partner and affiliates of our general partner will receive compensation and fees for services relating to this offering and the investment and management of our assets. The most significant items of compensation are summarized in the following table:
                           
            $ Amount for      
            Minimum     $ Amount for
Type of Compensation –           Offering     Maximum Offering
To Whom Paid     Form of Compensation     (50,000 units)(1)     (17,500,000 units)(1)
  
      Organizational and Offering Stage      
  
Selling Commissions (paid to unaffiliated selling group members)
    7.0% of gross offering proceeds (except that commissions for sales under our distribution reinvestment plan are reduced to 1.0% of gross offering proceeds)       $70,000         $18,500,000  
                       
       
Bona Fide Due Diligence Fee (paid to unaffiliated selling group members)
    0.5% of gross offering proceeds (except that no due diligence fee shall be paid for sales under our distribution reinvestment plan)       $5,000         $1,250,000  
                       
       
Wholesaling Fee (paid to IMS Securities, Inc., an unaffiliated selling group member)(2)
    Up to 1.2% of gross offering proceeds (except that no wholesaling fee shall be paid for sales under our distribution reinvestment plan)       $12,000         $3,000,000  
                       
       
Marketing Support Fee (paid to UMTH Funding Services, LP, an affiliate of our general partner)
    0.8% of gross offering proceeds (except that no marketing support fee shall be paid for sales under our distribution reinvestment plan)       $8,000         $2,000,000  
                       
       
Marketing Support Fee (paid to unaffiliated selling group members)
    Up to 1.0% of gross offering proceeds (except that no marketing support fee shall be paid for sales under our distribution reinvestment plan)       $10,000         $2,500,000  
                       
       
Organization and Offering Expenses (paid to our general partner)
    1.5% of gross offering proceeds (except that no organization and offering expenses shall be paid in connection with sales under our distribution reinvestment plan)       $15,000         $3,750,000  
                       

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            $ Amount for      
            Minimum     $ Amount for
Type of Compensation –           Offering     Maximum Offering
To Whom Paid     Form of Compensation     (50,000 units)(1)     (17,500,000 units)(1)
  
      Operational Stage      
  
Acquisition and Origination Expenses and Fees (paid to our general partner)
    3.0% of net amount available for investment in mortgages       $25,631         $9,262,427  
                       
       
Mortgage Servicing Fee (paid to our general partner)
    0.25% of the aggregate outstanding loan balances held by us. The fee will be payable monthly in an amount equal to one-twelfth of 0.25% of our aggregate outstanding loan balances as of the last day of the immediately preceding month       $2,136 (3)       $774,344 (3)
                       
       
Carried Interest (paid to our general partner)(4)
    1.0% of cash available for distribution and net proceeds from a capital transaction (or pro rata portion thereof) if we commit to invest more than 82% but no more than 84.5% of the gross offering proceeds in mortgage loans; an additional 1.0% of cash available for distribution and net proceeds from a capital transaction (or pro rata portion thereof) if we commit to invest more than 84.5% but no more than 86.5% of the gross offering proceeds in mortgage loans; and an additional 1.0% of cash available for distribution and net proceeds from a capital transaction (or pro rata portion thereof) for each additional 1.0% of additional commitments to investments in mortgages above 86.5% of the gross offering proceeds(5)(6)       N/A         N/A  
                       
       
Unsubordinated Promotional Interest (paid to our general partner)(4)
    10.0% of cash available for distribution(6)       N/A         N/A  
                       
       
Subordinated Promotional Interest (paid to our general partner)(4)
    15.0% of remaining cash available for distribution (including net proceeds from a capital transaction, or pro rata portion thereof) after limited partners have received a return of their net capital contributions and an 8.0% annual cumulative (non-compounded) return on their net capital contributions(6)       N/A         N/A  
                       
       
Operating Expenses (paid to our general partner and UMTH General Services, L.P., an affiliate of our general partner)(7)
    Reimbursement of actual amounts incurred, subject to certain limitations       N/A         N/A  
                       

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(1)  The estimated maximum dollar amounts are based on the sale to the public of a maximum of 12,500,000 units at $20 per unit and 5,000,000 units under our distribution plan at $20 per unit. The estimated minimum dollar amounts assume that no purchases are made under our distribution reinvestment plan.
 
(2)  Although IMS Securities, Inc., (IMS Securities) is not affiliated with our general partner, certain members of the advisory board to UMT Holdings are principals of IMS, Inc., which is an affiliate of IMS Securities. In addition, certain registered representatives of IMS Securities, from time to time, may also be employees of UMTH Funding. Such persons are expected to perform wholesaling services in connection with this offering. For all sales that are made through such persons or other wholesalers associated with IMS Securities, IMS Securities will be paid a wholesaling fee equal to 1.2% of the gross proceeds from such sales.
 
(3)  Assumes 85.44% of the gross offering proceeds are invested in mortgages after the minimum offering amount is raised and 88.50% of the gross offering proceeds are invested in mortgages after the maximum offering is raised. Actual amounts are dependent upon outstanding loan balances held by us and therefore cannot be determined at the present time. Such amount will be payable annually, will be less than the amount indicated until such time that all of the offering proceeds are disbursed as loans and not held by us, and will decrease to the extent that capital proceeds that constitute a return of capital are distributed to the limited partners and are not used to make new loans.
 
(4)  Provided we have cash available from our operations (other than from repayment of the principal amounts of outstanding loans), we intend to pay distributions to our general partner and limited partners on a monthly basis.
 
(5)  In order for proceeds to be considered “committed” for purposes of calculation and payment of a carried interest, we must be obligated by contract or other binding agreement to invest such proceeds in mortgages, to the exclusion of any other use for such proceeds or no use at all. We expect to pay our general partner 1.47% of cash available for distribution as its carried interest. Such percentage may change from time to time and will be calculated immediately prior to any distribution of cash available for distribution or net proceeds from a capital transaction to the partners under our partnership agreement. Carried interest will be distributable to our general partner when cash available for distribution or net proceeds from a capital transaction are distributed to the limited partners.
 
(6)  “Cash available for distribution” is the cash funds received by us from operations (other than net proceeds from a capital transaction that produces proceeds from (a) the repayment of principal or prepayment of a mortgage to the extent classified as a return of capital for federal income tax purposes, (b) the foreclosure, sale, exchange, condemnation, eminent domain taking or other disposition of a mortgage loan or of a property subject to a mortgage, or (c) insurance or a guarantee with respect to a mortgage), including, without limitation, interest, points, revenue participations in property appreciation and interest or dividends from interim investments, less all cash used to pay partnership expenses and debt payments and amounts set aside for reserves.
 
(7)  Employees of UMTH General Services, L.P. will assist our general partner in our management, and we will reimburse UMTH General Services, L.P. for its actual expenses in providing unitholder relations and reporting services for us.
      There are many additional conditions and restrictions on the amount of compensation our general partner and its affiliates may receive. There are also some smaller items of compensation and expense reimbursements that our general partner may receive. For a more detailed explanation of the fees and expenses payable to our general partner and its affiliates, see “Estimated Use of Proceeds” and “Compensation of Our General Partner and Its Affiliates.” Our general partner may not receive compensation in excess of the maximum amount permitted under the Statement of Policy Regarding Mortgage Programs published by the North American Securities Administrators Association, referred to in this prospectus as the NASAA Guidelines.

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Partnership Agreement
      Your rights and obligations as a limited partner of UDF III and your relationship with our general partner will be governed by our partnership agreement. Some of the significant features of our partnership agreement include the following:
  •  Voting Rights. Holders of a majority of our units of limited partnership interest may vote to:
  (1)  amend our partnership agreement, subject to the limited rights of our general partner to amend our partnership agreement without the approval of the limited partners as described in Section 11.2(b) of our partnership agreement;
 
  (2)  cause us to be liquidated and dissolved; and
 
  (3)  remove the general partner and elect a new general partner.
  In the event of any such vote, you will be bound by the majority vote even if you did not vote with the majority.
  •  Mergers and Consolidations. We generally may not merge or consolidate with any other partnership or corporation without approval by the holders of a majority of our units. Limited partners who dissent from any merger or consolidation may receive cash for their units based on the appraised value of our net assets.
 
  •  Termination. The latest termination date for UDF III will be December 31, 2028, unless extended by our general partner and the majority vote of our limited partners.
      For a discussion of material provisions of our partnership agreement, see “Summary of Partnership Agreement.” A complete copy of our partnership agreement is included as Exhibit B to this prospectus.
Distribution Reinvestment Plan
      You may participate in our distribution reinvestment plan pursuant to which you may have the distributions you receive reinvested in additional units. Regardless of whether you participate in our distribution reinvestment plan, you will be taxed on your share of our taxable income and participation in our distribution reinvestment plan would mean that you will have to rely solely on sources other than distributions from us to pay such taxes. As a result, you may incur a tax liability without receiving cash distributions to pay the liability. We may terminate the distribution reinvestment plan in our discretion at any time. For further explanation of our distribution reinvestment plan, see “Summary of Distribution Reinvestment Plan.” A complete copy of our distribution reinvestment plan is included as Exhibit D to this prospectus.
Unit Redemption Program
      After you have held your units for at least one year, you may redeem your units pursuant to our unit redemption program, subject to certain restrictions and limitations. The redemption price is dependent upon the number of years our units are held, ranging from 92% of the purchase price paid for units held less than two years to the full purchase price for units held at least five years.
      We will not redeem in excess of 5% of the weighted average number of units outstanding during the 12-month period immediately prior to the date of redemption. In addition, the cash available for redemption generally will be limited to 1% of the operating cash flow from the previous fiscal year, plus any proceeds from our distribution reinvestment plan. In general, you may present to us fewer than all of your units for redemption, except that you must present for redemption at least 25% of your units. Our general partner reserves the right to reject any request for redemption or to terminate, suspend or amend the unit redemption program at any time. See the section of this prospectus captioned “Summary of Partnership Agreement — Unit Redemption Program” for further explanation of the unit redemption program.

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Description of Units
      Each of our units will represent a capital contribution of $20, will be issued as fully paid and nonassessable and will have the rights, privileges and preferences as provided in our partnership agreement. We have received an opinion of Morris, Manning & Martin, LLP that the units will be fully paid and nonassessable when issued. Our units are subject to numerous transfer restrictions, as described in the “Summary of Partnership Agreement — Transferability of Units” section of this prospectus.
Other United Development Funding Programs
      Six of the seven partners of UMT Holdings and all of the owners of UMT Services have served as sponsors, officers, directors and advisors to three prior real estate programs over the last ten years. The programs include United Mortgage Trust, a publicly offered real estate investment trust, and UDF I and UDF II, both private offerings of limited partnership interests. The programs raised approximately $176.0 million in capital from approximately 3,500 investors. As of December 31, 2005, based on an analysis of the operating results of the prior real estate programs, the sponsors believe that each of such programs has met or is meeting its principal investment objectives in a timely manner. The “Prior Performance Summary” section of this prospectus beginning on page 77 contains a discussion of the programs sponsored by affiliates of our general partner from March 1997 through the date of this prospectus. Certain statistical data relating to such programs with investment objectives similar to ours is also provided in the “Prior Performance Tables” included as Exhibit A to this prospectus. The prior performance of the programs previously sponsored by affiliates of our general partner is not necessarily indicative of the results that we will achieve. Therefore, you should not assume that you will experience returns, if any, comparable to those experienced by investors in such prior real estate programs.

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QUESTIONS AND ANSWERS ABOUT THIS OFFERING
      Below we have provided some of the more frequently asked questions and answers relating to an offering of this type. Please see the remainder of this prospectus for more detailed information about this offering.
Q: Why are you structured as a limited partnership?
 
A: If we were to be structured as a standard “C corporation,” we would be taxed on our income and investors would be taxed on any cash distributions they receive. In order to avoid this so-called “double taxation” and to maximize distributions to investors, we have been structured as a limited partnership. The tax attributes of limited partnerships generally are allocated to investors rather than realized at the fund level.
 
Q: Who is your general partner?
 
A: Our general partner, UMTHLD, is a Delaware limited partnership organized in March 2003. Our general partner serves as the asset manager for UDF I and UDF II. Our general partner is indirectly owned by Todd F. Etter, Hollis M. Greenlaw, Craig A. Pettit, Christine A. Griffin, Timothy J. Kopacka and William E. Lowe. Our general partner provides certain services to us, including identifying prospective loans and investments, evaluating, underwriting and negotiating the acquisition and disposal of loans and investments and overseeing the performance of our loans and investments. Our general partner will be managed by its executive officers. See “Management — Key Personnel.”
 
Q: Does your general partner use any specific criteria when selecting potential investments?
 
A: Yes. Our general partner has developed the following underwriting criteria for the loans and investments that we intend to originate and purchase:
       •  Liens. All loans and investments made by us must be evidenced by a note and must be secured (1) by a first or second lien that is insured by a title insurance company or (2) by a commitment as to the priority of the loan or the condition of title; in addition, our loans and investments may be secured by a pledge of all ownership interests of the developer.
 
       •  Interest Rate. We will seek to originate loans bearing interest rates ranging from 10% to 15% per annum.
 
       •  Term and Amortization. We do not expect to establish a minimum or maximum term for our loans, and we do not expect our loans to amortize.
 
       •  Geographical Boundaries. We may buy or originate loans in any of the 48 contiguous United States. However, we expect that, initially, the majority of our loans will originate from Texas, Arizona and Florida.
After applying the underwriting criteria to a potential investment, our general partner will generally engage in a four-part evaluation and oversight process to further assess the suitability of the investment. See “Investment Objectives and Criteria — Underwriting Procedures.”
 
Q: What will secure your real estate loans and investments?
 
A. We expect that our real estate loans and investments will generally be secured by:
       •  the parcels of land to be developed; and/or
 
       •  in certain cases, a pledge of some or all of the equity interests in the developer entity; and
 
       •  in certain cases, additional assets of the developer, including parcels of undeveloped and developed real property.
If there is no third-party financing for a development project, our lien on the subject parcels will be a first priority lien. If there is third-party financing, we expect our lien on the subject parcels will be subordinate to such financing. We will enter each loan prepared to assume or retire any senior debt, if necessary to protect our capital. We will seek to enter into agreements with third-party lenders that will

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require the third-party lenders to notify us of a default by the developer under the senior debt and allow us to assume or retire the senior debt upon any default under the senior debt.
 
We also expect that some of our real estate and loans will have the benefit of unconditional guarantees of the developer and/or its parent companies and pledges of additional assets of the developer.
 
Q: Why do you intend to acquire some of your mortgage loans through joint ventures?
 
A: We intend to make some of our investments through joint ventures in order to diversify our portfolio of properties in terms of geographic region or property type and to enable us to make investments sooner than would be otherwise possible because the amount of gross proceeds raised in the early stages of this offering may be insufficient to make a desirable investment. In addition, increased portfolio diversification will reduce the risk to investors as compared to programs with a smaller number of investments. Such joint ventures may be with certain of our affiliates or with third parties.
 
Q: If I buy units, will I receive distributions and how often?
 
A: Provided we have cash available from our operations to make distributions (other than from repayment of the principal amounts of outstanding loans), we intend to pay distributions to our limited partners on a monthly basis. We intend to reinvest the principal repayments we receive on loans to create or invest in new loans during the term of the partnership. However, after the seventh anniversary of the effectiveness of this offering, a limited partner may elect to receive his pro rata share of any loan principal repayment. Any capital not reinvested will be used first to return unit holders’ capital contributions and then to pay distributions to unit holders. Because we have not identified any probable investments, there can be no assurances as to when we will begin to generate cash from operations for distribution to our limited partners. We are not obligated to make any distributions, and we do not expect to have any cash available for distribution before we make our initial investments. However, we expect that such distributions will begin no later than the end of the first full quarter after we have begun making investments. In addition, from time to time we may borrow funds or use net proceeds from this offering in order to pay distributions to our limited partners. For instance, we may borrow funds or use net proceeds from this offering for this purpose if we do not have cash available for distribution sufficient to cover the taxes on any “phantom income” to our limited partners. In the event that we make any such distributions, the cash distributed to our partners will be first applied as a return of each partner’s unreturned capital contributions and after a partner has been distributed the full amount of his capital contributions, against the partner’s 8% per annum, non-compounding, cumulative return on his unreturned capital contributions. The amount of each distribution will be determined by our general partner and will typically depend on the amount of distributable funds, current and projected cash requirements, tax considerations, cash reserves and other factors.
 
Q: How do you calculate the payment of distributions to limited partners?
 
A. Distributions will be paid on a monthly basis. However, we intend to calculate your individual distributions based on our monthly new investor admission dates so your ability to participate in distributions will begin to accrue immediately upon becoming a limited partner. Distributions will be allocated to our limited partners on a pro rata basis according to the number of units held and the number of days within the distribution period the units have been held.
 
Q: May I reinvest my distributions?
 
A: Yes. You may participate in our distribution reinvestment plan by checking the appropriate box on our subscription agreement or by filling out an enrollment form, which we will provide to you at your request or you can download it from our web site. The purchase price for units purchased under our distribution reinvestment plan is currently $20 per unit.
 
Q: Will I be taxed in respect of your income regardless of distributions?
 
A: Yes. Because we are a partnership, you will be taxed on your allocable share of income from operations (generally at ordinary income rates) and your share of any gains from sale of property without regard to the amount of your distributions. Distributions may exceed current taxable income or you may be allocated more taxable income than you receive in distributions. We cannot assure you that cash flow

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will be available for distribution in any year in amounts sufficient to pay your allocated tax liability. Additionally, reserves that we establish of available cash, including, without limitation, the reserve of 9.5% of available cash we intend to establish to recover organization and offering expenses, may result in you receiving a distribution of less than your allocated tax liability. As a result, you may have to use funds from other sources to pay your tax liability. See “Federal Income Tax Considerations.”
 
Q: Who can buy units?
 
A: An investment in our partnership is only suitable for persons who have adequate financial means and who will not need immediate liquidity from their investment. Investors can buy units pursuant to this prospectus provided that they have a net worth of at least $225,000 and an annual gross income of at least $60,000. For this purpose, net worth does not include your home, home furnishings and automobiles. You should carefully read the more detailed description in the “Suitability Standards” section of this prospectus beginning on page 1 for additional information.
 
Q. For whom is an investment in our units most likely appropriate?
 
A. An investment in our units may be appropriate for you if you meet the suitability standards described in this prospectus, and you seek to diversify your personal portfolio with a mortgage-based investment, seek to receive current interest income, seek to preserve capital and are able to hold your investment for a time period consistent with our liquidity plans. On the other hand, because we cannot guarantee you current income, we caution persons who require guaranteed income or immediate liquidity not to consider an investment in our units as meeting those needs.
 
Q: How do I subscribe for units?
 
A: If you choose to purchase units in this offering, you will need to complete and sign a subscription agreement, like the one contained in this prospectus as Exhibit C, for a specific number of units and pay for the units at the time you subscribe. Your payment will be placed into an escrow account with Coppermark Bank, where your funds will be held, along with those of other subscribers, until we sell at least 50,000 units and begin to admit investors. Your funds in escrow will be invested in short-term investments, which may include obligations of, or obligations guaranteed by, the U.S. government or bank money-market accounts or certificates of deposit of national or state banks that have deposits insured by the Federal Deposit Insurance Corporation (including certificates of deposit of any bank acting as a depository or custodian for any such funds) that mature on or before May 15, 2007 or that can be readily sold or otherwise disposed of for cash by such date without any dissipation of the offering proceeds invested. Until we sell the minimum offering of 50,000 units, checks should be made payable to “United Development Funding III, L.P. Escrow Account.” After we sell the initial 50,000 units and release the funds from escrow, checks should be made payable directly to us. Certain dealers who have “net capital,” as defined in the applicable federal securities regulations, of $250,000 or more may instruct their customers to make their checks payable directly to the dealer. In such case, the dealer will issue a check made payable to the escrow agent or us, as applicable, for the purchase price of your subscription. For a detailed discussion of how to subscribe for units, see the sections of this prospectus captioned “Plan of Distribution — Subscription Process” and “How to Subscribe.”
 
Q: What happens if you don’t sell at least 50,000 units?
 
A: If the minimum of 50,000 units, or $1.0 million, is not reached before May 15, 2007, we will terminate the offering and stop selling units. In such event, within ten days after termination of the offering, our escrow agent will return your funds, including interest if your funds have been held at least 35 days.
 
Q: If I buy units in this offering, how may I later sell them?
 
A: At the time you purchase the units, they will not be listed for trading on any national securities exchange or over-the-counter market. We do not expect any public market for the units to develop. As a result, you may find it difficult to sell your units. If you are able to find a buyer for your units, you may not sell your units to that buyer unless the buyer satisfies the suitability standards applicable to

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him or her. See the “Suitability Standards” and “Summary of Partnership Agreement — Transferability of Units” sections of this prospectus.
 
In addition, after you have held your units for at least one year, you may be able to have your units repurchased by us pursuant to our unit redemption program. Subject to the limitations described in this prospectus, we will also redeem units upon the request of the estate, heir or beneficiary of a deceased limited partner. Redemption of units, when requested, will be made quarterly with a priority given to redemptions upon the death of a limited partner provided we have adequate cash available for redemptions and subject to other limitations on redemptions. See “Summary of Partnership Agreement — Unit Redemption Program.”
 
Q: What are your exit strategies?
 
A: Within 20 years after termination of the offering, we will either (1) make an orderly disposition of our investments and distribute the cash to our investors or (2) upon approval of limited partners holding more than 50% of the outstanding units, continue operation for the term approved by the partners.
 
Q: Who is the transfer agent?
 
A: Phoenix American Financial Services, Inc.
2401 Kerner Boulevard,
San Rafael, California 94901
(866) 895-5050
www.pafsi.com
 
To ensure that any account changes are made promptly and accurately, all changes including your address, ownership type and distribution mailing address should be directed to the transfer agent.
 
Q: Will I be notified of how my investment is doing?
 
A: You will receive periodic updates on the performance of your investment with us, including:
          • a quarterly cash distribution report;
 
          • three quarterly financial reports;
 
          • an annual report; and
 
          • an annual Schedule K-1.
Information contained in these materials and other information concerning our business and our affiliates will be available on the web site maintained for us and our affiliates — www.udfonline.com.
 
Q: When will I get my detailed tax information?
 
A: Your Schedule K-1 tax information will be placed in the mail by March 15 of each year.
 
Q: Who can help answer my questions?
 
A: If you have more questions about the offering or if you would like additional copies of this prospectus, you should contact your registered representative or contact:
United Development Funding III, L.P. Investor Services
1702 N. Collins Boulevard, Suite 100
Richardson, Texas 75080
Telephone: (214) 370-8960 or (800) 859-9338
Fax: (469) 916-0695

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RISK FACTORS
      Your purchase of units involves a number of risks. You should specifically consider the following risk factors before making your investment decision.
Risks Related to an Investment in United Development Funding III, L.P.
There is no public trading market for our units; therefore, it will be difficult for you to sell your units.
      There is no public trading market for our units of limited partnership interest, and we do not expect one to ever develop. Our partnership agreement restricts our ability to participate in a public trading market or anything substantially equivalent to a public trading market by providing that any transfer that may cause us to be classified as a publicly traded partnership as defined in Section 7704 of the Internal Revenue Code shall be deemed void and shall not be recognized by us. Because our classification as a publicly traded partnership may significantly decrease the value of your units, our general partner intends to use its authority to the maximum extent possible to prohibit transfers of units that could cause us to be classified as a publicly traded partnership. As a result, it will be difficult for you to sell your units.
Your units have limited transferability and lack liquidity.
      Except for certain intra-family transfers, you are limited in your ability to transfer your units. Our partnership agreement and certain state regulatory agencies have imposed restrictions relating to the number of units you may transfer. In addition, the suitability standards imposed on prospective investors also apply to potential subsequent purchasers of our units. If you are able to find a buyer for your units, you may not sell your units to such buyer unless the buyer meets the suitability standards applicable to him or her. Accordingly, it will be difficult for you to sell your units promptly or at all. You may not be able to sell your units in the event of an emergency, and if you are able to sell your units, you may have to sell them at a substantial discount. It is also likely that your units would not be accepted as the primary collateral for a loan. See “Summary of Partnership Agreement — Transferability of Units.”
The price you pay for our units is likely to be less than the proportionate initial value of our investments; therefore, this offering is only suitable for long-term investors.
      The price received for our units is likely to be less than the proportionate initial value of our investments. Therefore, you should purchase the units only as a long-term investment. In addition, we are limited in our ability to buy back units pursuant to our redemption program. Moreover, except for requests for redemption by the estate, heir or beneficiary of a deceased limited partner, our general partner may reject any request for redemption of units or amend, suspend or terminate our unit redemption program at any time. We anticipate financing developments and properties in which we have debt positions until at least five years after the termination of this offering. See “Summary of Partnership Agreement — Transferability of Units” and “— Unit Redemption Program.” For each of these reasons, you should view your investment in the units strictly as a long-term investment.
If we, through our general partner, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions.
      Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our general partner in the identification of real estate loans and the determination of any financing arrangements. We are a “blind pool” because we do not currently own any mortgage loans and we have not identified any mortgage loans to acquire with proceeds from this offering. Except for the investments described in one or more supplements to this prospectus, you will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments. You must rely entirely on the management ability of our general partner. We cannot be sure that our general partner will be successful in obtaining suitable investments on financially attractive terms or that, if it makes investments on our behalf, our objectives will be achieved. If we, through our general partner, are unable to find suitable investments, it will be solely at the discretion of our general partner what action, if

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any, will be taken. In such an event, our ability to achieve our investment objectives and pay distributions to our limited partners would be adversely affected.
We have not identified any of the loans we intend to originate or purchase, and you will not have the opportunity to evaluate our loans prior to their origination or purchase.
      We are a “blind pool” because we have not yet identified any loans that we intend to originate or purchase with the proceeds of this offering, so you will not be able to evaluate the loans. Although we may purchase participations in loans previously made by UDF I or UDF II, there is currently no agreement between us and either UDF I or UDF II providing for such purchase. We will seek to invest substantially all of the offering proceeds available for investment, after the payment of fees and expenses, in the financing of raw or partially developed land for residential use. However, we are not limited to such investments. The loans we will purchase must meet the underwriting criteria that we have established; however, you must rely entirely on our general partner with respect to the acquisition of our investments. We cannot be sure that we will be successful in obtaining suitable investments. If we are unable to identify loans that satisfy our underwriting criteria and invest in those loans in a timely fashion, our business strategy and operations may be adversely affected.
We may suffer from delays in locating suitable investments, which could adversely affect the return on your investment.
      We could suffer from delays in locating suitable investments, particularly as a result of our reliance on our general partner. Delays we encounter in the selection and acquisition of mortgage loans could adversely affect your returns. In addition, if we are unable to invest our offering proceeds in income-producing mortgage loans in a timely manner, our ability to pay distributions to our limited partners would be adversely affected.
Competition with third parties in financing properties may reduce our profitability and the return on your investment.
      Real estate financing is a very competitive industry. Our principal competitors are mortgage banks and other lenders. We also compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, real estate investment trusts, other real estate limited partnerships and other entities engaged in real estate investment activities, many of which have greater resources than we do. Banks and larger real estate programs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the proliferation of the Internet as a tool for loan origination has made it very inexpensive for new competitors to participate in the real estate finance industry. We believe that the demand for development loans is increasing, which may cause more lenders and equity participants to enter this market. Our ability to make or purchase a sufficient number of loans and investments to meet our objectives will depend on the extent to which we can compete successfully against these other lenders, including lenders that may have greater financial or marketing resources, greater name recognition or larger customer bases than we have. Our competitors may be able to undertake more effective marketing campaigns or adopt more aggressive pricing policies than we can, which may make it more difficult for us to attract customers. Increased competition could result in lower revenues and higher expenses, which would reduce our profitability.
Increases in interest rates could increase the risk of default under our development loans and reduce the value of our subordinate loans to developers.
      Developers to whom we will make loans and with whom we will enter into subordinate debt positions and will use the proceeds of our loans and investments to develop raw real estate into residential home lots. The developers obtain the money to repay our development loans by reselling the residential home lots to home builders or individuals who will build a single-family residence on the lot. The developer’s ability to repay our loans will be based primarily on the amount of money generated by the developer’s

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sale of its inventory of single-family residential lots. If interest rates increase, the demand for single-family residences is likely to decrease. In such an interest rate climate, developers to which we have loaned money may be unable to generate sufficient income from the resale of single-family residential lots to repay our loans. Accordingly, increases in single-family mortgage interest rates could cause the number of homebuyers to decrease which would increase the likelihood of defaults on our development loans and, consequently, reduce our ability to pay distributions to our limited partners.
The loans we will make will have a higher risk than conventional real estate loans on residential properties.
      We will originate and purchase loans originated by affiliated and unaffiliated third parties on undeveloped vacant parcels, which will be improved by developers. These improvements may, but will not necessarily, increase the value of the subject parcels. The loans will be represented by notes that will be secured by either a subordinated lien on the parcel if the developer has a development loan senior to our loan; or a first lien if we are the senior lender. In some instances where the subject parcel is encumbered by a lien in favor of a third party other than us, we may, at our option, become the senior lender in order to protect the priority of our lien on the parcels. Our loans may also be secured by other assets of the developer. While we will seek to obtain an unconditional guarantee of the developer and/or its parent companies to further secure the developer’s obligations to us, we cannot assure you that we will obtain such an unconditional guarantee in all cases. If a default occurs under one or more of our loans, payments to us could be reduced or postponed. Further, in the event of a default, we may be left with a security or ownership interest in an undeveloped or partially developed parcel of real estate, which may have less value than a developed parcel. The guarantee of the developer and/or its parent companies and other pledged assets, if any, may be insufficient to compensate us for any difference in the amounts due to us under a development loan and the value of our interest in the subject parcel.
Decreases in the value of the property underlying our loans may decrease the value of our assets.
      We expect that all of the loans we make will be secured by an underlying real property interest in the parcel to be developed and may also be secured by a pledge of other assets owned by the developer or of ownership interests in the developer entity. To the extent that the value of the property that serves as security for these loans or investments is lower than we expect, the value of our assets, and consequently our ability to pay distributions to our limited partners, will be adversely affected.
We will be subject to the general market risks associated with real estate development.
      Our financial performance will depend on the successful development and sale of the real estate parcels that serve as security for the loans we make to developers. As a result, we will be subject to the general market risks of real estate development, including weather conditions, the price and availability of materials used in the development of the lots, environmental liabilities and zoning laws, and numerous other factors that may materially and adversely affect the success of the development projects. In the event the market softens, the developer may require additional funding and such funding may not be available. In addition, if the market softens, the amount of capital required to be advanced and the required marketing time for such development may both increase, and the developer’s incentive to complete a particular real estate development may decrease. Such circumstances may reduce our profitability and the return on your investment.
If we are unable to raise substantial funds, we will be limited in the number and type of properties we may finance and the value of your investment will fluctuate with the performance of the specific investments we make.
      This offering is being made on a “best efforts” basis, whereby the brokers participating in the offering are only required to use their best efforts to sell our units and have no firm commitment or obligation to purchase any of the units. As a result, we cannot assure you as to the amount of proceeds that will be raised in this offering or that we will achieve sales of the maximum offering amount. If we are unable to

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raise substantially more than the minimum offering amount, we will originate and purchase fewer loans and equity positions resulting in less diversification in terms of the number of properties owned and financed, the geographic regions in which such properties are located and the types of properties securing the mortgages in which we invest. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. For example, in the event we only raise the minimum amount of $1.0 million, we will most likely make our investments through one or more joint ventures with third parties and may only be able to invest in one asset. If we are only able to invest in one asset, we would not achieve any diversification of our assets. Additionally, we are not limited in the number or size of assets we acquire or the percentage of net proceeds we may invest in a single asset. Your investment in our units will be subject to greater risk to the extent that we lack a diversified portfolio of mortgage assets. In addition, our fixed operating expenses, as a percentage of gross income, would be higher, and our financial condition and ability to pay distributions could be adversely affected if we are unable to raise substantial funds.
We have no prior operating history or established financing sources, and the prior performance of real estate programs sponsored by affiliates of our general partner may not be an indication of our future results.
      We were formed in June 2005, and UMTHLD, our general partner, was formed in March 2003. Although our key personnel are experienced in operating businesses similar to our business, you should not rely on the past performance of any other businesses of our key personnel, general partner, or affiliates to predict our future results. In addition, we do not have any established financing sources, and we cannot assure you that we will raise sufficient capital to operate our business as planned. The results of our operations will depend on many factors, including, without limitation, our ability to originate loans and joint venture opportunities, the level and volatility of interest rates and general economic conditions. Delays in investing the net proceeds of this offering may reduce our income. We cannot assure you that we will be able to successfully operate our business or implement our operating policies and strategies as described in this prospectus. You should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies like ours in an early stage of development, many of which may be beyond our control. Therefore, to be successful in this market, we must, among other things:
  •  identify and acquire investments that further our investment strategy;
 
  •  increase awareness of the United Development Funding name within the investment products market;
 
  •  establish and maintain our network of licensed securities brokers and other agents;
 
  •  attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
 
  •  respond to competition both for investment opportunities and potential investors in us; and
 
  •  continue to build and expand our operations structure to support our business.
      We cannot guarantee that we will succeed in achieving these goals, and our failure to do so could cause you to lose all or a portion of your investment.
You must rely on our general partner for management of our business, and you will have no right or power to take part in our management.
      Our future success will depend on the continued services of our general partner and its key personnel to manage the partnership. Our general partner will provide all management and administrative services to us. As a limited partner, you will have no right or power to take part in our management. Our partnership agreement does not require our general partner to dedicate a minimum amount of time to the management of our business. Moreover, the general partner may assign its general partnership interest in us to any person or entity that acquires substantially all of our general partners’ assets or equity interests without the consent of any unit holder. In the event that our general partner is unable or unwilling to continue to

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provide management services to us, our ability to execute our strategy and meet our business objectives could be materially adversely affected. See “Summary of Partnership Agreement — Voting Rights of the Limited Partners.”
If we lose or are unable to obtain key personnel, our ability to implement our investment strategy could be delayed or hindered.
      We will depend on the diligence, experience and skill of the officers and employees of our general partner, including Todd F. Etter, Hollis M. Greenlaw and Jeff W. Shirley, for the selection, acquisition, structuring and monitoring of our lending and investment activities. These individuals are not bound by employment agreements with us or our general partner. If any of our general partner’s key personnel were to cease employment with them, our operating results could suffer. Affiliates of our general partner only maintain key person life insurance with respect to Mr. Etter. We have not obtained life insurance policies on any other key personnel involved in our operations and, therefore, have no insulation against extraneous events that may adversely affect their ability to implement our investment strategies. We also believe that our future success depends, in large part, upon our general partner’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for highly skilled managerial, operational and marketing personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. The loss of any key person could harm our business, financial condition, cash flow and results of operations. If we lose or are unable to obtain the services of key personnel, our ability to implement our investment strategy could be delayed or hindered.
Our general partner has a limited net worth consisting of assets that are not liquid, which may adversely affect the ability of our general partner to fulfill its financial obligations to us.
      Our general partner is responsible for the management of our partnership. Until we have made our initial investments and for a period of time thereafter, we anticipate that our general partner will fund our operations. We rely on our general partner to support us, including by identifying prospective loans and investments, evaluating, underwriting and negotiating the acquisition and disposal of loans and investments and overseeing the performance of our loans and investments. The net worth of our general partner consists primarily of interests in affiliated investment partnerships. Accordingly, the net worth of our general partner is illiquid and not readily marketable. This illiquidity, and the fact that our general partner has commitments to other affiliated programs, may adversely affect the ability of our general partner to fulfill its financial obligations to us.
Our rights and the rights of our limited partners to recover claims against our general partner are limited.
      Our partnership agreement provides that our general partner will have no liability, and that we will indemnify our general partner for any obligations, losses, damages, costs or other liabilities, arising out of any action or failure to act that the general partner in good faith determines was in our best interest, provided its action or failure to act did not constitute negligence or misconduct. As a result, we and our limited partners may have more limited rights against our general partner than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our general partner in some cases. For further discussion of the duties of our general partner, see “Fiduciary Duty of the General Partner.”
Risks Related to Conflicts of Interest
      We will be subject to conflicts of interest arising out of our relationships with our general partner and its affiliates, including the material conflicts discussed below. When conflicts arise between us and our general partner and its affiliates, they may not be resolved in our favor, which could cause our operating results to suffer. The “Conflicts of Interest” section of this prospectus provides additional information related to conflicts of interest between us and our general partner and its affiliates and our policies to reduce or eliminate certain potential conflicts.

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Our general partner will have equity interests and/or profit participations in developments we finance and may have a greater incentive to make loans, which may or may not be subordinate to our mortgage loans and/or make loans with respect to such development to preserve and/or enhance its economic interest in such development.
      We expect to make loans and/or provide credit enhancement transactions to affiliates of our general partner. Although we will not make any mortgage loan or provide any credit enhancement to any affiliate of our general partner unless the loan meets requirements and terms disclosed herein or we have received a fairness opinion from an independent advisor as to the fairness of such mortgage loan or credit enhancement, our general partner may choose to deploy and allocate funds for mortgage loans or credit enhancement transactions to affiliates of our general partner for which we receive fairness opinions rather than to loans or credit enhancement transactions to unaffiliated third parties that may offer less risk of loss. If an affiliate of our general partner has an equity interest or participation interest in a development that requires a loan or credit enhancement, then our general partner may have a greater incentive to make a loan with respect to such development to preserve and/or enhance its economic interest in such development. Moreover, so long as it determines that it is advisable to do so in the exercise of its fiduciary duties to us, the general partner may cause us to make a loan or provide a credit enhancement to one of its affiliates in connection with a development in which such affiliates of our general partner hold an interest instead of another development in which affiliates of the general partner do not hold an interest.
Our general partner is an affiliate of the general partner of UDF I and UDF II, provides asset management services for UDF I and UDF II, and may not always be able to allocate investment opportunities on a pro rata basis among us, UDF I and UDF II.
      Our general partner is an affiliate of the general partners of UDF I and UDF II, both of which engage in the same businesses as we will. Our general partner also provides asset management services for UDF I and UDF II. Our general partner will seek to equitably apportion among us, UDF I and UDF II all investment opportunities of which it becomes aware. We intend to enter into a participation agreement with UDF I and UDF II pursuant to which we will invest in the same loans and transactions as UDF I and UDF II on a pro rata basis based on the amount of capital held by each entity that is available for investment. However, circumstances may arise, due to availability of capital or other reasons, when it is not possible for us to make an investment on such pro rata basis. Our general partner may determine not to invest in otherwise suitable investments in which UDF I or UDF II will participate in order for us to avoid unrelated business taxable income, or “UBTI,” which is generally defined as income derived from any unrelated trade or business carried on by a tax-exempt entity or by a partnership of which it is a member, and which is generally subject to taxation. See “Federal Income Tax Considerations — Investment by Qualified Plans and Other Tax-Exempt Entities — Unrelated Business Taxable Income.” We cannot assure you that we will be able to invest in all investment opportunities of which our general partner becomes aware that may be suitable for us on a pro rata basis or otherwise.
Our founders may form other companies that will engage in the same businesses as we will, and we may not always be able to participate in investment opportunities on a pro rata basis between us and such other companies.
      Our general partner and its affiliates may engage in additional real estate-related activities in the future, including the activities in which we intend to engage, and may form new entities to engage in these activities. If new companies are formed for the purpose of engaging in the businesses in which we engage, our founders intend to allocate investment opportunities among us, UDF I, UDF II and the new entities equitably. However, we cannot assure you that we will be able to participate in all or any investment opportunities in which such other companies participate, on an equitable basis or otherwise.

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Certain of the principals of our general partner will face conflicts of interest relating to the extension and purchase of loans, and such conflicts may not be resolved in our favor.
      Certain of the principals of our general partner are also principals, directors, employees, officers and equity holders of other entities, including UDF I, UDF II, UMT Holdings and UMT Services, and they may also in the future hold positions with, and interests in, other entities engaged in real estate activities. These multiple responsibilities may create conflicts of interest for these individuals if they are presented with opportunities that may benefit us and their other affiliates. These individuals may be incentivized to allocate opportunities to other entities rather than to us if they are more highly compensated based on investments made by other entities. In determining which opportunities to allocate to us and to their other affiliates, these individuals will consider the investment strategy and guidelines of each entity. Because we cannot predict the precise circumstances under which future potential conflicts may arise, we intend to address potential conflicts on a case-by-case basis. There is a risk that our general partner will choose an investment for us that provides lower returns to us than a loan made by one of our affiliates. Our partnership agreement provides that it shall be deemed not to be a breach of any obligation our general partner has to us or our limited partners for the general partner or its affiliates to engage in other business activities in preference to or to the exclusion of us. The partnership agreement also expressly states that the general partner has no obligation to present business opportunities to us. You will not have the opportunity to evaluate the manner in which any conflicts of interest involving the general partner and its affiliates are resolved before making your investment. For more information on these potential conflicts of interest, see “Conflicts of Interest.”
We will face risks relating to joint ventures with our affiliates and third parties that are not present with other methods of investing in mortgage loans.
      We may enter into joint ventures with certain of our affiliates, as well as third parties for the funding of loans. We may also purchase loans in joint ventures or in partnerships or other co-ownership arrangements with our affiliates, the sellers of the loans, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other methods of investment in mortgages, including, for example:
  •  the possibility that our co-venturer or partner in an investment might become bankrupt, in which case our investment might become subject to the rights of the co-venturer or partner’s creditors and we may be forced to liquidate our investment before we otherwise would choose to do so;
 
  •  that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals, which may cause us to disagree with our co-venturer or partner as to the best course of action with respect to the investment and which disagreement may not be resolved to our satisfaction;
 
  •  that such co-venturer, or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, which may cause us not to realize the return anticipated from our investment; or
 
  •  that it may be difficult for us to sell our interest in any such co-venture or partnership.
      Moreover, in the event we determine to foreclose on the collateral underlying a non-performing loan, we may be required to obtain the cooperation of our co-venturer or partner to do so. We anticipate that we will co-invest with our affiliates in certain loans, in which case we expect to enter into an inter-creditor agreement that will define our rights and priority with respect to the underlying collateral. Our inability to foreclose on a property acting alone may cause significant delay in the foreclosure process, in which time the value of the property may decline.

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Our general partner will face additional conflicts of interest relating to co-investments, with affiliated entities and may make decisions that disproportionately benefit one or more of our affiliated entities instead of us.
      Affiliates of our general partner are currently sponsoring private placement offerings on behalf of UDF I and UDF II, both of which are unspecified, or “blind pool” programs. Because our general partner or its affiliates will have advisory and management arrangements with these other United Development Funding programs, it is likely that they will encounter opportunities to invest in or acquire interests in mortgage loans, participations and/or properties to the benefit of one of the United Development Funding programs, but not others. Our general partner or its affiliates may make decisions to finance certain properties, which decisions might disproportionately benefit a United Development Funding program other than us. In such event, our results of operations and ability to pay distributions to our unit holders could be adversely affected.
      Because our general partner and its affiliates control us, UDF I and UDF II, agreements and transactions among the parties with respect to any co-investment among two or more of such parties will not have the benefit of arm’s length negotiation of the type normally conducted between unrelated co-venturers. Under these co-investment arrangements, we may not have a first priority position with respect to the underlying collateral. In the event that a co-venturer has a right of first refusal to buy out the other co-venturer, it may be unable to finance such buy-out at that time. In addition, to the extent that our co-venturer is an affiliate of our general partner, certain conflicts of interest will exist. For a more detailed discussion, see “Conflicts of Interest — Co-investments and Joint Ventures with Affiliates of the General Partner.”
Employees of our general partner will face conflicts of interest relating to the allocation of their time and other resources among the various entities that they serve or have interests in, and such conflicts may not be resolved in our favor.
      Certain of the employees of our general partner will face competing demands relating to their time and resources because they are also affiliated with entities with investment programs similar to ours, and they may have other business interests as well, including business interests that currently exist and business interests they develop in the future. Because these persons have competing interests for their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. As a result, they may devote less time and resources to our business than is necessary. If this occurs, our business, financial condition and results of operations may suffer.
There is no separate counsel for our affiliates and us, which could result in conflicts of interest.
      Morris, Manning & Martin, LLP acts as legal counsel to us, our general partner and its affiliates. If the interests of the various parties become adverse, under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of the general partner or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected.
Risks Related to Our Business in General
The Delaware Revised Uniform Limited Partnership Act does not grant you any voting rights, and your rights are limited under our partnership agreement.
      A vote of a majority of the units of limited partnership interest is sufficient to take the following actions:
  •  to amend our partnership agreement;
 
  •  to dissolve and terminate UDF III;

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  •  to remove our general partner; and
 
  •  to authorize a merger or a consolidation of UDF III.
These are the only significant voting rights granted to our limited partners under our partnership agreement. In addition, Delaware law does not grant you any specific voting rights. Therefore, your voting rights in our operations are limited.
      Our partnership agreement provides that you may vote on only a few operational matters, including the removal of our general partner. However, you will be bound by the majority vote on matters requiring approval of a majority of the units of limited partnership interest even if you do not vote with the majority on any such matter. Therefore, you will have little to no control over our day-to-day operations.
      Our general partner will make all decisions with respect to our management and determine all of our major policies, including our financing, growth, investment strategies and distributions. Our general partner may revise these and other policies without a vote of our limited partners. Therefore, you will be relying almost entirely on our general partner for our management and the operation of our business. Our general partner may only be removed under certain conditions, as set forth in our partnership agreement. If our general partner is removed, it will receive payment equal to the fair market value of its interests in UDF III as agreed upon by our general partner and us, or by arbitration if we are unable to agree. See “Summary of Partnership Agreement — Voting Rights of the Limited Partners.”
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act of 1940.
      We are not registered as an investment company under the Investment Company Act of 1940 (Investment Company Act). If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
  •  limitations on capital structure;
 
  •  restrictions on specified investments;
 
  •  prohibitions on transactions with affiliates; and
 
  •  compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
      Our investment policy provides that we may invest in securities of other real estate investment entities or similar entities. See “Investment Objectives and Criteria.” Although we intend to make such investments only if our general partner determines that the proposed investment would not cause us to be an “investment company” under the Investment Company Act, we could become regulated as an investment company for purposes of that act, which would substantially reduce our ability to use leverage and could adversely affect our business, financial condition, liquidity and results of operations.
You are limited in your ability to sell your units pursuant to our redemption program.
      Any investor requesting repurchase of their units pursuant to our unit redemption program will be required to certify to us that such investor acquired the units by either (1) a purchase directly from us or (2) a transfer from the original subscriber by way of a bona fide gift not for value to, or for the benefit of, a member of the subscriber’s immediate or extended family or through a transfer to a custodian, trustee or other fiduciary for the account of the subscriber or his/her immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or by operation of law. You should also be fully aware that our unit redemption program contains certain restrictions and limitations. Units will be redeemed on a quarterly basis, pro rata among all limited partners requesting redemption in such quarter, with a priority given to redemptions upon the death or disability of a limited partner, next to limited partners who demonstrate, in the discretion of our general partner, another

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involuntary exigent circumstance, such as bankruptcy, next to limited partners subject to a mandatory distribution requirement under such limited partner’s IRA and, finally, to other redemption requests. We will not redeem in excess of 5% of the weighted average number of units outstanding during the 12-month period immediately prior to the date of redemption. In addition, the cash available for redemption generally will be limited to any proceeds from our distribution reinvestment plan plus such other operating funds as our general partner, in its sole discretion, may reserve for repurchases. Initially, the general partner has adopted a policy to reserve 1% of operating cash flow from the previous four quarters for use in connection with redemptions. Further, our general partner reserves the right to reject any request for redemption or to terminate, suspend, or amend the unit redemption program at any time. Therefore, in making a decision to purchase units, you should not assume that you will be able to sell any of your units back to us pursuant to our redemption program. For a more detailed description of the unit redemption program, see “Summary of Partnership Agreement — Unit Redemption Program.”
If you are able to resell your units to us pursuant to our redemption program, you will likely receive substantially less than the fair market value for your units.
      The purchase price for units we repurchase under our redemption program, for the period beginning after a limited partner has held the units for a period of one year, will be (1) 92% of the purchase price for any units held less than two years, (2) 94% of the purchase price of any units held for at least two years but less than three years, (3) 96% of the purchase price of any units held at least three years but less than four years, (4) 98% of the purchase price of any units held at least four years but less than five years and (5) the lesser of the purchase price for any units held at least five years or the net asset value of your units as determined by our annual valuations. In addition, the price we will pay for redeemed units will be offset by any net proceeds from capital transactions previously distributed to the redeeming limited partner as a return of capital. Accordingly, you would likely receive less by selling your units back to us than you would receive if our investments were sold for their estimated values and such proceeds were distributed in our liquidation.
Your interest in us may be diluted if the price we pay in respect of units redeemed under our unit redemption program exceeds the net asset value of our units.
      The prices we may pay for units redeemed under our unit redemption program may exceed the net asset value of such units at the time of redemption. If this were to be the case, investors who do not elect or are unable to have some or all of their units redeemed under our unit redemption program would suffer dilution in the value of their units as a result of redemptions. We intend to create a reserve from our net interest income and net proceeds from capital transactions to recover some of the organization and offering expenses, including selling commissions and marketing support fees, we will incur in connection with the offering of our units in order to cause the net asset value of the partnership to be on parity with or greater than the amount we may pay for units under our unit redemption program. However, it is likely that non-redeeming unit holders will experience dilution as a result of redemptions which occur at a time when the net asset value has decreased, regardless of the reserve.
We will have broad discretion in how we use the net proceeds of this offering.
      We will have broad discretion in how to use the net proceeds of this offering, and limited partners will be relying on our judgment regarding the application of these proceeds. You will not have the opportunity to evaluate the manner in which the net proceeds of this offering are invested or the economic merits of particular assets to be acquired or loans to be made.
The general partner’s profits interest may create an incentive for the general partner to make speculative investments.
      Because our general partner’s participation in cash available for distribution is largely subordinate to the payment of cumulative distributions to our limited partners, our general partner’s interest is not wholly aligned with those of our limited partners. The subordinated nature of our general partner’s interest means that our general partner is less likely to receive distributions if our investments result only in minimal

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returns. Our general partner’s subordinated profits interest in us may create an incentive for the general partner to cause us to make investments that have a higher potential return but are riskier or more speculative than would be the case in the absence of this profits interest.
We established the offering price on an arbitrary basis; as a result, your subscription price for units, including the price at which units will be redeemed pursuant to our unit redemption program, is not related to any independent valuation.
      Our general partner has arbitrarily determined the selling price of the units, including the price at which units will be redeemed pursuant to our unit redemption program, and such price bears no relationship to our book or asset values, or to any other established criteria for valuing outstanding units of limited partnership interest or other ownership interests.
Payment of fees to our general partner and its affiliates will reduce cash available for investment and distribution.
      Our general partner and its affiliates will perform services for us in connection with the offer and sale of the units, the selection and acquisition of our investments, and the administration of our investments. They will be paid substantial fees for these services, which will reduce the amount of cash available for investment in properties or distribution to limited partners. For a more detailed discussion of the estimated use of the proceeds of this offering, see “Estimated Use of Proceeds.”
We are under no obligation to pay cash distributions. Distributions may be paid from capital and there can be no assurance that we will be able to pay or maintain cash distributions, or that distributions will increase over time.
      There are many factors, including factors beyond our control, that can affect the availability and timing of cash distributions to limited partners. Distributions will be based principally on cash available from our loans, real estate securities and other investments. The amount of cash available for distributions will be affected by our ability to invest in mortgage loans or in entities that invest in mortgage loans as offering proceeds become available, the yields on the mortgage loans in which we invest, and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We are under no obligation to pay cash distributions and we can provide no assurance that we will be able to pay or maintain distributions or that distributions will increase over time. Nor can we give any assurance that income from the mortgage loans we make or acquire will increase or that future investments will increase our cash available for distributions to limited partners. Our actual results may differ significantly from the assumptions used by our general partner in establishing the distribution rate to limited partners.
      There are no limitations on our general partner’s ability to declare distributions in excess of available cash. We may fund our distributions from borrowings or the net proceeds of this offering. Accordingly, the amount of distributions paid at any time may not reflect current cash flow from our investments. To the extent distributions are paid from the proceeds of this offering or from borrowings, we will have less capital available to invest in mortgage loans, which may negatively impact our ability to make investments and substantially reduce current returns to our limited partners. In that event, we may not be able to invest the anticipated minimum of 85.44% of the proceeds of this offering until such time as we have sufficient cash flows from operations to fund our distributions. In addition, our general partner, in its discretion, may reinvest or retain for working capital any portion of our cash on hand. We cannot assure you that sufficient cash will be available to pay distributions to you.

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Adverse economic conditions will negatively affect our returns and profitability.
      Our results may be affected by the following market and economic challenges, which may result from a continued or exacerbated general economic slowdown experienced by the nation as a whole or by the local economies where properties subject to our mortgage loans may be located:
  •  poor economic conditions may result in a slowing of new home sales and corresponding lot purchases by builders resulting in defaults by borrowers under our mortgage loans; and
 
  •  job transfers and layoffs may cause new home sales to decrease.
      The length and severity of any economic downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic downturn is prolonged or becomes more severe.
Risks Related to the Mortgage Lending Business
Defaults on our mortgage loans will reduce our income and your distributions.
      Because most of our assets will be mortgage loans, failure of a borrower to pay interest or repay a loan will have adverse consequences on our income. For example,
  •  failure by a borrower to repay loans or interest on loans will reduce our income and, consequentially, distributions to our limited partners;
 
  •  we are required to pay loan servicing fees to our general partner on delinquent loans;
 
  •  we may not be able to resolve the default prior to foreclosure of the property securing the loan;
 
  •  we may be required to expend substantial funds for an extended period to develop foreclosed properties;
 
  •  the subsequent income and sale proceeds we receive from the foreclosed properties may be less than competing investments; and
 
  •  the proceeds from sales of foreclosed properties may be less than our investment in the properties.
Investments in land development loans present additional risks compared to loans secured by operating properties.
      We may invest up to 25% of the gross offering proceeds in loans to purchase or develop unimproved land. Unimproved land may be raw land with or without entitlements, or land with entitlements with or without improvements such as utilities, streets or curbs. Land development mortgage loans may be riskier than loans secured by improved properties, because:
  •  the application of the loan proceeds to the development project must be assured;
 
  •  during development the property does not separate income for the borrower to make loan payments;
 
  •  the completion of planned development may require additional development financing by the borrower and may not be available;
 
  •  depending on the sale of lots to homebuilders, demand for lots may decrease causing the price of the lots to decrease;
 
  •  there is no assurance that we will be able to sell unimproved land promptly if we are forced to foreclose upon it; and
 
  •  lot sale contracts are generally not “specific performance” contracts, and the developer may have no recourse if a homebuilder elects not to purchase lots.
Investments in second and wraparound mortgage loans present additional risks compared to loans secured by first deeds of trust.
      We expect that we will be the junior lender with respect to many of our loans. We will invest in second mortgage loans and, in some instances, wraparound mortgage loans. A wraparound, or all-inclusive, mortgage loan is a loan in which the lender combines the remainder of an old loan with a new loan at an interest rate that blends the rate charged on the old loan with the current market rate. In a second

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mortgage loan, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the prior mortgage lender. In a wraparound mortgage loan, our rights will be similarly subject to the rights of any prior mortgage lender, but the aggregate indebtedness evidenced by our loan documentation will be the prior mortgage loans in addition to the new funds we invest. We would receive all payments from the borrower and forward to any senior lender its portion of the payments we receive. Because both of these types of loans are subject to the prior mortgage lender’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans.
Many of our loans will require balloon payments, which are riskier than loans with fully amortized payments.
      We anticipate that substantially all of our loans will have balloon payments. A balloon payment is a large principal balance that is payable after a period of time during which the borrower has repaid none or only a small portion of the principal balance. Loans with balloon payments are riskier than loans with even payments of principal over an extended time period, such as 15 or 30 years, because the borrower’s repayment often depends on its ability to refinance the loan or sell the developed lots profitably when the loan comes due. There are no specific criteria used in evaluating the credit quality of borrowers for mortgage loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due.
Suitable mortgage loans may not be available to us from time to time, which could reduce the returns on your investment.
      We receive referrals by commercial loan brokers and other referral sources. In the event that the supply of such referrals or new applicants decreases, the availability of loans for us to invest in would also decrease. Decreases in loan referrals or new applicants would typically occur in a recessionary economy, as there would be reduced activity in the real estate market and, hence, reduced demand for financing. Such decreases in the demand for mortgage loans could leave us with excess cash. In such instances, we plan to make short-term, interim investments with proceeds available from sales of units and hold these, pending investment in suitable mortgage loans. Interest returns on those investments are usually lower than on mortgage loans, which may reduce the yield to holders of units, depending on how long these non-mortgage investments are held.
      When we invest in non-mortgage, short-term investments using proceeds from the sale of units, the purchasers of those units will nevertheless participate equally in our distributions of income with holders of units whose sale proceeds have been invested in mortgage loans. This will favor, for a time, holders of units whose purchase monies were invested in non-mortgage investments, to the detriment of holders of units whose purchase monies are invested in normally higher-yielding mortgage loans.
The interest-only loans we make or acquire may be subject to greater risk of default and there may not be sufficient funds or assets remaining to satisfy our loans, which may result in losses to us.
      We will make and acquire interest-only loans. Interest-only loans typically cost the borrower less in monthly loan payments than fully-amortizing loans which require a payment on principal as well as interest. This lower cost may enable a borrower to acquire a more expensive property than if the borrower was entering into a fully-amortizing mortgage loan. Borrowers utilizing interest-only loans are dependent on the appreciation of the value of the underlying property, and the sale or refinancing of such property, to pay down the interest-only loan since none of the principal balance is being paid down with the borrowers’ monthly payments. If the value of the underlying property declines due to market or other factors, it is likely that the borrower would hold a property that is worth less than the mortgage balance on the property. Thus, there may be greater risk of default by borrowers who enter into interest-only loans. In addition, interest-only loans include an interest reserve in the loan amount. If such reserve is required to be funded due to a borrower’s non-payment, the loan-to-value ratio for that loan will increase, possibly above generally acceptable levels. In the event of a defaulted interest-only loan, we would acquire the

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underlying collateral which may have declined in value. In addition, there are significant costs and delays associated with the foreclosure process. Any of these factors may result in losses to us.
Larger loans result in less diversity and may increase risk.
      We intend to invest in loans that individually constitute an average amount equal to the lesser of 1% to 5% of the total amount raised in this offering, or $2.5 million to $12.5 million. However, we may invest in larger loans depending on such factors as our performance and the value of the collateral. These larger loans are riskier because they may reduce our ability to diversify our loan portfolio. Our larger loans will not exceed an amount equal to 20% of the total capital contributions to be raised in this offering.
The concentration of loans with a common borrower may increase our risks.
      We may invest in multiple mortgage loans that share a common borrower. We are permitted under the NASAA Guidelines to invest up to 20% of our offering proceeds in loans to a single borrower, and we may choose to invest up to the maximum limit imposed upon us. The bankruptcy, insolvency or other inability of any borrower that is the subject of multiple loans to pay interest or repay principal on its loans would have adverse consequences on our income and reduce the amount of funds available for distribution to investors. In addition, we expect to be dependent on a limited number of borrowers, including Lennar Corporation, for a large portion of our business. The more concentrated our portfolio is with one or a few borrowers, the greater credit risk we face. In addition, the loss of any one of these borrowers would have a material adverse effect on our financial condition and results of operations.
Incorrect or changed property values could result in losses and decreased distributions to you.
      We depend primarily upon our real estate security to protect us on the loans that we make. We depend partly upon the skill of independent appraisers to value the security underlying our loans and partly upon our general partner’s internal underwriting and appraisal process. However, notwithstanding the experience of the appraisers selected by our general partner, they or the general partner may make mistakes, or regardless of decisions made at the time of funding, loan market conditions may deteriorate for various reasons, causing a decrease to the value of the security for our loans. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the full amount of our loan, thus reducing the amount of funds available to distribute to you.
Changes in market interest rates may reduce our income and your distributions.
      A substantial portion of all of our loans will be fixed-interest rate loans. Market interest rates on investments comparable to the units could materially increase above the general level of our fixed-rate loans. Our distributions could then be less than the yield you may obtain from these other investments. We will also make loans with variable interest rates, which will cause variations in the yield to us from these loans. All of our variable rate loans contain a floor rate not lower than the original interest rate. We may make loans with interest rate guarantee provisions in them, requiring a minimum period of months or years of earned interest even if the loan is paid off during the guarantee period. The duration of the guarantee is subject to negotiation and will likely vary from loan to loan. Other than these provisions, the majority of our loans will not include prepayment penalties for a borrower paying off a loan prior to maturity. The absence of a prepayment penalty in our loans may lead borrowers to refinance higher interest rate loans in a market of falling interest rates. This would then require us to reinvest the prepayment proceeds in loans or alternative short-term investments with lower interest rates and a corresponding lower yield to you. All of these risks increase as the length of maturity of a loan increases and the amount of cash available for new higher interest loans decreases. A material increase in market interest rates could result in a decrease in the supply of suitable mortgage loans to us, as there will likely be fewer attractive transactions for borrowers and less activity in the marketplace.

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Some losses that borrowers might incur may not be insured and may result in defaults that would increase your risk.
      Our loans require that borrowers carry adequate hazard insurance for our benefit. Some events are, however, either uninsurable or insurance coverage is economically not practicable. Losses from earthquakes, floods or mudslides, for example, may be uninsured and cause losses to us on entire loans. If a borrower allows insurance to lapse, an event of loss could occur before we become aware of the lapse and have time to obtain insurance ourselves. Insurance coverage may be inadequate to cover property losses, even though our general partner imposes insurance requirements on borrowers that it believes are adequate.
Foreclosures create additional ownership risks to us of unexpected increased costs or decreased income.
      When we acquire property by foreclosure, we have economic and liability risks as the owner, including:
  •  less income and reduced cash flows on foreclosed properties than could be earned and received on mortgage loans;
 
  •  selling the lots to homebuilders;
 
  •  controlling development and holding expenses;
 
  •  coping with general and local market conditions;
 
  •  complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection; and
 
  •  possible liability for injury to persons and property.
If we were found to have violated applicable usury laws, we would be subject to penalties and other possible risks.
      Usury laws generally regulate the amount of interest that may lawfully be charged on indebtedness. Each state has its own distinct usury laws. We believe that our loans will not violate applicable usury laws. There is a risk, however, that a court could determine that our loans do violate applicable usury laws. If we were found to have violated applicable usury laws, we could be subject to penalties, including fines equal to three times the amount of usurious interest collected and restitution to the borrower. Additionally, usury laws often provide that a loan that violates usury laws is unenforceable. If we are subject to penalties or restitution or if our loan agreements are adjudged unenforceable by a court, it would have a material, adverse effect on our business, financial condition and results of operations and we would have difficulty making distributions to our limited partners.
If we borrow money to make loans or for other permitted purposes, your risks will increase if defaults occur.
      We are permitted by our partnership agreement to borrow money to:
  •  acquire or make mortgage loans;
 
  •  prevent defaults under senior loans or discharge them entirely if that becomes necessary to protect our interests; or
 
  •  assist in the development or sale of any real property, which we have taken over as a result of a default.
      We do not currently intend to borrow money to fund loans, participations and make equity investments, but we may do so whenever our general partner determines that it is advantageous to us. We expect that at any time the total amount of indebtedness we have incurred will not exceed 50% of our total invested capital. However, we are permitted by our partnership agreement to borrow up to 70% of the aggregate fair market value of all of our mortgage loans.
      Our borrowings, if made, would be likely to be secured with recourse by the lending bank to all of our assets. We, and our limited partners, could face increased risk if we borrow. If the interest rates we are

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able to charge on our mortgage loans decrease below the interest rates we must pay on our borrowing, payments of interest due on our borrowing will decrease our income otherwise available for distribution to you. In addition, if one of our mortgage loans goes into default and we are unable to obtain repayment of the principal amount of the loan through foreclosure or otherwise, payments of principal required on our borrowing will decrease the amount of cash we have available and could reduce the amounts we otherwise would have available for repurchases of units from you.
      Although we have no current financing arrangements in place, we intend to pursue securing a credit facility to use in the future.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general.
      Our operating results will be subject to risks generally incident to the ownership of assets related to the real estate industry, including:
  •  changes in interest rates and availability of permanent mortgage funds;
 
  •  changes in general economic or local conditions;
 
  •  changes in tax, real estate, environmental and zoning laws; and
 
  •  periods of high interest rates and tight money supply.
For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the amount of income we receive from our investments.
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 costs 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 development 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 CERCLA. 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

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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 you 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 you.
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 your investment. We cannot assure you 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 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 and economy. 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 loans, both which would impair the value of our investments and decrease our ability to make distributions to you.
We will be subject to risks related to the geographic concentration of the properties securing the loans and equity investments we make.
      While we intend to enter into loan and agreements with respect to properties throughout the United States, we expect that, initially, the majority of our transactions will relate to properties located in Texas, Arizona and Florida because we are most familiar with the real estate markets in these areas. If the residential real estate market or general economic conditions in these geographic areas declines, the developers’ ability to sell completed project parcels located in these areas may be impaired, we may experience a greater rate of default on the loans we make with respect to properties in these areas and the value of the parcels that secure our loans in these areas could decline. Any of these events could materially adversely affect our business, financial condition or results of operations more so than if our investments were more geographically diversified.
We will be subject to a number of legal and regulatory requirements.
      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 limited partnerships, could make it more difficult or expensive for us to comply with such laws or otherwise harm our business.

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Federal Income Tax Risks
The Internal Revenue Service may challenge our characterization of material tax aspects of your investment in our units of limited partnership interest.
      An investment in units involves material income tax risks. You are urged to consult with your own tax advisor with respect to the federal, state and foreign tax considerations of an investment in our units. We will not seek any rulings from the Internal Revenue Service regarding any of the tax issues discussed herein. Further, although we have obtained an opinion from our counsel, Morris, Manning & Martin, LLP, regarding the material federal income tax issues relating to an investment in our units, you should be aware that the this opinion represents only our counsel’s best legal judgment, based upon the representations and assumptions referred to in the opinion and conditioned upon the existence of certain facts. Our counsel’s tax opinion has no binding effect on the Internal Revenue Service or any court. Accordingly, we cannot assure you that the conclusions reached in the tax opinion, if contested, would be sustained by any court. In addition, our counsel is unable to form an opinion as to the probable outcome of the contest of certain material tax aspects of the transactions described in this prospectus, including whether we will be characterized as a “dealer” so that sales of our assets would give rise to ordinary income rather than capital gain and whether we are required to qualify as a tax shelter under the Internal Revenue Code. Our counsel also gives no opinion as to the tax considerations to you of tax issues that have impact at the individual or partner level. For a more complete discussion of the tax risks and tax considerations associated with an investment in us, see “Federal Income Tax Considerations.”
Investors may realize taxable income without cash distributions, and you may have to use funds from other sources to pay your tax liabilities.
      As our limited partner, you will be required to report your allocable share of our taxable income on your personal income tax return regardless of whether you have received any cash distributions from us. It is possible that your limited partnership units will be allocated taxable income in excess of your cash distributions. We intend to establish reserves for working capital, our unit redemption program and to recover some of the organization and offering expenses incurred in connection with this offering. The establishment and maintenance of these reserves will reduce the amount of cash otherwise distributable to you and could result in you not being distributed cash equal to your taxable income that results from the allocation of income from us. Further, if you participate in our distribution reinvestment plan, you will be allocated your share of our net income, including net income allocable to units acquired pursuant to the distribution reinvestment plan, even though you will receive no cash distributions from us. We cannot assure you that cash flow will be available for distribution in any year. As a result, you may have to use funds from other sources to pay your tax liability.
We could be characterized as a publicly traded partnership, which would have an adverse tax effect on you.
      If the Internal Revenue Service were to classify us as a publicly traded partnership, we could be taxable as a corporation, and distributions made to you could be treated as portfolio income to you rather than passive income. Our counsel has given its opinion that we will not be classified as a publicly traded partnership, which is defined generally as a partnership whose interests are publicly traded or frequently transferred. However, this opinion is based only upon certain representations of our general partner and the provisions in our partnership agreement that attempt to comply with certain safe harbor standards adopted by the Internal Revenue Service. We cannot assure you that the Internal Revenue Service will not challenge this conclusion or that we will not, at some time in the future, be treated as a publicly traded partnership due to the following factors:
  •  the complex nature of the Internal Revenue Service safe harbors;
 
  •  the lack of interpretive guidance with respect to such provisions; and
 
  •  the fact that any determination in this regard will necessarily be based upon facts that have not yet occurred.

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The deductibility of losses will be subject to passive loss limitations, and therefore their deductibility will be limited.
      Limited partnership units will be allocated their pro rata share of our tax losses. Section 469 of the Internal Revenue Code limits the allowance of deductions for losses attributable to passive activities, which are defined generally as activities in which the taxpayer does not materially participate. Any tax losses allocated to investors will be characterized as passive losses, and accordingly, the deductibility of such losses will be subject to these limitations. Losses from passive activities are generally deductible only to the extent of a taxpayer’s income or gains from passive activities and will not be allowed as an offset against other income, including salary or other compensation for personal services, active business income or “portfolio income,” which includes non-business income derived from dividends, interest, royalties, annuities and gains from the sale of property held for investment. Accordingly, you may receive no current benefit from your share of tax losses unless you are currently being allocated passive income from other sources.
The Internal Revenue Service may challenge our allocations of profit and loss, and any reallocation of items of income, gain, deduction and credit could reduce anticipated tax benefits.
      Counsel has given its opinion that partnership items of income, gain, loss, deduction and credit will be allocated among our general partner and our limited partners substantially in accordance with the allocation provisions of our partnership agreement. We cannot assure you, however, that the Internal Revenue Service will not successfully challenge the allocations in the partnership agreement and reallocate items of income, gain, loss, deduction and credit in a manner that reduces anticipated tax benefits. The tax rules applicable to allocation of items of taxable income and loss are complex. The ultimate determination of whether allocations adopted by us will be respected by the Internal Revenue Service will depend upon facts that will occur in the future and that cannot be predicted with certainty or completely controlled by us. If the allocations we use are not recognized, limited partners could be required to report greater taxable income or less taxable loss with respect to an investment in us and, as a result, pay more tax and associated interest and penalties. Our limited partners might also be required to incur the costs of amending their individual returns.
We may be audited, which could result in the imposition of additional tax, interest and penalties.
      Our federal income tax returns may be audited by the Internal Revenue Service. Any audit of us could result in an audit of your tax return that may require adjustments of items unrelated to your investment in us, in addition to adjustments to various partnership items. In the event of any such adjustments, you might incur attorneys’ fees, court costs and other expenses contesting deficiencies asserted by the Internal Revenue Service. You may also be liable for interest on any underpayment and penalties from the date your tax was originally due. The tax treatment of all partnership items will generally be determined at the partnership level in a single proceeding rather than in separate proceedings with each partner, and our general partner is primarily responsible for contesting federal income tax adjustments proposed by the Internal Revenue Service. In this connection, our general partner may extend the statute of limitations as to all partners and, in certain circumstances, may bind the partners to a settlement with the Internal Revenue Service. Further, our general partner may cause us to elect to be treated as an electing large partnership. If it does, we could take advantage of simplified flow-through reporting of partnership items. Adjustments to partnership items would continue to be determined at the partnership level, however, and any such adjustments would be accounted for in the year they take effect, rather than in the year to which such adjustments relate. Our general partner will have the discretion in such circumstances either to pass along any such adjustments to the partners or to bear such adjustments at the partnership level.

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State and local taxes and a requirement to withhold state taxes may apply, and if so, the amount of net cash from operations payable to you would be reduced.
      The state in which you reside may impose an income tax upon your share of our taxable income. Further, states in which we will own properties acquired through foreclosure may impose income taxes upon your share of our taxable income allocable to any partnership property located in that state. Many states have also implemented or are implementing programs to require partnerships to withhold and pay state income taxes owed by non-resident partners relating to income-producing properties located in their states, and we may be required to withhold state taxes from cash distributions otherwise payable to you. You may also be required to file income tax returns in some states and report your share of income attributable to ownership and operation by the partnership of properties in those states. In the event we are required to withhold state taxes from your cash distributions, the amount of the net cash from operations otherwise payable to you would be reduced. In addition, such collection and filing requirements at the state level may result in increases in our administrative expenses that would have the effect of reducing cash available for distribution to you. You are urged to consult with your own tax advisors with respect to the impact of applicable state and local taxes and state tax withholding requirements on an investment in our units.
Legislative or regulatory action could adversely affect 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 units. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a limited partner. Any such changes could have an adverse effect on an investment in our units or on the market value or the resale potential of our properties. You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in units and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our units. You should also note that our counsel’s tax opinion assumes that no legislation will be enacted after the date of this prospectus that will be applicable to an investment in our units.
There are special considerations that apply to pension or profit sharing trusts or IRAs investing in our units, including potential adverse effects under ERISA and the Internal Revenue Code.
      If you are investing the assets of a pension, profit sharing, 401(k), Keogh or other qualified retirement plan, or the assets of an IRA, in our units of limited partnership interest, you should satisfy yourself that, among other things:
  •  your investment is consistent with your fiduciary obligations under ERISA and the Internal Revenue Code;
 
  •  your investment is made in accordance with the documents and instruments governing your plan or IRA, including your plan’s investment policy;
 
  •  your investment satisfies the prudence and diversification requirements of ERISA;
 
  •  your investment will not impair the liquidity of the plan or IRA;
 
  •  your investment will not produce UBTI for the plan or IRA;
 
  •  you will be able to value the assets of the plan annually in accordance with ERISA requirements; and
 
  •  your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
For a more complete discussion of the foregoing issues and other risks associated with an investment in units by retirement plans, see “Investment by Tax-Exempt Entities and ERISA Considerations.”

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We may terminate the offering or dissolve UDF III if our assets are deemed to be “plan assets” or if we engage in prohibited transactions.
      If our assets were deemed to be assets of qualified plans investing as limited partners, known as “plan assets,” our general partner would be considered to be a plan fiduciary and certain contemplated transactions between our general partner or its affiliates and us may be deemed to be prohibited transactions subject to excise taxation under Section 4975 of the Internal Revenue Code. Additionally, if our assets were deemed to be plan assets, ERISA’s fiduciary standards would extend to the general partner as a plan fiduciary with respect to our investments. We have not requested an opinion of our counsel regarding whether or not our assets would constitute plan assets under ERISA, nor have we sought any rulings from the U.S. Department of Labor (Department of Labor) regarding classification of our assets.
      Department of Labor regulations defining plan assets for purposes of ERISA contain exemptions that, if satisfied, would preclude assets of a limited partnership such as ours from being treated as plan assets. We cannot assure you that our partnership agreement and this offering have been structured so that the exemptions in such regulations would apply to us, and although our general partner intends that an investment by a qualified plan in units will not be deemed an investment in our assets, we can make no representations or warranties of any kind regarding the consequences of an investment in our units by qualified plans in this regard. Plan fiduciaries are urged to consult with and rely upon their own advisors with respect to this and other ERISA issues that, if decided adversely to us, could result in prohibited transactions, which would cause the imposition of excise taxation and the imposition of co-fiduciary liability under Section 405 of ERISA in the event actions undertaken by us are deemed to be non-prudent investments or prohibited transactions.
      In the event our assets are deemed to constitute plan assets, or if certain transactions undertaken by us are deemed to constitute prohibited transactions under ERISA or the Internal Revenue Code and no exemption for such transactions applies or is obtainable by us, our general partner has the right, but not the obligation, upon notice to all limited partners, but without the consent of any limited partner to:
  •  terminate the offering of units;
 
  •  compel a termination and dissolution of UDF III; or
 
  •  restructure our activities to the extent necessary to comply with any exemption in the Department of Labor regulations or any prohibited transaction exemption granted by the Department of Labor or any condition that the Department of Labor might impose as a condition to granting a prohibited transaction exemption. See “Investment by Tax-Exempt Entities and ERISA Considerations” elsewhere in this prospectus.
Adverse tax considerations may result because of minimum distribution requirements.
      If you intend to purchase units through your IRA, or if you are a trustee of an IRA or other fiduciary of a retirement plan considering an investment in units, you must consider the limited liquidity of an investment in our units as it relates to applicable minimum distribution requirements under the Internal Revenue Code. If units are held and our investments have not generated sufficient income at such time as mandatory distributions are required to begin to an IRA beneficiary or qualified plan participant, Sections 408(a)(6) and 401(a)(9) of the Internal Revenue Code will likely require that a distribution-in-kind of the units be made to the IRA beneficiary or qualified plan participant. Any such distribution-in-kind of units must be included in the taxable income of the IRA beneficiary or qualified plan participant for the year in which the units are received at the fair market value of the units without any corresponding cash distributions with which to pay the income tax liability attributable to any such distribution. Also, fiduciaries of a retirement plan should consider that, for distributions subject to mandatory income tax withholding under Section 3405 of the Internal Revenue Code, the fiduciary may have an obligation, even in situations involving in-kind distributions of units, to liquidate a portion of the in-kind units distributed in order to satisfy such withholding obligations. There may also be similar state and/or local tax withholding or other obligations that should be considered.

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UBTI may be generated with respect to tax-exempt investors.
      We may incur indebtedness, which will cause recharacterization of a portion of our income allocable to tax-exempt investors as UBTI. If we generate UBTI, a trustee of a charitable remainder trust that has invested in us will lose its exemption from income taxation with respect to all of its income for the tax year in question. A tax-exempt limited partner other than a charitable remainder trust that has UBTI in any tax year from all sources of more than $1,000 will be subject to taxation on such income and be required to file tax returns reporting such income. See “Federal Income Tax Considerations — Investment by Qualified Plans and Other Tax-Exempt Entities” elsewhere in this prospectus.
Forward-Looking Statements
      This prospectus contains forward-looking statements. Such statements can be identified by the use of forward-looking terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of these words and similar expressions. Although we believe that our expectations reflected in the forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include those set forth above, as well as general economic, business and market conditions, changes in federal and local laws and regulations and increased competitive pressures. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform those statements to actual results.

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ESTIMATED USE OF PROCEEDS
      The following table sets forth information about how we intend to use the proceeds raised in this offering, assuming that we sell either the minimum offering of 50,000 units or the maximum offering of 17,500,000 units. Many of the figures set forth below represent management’s best estimate since they cannot be precisely calculated at this time. We expect that at least 85.44% of the money that limited partners invest will be available for use by us to make real estate loans or and purchase participations in real estate development loans. In no event will less than 82% of the gross proceeds from this offering be available to us for investment. The remaining up to 14.15% of gross proceeds of this offering will be used to pay fees and expenses to our general partner and our selling group members. Our fees and expenses, as listed below, include the following:
  •  Selling commissions equal to 7.0% of aggregate gross offering proceeds (1.0% of gross proceeds for sales pursuant to our distribution reinvestment plan), which commissions may be reduced under certain circumstances, and bona fide due diligence fee of up to 0.5% of aggregate gross offering proceeds, both of which are payable to broker-dealers participating in the offering of our units. For a description of additional provisions relating to selling commissions and the bona fide due diligence fee, see “Plan of Distribution.”
 
  •  Organization and offering expenses, which are defined generally as any and all costs and expenses incurred by us, our general partner or its affiliates in connection with our formation and qualification, and registration, marketing and distribution of our units, including, but not limited to, accounting and escrow fees, printing, initial advertising and marketing expenses and all other accountable offering expenses, other than selling commissions, wholesaling fees and marketing support fees. Our general partner will be responsible for the payment of organization and offering expenses, other than selling commissions and the bona fide due diligence fee, to the extent they exceed 1.5% of gross offering proceeds without recourse against or reimbursement by us.
 
  •  Wholesaling fees and marketing support fees of up to an aggregate of 3.0% of our gross offering proceeds, except that no wholesaling fees or marketing support fees shall be paid in respect of sales pursuant to our distribution reinvestment plan. Wholesaling fees of up to 1.2% of our gross offering proceeds will be paid to IMS Securities, an unaffiliated selling group member, for wholesaling services. Marketing support fees of 0.8% of our gross offering proceeds will be paid to UMTH Funding, an affiliate of our general partner, for marketing and promotional services provided to our selling group members. An additional marketing support fee will be paid directly to unaffiliated participating selected dealers in an amount to be determined in the sole discretion of our general partner, but which shall not exceed 1.0% of our gross offering proceeds. Such services include, but are not limited to, producing materials used by our selling group members to market our units and coordinating the due diligence process. The marketing support fee may be deemed to be compensation for services directly or indirectly performed on behalf of our selling group members and, therefore, would be considered underwriting compensation.
 
  •  We will pay acquisition and origination expenses and fees to our general partner equal to 3% of the amount available for investment in mortgages for fees and expenses associated with the selection, acquisition and origination of mortgages, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses and total insurance funded by us. Acquisition and origination fees and expenses will be paid by us with respect to each new loan we originate or acquire. Such fees and expenses will be paid at the time we enter into or acquire a new loan.

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      In no event shall the total underwriting compensation, including selling commissions, bona fide due diligence fees, wholesaling fees and marketing support fees, exceed 10% of gross offering proceeds.
                                                 
    Minimum Offering   Maximum Primary Offering   Maximum Total Offering
    (50,000 units)(1)   (12,500,000 units)(1)   (17,500,000 units)(1)
             
    Amount   Percent   Amount   Percent   Amount   Percent
                         
Gross offering proceeds
  $ 1,000,000       100.00 %   $ 250,000,000       100.00 %   $ 350,000,000       100.00 %
Selling commissions
    70,000       7.00       17,500,000       7.00       18,500,000       5.29  
Wholesaling fees
    12,000       1.20       3,000,000       1.20       3,000,000       0.86  
Marketing support fees(2)
    18,000       1.80       4,500,000       1.80       4,500,000       1.29  
Due diligence fees
    5,000       0.50       1,250,000       0.50       1,250,000       0.36  
Organization and offering expenses(3)
    15,000       1.50       3,750,000       1.50       3,750,000       1.07  
Acquisition and origination expenses and fees
    25,631       2.56       6,407,767       2.56       9,262,427       2.65  
                                     
Amount estimated to be invested(4)
  $ 854,369       85.44 %   $ 213,592,233       85.44 %   $ 309,737,573       88.50 %
                                     
 
(1)  For purposes of this table, the minimum offering and maximum primary offering amounts assume that no purchases are made under our distribution reinvestment plan, and the maximum total offering amounts assume the sale of all 5,000,000 units being offered under our distribution reinvestment plan.
 
(2)  Includes a 0.8% marketing support fee to be paid to UMTH Funding (a portion of which may be reallowed to participating selected dealers for direct marketing support) and an additional marketing support fee to be paid directly to participating selected dealers in an amount to be determined in the sole discretion of our general partner, but which shall not exceed 1.0% of the gross offering proceeds.
 
(3)  We currently estimate that approximately $350,000 of organization and offering expenses will be incurred if only the minimum offering of 50,000 units ($1.0 million) is sold. However, we will pay only $15,000 of those expenses and the balance will be paid by UMTHLD, our general partner. Our general partner will pay any amount exceeding 1.5% of the gross offering proceeds, excluding proceeds from sales under our distribution reinvestment plan. Organization and offering expenses will necessarily increase as the volume of units sold in the offering increases, in order to pay the increased expenses of marketing and distributing the additional units and qualifying the additional investors.
 
(4)  Includes amounts we expect to invest in loans net of fees and expenses. We estimate that at least 85.44% of the gross proceeds received from the sale of units will be used to acquire mortgage loans and other investments. The percentage of gross offering proceeds available to be invested may increase to 88.50% if our distribution reinvestment plan is fully subscribed.
      Until required in connection with the funding of loans and loan participations, substantially all of the net proceeds of this 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.

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INVESTMENT OBJECTIVES AND CRITERIA
General
      UDF III is a Delaware limited partnership formed on June 13, 2005. We have had no operations to date. Our investment objectives are:
  •  to make, originate or acquire a participation interest in mortgage loans (first priority and junior priority) typically in the range of $500,000 to $10,000,000, and to provide credit enhancements to real estate developers and regional and national homebuilders who acquire real property, subdivide such real property into single-family residential lots and sell such lots to homebuilders or build homes on such lots;
 
  •  to produce net interest income from the interest on mortgage loans that we originate or purchase or in which we acquire a participation interest;
 
  •  to produce a profitable fee from our credit enhancement transactions;
 
  •  to produce income through origination fees charged to borrowers;
 
  •  to maximize distributable cash to investors; and
 
  •  to preserve, protect and return capital contributions.
      We expect to derive a substantial portion of our income by originating, purchasing, participating in and holding for investment mortgage 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 that will be marketed and sold to home builders. We may also offer credit enhancements to developers in the form of loan guarantees to third-party lenders, letters of credit issued for the benefit of third-party lenders and similar credit enhancements. In the typical credit enhancement transaction, we expect to charge 3% to 7% of the projected maximum amount of our outstanding credit enhancement obligation for each 12-month period such obligation is outstanding as a credit enhancement fee in addition to any costs that we may incur in providing the credit enhancement. We cannot assure you that we will obtain a 3% to 7% credit enhancement fee. The actual amount of such charges will be based on the risk perceived by our general partner to be associated with the transaction, the value of the collateral associated with the transaction, our security priority as to the collateral associated with the transaction, the form and term of the credit enhancement, and our overall costs associated with providing the credit enhancement.
      Our investment objective will be to make mortgage loans. Whenever possible, we generally intend to structure our loans so that we are able to earn a return on our investments through interest payments to us in respect of such loans. We have not originated or purchased any mortgage loans and we have not identified specific loans or credit enhancements that we intend to make. The purpose of this offering is to raise funds to enable us to originate and purchase loans and provide credit enhancements to developers.
      We intend to distribute, on a monthly basis, net interest income, after payment of our operating fees and expenses, to our unit holders in accordance with the terms of our partnership agreement. We intend to reinvest the principal repayments we receive on loans to create or invest in new loans during the term of the partnership. However, following the seventh anniversary of the effectiveness of this offering, a limited partner may elect to receive his or her pro rata share of any loan principal repayments. Any capital not reinvested will be used first to return unit holders’ capital contributions and then to pay distributions to unit holders. Within 20 years after termination of this offering, we will either (1) make an orderly disposition of investments and distribute the cash to investors or (2) upon approval of limited partners holding more than 50% of the outstanding units, continue the operation of the Partnership for the term approved by the limited partners.
      Our founders, Todd F. Etter, Hollis M. Greenlaw, Craig A. Pettit, Christine A. Griffin, Timothy J. Kopacka, William E. Lowe and Melvin E. Horton, formed UDF I in March 2003 and UDF II in June 2004. Both UDF I and UDF II are real estate finance companies that engage in the business in which we

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intend to engage. UDF I completed a private placement offering of limited partnership interests in November 2004 in which it raised gross proceeds of $10.0 million. UDF II is currently offering up to $25.0 million of limited partnership interests through a private placement. UDF II has raised gross proceeds of approximately $9.63 million through December 31, 2005. Our general partner is an affiliate of the general partners of UDF I and UDF II. Our general partner also serves as the asset manager for UDF I and UDF II.
      Once we commence operations, we may invest in the same loans in which UDF I and UDF II invest. We believe that we will be able to invest in a more diversified portfolio of loans if we are able to hold loans jointly with our affiliates. We intend to enter into an agreement with UDF I and UDF II that provides that we will make such investments on a pro rata basis based on the amount of capital held by each entity that is available for investment to the extent practicable. UDF I and UDF II may also make equity investments in which we will not participate. We may make loans or participate in loans to borrowers in which UDF I and/or UDF II and/or our general partner or its affiliates have an equity investment. However, circumstances may arise, due to availability of capital or other reasons, when it is not possible for UDF I, UDF II and us to each make an investment on such pro rata basis. We cannot assure you that we will be able to invest in all investment opportunities of which the general partner becomes aware that are suitable for us on a pro rata basis with UDF I and UDF II or otherwise. The structure of our participation in investments may vary and will be determined on a case-by-case basis. We may, but are not obligated to, purchase participations in loans and investments made by UDF I or UDF II before we commence operations.
      Our founders are also principals, employees, officers and equity holders of other entities that are engaged in real estate related activities and these entities may also participate in the loans and investments we make. Our founders are also affiliated with businesses that advise and operate United Mortgage Trust and UMT Holdings, which has made an offer to acquire United Mortgage Trust. UMT Holdings is the sole limited partner and 99.9% owner of our general partner. UMT Holdings is a real estate finance company focusing primarily on collateralized interim mortgages for the purchase and/or renovation of single-family homes and real estate loans for the acquisition and development of residential housing lots. UMT Holdings has made loans to UDF I and UDF II that have been used for funding loans and equity investments. UMT Holdings may continue to provide funds to UDF I and UDF II. We cannot assure you that any financing or other resources that UMT Holdings provides to UDF I or UDF II will also be provided to us on substantially similar terms or at all.
Industry Background
      Sales of new single-family homes through December 2005 reached an annual rate of 1,285,000 and set a new record for housing sales for the sixth consecutive year, according to U.S. Commerce Department and National Association of Home Builders figures. Total new single-family home sales for 2004 were 1,203,000.
      New single-family housing starts for 2005 reached 1,604,000. New single-family housing starts are projected at 1,716,000 for the year 2006, which represents a 6.5% increase over 2005. Total single-family housing starts for 2005 represented a 6.9% increase over 2004.
      In addition to the increase in sales of single-family homes, the prices for these homes, and their underlying mortgage loans, are also increasing. The median sales price for a new single-family home increased 7.2% to $238,000 in 2005, up from $221,000 in 2004. The 2004 median price represented a 12.24% increase over the 2003 median housing price.
      The record-breaking pace of new-home sales has been attributed to strong demographic demand, low mortgage rates and rising employment and household income.

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Annual Single Family Housing Starts
(GRAPH)
      According to the Seiders’ Report, forecasts for 2006 suggest a “cooling” process in the single family housing market. The supply of new homes for sale, relative to the pace of sales, has been rising for over a year. Increased new home inventory may result in decreased demand for residential lots and residential lot development loans.
      The National Association of Home Builders’ (NAHB) baseline forecast shows modest growth in home sales and housing production during the 2006-2007 period, accompanied by a slowdown in housing price appreciation. The NAHB’s long term forecast suggests sustainable levels of housing market activity slightly below recent levels.
      We intend to seek to make or acquire loans primarily with respect to projects where the completed subdivision will consist of homes at or below the median price of the U.S. housing market. According to U.S. Commerce Department figures, the median sales price of new single-family homes was $228,000 in 2005. Median-priced housing represents approximately 50% of new home production.

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(GRAPH)
Source: The Seiders’ Report: December 8, 2005 — HousingEconomics.com
(GRAPH)
Source: The Seiders’ Report: December 8, 2005 — HousingEconomics.com

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      The ability to efficiently locate and develop property is crucial to the home building industry. The single-family residential lot development business is a fragmented industry comprised of many individuals and companies. Lot developers include builders, contractors, brokers and other entities that are engaged in real estate development activities. Housing and real estate development trends, specific knowledge of a market, economic development and numerous other factors contribute to lot developers’ planning process. The availability of adequate unimproved acreage, access to jobs, housing costs and other general economic factors all impact the demand for single-family lots and the locations suitable for housing expansion in a particular area.
      Subject to their individual or company financial condition, lot developers finance their development projects through a combination of personal equity, loans and third-party investments from banks, thrifts, institutional and private lenders and investors. Factors for determining the mix of financing include the amount, availability and cost of funds. Lot developers are able to choose from a variety of financing instruments. Financing instruments include seller financing, such as purchase money mortgages; institutional land acquisition and development loans provided by institutions such as banks and insurance companies; and equity or debt financing from private investors, real estate investment trusts and pension funds.
      National home builders generally are affiliated with a land development company. Typically, the captive land development affiliate will supply one-half to two-thirds of the builder’s lot inventory requirement. National home builders are thus dependent on unrelated third-party developers to meet their remaining lot inventory requirement. In addition, national home builders, while well-capitalized, are sensitive to carrying land and lot inventories and the associated debt on the parent company balance sheet. Prior to the enactment of the Financial Accounting Standards Board financial regulation 46 (FIN 46), land development activities were housed in special purpose entities that were not reported on the parent company’s balance sheet. Subsequent to the enactment of FIN 46, ownership of a controlling interest in a special purpose entity requires consolidation of the entity with the parent company. Consequently, most national home builders are receptive to equity participation by unaffiliated third parties in their development projects. Our general partner and its affiliates currently participate in, and intend to continue participating in, FIN 46 compliant structures.
      In a typical development transaction, a developer purchases or obtains an option to purchase a specific parcel of land. Developers must secure financing in order to pay the purchase price for the land as well as to pay expenses incurred while developing the lots. Typically, lenders limit their liability when lending to development projects by refusing to lend in excess of a particular percentage of the value of the property. Developers may obtain additional financing by entering into participation agreements with investors, and national home builders will enter into joint venture agreements to limit their ownership percentage in a development. Participation agreements structured as joint ventures typically establish a joint venture organized as a limited liability company or partnership that will own the parcel of land. In return for cash or a loan to the developer, the investor receives equity in the joint venture entitling the investor to a percentage of the profits upon the sale of developed lots. Participation agreements may also be structured as a contractual right to receive a percentage of the developer’s profits on the sale of the developed lots. By combining bank loans and participation agreements, developers are able to meet lenders’ requirements that the developers retain a specific amount of equity in the project, as well as earn significantly higher returns in part due to lower loan principal amounts and, therefore, lower interest payments.
      Once financing has been secured, the lot developers create individual lots. Developers secure permits allowing the property to be developed and then design and build roads and utility systems for water, sewer, gas and electricity to service the property. Finally, lot developers market and sell the individual lots directly or through real estate professionals to home builders.
      A typical development timeline includes three to six months for the design and approval process, six to nine months for installation of all site improvements, and 24 to 36 months for the sales process. Larger developments (over 100 lots) are usually developed in phases.

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Business of the Partnership
      We expect our loans and credit enhancement offerings will:
  •  produce net interest income from interest on loans;
 
  •  produce a profitable fee from our credit enhancement transactions;
 
  •  produce income through origination fees charged to borrowers;
 
  •  provide cash for distributions to our limited partners; and
 
  •  permit reinvestment of payments of principal, participations, equity investments and interest net of expenses.
      We intend to concentrate on making development loans to single-family lot developers who sell their lots to national and large regional home builders loans and loans to national home builders and entities created by home builders in conjunction with our general partner or affiliates of our general partner for the acquisition of property and development of residential lots. We intend to seek to make or acquire loans primarily with respect to projects where the completed subdivision will consist of homes at or below the median price of the U.S. housing market. As a rule of thumb, real estate lots generally represent 25% of the final cost of residential properties. Based on this general rule, we estimate that the lot price for a median price home would be approximately $55,250.
      We have identified and intend to target as a primary development market lots that have been pre-sold to national or large regional affordable housing builders. We will seek to make or acquire loans primarily in connection with projects where the completed subdivision will consist of homes at or below the median price of the U.S. housing market. We expect these homes to be priced generally between $90,000 and $190,000 and targeted for the first time home buyer or, for the higher priced homes, the so-called “move-up” home buyers. These projects may also include large-scale planned communities, commonly referred to as “master planned communities,” that provide a variety of housing choices, including choices suitable for first time home buyers and move-up home buyers, as well as homes with purchase prices exceeding $200,000.
      We anticipate that the developments that secure substantially all of our loans will consist of both single phase and, where larger parcels of land are involved, multi-phase projects and will be subject to third party land acquisition and development loans representing approximately 70% to 80% of total project costs. These loans will have priority over the loans that we originate or buy which we expect will represent approximately 10% to 20% of total project costs. In each instance, we will require the borrower to cover at least 10% of the total project costs with its own equity investment. We will subordinate our loans if required to comply with the terms of debt from the developer to third-party lenders, thus allowing developers to avail themselves of additional development funding at a lower cost to the developer than our loan. The use of third-party leverage, typically bank debt, at favorable rates allows developers to reduce their overall cost of funds for a project by combining our funds with lower-cost debt. Projects that fail to meet timing projections will increase the developer’s overall cost of funds because the developer will be carrying debt and incurring interest for a longer period than anticipated. Conversely, a developer whose projects sell out ahead of schedule may benefit from a lower overall cost of funds.
      In addition to the risk that a developer’s activities to develop the subject parcels will not be successful or will exceed the developer’s budget, we believe that we will be subject to market-timing risk, or the risk that market conditions will adversely impact the developer’s ability to sell the developed lots at a profit. Economic issues affecting the new home sales market, such as interest rates and employment rates, will affect the demand for lots and therefore also impact the likelihood that a developer will be successful.
      Some of the risks inherent with development financing under this model include: (1) the need to contribute additional capital in the event the market softens and the developer requires additional funding; (2) the reduction of the developer’s incentive if the developer’s profits decrease, which could result as both capital advanced and marketing time increase; and (3) the possibility, in those situations that our returns

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will be less than our projected returns. For a discussion of additional risks, see the section of this prospectus captioned “Risk Factors — Risks Related to an Investment in United Development Funding III, L.P.” beginning on page 21.
      We may also offer to developers credit enhancements in the form of loan guarantees to third-party lenders, letters of credit issued for the benefit of third-party lenders and similar credit enhancements. In the typical credit enhancement transaction, we expect to charge 3% to 7% of the projected maximum amount of our outstanding credit enhancement obligations for each twelve-month period such obligation is outstanding as a credit enhancement fee in addition to any costs that we may incur in providing such enhancement. The actual amount of such charges will be based on the risk perceived by our general partner to be associated with the transaction, the value of the collateral associated with the transaction, our security priority as to the collateral associated with the transaction, the form and term of the credit enhancement, and our overall costs associated with providing the credit enhancement. In the event that any third-party lender requires us to perform under our guarantee, draws down on a letter of credit that we have provided, or otherwise utilizes a credit enhancement that we have provided, the amount we provide to the third-party lender will be added to the outstanding balance under the terms of the loan or investment with the developer and subject to the returns, preferences and security set forth in those documents.
      Our loan and participation transactions will be made with respect to real estate located throughout the United States although we believe that, initially, the majority of our transactions will be made with respect to real estate located in Texas, Arizona and Florida.
Security
      We expect that our real estate loans will generally be secured by:
  •  the parcels of land to be developed;
 
  •  in certain cases, a pledge of some or all of the equity interests in the developer entity; and
 
  •  in certain cases, additional assets of the developer, including parcels of undeveloped and developed real property.
      If there is no third-party financing for a development project, our lien on the subject parcels will be a first priority lien. If there is third-party financing, we expect our lien on the subject parcels will be subordinate to such financing. We will enter each loan prepared to assume or retire any senior debt, if necessary to protect our capital. We will seek to enter into agreements with third-party lenders that will require the third-party lenders to notify us of a default by the developer under the senior debt and allow us to assume or retire the senior debt upon any default under the senior debt.
      We also expect that most of our real estate loans, including loans made to entities affiliated with our general partner, will have the benefit of unconditional guarantees of the developer and/or its parent companies and pledges of additional assets of the developer. We generally do not intend to allow a developer to incur debt that would be junior in right of payment to our debt.
Underwriting Criteria
      We have developed the following underwriting criteria for the loans and investments that we intend to originate and purchase:
  •  Liens. All loans and investments made by us must be evidenced by a note and must be secured (1) by a first or second lien that is insured by a title insurance company or (2) by a commitment as to the priority of the loan or the condition of title; in addition, our loans and investments may be secured by a pledge of all ownership interests of the developer. We expect most of our loans and investments will be secured by a lien and a pledge of all ownership interests in the developer.
 
  •  Interest Rate. We will seek to originate loans bearing interest at rates ranging from 10% to 15% per annum.

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  •  Term and Amortization. We do not expect to establish a minimum or maximum term for our loans. Loans will generally be structured as interest-only notes with balloon payments or reductions to principal tied to net cash from the sale of developed lots and the release formula created by the senior lender, i.e., the conditions under which principal is repaid to the senior lender, if any. We do not expect our loans to amortize.
 
  •  Geographical Boundaries. We may buy or originate loans in any of the 48 contiguous United States. However, we expect that, initially, the majority of our loans will originate from Texas, Arizona and Florida.
      The principal amounts of our loans and the number of loans we make will be affected by market availability and will depend upon the amount of net offering proceeds available to us from the sale of units. If we realize less than the maximum net offering proceeds, we will reduce the number of loans in which we intend to invest. At this time, we cannot predict the minimum size of our portfolio because this will depend in large part on the number of units we sell in this offering.
Loans to Our General Partner and Its Affiliates
      Many large national homebuilders develop lots for their own consumption through land development affiliate companies. Due to accounting and reporting requirements for the development entities, most national homebuilders are receptive to equity participation by unaffiliated third parties. The equity participations generally take the form of a joint venture or partnership wherein each party contributes equity and guarantees some or all of the acquisition and development loan. Our general partner and its affiliates, UDF I and UDF II, currently participate and intend to continue participating in equity participations with national home builders. Because these equity participations generally involve leverage, we do not intend to participate in them. However, we are not prohibited from engaging in equity participations, nor are we prohibited from using leverage if our general partner determines that it would be in our best interests to do so. The use of leverage would create UBTI for our tax-exempt investors. See “Federal Income Tax Considerations — Investment by Qualified Plans and Other Tax-Exempt Entities — Unrelated Business Taxable Income.” If we did choose to participate in a joint venture as opposed to making a loan to such joint venture, we would do so because the equity participation that we are offered provides a greater projected return than what we would be able to obtain if we simply loaned our funds to the joint venture. This would be applicable if a projected return from an offered equity participation would be usurious if we instead loaned our funds to the joint venture. Moreover, it is possible that part of the consideration for our loan to a joint venture may be an equity participation in such joint venture.
      Loans or credit enhancements will be made or provided to affiliates of our general partner in circumstances that our general partner or its affiliate is participating in a joint venture with a developer or homebuilder to facilitate a FIN 46 compliant structure. Generally, a party who controls a majority of the voting interests of another entity is required to consolidate the assets and liabilities of such other entity with such party’s assets and liabilities on such party’s financial statements. FIN 46 provides an exception to this general rule if either (a) the entity, in order to conduct its business, requires additional funds above its contributed equity capital and such additional funds are subordinate to the equity capital contributed to the entity or (b) the equity owners in such entity do not have significant control of the entity. If either of those two factors is present, then the person that is the primary beneficiary of the interests in the entity will be required to consolidate the assets and liabilities of such entities with such owner’s assets and liabilities. A “primary beneficiary” is generally the person who is ultimately entitled to the economic benefits and losses from the entity and is not necessarily an equity owner of the entity. Affiliates of the general partner intend to form joint ventures with developers or homebuilders and to structure such joint ventures so that either of the two factors referenced above that result in the applicability of FIN 46 is not present or so that such homebuilders or developers are not the primary beneficiaries of such entities, and therefore, not required to consolidate the assets and liabilities of the joint venture (including any loan made by us to such joint venture) with such developers’ or homebuilders’ assets and liabilities. Loans or

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credit enhancements will be made or provided to affiliates of our general partner (or entities which affiliates of our general partner holds an interest) only if:
  •  the loan or credit enhancement includes each of the following terms:
  —  the loan or credit enhancement is secured by a first or junior lien on residential real estate;
 
  —  the loan or credit enhancement amount, inclusive of first and junior indebtedness provided by us, shall not exceed 80% of the appraised value of the property securing the indebtedness;
 
  —  the affiliate may not own more than 50% of the borrowing entity;
 
  —  the borrowing entity must provide a minimum equity contribution of not less than 20% of the property acquisition price or acquisition price and development costs;
 
  —  the loan or credit enhancement rate of interest shall not be less than the highest rate charged by us to unaffiliated borrowers; and
 
  —  the loan or credit enhancement provides recourse to the borrower not less than 100% of the loan or credit enhancement amount; or
  •  an independent advisor issues an opinion to the effect that the proposed loan or credit enhancement to an affiliate of our general partner is fair and at least as favorable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances. In addition, our general partner will be required to obtain a letter of opinion from the independent advisor in connection with any disposition, renegotiation, or other subsequent transaction involving loans or credit enhancements made to our general partner or an affiliate of our general partner. The independent advisors from whom we expect to request fairness opinions are Henry S. Miller Investment Banking Group, Value, Inc. and Jackson, Claborn, Inc. The independent advisor’s compensation must be paid by our general partner and not be reimbursable by us.
Underwriting Procedures
      In determining whether to make or purchase loans, or to enter into joint ventures, we will generally engage in a four-part evaluation and oversight process consisting of:
  •  Economic Feasibility Study, or “EFS”;
 
  •  Engineering Due Diligence, or “EDD”;
 
  •  Exit Strategies Analysis, or “ESA”; and
 
  •  Construction Supervision Oversight, or “CSO.”
      In order to meet the EFS criteria in a loan transaction, the development project generally must support the cost of our loan, by using the developer’s financial projections, and the cost of supporting our loan must represent less than 25% of the developer’s projected total profit from the project. When the preceding criteria are met, we will meet with the developer to review the project. This review is structured to determine if the developer can justify all of the assumptions and estimates of the project. The EDD is conducted by an independent land planning and civil engineering firm and includes review of appropriate planning and public works approvals; proper permitting for flood plain, highways and streets; payment of construction, impact and inspection fees; any optional approvals affecting aquifers, endangered species, wetlands, forests and historical or archeological sites; determination of engineering readiness including construction plans, geotechnical reports and erosion control; utility access review for gas, electric, telephone and cable television; determination of construction readiness including contractor and sub-contractor selections, bonding, legal agreements, scheduling, site preparation and approvals for construction or drainage easements; and a complete review of all project construction costs with comparisons to similar projects.

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      Following the EDD process, the ESA is conducted. This process includes review of lot purchase contracts, evaluation of all market absorption data, current economic conditions, trends and projections in housing starts and risk analysis. Alternative buyers and uses for the lots are identified and various pricing models to facilitate sales in a soft market are evaluated. Before we will extend a loan, we must be satisfied that the project can be completed per the developer’s projections and that there is sufficient equity and collateral to minimize the capital risk to us.
      Once final approval has been granted, we retain an affiliated construction manager or a third-party construction management firm to conduct CSO. Such affiliated construction manager or third-party firm will be responsible for overseeing site improvements, senior debt draws and application of funds and administration of development contracts. Once site improvements are complete and the developer has begun to market lots, we monitor sales and corresponding debt repayment rates.
Borrowing Policies
      We may borrow money to fund loans when our general partner determines that it is advantageous to us. Although we do not have any current intention to use leverage to fund loans, if our general partner determines to do so in the future, we expect that at any time the total amount of indebtedness we will incur will not exceed 50% of our total invested capital. If we operate on a leveraged basis, we expect that we will have more funds available to fund loans and other investments. This would allow us to make or acquire more loans and investments than would otherwise be possible, resulting in a more diversified portfolio. However, our use of leverage would increase our risk of loss because defaults on indebtedness secured by our assets may result in lenders initiating foreclosure of our assets. See “Risk Factors — Risks Related to the Mortgage Lending Business — If we borrow money to make loans or for other permitted purposes, your risks will increase if defaults occur.”
      Section 11.2(a) of our partnership agreement authorizes us to borrow funds up to an amount equal to 70% of the aggregate fair market value of all of our mortgage assets. We may borrow funds from our general partner or its affiliates only if the following qualifications are met:
  •  any such borrowing cannot constitute a “financing” as that term is defined under the NASAA Guidelines, i.e., indebtedness encumbering partnership properties or incurred by the partnership, the principal amount of which is scheduled to be paid over a period of not less than 48 months, and not more than 50% of the principal amount of which is scheduled to be paid during the first 24 months;
 
  •  interest and other financing charges or fees must not exceed the amounts that would be charged by unrelated lending institutions on comparable financing for the same purpose in the same locality as our principal place of business; and
 
  •  no prepayment charge or penalty shall be required. See Section 18.2 of our partnership agreement, which is included as Exhibit B of this prospectus.
Sale and Securitization of Assets
      We anticipate that from time to time we may be able to increase our yield through the sale or securitization and sale of portions of our loan assets. Possible reasons for the sale of our loan assets include:
  •  enabling us to realize a gain from the sale of the assets;
 
  •  increasing our yield on securitized asset pools;
 
  •  redeploying our capital in higher yield loans;
 
  •  accelerating the return from a loan;
 
  •  limiting risk in a slowing economic climate;

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  •  increasing liquidity for our limited partners; and
 
  •  reducing our borrowings.
      Our general partner will exercise its discretion as to whether or not to sell or securitize and sell any of our loans.
Investment Limitations
      We will not invest as a general or limited partner in other limited partnerships except under limited circumstances permitted under our partnership agreement and the NASAA Guidelines.
      We will not underwrite securities of other issuers or invest in securities of other issuers for the purpose of exercising control. Notwithstanding the foregoing, we may invest in joint ventures or partnerships and in corporations in which real estate is the principal asset, provided that such acquisition can best be effected by the acquisition of the securities of such corporation, subject to the limitations set forth below.
      We will not engage in any of the following activities:
  •  acquire assets in exchange for limited partnerships interests;
 
  •  issue units of limited partnership interest after the termination of this offering; or
 
  •  make loans to our general partner or its affiliates, except as permitted by our partnership agreement and the NASAA Guidelines. See “Conflicts of Interest — Loans to Affiliates of our General Partner.”
      Our general partner will continually review our investment activity to attempt to ensure that we do not come within the application of the Investment Company Act of 1940, as amended. Among other things, our general partner will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an “investment company” under the Investment Company Act.

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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
      Our development loans will ordinarily be secured by a first or second priority lien on the real estate being developed. This lien will take the form of a mortgage, deed of trust or other security instrument. The following discussion contains summaries of certain legal aspects of mortgage loans that are general in nature. Because many of the legal aspects of mortgage loans are governed by applicable state laws (which vary substantially from state to state), the following summaries do not purport to be complete, to reflect the laws of any particular state, to reflect all of the laws applicable to any particular mortgage loan or to encompass the laws of all states in which the properties securing mortgage loans in which we might invest are situated. It is instead intended to be a general discussion of the significant legal principles and regulations that could affect us as a mortgage lender. The summaries are qualified in their entirety by reference to the applicable federal, state and local laws governing mortgage loans and their enforcement.
Mortgages and Deeds of Trust Generally
      Mortgage loans are secured by either mortgages or deeds of trust or other similar security instruments, depending upon the prevailing practice in the state in which the mortgaged property is located. There are two parties to a mortgage: the mortgagor, who is the borrower and owner of the mortgaged property, and the mortgagee, who is the lender. In a mortgage transaction, the mortgagor delivers to the mortgagee a note, bond or other written evidence of indebtedness and a mortgage. A mortgage creates a lien upon the real property encumbered by the mortgage as security for the obligation evidenced by the note, bond or other evidence of indebtedness. Although a deed of trust is similar to a mortgage, a deed of trust has three parties, the borrower-property owner called the trustor (similar to a mortgagor), a lender called the beneficiary (similar to a mortgagee), and a third-party grantee called the trustee. Under a deed of trust, the borrower grants the property, until the debt is paid to the trustee in trust for the benefit of the beneficiary to secure payment of the obligation. A deed of trust generally provides the trustee with a power of sale if the borrower defaults in the payment of the obligation. The trustee’s authority under a deed of trust and the mortgagee’s authority under a mortgage are governed by applicable law, the express provisions of the deed of trust or mortgage, and, in some cases, the direction of the beneficiary.
      The real property covered by a mortgage is most often the fee estate in land and improvements. However, a mortgage may encumber other interests in real property such as a tenant’s interest in a lease of land and improvements and the leasehold estate created by such lease. A mortgage covering an interest in real property other than the fee estate requires special provisions in the instrument creating such interest or in the mortgage to protect the mortgagee against termination of such interest before the mortgage is paid.
      The priority of liens on real estate created by mortgages and deeds of trust depends on their terms and, generally, on the order of filing with a state, county or municipal office, although such priority may in some states be altered by the mortgagee’s or beneficiary’s knowledge of unrecorded liens against the mortgaged property. However, filing or recording does not establish priority over governmental claims for real estate taxes and assessments. In addition, the Internal Revenue Code of 1986, as amended, provides priority to certain tax liens over the lien of the mortgage.
      Foreclosure of a mortgage is generally accomplished by judicial actions initiated by the service of legal pleadings upon all necessary parties having an interest in the real property. Delays in completion of foreclosure may occasionally result from difficulties in locating all necessary parties to the lawsuit. When the mortgagee’s right to foreclose is contested, the legal proceedings necessary to resolve the issue can be time-consuming. A judicial foreclosure may be subject to most of the delays and expenses of other litigation, sometimes requiring up to several years to complete. At the completion of the judicial foreclosure proceedings, if the mortgagee prevails, the court ordinarily issues a judgment of foreclosure and appoints a referee or other designated official to conduct the sale of the property. These sales are made in accordance with procedures that vary from state to state. The purchaser at this sale acquires the estate or interest in real property covered by the mortgage.
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generally following a request from the beneficiary/lender, to sell the property to a third party upon any default by the borrower under the terms of the note or deed of trust. A number of states also require that a lender provide notice of acceleration of a note to the borrower. Notice requirements under a trustee’s sale vary from state to state. In some states, the trustee must record a notice of default and send a copy to the borrower-trustor and to any person who has recorded a request for a copy of a notice of default and notice of sale. In addition, the trustee must provide notice in some states to any other individual having an interest in the real property, including any junior lien holders. In some states, the borrower, or any other person having a junior encumbrance on the real estate, may, during a reinstatement period, cure the default by paying the entire amount in arrears plus the costs and expense incurred in enforcing the obligations. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys’ fees, which may be recovered by a lender. If the deed of trust is not reinstated, a notice of sale must be posted in a public place and, in most states, published for a specific period of time in one or more newspapers. In addition, some state laws require that a copy of the notice of sale be posted at the property and sent to all parties having an interest in the real property.
      In case of foreclosure under either a mortgage or deed of trust, the sale by the referee or other designated official or by the trustee is often a public sale. However, because of the difficulty a potential buyer at the sale might have in determining the exact status of title to the property subject to the lien of the mortgage or deed of trust and the redemption rights that may exist (see “— Statutory Rights of Redemption” below), and because the physical condition of the property may have deteriorated during the foreclosure proceedings and/or for a variety of other reasons (including exposure to potential fraudulent transfer allegations), a third party may be unwilling to purchase the property at the foreclosure sale. For these and other reasons, it is common for the lender to purchase the property from the trustee, referee or other designated official for an amount equal to the outstanding principal amount of the indebtedness secured by the mortgage or deed of trust, together with accrued, and unpaid interest and the expenses of foreclosure, in which event, if the amount bid by the lender equals the full amount of such debt, interest and expenses, the mortgagee’s debt will be extinguished. Thereafter, the lender will assume the burdens of ownership, including paying operating expenses and real estate taxes and making repairs. The lender is then obligated as an owner until it can arrange a sale of the property to a third party. The lender will commonly obtain the services of a real estate broker and pay the broker’s commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender’s investment in the property. Moreover, a lender commonly incurs substantial legal fees and court costs in acquiring a mortgaged property through contested foreclosure, forfeiture and/or bankruptcy proceedings. Furthermore, an increasing number of states require that any environmental hazards be eliminated before a property may be resold, and a lender may be responsible under federal or state law for the cost of cleaning up a mortgaged property that is environmentally contaminated. See “— Environmental Laws” below. As a result, a lender could realize an overall loss on a mortgage loan even if the related mortgaged property is sold at foreclosure or resold after it is acquired through foreclosure for an amount equal to the full outstanding principal amount of the mortgage loan, plus accrued interest.
      In foreclosure proceedings, some courts have applied general equitable principles. These equitable principles are generally designed to relieve the borrower from the legal effects of the borrower’s defaults under the loan documents. Examples of judicial remedies that have been fashioned include judicial requirements that the lender undertake affirmative and expensive actions to determine the causes of the borrower’s default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lender’s judgment and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from temporary financial disability. In other cases, courts have limited the right of the lender to foreclose if the default under the mortgage instrument is not monetary, such as the borrower’s failing to adequately maintain the property or the borrower’s executing a second mortgage or deed of trust affecting the property in violation of the provisions of the first mortgage or deed of trust. Finally, some courts have been faced with the issue of whether or not federal or state constitutional provisions reflecting due process concerns for adequate notice require that borrowers under mortgages receive notices in addition to the statutorily-prescribed

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requirements. For the most part, these cases have upheld the notice provisions as being reasonable or have found that the sale under a deed of trust or a mortgage having a power of sale does not involve sufficient state action to afford constitutional protection to the borrower.
Applicability of Usury Laws
      State and federal usury laws limit the interest that lenders are entitled to receive on a mortgage loan. In determining whether a given transaction is usurious, courts may include charges in the form of “points” and “fees” as “interest,” but may exclude payments in the form of “reimbursement of foreclosure expenses” or other charges found to be distinct from “interest.” Where possible, we intend to elect to have our loans be governed by Nevada law, which does not limit the amount of interest that parties may agree to in writing. The election to be governed by Nevada law, therefore, will allow us to extend loans that will earn our targeted return. However, we may not always be able to elect to have Nevada law govern our loans. In addition, even if we believe Nevada law should govern a particular loan, a court may find that the law of another state, which imposes limits on interest, applies, and that our loan violates that law. If the amount charged for the use of the money loaned is found to exceed a statutorily established maximum rate, the form employed and the degree of overcharge are both immaterial to the determination that the loan is usurious. Statutes differ in their provision as to the consequences of a usurious loan. One group of statutes requires the lender to forfeit the interest above the applicable limit or imposes a specified penalty. Under this statutory scheme, the borrower may have the recorded mortgage or deed of trust cancelled upon paying its debt with lawful interest, or the lender may foreclose, but only for the debt plus lawful interest. Under a second, more severe type of statute, a violation of the usury law results in the invalidation of the transaction, thereby permitting the borrower to have the recorded mortgage or deed of trust cancelled without any payment (thus prohibiting the lender from foreclosing). See “Risk Factors — Risks Related to the Mortgage Lending Business — If we were found to have violated applicable usury laws, we would be subject to penalties and other possible risks.”
Environmental Laws
      Real property pledged as security to a lender may be subject to potential environmental risks. Such environmental risks may give rise to a diminution in value of property securing any mortgage loan or, as more fully described below, liability for cleanup costs or other remedial actions, which liability could exceed the value of such property or the principal balance of the related mortgage loan. In certain circumstances, a lender may choose not to foreclose on contaminated property rather than risk incurring liability for remedial actions.
      Under the laws of certain states, the owner’s failure to perform remedial actions required under environmental laws may in certain circumstances give rise to a lien on mortgaged property to ensure the reimbursement of remedial costs. In some states such lien law gives priority over the lien of an existing mortgage against such property. Because the costs of remedial action could be substantial, the value of a mortgaged property as collateral for a mortgage loan could be adversely affected by the existence of an environmental condition giving rise to a lien.
      Under limited circumstances, secured lenders may be liable for the costs of investigation and cleanup of contaminated property. Pursuant to CERCLA and similar state laws, current or previous owners or operators of real property are liable for the cost of investigation, removal or remediation of hazardous substances at their properties. CERCLA contains a secured creditor exemption that eliminates owner and operator liability for lenders who hold indicia of ownership in a contaminated property primarily to protect their security interest in that property, provided the lender does not participate in the management of the property. Although a lender may not exercise day-to-day control over environmental compliance issues at the facility, a lender may require a borrower to inspect or clean up the property without triggering CERCLA liability. A lender may also foreclose on the property without triggering CERCLA liability, provided the lender seeks to divest itself of the facility at the earliest practicable, commercially reasonable time, on commercially reasonable terms. However, even if a lender does not incur CERCLA liability, the diminished value of a contaminated property may significantly impact and in some cases negate the value

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of the lien. The secured lender liability protection under CERCLA varies somewhat under individual state laws.
      We intend to generally require that a Phase I environmental assessment be conducted on all property before we originate or purchase a development loan with respect to such property. We also expect to receive an endorsement letter from the firm that conducts the environmental assessment allowing us to rely on such assessment as a condition to funding the loan. Phase I environmental site assessments are intended to evaluate information regarding the environmental condition of the surveyed property and surrounding properties based generally on visual observations, interviews and certain publicly available databases. These assessments do not typically take into account all environmental issues including, but not limited to, testing of soil or groundwater or the possible presence of asbestos, lead-based paint, radon, wetlands or mold.
      “Hazardous substances” are generally defined as any dangerous, toxic or hazardous pollutants, chemicals, wastes or substances, including, without limitation, those identified pursuant to CERCLA or any other environmental laws, and specifically include, without limitation, gasoline, diesel fuel, fuel oil, petroleum hydrocarbons, asbestos and asbestos-containing materials, polychlorinated biphenyls, radon gas, and urea formaldehyde foam insulation.
      If a secured lender becomes liable for cleanup costs, it may bring an action for contribution against the current owners or operators, the owners or operators at the time of on-site disposal activity or any other party who contributed to the environmental hazard. Such persons or entities may be bankrupt or otherwise judgment-proof, however, and recovery cannot be guaranteed. A contribution action against the borrower may be adversely affected by the limitations on recourse in the loan documents. Similarly, in some states anti-deficiency legislation and other statutes requiring the lender to exhaust its security before bringing a personal action against the borrower may curtail the lender’s ability to recover environmental cleanup and other related costs and liabilities incurred by the lender. For more discussion of some of the risks associated with environmentally impacted properties, see “Risk Factors — General Risks Related to Investments in Real Estate — 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.”
Junior Mortgages and Deeds of Trust; Rights of Senior Mortgages or Beneficiaries
      Priority of liens on mortgaged property created by mortgages or deeds of trust depends on their terms and, generally, on the order of filing with a state, county or municipal office, although priority may in some states be altered by the mortgagee’s or beneficiary’s knowledge of unrecorded liens, leases or encumbrances against the mortgaged property. However, filing or recording does not establish priority over governmental claims for real estate taxes and assessments or, in some states, for reimbursement of remediation costs of certain environmental conditions. In addition, the Internal Revenue Code provides priority to certain tax liens over the lien of a mortgage. State law also may provide priority to certain mechanic’s, materialmen’s and workmen’s liens over a mortgage lien.
      We expect that we will be the junior lender with respect to many of our loans. Our rights as mortgagee or beneficiary under a junior mortgage or deed of trust will be subordinate to those of the mortgagee or beneficiary under the senior mortgage or deeds of trust, including the prior rights of the senior mortgagee or beneficiary to receive rents, hazard insurance and condemnation proceeds and to cause the property securing the mortgage loan to be sold upon default of the mortgagor, thereby extinguishing the junior mortgagee’s or beneficiary’s lien, unless we assert our subordinate interest in foreclosure litigation or cure the defaulted senior loan. As discussed more fully below, in many states a junior mortgagee may cure a defaulted senior loan in full, adding the amounts expended to the balance due on the junior loan. Absent a provision in the senior mortgage, no notice of default is generally required to be given to the junior mortgagee or beneficiary. In situations where our loan will be a junior loan, we will seek to enter into agreements with the senior lender that give us the right to receive notice of default by the borrower on the senior loan and the right to retire or assume the senior loan upon such default. For a discussion of some of the risks associated with being the junior lender, see “Risk Factors — Risks Related

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to the Mortgage Lending Business — Investments in second and wraparound mortgage loans present additional risks compared to loans secured by first deeds of trust.”
      The form of mortgage or deed of trust used by many institutional lenders confers on the mortgagee or beneficiary the right both to receive proceeds collected under any hazard insurance policy and awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the mortgage or deed of trust, in such order as the mortgagee may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the mortgagee or beneficiary under the senior mortgage or deed of trust will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation and to apply the same to the indebtedness secured by the senior mortgage or deed of trust. Proceeds in excess of the amount of the senior indebtedness will, in most cases, be applied to the indebtedness secured by a junior mortgage or deed of trust. The laws of certain states may limit the ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance and partial condemnation awards to the secured indebtedness. In such states, the mortgagor or trustor must be allowed to use the proceeds of hazard insurance to repair the damage unless the security of the mortgagee or beneficiary has been impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled to the award for a partial condemnation of the real property security only to the extent that its security is impaired. Where our loan is subordinate to a senior lender, we will not receive any proceeds from insurance payouts or awards of damages that are available to be paid to secured lenders until the debt to the senior lender has been satisfied in full.
      The form of mortgage or deed of trust used by many institutional lenders typically contains a “future advances” clause, which provides that additional amounts advanced to or on behalf of the mortgagor or trust or by the mortgagee or beneficiary are to be secured by the mortgage or deed of trust. While such a clause is valid under the laws of most states, the priority of any advance made under the clause depends, in some states, on whether the advance was an “obligatory” or “optional” advance. If the mortgagee or beneficiary is obligated to advance the additional amounts, the advance may be entitled to receive the same priority as amounts initially made under the mortgage or deed of trust, notwithstanding that there may be intervening junior mortgages or deeds of trust and other liens between the date of recording of the mortgage or deed of trust and the date of the future advance, and notwithstanding that the mortgagee or beneficiary had actual knowledge of such intervening junior mortgages or deeds of trust and other liens at the time of the future advance. Where the mortgagee or beneficiary is not obligated to advance the additional amounts and has actual knowledge of the intervening junior mortgages or deeds of trust and other liens, the additional advance may be subordinate to such intervening junior mortgages or deeds of trust and other liens. Priority of advances under a “future advance” clause rests, in other states, on state law giving priority to advances made under the loan agreement up to a “credit limit” amount stated in the recorded mortgage or deed of trust.
      Another provision typically found in the forms of mortgages and deeds of trust used by many institutional lenders obligates the mortgagor or trustor to pay before delinquency all taxes and assessments on the property and, when due, all encumbrances, charges and liens on the property that appear prior to the mortgage, to provide and maintain fire insurance on the property, to maintain and repair the property and not to commit or permit any waste thereof, and to appear in and defend any action or proceeding purporting to affect the property or the rights of the mortgagee under the mortgage. Upon a failure of the mortgagor or trustor to perform any of these obligations, the mortgagee or beneficiary is given the right under the mortgage or deed of trust to perform the obligation itself, at its election, with the mortgagor or trustor agreeing to reimburse the mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary on behalf of the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary become part of the indebtedness secured by the mortgage.
Statutory Rights of Redemption
      In some states, after a foreclosure sale pursuant to a mortgage or deed of trust, the borrower and certain foreclosed junior lien holders are given a statutory period in which to redeem the property from the

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foreclosure sale. In some states, redemption may occur only upon payment of the entire principal balance of the loan, accrued interest and expenses of foreclosure. In other states, redemption may be authorized if the borrower pays only a portion of the sums due. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property. The right of redemption may defeat the title of any purchaser at a foreclosure sale or any purchaser from the lender subsequent to a foreclosure sale. Certain states permit a lender to avoid a post-sale redemption by waiving its right to a deficiency judgment. Consequently, the practical effect of the redemption right is often to force the lender to retain the property and pay the expenses of ownership until the redemption period has run. Under the laws of some states, mortgages under contracts for deed may also have a post-foreclosure right of redemption, and a mortgagor with a sufficient equity investment in the property may be permitted to share in the proceeds of any sale of the property after the indebtedness is paid or may otherwise be entitled to a prohibition of the enforcement and the forfeiture clause.
Bankruptcy Laws
      Statutory provisions, including the Federal Bankruptcy Code and state laws affording relief to debtors, may interfere with and delay the ability of the secured mortgage lender to obtain payment of the loan, to realize upon collateral and/or to enforce a deficiency judgment. Under the Bankruptcy Code, virtually all actions (including foreclosure actions and deficiency judgment proceedings) are automatically stayed upon the filing of a bankruptcy petition, and often no interest or principal payments are made during the course of the bankruptcy proceeding. The delay and consequences thereof caused by such an automatic stay can be significant. However, the automatic stay can be lifted unless the debtor can provide adequate security to the creditor, usually in the form of post-petition payments on the debt. Also, under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a junior lien holder, including, without limitation, any junior mortgagee, may stay the senior lender from taking action to foreclose that junior lien.
      Under the Bankruptcy Code, provided certain substantive and procedural safeguards for the lender are met, the amount and terms of a mortgage secured by property of the debtor may be modified under certain circumstances. The outstanding amount of the loan secured by the real property may be reduced to the then current value of the property (with a corresponding partial reduction of the amount of the lender’s security interest) pursuant to a confirmed plan or lien avoidance proceeding, thus leaving the lender in the position of a general unsecured creditor for the difference between such value and the outstanding balance of the loan. Other modifications may include a reduction in the amount of each monthly payment, which reduction may result from a reduction in the rate of interest and/or the alteration of the repayment schedule (with or without affecting the unpaid principal balance of the loan), and/or an extension (or reduction) of the final maturity date. Some courts with federal bankruptcy jurisdiction have approved plans, based on the particular facts of the reorganization case, that effected the curing of a mortgage loan default by paying arrearage over a number of years. Also, under the Bankruptcy Code, a bankruptcy court may permit a debtor through its rehabilitative plan to decelerate a secured loan and to reinstate the loan even though the lender accelerated the mortgage loan and final judgment of foreclosure had been entered in state court (provided no sale of the property had yet occurred) prior to the filing of the debtor’s petition. This may be accomplished even if the full amount due under the original loan is never repaid. Other types of significant modifications to the terms of the mortgage or deed of trust may be acceptable to the bankruptcy court, often depending on the particular facts and circumstances of the specific case.
      In a bankruptcy or similar proceeding, action may be taken seeking the recovery as a preferential transfer of any payments made by the mortgagor to the lender under the related mortgage loan. Payments on long-term debt may be protected from recovery as preferences if they are payments in the ordinary course of business made on debts incurred in the ordinary course of business. Whether any particular payment would be protected depends upon the facts specific to a particular transaction.

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Enforceability of Certain Provisions
Acceleration on Default
      We may extend loans that contain a “debt acceleration” clause, which permits the lender to accelerate the full debt upon a monetary or non-monetary default by the borrower. In the event that we decide to exercise the debt acceleration clause, our right to receive payment or foreclose our interest in, and take possession of, the collateral will be subordinate to the rights of the senior lender. Typically, we will be required to assume the senior debt or ensure that the senior debt is repaid before we may fully exercise the debt acceleration provisions in our loans.
      The courts of most states will enforce clauses providing for acceleration in the event of a material payment default after giving effect to any appropriate notices. The equity courts of any state, however, may refuse to foreclose a mortgage or deed of trust when an acceleration of the indebtedness would be inequitable or unjust or the circumstances would render the acceleration unconscionable. Furthermore, in some states, the borrower may avoid foreclosure and reinstate an accelerated loan by paying only the defaulted amounts and the costs and attorneys’ fees incurred by the lender in collecting such defaulted payments.
      State courts also are known to apply various legal and equitable principles to avoid enforcement of the forfeiture provisions of installment contracts. For example, a lender’s practice of accepting late payments from the borrower may be deemed a waiver of the forfeiture clause. State courts also may impose equitable grace periods for payment of arrearage or otherwise permit reinstatement of the contract following a default. Not infrequently, if a borrower under an installment contract has significant equity in the property, equitable principles will be applied to reform or reinstate the contract or to permit the borrower to share the proceeds upon a foreclosure sale of the property if the sale price exceeds the debt.
Secondary Financing: Due-on-Encumbrance Provisions
      Some mortgage loans have no restrictions on secondary financing, thereby permitting the borrower to use the mortgaged property as security for one or more additional loans. Some mortgage loans may preclude secondary financing (often by permitting the first lender to accelerate the maturity of its loan if the borrower further encumbers the mortgaged property) or may require the consent of the senior lender to any junior or substitute financing. However, such provisions may be unenforceable in certain jurisdictions under certain circumstances.
      Where the borrower encumbers the mortgaged property with one or more junior liens, the senior lender is subject to additional risk. First, the borrower may have difficulty servicing and repaying multiple loans. Second, acts of the senior lender that prejudice the junior lender or impair the junior lender’s security may create a superior equity in favor of the junior lender. Third, if the borrower defaults on the senior loan and/or any junior loan or loans, the existence of junior loans and actions taken by junior lenders can impair the security available to the senior lender and can interfere with, delay and in certain circumstances even prevent the taking of action by the senior lender. Fourth, the bankruptcy of a junior lender may operate to stay foreclosure or similar proceedings by the senior lender.

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MANAGEMENT
General
      We operate under the direction of our general partner, UMTHLD, which is responsible for the management and control of our affairs. Our general partner will be assisted by the employees of UMTH General Services, L.P., an affiliate of our general partner. The general partner of UMTH General Services, L.P. is UMT Services, Inc. We do not employ our own management personnel. Instead, we pay fees to our general partner for its services to us.
      Our general partner will be responsible for our direction and management, including identifying prospective loans, evaluating, underwriting and negotiating the acquisition and disposal of loans and overseeing the performance of our loans. The powers and duties of the general partner are described in Article XI of our partnership agreement. The compensation payable to the general partner for performance of its duties is set forth in “Compensation of our General Partner and Its Affiliates” and Article XII of our partnership agreement. A complete copy of our partnership agreement is included as Exhibit B to this prospectus.
      A change in our management may be accomplished by removal of our general partner or the designation of a successor or additional general partner, in each case in accordance with the provisions of our partnership agreement. Our partnership agreement provides that a general partner may be removed and a new general partner elected upon the written consent or affirmative vote of limited partners owning more than 50% of the limited partnership interests. Our partnership agreement further provides that a general partner may designate a successor or additional general partner with the consent of the general partner and limited partners holding more than 50% of the limited partnership interests. Generally, except in connection with such a designation, the general partner shall not have the right to retire or withdraw voluntarily from us or to sell, transfer or assign its interest without the consent of the limited partners holding more than 50% of the limited partnership interests. See “Summary of Partnership Agreement.”
Our General Partner
      Our general partner, UMTHLD, is a Delaware limited partnership formed in March 2003. The executive offices of our general partner are located at 1702 N. Collins Boulevard, Suite 100, Richardson, Texas 75080. UMT Holdings holds 99.9% of the limited partnership interests in our general partner. UMT Services serves as the general partner of our general partner. Todd F. Etter and Hollis M. Greenlaw together own 100% of UMT Services.
      Our general partner serves as the asset manager for UDF I and UDF II and will act as our sole general partner. Financial statements of our general partner are included in this prospectus beginning on page F-8. As of December 31, 2005, the net worth of our general partner was approximately $3.71 million on a generally accepted accounting principles basis; however, the net worth of our general partner consists primarily of its interest in UDF I and UDF II and, therefore, does not represent liquid assets. See “Risk Factors — Risks Related to an Investment in United Development Funding III, L.P. — Our general partner has a limited net worth consisting of assets that are not liquid, which may adversely affect the ability of our general partner to fulfill its financial obligations to us.”
      Todd F. Etter and Hollis M. Greenlaw are our promoters and the directors of our general partner.
Key Personnel
      We are managed by the key personnel of our general partner, UMTHLD. Our general partner provides certain services to us, including identifying prospective loans and investments, evaluating, underwriting and negotiating the acquisition and disposal of loans and investments and overseeing the

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performance of our loans. The following key personnel hold the positions noted below with our general partner and its affiliates:
             
Name   Age   Position with Our General Partner
         
Todd F. Etter
    56     Director of UMT Services, its general partner
Hollis M. Greenlaw
    41     Director of UMT Services, its general partner
Michael K. Wilson
    43     Director of UMT Services, its general partner
Jeff W. Shirley
    47     President and Chief Executive Officer
Cara D. Obert
    36     Chief Financial Officer of UMT Holdings, its limited partner
Christine A. Griffin
    53     Secretary
      Mr. Etter and Mr. Greenlaw are directors, officers and shareholders of UMT Services and UMT Holdings. Mr. Etter, Mr. Greenlaw and Ms. Griffin are partners of UMT Holdings. Mr. Etter, Mr. Greenlaw and Ms. Griffin are shareholders of the general partner of UDF I. Mr. Etter, Mr. Greenlaw and Ms. Griffin are also officers of the general partner of UDF II.
      Theodore “Todd” F. Etter, Jr. Mr. Etter serves as a director of our general partner. Mr. Etter has served as a partner and Chairman of UMT Holdings, the parent company of our general partner and as Vice President and a Director of UMT Services, the general partner of UMT Holdings and our general partner, since March 2003. Also since March 2003, Mr. Etter has served as Chairman and Vice President of UMT Services, the general partner of UMT Holdings and our general partner, and as Chairman of UMT Funding. UMT Holdings, through its subsidiaries, UMTH Lending, UMTHLD and UMTH Funding, originates, purchases, sells and services interim loans for the purchase and renovation of single-family homes, land development loans and real estate related corporate finance services. Mr. Etter serves as President of the general partner of UDF I and as Chairman of the general partner of UDF II, each of which are limited partnerships formed to originate, purchase, sell and service land development loans and equity participations. See “Prior Performance Summary.” Since 2000, Mr. Etter has been the Chairman of UMT Advisors, Inc., advisor to United Mortgage Trust, and since 1996, he has been Chairman of Mortgage Trust Advisors, Inc., which served as the advisor to United Mortgage Trust from 1996 to 2000. Mr. Etter has overseen the growth of United Mortgage Trust from its inception in 1997 to over $150 million in capital. Since 1998, Mr. Etter has been a 50% owner of and has served as a director of Capital Reserve Corp. Since 2002, he has served as an owner and director of Ready America Funding Corp. Both Capital Reserve Corp. and Ready America Funding Corp. are Texas corporations that originate, sell and service mortgage loans for the purchase, renovation and construction of single-family homes. In 1992, Mr. Etter formed, and since that date has served as President of, South Central Mortgage, Inc. (SCMI), a Dallas, Texas-based mortgage banking firm. In July 2003, Mr. Etter consolidated his business interests in Capital Reserve Corp., Ready America Funding Corp. and SCMI into UMT Holdings. From 1980 through 1987, Mr. Etter served as a Principal of South Central Securities, an NASD member firm. In 1985, he formed South Central Financial Group, Inc., a Dallas, Texas-based investment banking firm, and he continues to serve as its President. From 1974 through 1981, he was Vice President of Crawford, Etter and Associates, a residential development, marketing, finance and construction company. Mr. Etter is a registered representative of IMS Securities, an NASD member and one of our selling group members. Mr. Etter received a Bachelor of Arts degree from Michigan State University in 1972.
      Hollis M. Greenlaw. Mr. Greenlaw has served as a Director of our general partner, a partner and the President and Chief Executive Officer of UMT Holdings and as President, Chief Executive Officer and a Director of UMT Services since March 2003. Mr. Greenlaw also served as President of our general partner from March 2003 until June 2005. Since March 2003, Mr. Greenlaw has directed the funding of over $176.6 million in loans and investments for UDF I and UDF II. Since May 1997, Mr. Greenlaw has been a partner of The Hartnett Group, Ltd., a closely-held private investment company managing over $40 million in assets. The Hartnett Group, Ltd. and its affiliated companies engage in securities and futures trading; acquire, develop, and sell real estate, including single-family housing developments, commercial office buildings, retail buildings and apartment homes; own several restaurant concepts

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throughout the United States; and make venture capital investments. From March 1997 until June 2003, Mr. Greenlaw served as Chairman, President and CEO of a multi-family real estate development and management company owned primarily by The Hartnett Group, Ltd. and developed seven multi-family communities in Arizona, Texas and Louisiana with a portfolio value exceeding $80 million. Prior to joining The Hartnett Group, Ltd., from 1992 until 1997, Mr. Greenlaw was an attorney with the Washington, D.C. law firm of Williams & Connolly, where he practiced business and tax law. Mr. Greenlaw received a Bachelor of Arts degree from Bowdoin College in 1986, where he was a James Bowdoin Scholar and elected to Phi Beta Kappa, and received a Juris Doctorate from the Columbia University School of Law in 1990. Mr. Greenlaw is a member of the Maine, District of Columbia and Texas bars.
      Michael K. Wilson. Mr. Wilson has served as a director of UMT Services, Inc. since August 2005 and as Senior Vice President of Marketing of our general partner since January 2004. He has also served as President of UMTH Funding since August 2005. From January 2003 through January 2004, Mr. Wilson served as senior vice president of operations of Interelate, Inc., a marketing services business process outsourcing firm. From June 2002 to September 2002, Mr. Wilson was vice president of marketing for Moto One, a software development company. From September 2001 to May 2002, Mr. Wilson was the sole principal of Applied Focus, LLC, an independent management consulting company that provided management consulting services to executives of private technology companies. Mr. Wilson continues to serve as a consultant for Applied Focus, LLC. From April 1998 to September 2001, Mr. Wilson served as senior director and vice president of Matchlogic, the online database marketing division of Excite@Home, where he directed outsourced ad management, CRM and relationship marketing services for Global 500 clients. From July 1985 to April 1998, Mr. Wilson was employed with Electronic Data Systems (EDS) in Detroit, Michigan where he directed several multi-million dollar IT services engagements in the automotive industry. Mr. Wilson graduated from Oakland University in 1985 with a Bachelor of Science degree in Management Information Systems and earned a Master of Business Administration degree from Wayne State University in 1992.
      Jeff W. Shirley. Mr. Shirley, a Certified Public Accountant, joined our general partner as its President in July 2005. From August 2002 through June 2005, Mr. Shirley served as a Texas Regional Vice President for the national homebuilding company Lennar Corporation. While at Lennar, Mr. Shirley’s primary focus was the formation, execution, financing and management of FIN 46 compliant transactions for the Texas region. Mr. Shirley directed in excess of $300 million in land development financing activities, including the formation of two land acquisition and development funds between Lennar and UDF I and UDF II. From June 1996 through July 2002, Mr. Shirley was employed by the Fortress Group, a publicly traded homebuilder headquartered in Vienna, Virginia. During his tenure with Fortress, Mr. Shirley served as the Vice President of Finance and subsequently as Chief Financial Officer. The Fortress Group grew to become one of the nation’s 30 largest homebuilders before its sale to Lennar. From September 1981 through June 1996, Mr. Shirley was employed in public accounting practice in Chicago and Southern California in the Audit and Consulting segments of Coopers & Lybrand, Kenneth Leventhal & Company and Price Waterhouse. While in public accounting, Mr. Shirley’s industry focus was homebuilders and his experience included mergers, acquisitions, accounting system implementations, initial public offerings, structured debt workouts and traditional audits. Mr. Shirley graduated from Augustana College in Rock Island, Illinois with a Bachelor of Arts degree, cum laude, in accounting and business.
      Cara D. Obert. Ms. Obert, a Certified Public Accountant, has served as the Chief Financial Officer for UMT Holdings since March 2004, and served as Controller for UMT Holdings from October 2003 through March 2004. From 1996 to 2003, she was a self-employed consultant, assisting clients, including Fortune 500 companies, in creating and maintaining financial accounting systems. She served as Controller for Value-Added Communications, Inc., a Nasdaq listed telecommunications company that provided communications systems for the hotel and prison industries. From 1990 to 1993, she was employed with Arthur Andersen LLP, an international accounting and consulting firm. She graduated from Texas Tech University in 1990 with a Bachelor of Arts degree, cum laude, in accounting.

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      Christine A. Griffin. Ms. Griffin, the Secretary of our general partner, is partner of UMT Holdings and also serves as the President of UMTH General Services, L.P. Ms. Griffin has served as the President, Chief Executive Officer and Chief Financial Officer of United Mortgage Trust since July 1996. Since January 2000, she has been the President of UMT Advisors, Inc., advisor to United Mortgage Trust. In her capacity at United Mortgage Trust, Ms. Griffin directed all public reporting, shareholder relations, loan servicing and investment portfolio management. From June 1995 until July 1996, Ms. Griffin served as Chief Financial Officer of SCMI. Her responsibilities at SCMI included day-to-day bookkeeping through financial statement preparation, mortgage warehouse lines administration, and investor communications and reporting. Additionally, Ms. Griffin was responsible for researching and implementing a note servicing system for SCMI and its subservicer. Before joining SCMI, Ms. Griffin was Vice President of Woodbine Petroleum, Inc., a publicly traded oil and gas company for ten years, during which time her responsibilities included regulatory reporting, shareholder relations, and audit supervision. Ms. Griffin graduated from George Mason University in Virginia in 1978 with a Bachelor of Arts degree, summa cum laude, in politics and government.

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COMPENSATION OF OUR GENERAL PARTNER AND ITS AFFILIATES
      We will be managed by our general partner. The following table summarizes all of the compensation and fees, including reimbursement of expenses, we will pay to our general partner and its affiliates, and to unaffiliated selling group members, during the various phases of our organization and operation.
                 
Type of Compensation –           Estimated Maximum
To Whom Paid     Form of Compensation     Dollar Amount(1)
  
      Organizational and Offering Stage      
  
Selling Commissions (paid to unaffiliated Selling Group Members)
    7.0% of gross offering proceeds (except that commissions for sales under our distribution reinvestment plan are reduced to 1.0% of gross offering proceeds)     $18,500,000 ($70,000 in the event we sell only the minimum of 50,000 units)
               
     
Bona Fide Due Diligence Fee (paid to unaffiliated Selling Group Members)
    0.5% of gross offering proceeds (except that no due diligence fee shall be paid for sales under our distribution reinvestment plan)     $1,250,000 ($5,000 in the event we sell only the minimum of 50,000 units)
               
     
Wholesaling Fee (paid to IMS Securities, an unaffiliated selling group member)(2)
    Up to 1.2% of gross offering proceeds (except that no wholesaling fee shall be paid for sales under our distribution reinvestment plan)     $3,000,000 ($12,000 in the event we sell only the minimum of 50,000 units)
               
     
Marketing Support Fee (paid to UMTH Funding, an affiliate of our general partner)
    0.8% of gross offering proceeds (except that no marketing support fee shall be paid for sales under our distribution reinvestment plan)     $2,000,000 ($8,000 in the event we sell only the minimum of 50,000 units)
               
     
Marketing Support Fee (paid to unaffiliated selling group members)
    Up to 1.0% of gross offering proceeds (except that no marketing support fee shall be paid for sales under our distribution reinvestment plan)     $2,500,000 ($10,000 in the event we only sell the minimum 50,000 units
               
     
Organization and Offering Expenses (paid to our general partner)
    1.5% of gross offering proceeds excluding proceeds from our distribution reinvestment plan     $3,750,000 ($15,000 in the event we sell only the minimum of 50,000 units)
               
                 
      Operational Stage      
  
Acquisition and Origination Expenses and Fees (paid to our general partner)
    3.0% of net amount available for investment in mortgages for fees and expenses associated with the selection, acquisition and origination of mortgages, including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, and title insurance funded by us     $9,262,427 ($25,631 in the event we sell only the minimum of 50,000 units)
               
     
Mortgage Servicing Fee (paid to our general partner)
    0.25% of the aggregate outstanding loan balances held by us. The fee will be payable monthly in an amount equal to one-twelfth of 0.25% of our aggregate outstanding loan balances as of the last day of the immediately preceding month     $774,344 ($2,136 in the event we sell only the minimum of 50,000 units)(3)
               

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Type of Compensation –           Estimated Maximum
To Whom Paid     Form of Compensation     Dollar Amount(1)
  
Carried Interest (paid to our general partner)(4)
    1.0% of cash available for distribution and net proceeds from a capital transaction (or pro rata portion thereof) if we commit to invest more than 82% but no more than 84.5% of the gross offering proceeds in mortgage loans; an additional 1.0% of cash available for distribution and net proceeds from a capital transaction (or pro rata portion thereof) if we commit to invest more than 84.5% but no more than 86.5% of the gross offering proceeds in mortgage loans; and an additional 1.0% of cash available for distribution and net proceeds from a capital transaction (or pro rata portion thereof) for each additional 1.0% of additional commitments to investments in mortgages above 86.5% of the gross offering proceeds (5)(6)     Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.
               
     
Unsubordinated Promotional Interest (paid to our general partner)(4)
    10.0% of cash available for distribution (6)     Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.
               
     
Subordinated Promotional Interest (paid to our general partner)(4)
    15.0% of cash available for distribution (including net proceeds from a capital transaction, or pro rata portion thereof) after limited partners have received a return of their net capital contributions and an 8.0% annual cumulative (non-compounded) return on their net capital contributions (6)     Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.
               
     
Operating Expenses (paid to our general partner and UMTH General Services, L.P., an affiliate of our general partner (7))
    Reimbursement of actual amounts incurred, subject to certain limitations     Actual amounts are dependent upon results of operations and therefore cannot be determined at the present time.
               
(1)  The estimated maximum dollar amounts are based on the sale of a maximum of 12,500,000 units to the public at $20 per unit and 5,000,000 units under our distribution plan at $20 per unit. The estimated minimum dollar amounts assume no purchases are made under our distribution reinvestment plan.
 
(2)  Although IMS Securities is not affiliated with our general partner, certain members of the advisory board to UMT Holdings are principals of IMS, Inc., which is an affiliate of IMS Securities. In addition, certain registered representatives of IMS Securities, from time to time, may also be employees of UMTH Funding. Such persons are expected to perform wholesaling services in connection with this offering. For all sales that are made through such persons or other wholesalers associated with IMS Securities, IMS Securities will be paid a wholesaling fee equal to 1.2% of the gross proceeds from such sales.
 
(3)  Assumes 88.50% of the gross offering proceeds are invested in mortgages after the maximum offering amount is raised (and 85.44% of the gross offering proceeds are invested in mortgages after the minimum offering amount is raised). Actual amounts are dependent upon outstanding loan balances held by us and therefore cannot be determined at the present time. Such amount will be payable

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annually, will be less than the amount indicated until such time that all of the offering proceeds are disbursed as loans and not held by us, and will decrease to the extent that capital proceeds that constitute a return of capital are distributed to the limited partners and are not used to make new loans.
 
(4)  Provided we have cash available for our operations (other than from repayment of the principal amounts of outstanding loans), we intend to pay distributions to our general partner and limited partners on a monthly basis.
 
(5)  In order for proceeds to be considered “committed” for purposes of calculation and payment of a carried interest, we must be obligated by contract or other binding agreement to invest such proceeds in mortgages, to the exclusion of any other use for such proceeds or no use at all. We expect to pay our general partner 1.47% of cash available for distribution as its carried interest. Such percentage may change from time to time and will be calculated immediately prior to any distribution of cash available for distribution or net proceeds from a capital transaction to the partners under our partnership agreement. Carried interest will be distributable to our general partner when cash available for distribution or net proceeds from a capital transaction are distributed to the limited partners.
 
(6)  “Cash available for distribution” is the cash funds received by us from operations (other than net proceeds from a capital transaction that produces proceeds from (a) the repayment of principal or prepayment of a mortgage to the extent classified as a return of capital for federal income tax purposes, (b) the foreclosure, sale, exchange, condemnation, eminent domain taking or other disposition of a mortgage loan or of a property subject to a mortgage, or (c) insurance or a guarantee with respect to a mortgage), including, without limitation, interest, points, revenue participations in property appreciation and interest or dividends from interim investments, less all cash used to pay partnership expenses and debt payments and amounts set aside for reserves.
 
(7)  Employees of UMTH General Services, L.P. will assist our general partner in our management, and we will reimburse UMTH General Services, L.P. for its actual expenses in providing unitholder relations and reporting services for us.

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CONFLICTS OF INTEREST
      We do not have any officers, employees or directors, and we depend entirely on our general partner and its affiliates to manage our operations. As a result, we are subject to various conflicts of interest arising out of our relationship with our general partner and its affiliates, including conflicts related to the arrangements pursuant to which our general partner and its affiliates will be compensated by us. In addition, as described below, we are subject to various conflicts of interest arising out of our general partners’ affiliation with other United Development Funding programs.
      All of our agreements and arrangements with our general partner and its affiliates, including those relating to compensation, are not the result of arm’s-length negotiations. See “Compensation of Our General Partner and Its Affiliates.” The currently anticipated conflicts of interest in our transactions with our general partner and its affiliates that are material to our offering of limited partnership units are described below.
      UMTHLD is our general partner and will make all our investment decisions. Our general partner also will be responsible for managing our affairs on a day-to-day basis and for identifying and making loans on our behalf. UMT Holdings holds 99.9% of the limited partnership interests in our general partner. UMT Services owns the remaining 0.1% of the limited partnership interests in our general partner and serves as its general partner. Todd F. Etter and Hollis M. Greenlaw, who are directors of UMT Services, own approximately 66.7% of the equity interests in UMT Services. See the flow chart showing the relationship between our general partner and its affiliates in the “Prospectus Summary” section of this prospectus.
      Our general partner was organized in March 2003 and serves as the asset manager for UDF I and UDF II. Financial statements of our general partner are included in this prospectus beginning on page F-8. As of December 31, 2005, the net worth of our general partner was approximately $3.71 million. However, the net worth of our general partner consists primarily of its interest in UDF I and UDF II and, therefore, does not represent liquid assets. See “Risk Factors — Risks Related to an Investment in United Development Funding III, L.P. — Our general partner has a limited net worth consisting of assets that are not liquid, which may adversely affect the ability of our general partner to fulfill its financial obligations to us.”
      Because we were organized and will be operated by our general partner, conflicts of interest will not be resolved through arm’s-length negotiations but through the exercise of our general partner’s judgment consistent with its fiduciary responsibility to the limited partners and our investment objectives and policies. For a description of some of the risks related to these conflicts of interest, see “Risk Factors — Risks Related to Conflicts of Interest,” “Fiduciary Duty of the General Partner” and “Investment Objectives and Criteria.”
Loans to Affiliates of Our General Partner
      We intend to make mortgage loans and to provide credit enhancement transactions to affiliates of our general partner. A typical mortgage loan or credit enhancement transaction to one of our general partner’s affiliates will involve a loan or credit enhancement to the entity that owns the property that will secure such mortgage loan or credit enhancement and in which an affiliate of our general partner holds a direct or indirect equity or participation interest. It may be necessary or advisable due to state or local regulatory or tax reasons to not make such loan or credit enhancement directly to the entity that owns the property that secures the loan or credit enhancement but to another entity. In all events, however, the underlying property for which a mortgage loan or credit enhancement is made will secure the mortgage loan or credit enhancement. We expect to charge 3% to 7% of the projected maximum amount of our outstanding credit enhancement obligation for each 12-month period such obligation is outstanding as a credit enhancement fee in addition to reimbursement of any costs that we may incur in providing the credit enhancement. The actual amount of such charges will be based on the risk perceived by our general partner to be associated with the transaction, the value of the collateral associated with the transaction, our security priority as to the collateral associated with the transaction, the form and term of the credit enhancement, and our overall costs associated with providing the credit enhancement.

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      We will not make any mortgage loan or provide any credit enhancement to any affiliate of our general partner unless the loan meets the requirements and terms disclosed in the section of this prospectus under the heading “Investment Objectives and Criteria — Loans to Our General Partner and Its Affiliates” or, prior to making such loan or provision of such credit enhancement, we have received a fairness opinion from an independent advisor as to the fairness of such mortgage loan or credit enhancement. The fees we will charge affiliates of our general partner in connection with any loans or credit enhancements made to such affiliates, and the other terms of such loans, will be no less favorable to us than fees charged to non-affiliates.
      An “independent advisor” is someone who meets all of the following criteria:
  •  The advisor must be a long-established, nationally recognized investment banking firm, accounting firm, mortgage banking firm, real estate financial consulting firm or advisory firm;
 
  •  The advisor must have a staff of real estate professionals;
 
  •  The compensation of the advisor must be determined and embodied in a written contract before an opinion from such advisor is rendered;
 
  •  If the advisor is not the advisor previously engaged by us to render a fairness opinion for the same transaction or a preceding transaction involving us, our general partner must inform our limited partners (by no later than our next annual report) of the date when such advisor was engaged, and whether there were any disagreements with the former advisor on any matters of valuation, assumptions, methodology, accounting principles and practice, or disclosure, which disagreements, if not resolved to the satisfaction of the former advisor would have caused him to make reference, in connection with the fairness opinion, to the subject matter of the disagreement or decline to give an opinion; and
 
  •  The advisor, directly or indirectly, may not have an interest in, nor any material business or professional relationship with, us, our general partner, the borrower, or any affiliates of us, our general partner or the borrower. Independence will be considered to be impaired if, for example, during the period of the advisor’s engagement, or at any time of expressing its opinion, the advisor or the advisor’s firm: (1) has, or was committed to acquire any direct or indirect ownership interest in us, our general partner, borrower, or affiliates of us, our general partner or the borrower; (2) had any joint closely-held business investment with us, our general partner, the borrower, or affiliates of us, our general partner or the borrower, which was material in relation to the advisor’s net worth; or (3) had any loan to or from us, our general partner, the borrower, or affiliates of us, our general partner or the borrower. For purposes of determining whether a business or professional relationship or joint investment is material, the gross revenue derived by the advisor from us, our general partner, the borrower, or affiliates of us, our general partner or the borrower shall be deemed material if it exceeds 5% of the annual gross revenue derived by the advisor from all sources, or exceeds 5% of the individual’s or advisory firm’s net worth (on an estimated fair market value basis).
      The independent advisors from whom we expect to request fairness opinions are Henry S. Miller Investment Banking Group, Value, Inc. and Jackson, Claborn, Inc.
Purchases, Sales and Leases with Our General Partner
      We will not sell any mortgage loan or foreclosed property to our general partner or its affiliates. In addition, we will not purchase any mortgage loan in which our general partner or its affiliates have an interest or from any entity in which our general partner or its affiliates have an interest except (1) pursuant to a joint venture agreement meeting certain conditions as described in our partnership agreement or (2) pursuant to a right of first refusal for such property in accordance with the terms of our partnership agreement, provided that the purchase price for such property pursuant to the right of first refusal is not greater than the fair market value as determined by an independent appraisal. Notwithstanding the foregoing, our general partner or its affiliates may temporarily enter into contracts

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relating to investment properties to be assigned to us prior to closing or may purchase property in their own names (and assume loans in connection therewith) and temporarily hold title thereto for the purpose of facilitating the acquisition of such property for us or the borrowing of money or obtaining of financing for us or completion of construction of the property or any other purpose related to our business, provided that (1) such property is purchased by us for a price no greater than the cost of such property to our general partner or its affiliates (including closing and carrying costs), (2) our general partner or its affiliates has not held title to such property for more than 12 months prior to the commencement of this offering, (3) the cost of the property does not exceed the funds reasonably anticipated to be available to us to purchase such property, (4) there is no other benefit to our general partner or its affiliate other than from compensation otherwise permitted, and (5) all income generated and expenses associated with the property are treated as belonging to us. Neither our general partner nor any of its affiliates will be granted an exclusive right to sell or exclusive employment to sell any property on our behalf.
Interests in Other Mortgage Programs
      Our general partner and its affiliates are affiliated with other mortgage programs similar to ours, and we expect that they will organize other such programs in the future. Our general partner also provides asset management services to affiliated programs and receives compensation from such programs for such services. Our general partner and such affiliates have legal and financial obligations with respect to these other programs that are similar to their obligations to us.
      We rely on our general partner and its affiliates for the day-to-day operation of our business. As a result of their interests in other mortgage programs and the fact that they have also engaged, and will continue to engage, in other business activities, our general partner and its affiliates will have conflicts of interest in allocating their time between us and other mortgage programs and other activities in which they are involved. In addition, our partnership agreement does not specify any minimum amount of time or level of attention that our general partner must devote to us. However, our general partner believes that it and its affiliates have sufficient personnel to discharge fully its responsibilities to us and the other ventures in which it is involved.
Lack of Separate Representation
      Morris, Manning & Martin, LLP acts as counsel to us, our general partner and our affiliates in connection with this offering and may in the future act as counsel to us, our general partner and our affiliates. There is a possibility that in the future the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all of such parties. In the event that a dispute was to arise between us, our general partner or any of our affiliates, separate counsel for such matters will be retained as and when appropriate.
Co-investments and Joint Ventures with Affiliates of the General Partner
      We are likely to participate as co-investors in certain loans along with UDF I, UDF II or other affiliates of our general partner (as well as other parties) for the funding or acquisition of mortgage loans or entities that make or invest in mortgage loans. Our general partner and its affiliates may have conflicts of interest in determining which affiliated program should enter into any particular co-investment agreement. We intend to enter into a participation agreement with UDF I and UDF II pursuant to which we will invest in the same loans and transactions as UDF I and UDF II on a pro rata basis based on the amount of capital held by each entity that is available for investment. However, circumstances may arise, due to availability of capital or other reasons, when it is not possible for us to make an investment on such pro rata basis. In the event that we do co-invest in a loan with an affiliate, we expect to also enter into an inter-creditor agreement that will define our rights and priority with respect to the underlying collateral. Our general partner will face conflicts of interests with respect to such agreement among creditors. Moveover, any co-venturer may have economic or business interests or goals that are or that may become inconsistent with our business interests or goals. Furthermore, we may enter into joint venture

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arrangements with certain other affiliates. Should any such joint venture be consummated, our general partner may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Since our general partner and its affiliates will control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.
Receipt of Fees and Other Compensation by Our General Partner and Its Affiliates
      A transaction involving the purchase and sale of mortgage loans will result in the receipt of compensation by our general partner and its affiliates, including placement fees and origination fees. Subject to its fiduciary duties and specific restrictions set forth in our partnership agreement, our general partner has considerable discretion with respect to all decisions relating to the terms and timing of all transactions. Therefore, our general partner may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that such fees will generally be payable to our general partner and its affiliates regardless of the quality of our investments or the services provided to us. See “Compensation of Our General Partner and Its Affiliates.”
Tax Audit Proceeding
      In the event of an audit of our federal income tax returns by the Internal Revenue Service, it is possible that the interests of our general partner in such tax audit could become inconsistent with or adverse to the interests of our limited partners. In this regard, our general partner, who is primarily responsible for contesting federal income tax adjustments proposed by the Internal Revenue Service, may be subject to various conflicts of interest in connection with the negotiation and settlement of issues raised by the Internal Revenue Service in a federal income tax audit. For example, as the tax matters partner and preparer of our tax returns, our general partner may desire to settle an audit in order to avoid the possibility of the imposition of a penalty against it, even though we may have a sustainable defense to the position asserted by the Internal Revenue Service or may be not be responsible for the full amount asserted by the Internal Revenue Service. See “Federal Income Tax Considerations.”
Relationship with an Affiliate of a Selling Group Member
      Certain members of the advisory board to UMT Holdings are principals of IMS, Inc., which is an affiliate of IMS Securities, one of our proposed selling group members. UMT Holdings compensates IMS, Inc. $2,500 per month for the service of these persons on the UMT Holdings advisory board. Some employees, consultants and others providing services to or on behalf of us, UMT Holdings, and affiliates of us or UMT Holdings, in some cases in return for compensation from these entities, are also registered representatives with IMS Securities, and may receive compensation from IMS Securities unrelated to this offering. In addition, certain registered representatives of IMS Securities, from time to time, may also be employees of UMTH Funding, an affiliate of our general partner. Such persons are expected to perform wholesaling services in connection with this offering. In the ordinary course of their businesses, the participating dealers and their respective affiliates may have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with our affiliates, for which the participating dealers may have received and may receive in the future customary compensation for their services. These arrangements may create conflicts of interest between our general partner and its general partner, UMT Holdings.
Guidelines and Limits Imposed by Our Partnership Agreement
      The agreements and arrangements among us, our general partner and its affiliates have been established by our general partner, and our general partner believes the amounts to be paid thereunder to be reasonable and customary under the circumstances. In an effort to establish standards for minimizing and resolving these potential conflicts, our general partner has agreed to the guidelines and limitations set forth in Section 11.3 of our partnership agreement entitled “Limitations on Powers of the General

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Partner” and in Article XIII of our partnership agreement entitled “Transactions Between General Partners and the Partnership.” Among other things, these provisions:
  •  set forth the specific conditions under which we may own mortgages jointly or in a partnership with an affiliate of the general partners;
 
  •  prohibit us from purchasing mortgages or leasing investment properties from our general partners or their affiliates except under certain limited circumstances;
 
  •  prohibit the commingling of partnership funds (except in the case of making capital contributions to joint ventures and to the limited extent permissible under the NASAA Guidelines); and
 
  •  require us to obtain an independent appraisal of the property securing each mortgage loan that we purchase.

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FIDUCIARY DUTY OF THE GENERAL PARTNER
      Our general partner will be accountable to us as a fiduciary and, consequently, will be required to exercise good faith and integrity in all its dealings with respect to partnership affairs. Our general partner must exercise its fiduciary duty to ensure the safekeeping and authorized use of all funds and assets, whether or not in its immediate possession or control, and must not use or employ, or permit another to use or employ, such funds or assets in any manner except for our exclusive benefit. In addition, our general partner is not permitted to contract away the fiduciary duty owed to the limited partners by our general partner under common law.
      Where the question has arisen, courts have held that a limited partner may institute legal action either (1) on behalf of himself or all other similarly situated limited partners, referred to as a “class action,” to recover damages for a breach by a general partner of his fiduciary duty, or (2) on behalf of the partnership, referred to as a “partnership derivative action,” to recover damages from third parties. Delaware law specifically permits a limited partner of a Delaware limited partnership to bring a derivative action on behalf of the partnership if:
  •  the general partner or partners of the partnership have refused to bring the action on behalf of the partnership or if an effort to cause such general partner or partners to bring the action is not likely to succeed; and
 
  •  the limited partner was a partner at the time the transaction complained of occurred or such partner became a partner by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner or an assignee of a partnership interest at the time of such transaction.
      Under Delaware law, a general partner of a Delaware limited partnership has the same liabilities to the partnership and the other partners as a partner in a partnership without limited partners, except as provided in the partnership agreement or Delaware law. As a result, subject to the terms of our partnership agreement, our general partner is liable for the debts and obligations that we incur. However, our partnership agreement provides that our general partner and its affiliates shall not be liable, responsible or accountable in damages or otherwise to us or to any of our limited partners for any act or omission performed or omitted by our general partner or its affiliates in good faith and reasonably believed to be in our best interest, except for conduct involving the receipt of an improper personal benefit, negligence, misconduct or breach of fiduciary duty.
      Our partnership agreement provides that we will indemnify our general partner and its affiliates from and against liabilities and related expenses incurred in dealing with third parties while acting on behalf of or performing services for us arising out of any act or failure to act that our general partner reasonably believed was in our best interest, provided that our general partner shall not be indemnified by us for any liabilities resulting from its own negligence or misconduct. Our partnership agreement provides that our general partner will not be indemnified for liabilities with respect to a proceeding in which (1) the general partner is found liable on the basis that it improperly received personal benefit, whether or not the benefit resulted from an action taken in its official capacity, or (2) the general partner is found liable to us or our limited partners. In addition, our general partner will not be indemnified for any liabilities or expenses in relation to a proceeding in which its action or failure to act constituted negligence or misconduct in the performance of its duty to us or our limited partners. Any indemnification of our general partner is recoverable only out of our assets and not from the limited partners.
      Notwithstanding the foregoing, we will not indemnify our general partner or any person acting as a broker-dealer with respect to our units of limited partnership interest from any liabilities incurred by them arising under federal and state securities laws unless:
  •  there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular person seeking indemnification;

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  •  such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular person seeking indemnification; or
 
  •  a court of competent jurisdiction approves a settlement of the claims against the particular person seeking indemnification and finds that indemnification of the settlement and related costs should be made.
      In addition, prior to seeking a court approval for indemnification, our general partner is required to apprise the court of the position of the Securities and Exchange Commission and various securities regulatory authorities with respect to indemnification for securities violations. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (Securities Act), may be permitted for our general partner or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable.

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PRIOR PERFORMANCE SUMMARY
Prior Investment Programs
      The information presented in this section represents the historical experience of certain real estate programs managed by our general partner and its affiliates. Our investors should not assume that they will experience returns, if any, comparable to those experienced by investors in such prior real estate programs. Investors who purchase our units will not thereby acquire any ownership interest in any partnerships or corporations to which the following information relates or in any other programs of our affiliates.
      UMTHLD serves as our general partner, UMT Holdings is the sole limited partner of our general partner and UMT Services serves as UMTHLD’s general partner. Six of the seven partners of UMT Holdings and all of the owners of UMT Services have served as sponsors, officers, directors or advisors to three prior real estate programs over the last ten years. Based on an analysis of the operating results of the prior real estate programs, the sponsors believe that each of such programs has met or is meeting its principal investment objectives in a timely manner. The information in this section and in the Prior Performance Tables included in this prospectus as Exhibit A shows relevant summary information concerning real estate programs sponsored by our affiliates. The Prior Performance Tables set forth information as of the dates indicated regarding certain of these prior programs as to (1) experience in raising and investing funds (Table I); (2) compensation to sponsor (Table II); (3) annual operating results of prior real estate programs (Table III); and (4) results of sales or disposals of assets (Table V). Because no real estate program sponsored by our affiliates has completed operations in the most recent five years, Table IV has not been included in the Prior Performance Tables. Additionally, Table VI, which is contained in Part II of the registration statement for this offering and which is not part of this prospectus, provides certain additional information relating to assets acquired by the prior real estate programs. We will furnish copies of such table to any prospective investor upon request and without charge. The purpose of this prior performance information is to enable you to evaluate accurately the experience of our advisor and its affiliates in sponsoring like programs. The following discussion is intended to summarize briefly the objectives and performance of the prior real estate programs and to disclose any material adverse business developments sustained by them.
Public Programs
      Currently, UMT Advisors, Inc., an affiliate of our general partner, is administering United Mortgage Trust, a Maryland real estate investment trust with investment objectives similar to ours. United Mortgage Trust invests in loans secured by residential real estate. The last public offering with respect to United Mortgage Trust terminated on October 15, 2003. See Tables I and II of the Prior Performance Tables for more detailed information about the experience of our affiliates in raising and investing funds for the public offerings initiated over the last ten years and compensation paid to the sponsors of these programs.
United Mortgage Trust
      United Mortgage Trust, a Maryland real estate investment trust, was formed in March 1997 to acquire residential real estate secured loans. UMT Advisors, Inc., an affiliate of our general partner, serves as the advisor to United Mortgage Trust. The first public offering of United Mortgage Trust’s shares of beneficial interest commenced in March 1997 and was succeeded by a secondary offering in June 2001. At the close of the secondary public offering on October 15, 2003, United Mortgage Trust had raised gross offering proceeds of approximately $148.9 million from the issuance of 7,501,037 shares of beneficial interest to 3,431 investors. Approximately 88% of the net offering proceeds from the sale of United Mortgage Trust’s shares of beneficial interest, or approximately $131.0 million, was available for the purchase of residential real estate secured loans. As of December 31, 2005, United Mortgage Trust had issued an aggregate of 7,852,701 shares, with 797,582 shares repurchased and retired to treasury, leaving 7,055,119 shares outstanding. Total capital raised from share issuances was approximately $156.8 million.

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Shares sold subsequent to October 2003 have been offered under our dividend reinvestment plan. No commissions are paid with respect to shares sold under this plan subsequent to October 2003.
      United Mortgage Trust primarily purchases interim real estate loans for the acquisition and renovation of residential real estate secured by first lien mortgages and residential lot development loans for the acquisition and development of single-family lots secured by first and second lien mortgages and equity participations in residential real estate lot developments. In addition, United Mortgage Trust’s portfolio includes long-term residential real estate loans. Proceeds from the repayment of loans are reinvested in new interim and residential lot development loans. In addition, United Mortgage Trust previously purchased long-term residential real estate loans. United Mortgage Trust purchased 6,414 loans during the period of March 1997 through December 31, 2005. Of the loans acquired, approximately 77%, or 4,945, have been repaid or satisfied through foreclosure on the underlying assets. Loans paid in full represent 71%, or 4,527 loans, and 7%, or 418 loans, were foreclosed upon and the underlying assets sold. With respect to the loans that were satisfied through foreclosure on the underlying assets, United Mortgage Trust’s aggregate provision for loan losses through December 31, 2005 was $8,703,463; however, actual loan losses after sales of foreclosed assets were $6,763,969. The remaining amount was carried forward as a reserve provision for future losses. All of the loans purchased were residential real estate loans secured by single-family homes, residential lots or land designated for development into single-family or residential lots. The aggregate dollar amount of the loans acquired by United Mortgage Trust, as of December 31, 2005, was approximately $504.0 million. Approximately 74% of the aggregate portfolio loans were secured by renovation properties or new home construction properties, approximately 11% were secured by owner occupied residences, and approximately 15% were secured by residential lot developments. As of December 31, 2005, approximately 68% of the properties securing United Mortgage Trust’s loans were located in Texas, 10% in California, 3% each in Georgia, Missouri, North Carolina and Tennessee, 1% each in Colorado, Illinois, Indiana, Michigan, Ohio and South Carolina and Virginia, and less than 1% each in Alabama, Florida, Iowa, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Oklahoma and Pennsylvania. At year end 2004, approximately 80% of the properties securing United Mortgage Trust’s loans were located in Texas, 5% were in Florida, 3% in Georgia, 2% each in California, Illinois and North Carolina, 1% each in Tennessee, Indiana, Colorado and Missouri, and less than 1% each in Pennsylvania, Kentucky, Louisiana, Oklahoma, South Carolina, Ohio, Kansas, Mississippi, Alabama, Minnesota and Michigan. At years end 2003 and 2002, the vast majority of the properties securing United Mortgage Trust’s mortgage investments were located in Texas.
      The following table breaks down the aggregate value of loans held by United Mortgage Trust as of December 31, 2005. References in the following table and in this “Prior Performance Summary” section to “long-term” loans shall be to loans with terms ranging from 180 to 360 months in length, which have historically been referred to by the company as residential mortgages or contracts for deed. References in the following table and in this “Prior Performance Summary” section to “interim” loans shall be to loans with terms of 12 months or less, historically referred to by the company as interim mortgage loans.
United Mortgage Trust Portfolio, December 31, 2005
                 
    Percent of Total   Portfolio as of
Type of Loan   Loans   December 31, 2005
         
Interim real estate loans
    67%     $ 72,956,000  
Residential lot development loans
    28%     $ 30,317,000  
Long-term residential real estate loans
    5%     $ 5,816,000  
      Upon request, prospective investors may obtain from us, without charge, copies of offering materials and any reports prepared in connection with United Mortgage Trust, including a copy of the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a reasonable fee, we will also furnish, upon request, copies of the exhibits to any such Form 10-K. Any such request should be directed to Shareholder Relations, UMT Holdings, L.P., 1702 N. Collins Boulevard, Suite 100, Richardson, Texas 75080. Many of the offering materials and reports prepared in connection with the

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United Mortgage Trust public program are also available on the United Mortgage Trust web site, www.unitedmortgagetrust.com. In addition, the Securities and Exchange Commission maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission.
Acquisition of Loans for United Mortgage Trust (January 1, 2002 through December 31, 2005)
      As of December 31, 2005, United Mortgage Trust owned outright 36 long-term residential real estate loans and two rental properties. The balance of United Mortgage Trust’s interest in long-term loans (387 long-term loans) were securitized and held in trust on behalf of Bayview Financial, L.P. (Bayview), an unaffiliated third-party investor in the senior position, and UMT LT Trust, a wholly owned subsidiary of United Mortgage Trust, in the subordinate position. The total unpaid principal balance for long-term residential loans on United Mortgage Trust’s books at December 31, 2005 was approximately $5.8 million, and the annualized yield was 10.86%. Such yield is stated on an accrual basis and represents the blended yield, as of December 31, 2005, of United Mortgage Trust’s interest in the aforementioned 36 long-term residential loans and in the aforementioned securitized loans. All annualized yields take into account downward adjustments for non-performing loans. United Mortgage Trust used the proceeds from the sale of the securitizations to pay down its line of credit, fund a line of credit for UDF I, and invest in interim mortgage loans. The unpaid principal balance on the UDF I line of credit was approximately $30.0 million, and the annualized yield for the year ended December 31, 2005 was 14.14%. Interim mortgages totaled approximately $73.0 million (1,013 loans at December 31, 2005) and the annualized yield for the loans was 12.98%.
Mortgage Portfolio Table
                                 
    As of   As of   As of   As of
    December 31,   December 31,   December 31,   December 31,
    2002   2003   2004   2005
                 
Long-term mortgages
    827       545       311       36  
Rental properties
          5       3       2  
Loans remaining in first securitization
                219       201  
Loans remaining in second securitization
                      186  
Vacant properties
    78       72       24       33  
Interim mortgages
    827       1,136       945       1,013  
Unpaid principal balance
  $ 88,112,000     $ 105,936,898     $ 94,390,188     $ 82,692,038  
Annual yield
    13.04 %     13.18 %     12.79 %     13.15 %
Investment-to-value ratio
    69.66 %     70.34 %     71.17 %     67.98 %
Average loan unpaid principal balance
  $ 53,000     $ 60,000     $ 63,000     $ 52,000  
      As of December 31, 2005, approximately 68% of the properties securing United Mortgage Trust’s loans were located in Texas, 10% in California, 3% each in Georgia, Missouri, North Carolina and Tennessee, 1% each in Colorado, Illinois, Indiana, Michigan, Ohio and South Carolina and Virginia, and less than 1% each in Alabama, Florida, Iowa, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Oklahoma and Pennsylvania. At year end 2004, approximately 80% of the properties securing United Mortgage Trust’s loans were located in Texas, 5% were in Florida, 3% in Georgia, 2% each in California, Illinois and North Carolina, 1% each in Tennessee, Indiana, Colorado and Missouri, and less than 1% each in Pennsylvania, Kentucky, Louisiana, Oklahoma, South Carolina, Ohio, Kansas, Mississippi, Alabama, Minnesota and Michigan. At years end 2003 and 2002, the vast majority of the properties securing United Mortgage Trust’s mortgage investments were located in Texas.

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      During 2003, United Mortgage Trust extended a $7.0 million line of credit to UDF I, a partnership that is affiliated with United Mortgage Trust’s advisor. In 2004, the line of credit was increased to $30.3 million. The line of credit was used to finance UDF I’s loans and investments in residential real estate developments. The UDF I loans are first lien loans or subordinate loans. The long term loan component securing the line of credit bears interest at an annualized percentage rate of 15% with interest payable monthly. The bridge loan component securing the line of credit bears interest at an annualized percentage rate of 13.5% with interest payable monthly, and is secured by the assignment of first lien loans made by UDF I to developers for the acquisition of pre-development residential real estate. As of December 31, 2005, 2004 and 2003, outstanding balances were approximately $30.3 million, $28.7 million and $6.1 million, respectively. See “— Acquisition of Investments and Loans for UDF I and UDF II (June 2003 (Inception) through December 31, 2005)” below.
      The tables below illustrate United Mortgage Trust’s default history for the years ended December 31, 2002, 2003, 2004 and 2005:
Long-term Residential Real Estate Loans Defaulted, Foreclosed Loans
                                 
    2002   2003   2004   2005
                 
Number of loans defaulted at beginning of year
    54       78       72       24  
Aggregate value
  $ 2,615,000     $ 3,676,000     $ 3,346,000     $ 868,000  
Additional defaults during year
    67       83       50       59  
Aggregate value
  $ 3,082,000     $ 3,818,000     $ 2,300,000     $ 2,830,000  
Defaulted properties disposed of during year
    43       89       98       49  
Aggregate value
  $ 2,021,000     $ 4,148,000     $ 4,778,000     $ 2,204,000  
Number of loans defaulted at end of year
    78       72       24       34  
Aggregate value
  $ 3,676,000     $ 3,346,000     $ 868,000     $ 1,494,000  
Interim Mortgages Defaulted, Foreclosed Loans
                                 
    2002   2003   2004   2005
                 
Number of loans defaulted at beginning of year
                25       23  
Aggregate value
              $ 1,263,000     $ 2,026,000  
Additional defaults during year
          25       19       23  
Aggregate value
        $ 1,263,000     $ 1,343,000     $ 1,659,000  
Defaulted properties disposed of during year
                21       14  
Aggregate value
              $ 580,000     $ 1,258,000  
Number of loans defaulted at end of year
          25       23       32  
Aggregate value
        $ 1,263,000     $ 2,026,000     $ 2,427,000  
Loan Losses Including Provision for Loan Losses
                                 
    2002   2003   2004   2005
                 
Losses
  $ 8,300     $ 2,172,000     $ 2,789,000     $ 3,742,000  

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      The following tables compare United Mortgage Trust’s three loan categories in dollars and as a percentage of United Mortgage Trust’s portfolio as of December 31, 2002, 2003, 2004 and 2005.
                                   
    As of   As of   As of   As of
    December 31,   December 31,   December 31,   December 31,
    2002   2003   2004   2005
                 
Long-term residential real estate loans(1)
  $ 39,840,000     $ 29,780,000     $ 17,749,000     $ 5,816,000  
 
Percentage increase over prior period
    (0.4 )%     (1 )%     (40 )%     (67 )%
Interim mortgages
  $ 49,136,000     $ 71,547,000     $ 73,748,000     $ 72,956,000  
 
Percentage increase over prior period
    180 %     48 %     3 %     (1 )%
UDF I line of credit
        $ 6,093,000     $ 28,722,000     $ 30,317,000  
 
Percentage increase over prior period
          100 %     371 %     6 %
 
(1)  Includes UMT LT Trust’s subordinate interest in the Bayview securitizations.
                                 
    As of   As of   As of   As of
    December 31,   December 31,   December 31,   December 31,
    2002   2003   2004   2005
                 
Long-term residential real estate loans
    45 %     28%       15%       5%  
Interim mortgages
    55 %     66%       61%       67%  
UDF I line of credit
          6%       24%       28%  
      As reflected in the above charts, United Mortgage Trust’s investments in long-term residential real estate loans (including mortgage loans and contracts for deed) have decreased over time. In 2000, United Mortgage Trust’s trustees directed its advisor to decrease the percentage of capital invested by United Mortgage Trust in long-term loans and to increase the capital invested in interim loans. This decision by United Mortgage Trust’s trustees was driven by the higher yield, lower default rates and lower loan-to- value ratio that had been realized by United Mortgage Trust in its previous interim loans. The long-term loan portfolio was reduced by United Mortgage Trust through prepayment by borrowers, sales of loans to third-party investors and sales of loans through securitization.
      As of December 31, 2005 United Mortgage Trust had purchased, in the aggregate, approximately $53.0 million of long-term real estate loans, invested approximately $374.0 million in interim mortgages and had invested approximately $77.0 million with UDF I. Approximately $18.0 million of the long-term loans were acquired from South Central Mortgage, Inc., an affiliate of United Mortgage Trust.
      Outstanding balances as of December 31, 2002, 2003, 2004 and 2005 pledged by or purchased from affiliates of United Mortgage Trust’s advisor were:
                                 
    As of   As of   As of   As of
    December 31,   December 31,   December 31,   December 31,
Affiliated Company   2002   2003   2004   2005
                 
Line of Credit (UDF I)
        $ 6,093,000     $ 28,722,000     $ 30,317,000  
Ready America Funding
  $ 9,424,000     $ 14,565,000     $ 25,011,000     $ 21,087,000  
UMTH Lending
        $ 13,713,000     $ 11,399,000     $ 24,164,000  
Capital Reserve Corp. 
  $ 19,209,000     $ 9,194,000     $ 4,793,000     $ 2,030,000  
Ready Mortgage Corp. 
  $ 6,091,000     $ 6,346,000     $ 2,338,000     $ 192,000  
REO Property Company
        $ 1,735,000     $ 1,910,000     $ 788,000  
South Central Mortgage, Inc. 
  $ 923,000     $ 306,000     $ 150,000     $ 150,000  
      United Mortgage Trust’s average daily outstanding balance on its line of credit, or leverage used in the acquisition of mortgage investments, during the years ended December 31, 2005, 2004, 2003 and 2002

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was approximately $7.2 million, $4.9 million, $2.4 million, $3.0 million and $1.4 million, respectively. The outstanding balance on the line of credit was approximately $13.8 million as of December 31, 2005.
Private Programs
      The prior privately offered programs sponsored by our affiliates include two real estate limited partnerships, UDF I and UDF II. UDF I and UDF II invest in first lien and subordinate loans secured by residential real estate designated for single-family lot development, joint ventures and equity investments in single-family lot developments and provide credit enhancements for residential real estate acquisition and development loans. UDF II participates pro-rata in the investments purchased, originated or made by UDF I. Therefore, the loan and investment data summarized below includes investments by UDF I and UDF II collectively. Earnings for UDF I vary from UDF II primarily due to timing and amount of the investment. See Table III beginning on page A-4 for the individual performances of UDF I and UDF II. Through December 31, 2005, UDF I and UDF II have purchased or participated in 65 loans totaling approximately $154.1 million and made thirteen equity investments totaling approximately $22.5 million. Out of those purchases or participations, 48 of the loans totaling approximately $89.7 million and six of the equity investments totaling approximately $5.3 million have been partially or fully repaid. As of December 31, 2005, none of the prior private programs sponsored by affiliates of our general partner have foreclosed upon a property due to a default by a borrower. In one instance, however, a loan was declared in default and the lender, UDF I, accepted a negotiated sum as payment in full under the loan. There was no principal lost on that loan, only a reduction in the amount of interest paid, and the property was not foreclosed upon. All of the loans purchased or originated and investments made were residential development loans or investments, and 54% of the loans and investments were in the greater Dallas/ Fort Worth metropolitan area. Approximately 30% of the loans and investments were in the greater Houston metropolitan area, and approximately 16% of the loans and investments were in other markets. As of December 31, 2005, the total amount of funds raised from investors in UDF I was $10.05 million, and there were 43 investors in the program. UDF II is currently offering units of limited partnership interests to investors. As of December 31, 2005, the total amount of funds raised from investors in UDF II was $9.63 million and there were 128 investors in the program. UDF I and UDF II have investment objectives substantially similar to ours. See Tables I and II of the Prior Performance Tables for more detailed information about the experience of our affiliates in raising and investing funds for the private offerings initiated over the last ten years and compensation paid to the sponsors of these programs.
      The aggregate dollar amount of the loans and investments made by UDF I and UDF II from their inception in June 2003 through December 31, 2005 was approximately $176.6 million, including borrowed funds, reinvested distributions and loan principal repayments. As of December 31, 2005, all of the properties underlying the loans and investments made by UDF I and UDF II were new property developments. Through December 31, 2005, approximately $95 million in loan payoffs and return of equity investments has been received by UDF I or UDF II. Loan principal payoffs and equity returned are reinvested in new loans and equity investments as soon as practical. UDF I and UDF II distribute or reinvest partnership income as directed by their individual limited partners. Of the aggregate amount loaned or invested, approximately 92% was used to fund first lien and subordinate loans and approximately 8% was invested as equity in land development projects. The following table shows a breakdown by percentage of the aggregate amount of the loans and equity investments funded by UDF I and UDF II as of December 31, 2005:
                         
            Number of Loans
Type of Investment   Percent of Total   Amount   or Investments
             
Land Development Loans
    92 %   $ 154,100,000       65  
Land Development Equity Investments
    8 %   $ 13,900,000       13  
      As of December 31, 2005, approximately $95 million of the loans and investments have been repaid or returned to UDF I and UDF II. From June 2003 through December 31, 2005, UDF I and UDF II have received approximately $3.2 million in net income from their investments. See Tables III and V of the Prior Performance Tables for more detailed information as to the operating results of such programs.

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      As of December 31, 2005, the percentage of these programs, by investment, with investment objectives similar to ours was 100%.
      Table VI details the number and dollar amount of long-term residential loans, interim loans and land development loans purchased by United Mortgage Trust and amount of leverage used historically by United Mortgage Trust. Table VI also includes the number of loans and investments purchased and made by UDF I and UDF II, the location of the development and the historical amount of leverage used by UDF I and UDF II. For more detailed information regarding acquisitions of assets by such programs since December 31, 2005, see Table VI contained in Part II of the registration statement of which this prospectus is a part. We will provide a copy of Table VI to any prospective investor upon request and without charge.
Acquisition of Investments and Loans for UDF I and UDF II (June 2003 (Inception) through December 31, 2005)
      On July 16, 2004, UDF I and UDF II entered into a master participation agreement pursuant to which UDF II agreed to invest the monies received by UDF II from investors in the existing assets of UDF I, including, without limitation, investments in loans, profit participations and equity (the UDF Investments). Under the terms of the agreement, UDF II will invest pari passu and pro rata in the UDF Investments in proportion to the amount of investment capital received by UDF II as compared to the amount of investment capital received by UDF I. In consideration for UDF II’s participation in the UDF Investments, the master participation agreement requires UDF I to share its returns with UDF II pari passu and pro rata based on the relative participation of UDF I and UDF II in the UDF Investments, in terms of the amount of capital used to purchase UDF Investments, with all allocable liabilities, income and expenses determined by UDF I in its reasonable discretion.
      In accordance with the master participation agreement and effective as of July 17, 2004, UDF II purchased a participation interest in all of the then-existing UDF Investments. UDF II has participated in all UDF Investments entered into by UDF I since such time. With respect to the following summaries of UDF I’s equity investments and loans, any investments or loans outstanding as of, or entered into subsequent to, July 16, 2004 include a participation interest by UDF II.
      In addition to the foregoing, from time to time, programs sponsored by us or our affiliates may conduct other private offerings of securities.
      The prior programs sponsored by our affiliates have occasionally been adversely affected by the limited supply of suitable loans available for purchase. When sufficient numbers of suitable loans historically were not available for purchase, United Mortgage Trust experienced excess uninvested cash. Uninvested cash resulted in lower earnings per share as evidenced for the years 1998 and 1999 on Table III beginning on page A-4. Increased loan default rates resulted in decreased net income for United Mortgage Trust, as evidenced for the years 2003 and 2004 illustrated on Table III. Decreases in the available amount and use of leverage, along with increases in the amount of equity in relation to debt result in lower returns on equity, as experienced by UDF I and UDF II for the years 2004 and 2005, as illustrated on Table III. The continuing operations of prior programs sponsored by our affiliates can be expected in the future to experience decreases in net income when economic conditions decline, specifically the availability of suitable loans, loan default increases and decreases in the amount and availability of leverage. Some of these programs may be unable to optimize their returns to investors because of requirements to liquidate when adverse economic conditions caused real estate prices to be relatively depressed. In addition, prior programs may be required to assume or pay off senior debt in order to protect their investments. Our business will be affected by similar conditions.
      No assurance can be made that our program or other programs sponsored by our general partner and its affiliates will ultimately be successful in meeting their investment objectives.

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DISTRIBUTIONS AND ALLOCATIONS
Carried Interest
      If our general partner enters into commitments to investments in mortgages in excess of 82% of the gross offering proceeds, our general partner will be entitled to a carried interest equal to (a) 1% for the first 2.5% of commitments to investments in mortgages above 82% of the gross offering proceeds (or if commitments to investments in mortgages are above 82% but no more than 84.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 82%), (b) 1% for the next 2% of additional commitments to investments in mortgages above 84.5% of the gross offering proceeds (or if commitments to investments in mortgages are above 84.5% but no more than 86.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 84.5%) and (c) 1% for each additional 1% of additional commitments to investments in mortgages above 86.5% of the gross offering proceeds (or a fractional percentage equal to the fractional amount of any 1% of additional commitments to investments in mortgages). By way of illustration, if 85.5% of UDF III’s gross offering proceeds are committed to investments in mortgages, then our general partner would be entitled to a carried interest of 1.5% (1% for the first 2.5% of commitments to investments in mortgages above 82% of the gross offering proceeds and 0.5% for the next 1% of additional commitments to investments in mortgages above 84.5% of the gross offering proceeds) of any amount otherwise distributable to the limited partners after deduction of any promotional interest payable to our general partner.
      A “carried interest” is an equity interest in UDF III to participate in all distributions, other than distributions attributable to our general partner’s promotional interest, of cash available for distribution and net proceeds from a capital transaction that are distributable under subsection (c) of the distribution priority for net proceeds from a capital transaction described below.
      In order for proceeds to be considered “committed” for purposes of calculation and payment of a carried interest, we must be obligated by contract or other binding agreement to invest such proceeds in mortgages, to the exclusion of any other use for such proceeds or no use at all.
      “Investments in mortgages” are the aggregate amount of capital contributions from investors used by us to make or invest in mortgage loans or the amount actually paid or allocated to the purchase of mortgages, working capital reserves (but excluding working capital reserves in excess of 3% of the aggregate capital contributions) and other cash payments such as interest and taxes but excluding our organization and offering expenses, selling commissions, wholesaling fees, marketing support fees, due diligence fees, acquisition and origination fees, and any other front-end fees.
      Our general partner’s “promotional interest” is our general partner’s right to receive:
  •  prior to the return to the limited partners of all of their capital contributions plus an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, 10% of all cash available for distribution;
 
  •  following the return to the limited partners of all of their capital contributions plus an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, 15% of all cash available for distribution; and
 
  •  following the return to the limited partners of all of their capital contributions plus an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, 15% of all net proceeds from a capital transaction. See “— Net Proceeds from a Capital Transaction” below.
Distributions of Cash Available for Distribution
      “Cash available for distribution” is the cash funds received by us from operations (other than net proceeds from a capital transaction described below), including, without limitation, interest, points or dividends from interim investments and proceeds from borrowings, if any, less all cash used to pay partnership expenses and debt payments and amounts set aside for reserves. Our partnership agreement

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provides that any cash available for distribution that is distributed to a limited partner will be first applied as a return of capital until such limited partner has been distributed aggregate cash available for distribution and capital proceeds equal to such limited partner’s capital contributions. Next, distributions will be applied in satisfaction of the limited partner’s unreturned 8% per annum, non-compounding, cumulative return on his unreturned capital contributions until such limited partner has been distributed aggregate cash available for distribution and capital proceeds equal to his capital contributions and 8% per annum, non-compounding, cumulative return on his unreturned capital contributions. Thereafter, any cash available for distribution that is distributed to a limited partner will be deemed a distribution of profit (above the 8% per annum, non-compounding, cumulative return on his unreturned capital contributions) with respect to the limited partner’s units.
      Prior to the return to the limited partners of all of their capital contributions and an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, cash available for distribution shall be distributed as follows: (a) a percentage of such cash available for distribution equal to the difference between 90% less our general partner’s carried interest shall be distributed to the limited partners in accordance with the limited partners’ relative unit ownership, and (b) a percentage of such cash available for distribution equal to the sum of 10% (our general partner’s promotional interest) plus our general partner’s carried interest shall be distributed to our general partner. For example, if our general partner’s carried interest equaled 1.47% on the date of a distribution of cash available for distribution and the limited partners had not been distributed all of their capital contributions and an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions immediately prior to such distribution or as a result of such distribution, then 88.53% of the cash available for distribution on the date of such distribution would be distributed to the limited partners and 11.47% of the cash available for distribution on the date of such distribution would be distributed to our general partner.
      Following the return to the limited partners of all of their capital contributions and an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, cash available for distribution shall be distributed as follows: (a) a percentage of such cash available for distribution equal to the difference between 85% less our general partner’s carried interest shall be distributed to the limited partners in accordance with the limited partners’ relative unit ownership, and (b) a percentage of such cash available for distribution equal to the sum of 15% (our general partner’s promotional interest) plus our general partner’s carried interest shall be distributed to our general partner. For example, if our general partner’s carried interest equaled 1.47% on the date of a distribution of cash available for distribution and the limited partners had been distributed all of their capital contributions and an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions immediately prior to such distribution, then 83.53% of the cash available for distribution on the date of such distribution would be distributed to the limited partners and 16.47% of the cash available for distribution on the date of such distribution would be distributed to our general partner.
      We intend to create a reserve from our net interest income and net proceeds from capital transactions, in addition to our working capital reserves and reserves for our unit redemption program, to recover some of the organization and offering expenses, including selling commissions and marketing support fees, we will incur in connection with this offering. By recovering some of such organization and offering expenses, such reserve is intended to cause the net asset value of the partnership to be on parity with or greater than the amount that we may pay for units under our unit redemption program, so that investors that do not elect or are unable to have some or all of their units redeemed under our unit redemption program hold units that have a value approximately equal to or greater than the price payable or paid for units that are redeemed. We initially intend to deposit in such reserve 9.5% of any cash that is otherwise available for distribution (from operations or capital proceeds). Provided that we do not suffer a sustained decline in our net asset value, we expect such amount will recover approximately 10% of the organization and offering expenses per year, taking into account amortization of such expenses, and that all organization and offering expenses will be fully recovered after ten years, or sooner. However, it is likely that non-redeeming unit holders will experience dilution as a result of redemptions which occur at a time when the net

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asset value has decreased, regardless of the reserve. The reserve will reduce the amount of cash available for distribution.
Net Proceeds from a Capital Transaction
      A “capital transaction” means a transaction that produces proceeds from (a) the repayment of principal or prepayment of a mortgage to the extent classified as a return of capital for federal income tax purposes, (b) the foreclosure, sale, exchange, condemnation, eminent domain taking or other disposition of a mortgage loan or of a property subject to a mortgage, or (c) insurance or a guarantee with respect to a mortgage.
      Except as provided below with respect to the distribution of certain capital proceeds received by us after the seventh anniversary of the date that this offering is declared effective by the Securities and Exchange Commission, net proceeds from capital transactions shall be distributed as follows:
  •  first, to the limited partners until the limited partners have been returned all of their capital contributions, such distributions to be made to the limited partners in proportion to their respective unreturned capital contributions;
 
  •  next, to the limited partners until the limited partners have been distributed an 8% per annum, non-compounding, cumulative return on their unreturned capital contributions, such distributions to be made to the limited partners in proportion to their respective accrued but unpaid preferred returns; and
 
  •  thereafter, (a) a percentage of such remaining net proceeds from a capital transaction equal to the difference between 85% less our general partner’s carried interest shall be distributed to the limited partners in accordance with the limited partners’ relative unit ownership, and (b) a percentage of such net proceeds from a capital transaction equal to the sum of 15% (our general partner’s promotional interest) plus our general partner’s carried interest shall be distributed to our general partner.
      If we desire to reinvest capital proceeds after the seventh anniversary of the date that this offering is declared effective by the Securities and Exchange Commission, then a limited partner may elect to receive his share of any capital proceeds that we desire to reinvest by providing written notice to us of such election. If a limited partner elects to receive his share of any capital proceeds we desire to reinvest, then such limited partner shall be entitled to receive a portion of all capital proceeds received by us after the date we receive such notice or the seventh anniversary of the date that the offering is declared effective by the Securities and Exchange Commission, whichever is later. The portion of capital proceeds distributable to a limited partner in this circumstance will correspond to the limited partner’s proportionate share of the unreturned capital contributions of all limited partners immediately prior to such distribution.
      The reserve we intend to create to recover some of the organization and offering expenses we will incur in connection with this offering will reduce the amount of cash available for distribution. See “— Distributions of Cash Available for Distribution,” above.
Liquidating Distributions
      Liquidating distributions, defined in our partnership agreement to mean generally the distribution of the net proceeds from our dissolution and termination or from the sale of substantially all of our remaining assets, will be distributed among the general partner and the limited partners in accordance with each such partner’s positive capital account balances, after the allocation of gain on sale and other appropriate capital account adjustments. The effect of this provision is that liquidating distributions will be made in a manner essentially the same as we make other distributions of net proceeds from a capital transaction (and not in the manner capital proceeds are distributed to any limited partner that elects to receive capital proceeds we desire to reinvest after the seventh anniversary of the date that this offering is declared effective by the Securities and Exchange Commission).

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Partnership Allocations
      All of our profits and losses will be allocated to cause each partner’s capital account to equal the amount that would be distributed to each partner if we were liquidated as of the end of each fiscal year. However, excluding amounts allocable to our general partner’s carried interest, in no event will our general partner be allocated (a) more than 10% of profits from normal operations prior to the return to the limited partners of all of their capital contributions and an 8% per annum preferred return on their capital contribution, (b) more than 15% of profits from normal operations following the return to the limited partners of all of their capital contributions and an 8% per annum preferred return on their capital or (c) gains from capital transactions that would result in distributions to our general partner of more than 15% of the amount remaining after limited partners have received a return of their net capital contributions plus an 8% annual, non-compounded return on their net capital contributions. It is the intent of the foregoing limitations that our general partner receives no more than is allowed pursuant to applicable provisions of the NASAA Guidelines. Any amount that must be reallocated will be reallocated to our limited partners on a per unit basis.
      Our partnership agreement contains a “qualified income offset” provision which provides that in the event that any partner receives an adjustment, allocation or distribution of certain items that causes a deficit or negative balance in such partner’s capital account, such partner will be allocated items of income or gain consisting of a pro rata portion of each item of partnership income, including gross income, and gain for such year in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. The intent of the foregoing provision is to prohibit allocations of losses or distributions of cash to a limited partner that would cause the limited partner’s capital account to become negative. A limited partner’s capital account would become negative in the event that the aggregate amount of losses allocated and cash distributed to such limited partner exceeded the sum of his capital contributions plus any income allocated to him, and, in the event such allocation or distribution did cause his capital account to become negative, such limited partner would be allocated income or gain in an amount necessary to bring his capital account back to zero. See “Federal Income Tax Considerations — Allocations of Profit and Loss.”
      The qualified income offset provision may result in income being specially allocated to limited partners even in a fiscal year when we have a net loss from operations or from the sale of foreclosed property.
      Income, losses and distributions of cash relating to units that are acquired directly from us during this offering will be allocated among the limited partners on a pro rata basis based on the number of days such units have been owned by such limited partners.
      Under our partnership agreement, if our general partner determines that it will be advantageous to us, it is authorized, in its discretion, to amend the allocations provisions of our partnership agreement in order to satisfy certain tax rules, which may permit us to avoid generating UBTI for limited partners that are tax-exempt entities. However, even if our general partner is advised by our regular accountants or counsel that the amendments will achieve such a result, our general partner is not obligated to amend the allocations provisions.

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SUMMARY OF DISTRIBUTION REINVESTMENT PLAN
      The following is a summary of our distribution reinvestment plan. A complete copy of our form of distribution reinvestment plan is included in this prospectus as Exhibit D.
Investment of Distributions
      We have adopted a distribution reinvestment plan pursuant to which investors may elect to have a portion of the full amount of their distributions from us reinvested in additional units. We are offering 5,000,000 units for sale pursuant to our distribution reinvestment plan at $20 per unit, which will be available only until the termination of this offering, which is anticipated to be May 15, 2008, unless extended by our general partner. Our general partner has the discretion to extend the offering period for the units being offered pursuant to this prospectus under our distribution reinvestment plan.
      Selling commissions not to exceed 1.0% may be paid with respect to units purchased pursuant to the distribution reinvestment plan. Each limited partner is permitted to identify, change or eliminate the name of his account executive at a participating dealer with respect to distributions reinvested. In the event that no account executive is identified, or in the event that the account executive is not employed by a broker-dealer having a valid selling agreement with us, no selling commission will be paid with respect to distributions that are then being reinvested. Amounts that would otherwise have been paid as selling commissions will be retained and used for additional investments. Accordingly, the economic benefits resulting from an investor’s decision not to identify an account executive will be shared with all investors. No marketing support fee will be paid with respect to units purchased pursuant to the distribution reinvestment plan.
      Pursuant to the terms of our distribution reinvestment plan, the reinvestment agent (which is currently Phoenix American Financial Services, Inc.) will act on behalf of participants to reinvest the distributions they receive from us. Investors participating in the distribution reinvestment plan may purchase fractional units. If sufficient units are not available for issuance under our distribution reinvestment plan, the reinvestment agent will remit excess cash to the participants. Investors purchasing units pursuant to our distribution reinvestment plan will have the same rights as other limited partners as to those units and will be treated in the same manner as if such units were issued pursuant to our offering.
      After the expiration of the offering of our units under the distribution reinvestment plan, our general partner may determine to allow participants to reinvest their distributions from us in units issued by a subsequent United Development Funding program only if all of the following conditions are satisfied:
  •  a registration statement covering the interests in the subsequent United Development Funding program has been declared effective under the Securities Act of 1933;
 
  •  the offer and sale of such interests is qualified for sale under applicable state securities laws;
 
  •  prior to the time of such reinvestment, the investor has received the final prospectus and any supplements thereto offering interests in the subsequent United Development Funding program and such prospectus allows investments pursuant to a distribution reinvestment plan;
 
  •  the participant executes the subscription agreement included with the prospectus for the subsequent United Development Funding program;
 
  •  the participant qualifies under applicable investor suitability standards as contained in the prospectus for the subsequent United Development Funding program; and
 
  •  the subsequent United Development Funding program has substantially identical investment objectives as we have.

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      Investors who invest in subsequent United Development Funding programs pursuant to a distribution reinvestment plan will become investors in such subsequent United Development Funding program and, as such, will receive the same reports as other investors in the subsequent United Development Funding program.
Election to Participate or Terminate Participation
      An investor may become a participant in our distribution reinvestment plan by making a written election to participate on his subscription agreement at the time he subscribes for units. Any other investor who has not previously elected to participate in the distribution reinvestment plan may so elect at any time by delivering to the reinvestment agent a completed enrollment form or other written authorization required by the reinvestment agent. Participation in our distribution reinvestment plan will commence with the next distribution payable after receipt of the participant’s notice, provided it is received at least ten days prior to the last day of the month to which the distribution relates.
      Some brokers may determine not to offer their clients the opportunity to participate in our distribution reinvestment plan. Any prospective investor who wishes to participate in our distribution reinvestment plan should consult with his broker as to the broker’s position regarding participation in the distribution reinvestment plan.
      Our general partner reserves the right to prohibit qualified retirement plans from participating in our distribution reinvestment plan if such participation would cause our underlying assets to constitute “plan assets” of qualified retirement plans. See “Investment by Tax-Exempt Entities and ERISA Considerations.”
      Each investor electing to participate in our distribution reinvestment plan agrees that, if at any time he fails to meet the applicable investor suitability standards or cannot make the other investor representations or warranties set forth in the then current prospectus, subscription agreement or partnership agreement relating to such investment, he will promptly notify the reinvestment agent in writing of that fact.
      Subscribers should note that affirmative action in the form of written notice to the reinvestment agent must be taken to withdraw from participation in our distribution reinvestment plan. A withdrawal from participation in our distribution reinvestment plan will be effective beginning with the first distribution that relates to the month ended ten or more days after notice of termination is received. In addition, a transfer of units will terminate participation in the distribution reinvestment plan with respect to such transferred units as of the first day of the month in which the transfer is effective, unless the transferee demonstrates to the reinvestment agent that the transferee meets the requirements for participation in the plan and affirmatively elects to participate in the plan by providing to the reinvestment agent an executed enrollment form or other written authorization required by the reinvestment agent.
      Offers and sales of units pursuant to the distribution reinvestment plan must be registered in every state in which offers and sales are made. Generally, such registrations are for a period of one year. Thus, we may have to stop selling units pursuant to the distribution reinvestment plan in any states in which registration is not renewed annually.
Reports to Participants
      Within 60 days after the end of each fiscal quarter, the reinvestment agent will mail to each participant a statement of account describing, as to such participant, the distributions received during the quarter, the number of units or other interests purchased during the quarter, the purchase price for such units or interests, and the total units or interests purchased on behalf of the participant pursuant to our distribution reinvestment plan.

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Federal Income Tax Considerations
      Taxable participants will incur tax liability for interest income allocated to them even though they have elected not to receive their distributions in cash but rather to have such distributions reinvested under our distribution reinvestment plan. See “Risk Factors — Federal Income Tax Risks.”
Amendment and Termination
      We reserve the right to amend any aspect of our distribution reinvestment plan with 30 days notice to participants. We also reserve the right to terminate our distribution reinvestment plan in the sole discretion of the general partner at any time by sending written notice of termination to all participants.

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REAL PROPERTY LOANS AND INVESTMENTS
      As of the date of this prospectus, we have not funded, acquired nor contracted to acquire any specific loans. Our general partner is continually evaluating various potential loans and engaging in discussions and negotiations with developers and home builders regarding the financing of development properties. We intend to participate in loans made by affiliated partnerships, specifically UDF I and UDF II. Our general partner intends to supplement this prospectus approximately once each quarter to disclose the transactions entered into in the preceding quarter and any probable transactions we are considering. YOU SHOULD UNDERSTAND THAT THE INITIAL DISCLOSURE OF ANY PROPOSED TRANSACTION CANNOT BE RELIED UPON AS AN ASSURANCE THAT WE WILL ULTIMATELY CONSUMMATE SUCH TRANSACTION OR THAT THE INFORMATION PROVIDED CONCERNING THE PROPOSED TRANSACTION WILL NOT CHANGE BETWEEN THE DATE OF SUCH SUPPLEMENT AND THE CONSUMMATION OF THE TRANSACTION.
      We intend for the proceeds of this offering to be invested in accordance with our investment policies and to return to investors any funds available for investment that are not expended or committed to the funding or acquisition of mortgage loans on or before the later of the second anniversary of the effective date of the registration statement or one year after the termination of the offering and not reserved for working capital purposes. For information regarding when funds shall be deemed committed for this purpose, see “Distributions and Allocations.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
      As of the date of this prospectus, we have not yet commenced active operations. Once the minimum subscription is achieved, subscription proceeds will be released to us as accepted and applied to investments in mortgage loans and equity investments in entities that make mortgage loans and the payment or reimbursement of selling commissions and other organization and offering expenses. See “Estimated Use of Proceeds.” We will experience a relative increase in liquidity as additional subscriptions for units are received and a relative decrease in liquidity as net offering proceeds are expended in connection with the funding and acquisition of mortgage loans.
      The net proceeds of this offering will provide funds to enable us to fund or acquire loans. We may fund the loans in cash or a combination of cash and senior debt, if favorable borrowing terms are available. The proceeds from such senior debt borrowings will be used to fund and acquire loans. We have not entered into any arrangements to fund or acquire any mortgage loans. The number of loans we fund or acquire will depend upon the number of units sold and the resulting amount of the net proceeds available for investment in loans. In the event that this offering is not fully sold, our ability to diversify our investments may be diminished.
      Until required for the funding or acquisition of loans, net offering proceeds will be kept in short-term, liquid investments. Our general partner may, but is not required to, establish reserves from gross offering proceeds, out of cash flow generated by loans or out of net proceeds from loan repayments.
Material Trends Affecting Our Business
      We are a real estate finance company and derive a substantial portion of our income by originating, purchasing, participating in and holding for investment mortgage loans made directly by us or indirectly through our affiliates to persons and entities for the acquisition and development of real property as single-family residential lots that will be marketed and sold to home builders. We intend to concentrate our lending activities in the southeast and southwest sections of the United States, particularly in Texas, Florida and Arizona. These areas continue to experience a strong demand for new construction single family homes. Additionally, we intend to concentrate our lending activities with national homebuilders and large regional homebuilders and developers who sell single family residential home lots to such national and regional homebuilders.
      The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing for acquisition, construction and permanent mortgages, interest rate levels and demand for housing. Sales of new homes are also affected by the condition of the resale market for used homes, including foreclosed homes. Housing demand is, in general, adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing.
      Our primary market risk exposure is the 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 most instances, the loans we will make will be junior in the right of repayment to senior lenders who will provide loans representing 70% to 80% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.
      Our general partner is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that they reasonably anticipate to have a material impact on either the income to be derived from our investments in mortgage loans and entities that make mortgage loans, other than those referred to in this prospectus.

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Liquidity
      Our liquidity requirements will be affected by (1) outstanding loan funding obligations, (2) our administrative expenses, and (3) debt service on senior indebtedness required to preserve our collateral position. We expect that our liquidity will be provided by (1) loan interest payments, (2) loan principal payments, (3) proceeds form sale of units of our limited partnership interests, (4) sale of loan pools through securitization and direct sale of loans, (5) proceeds from our distribution reinvestment plan, and (6) credit lines available to us.
      In most cases, loan interest payments will be funded by an interest reserve. Interest reserve accounts are funded as loan proceeds and are intended to provide cash for monthly interest payments until such time that revenue from sale of land or developed lots are sufficient to meet the debt service obligations. In the event that interest reserves are exhausted prior to realization of sufficient cash from land or lot sales, a loan default may occur. Payment defaults and decreasing land and lot sales may result in less liquidity and affect our ability to meet our obligations and make distributions. The inability to sell additional partnership interests may result in our inability to fund loans, and the inability to sell loan pools may result in longer periods to return principal to our investors. Limited credit facilities may impact our ability to meet our obligations or expand our loan portfolio when other sources of cash are not sufficient.
      Increased liquidity needs could result in the liquidation of loans to raise cash, thereby reducing the number and amount of loans outstanding and the resultant earnings realized. We do not intend to incur indebtedness; however, we may secure lines of credit to bridge any cash needs when other sources of cash are insufficient to meet our obligations.

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SUMMARY OF PARTNERSHIP AGREEMENT
      The rights and obligations of our investors will be governed by our partnership agreement. The form of our partnership agreement is included in its entirety as Exhibit B to this prospectus. Our partnership agreement will be executed and become effective as of the effective date of this prospectus. Prospective investors should study our partnership agreement carefully before making any investment decision to purchase our units.
      The following statements are intended to summarize the material provisions of our partnership agreement, with the exception of certain information that is summarized under separate sections of this prospectus. See “Distributions and Allocations.”
Powers of the General Partner
      Our general partner has complete authority and discretion in the management and control of our business. Our limited partners have no right or power to take part in our management. See Articles XI and XVI of the partnership agreement.
Liabilities of Our Limited Partners; Nonassessability of Units
      We are organized as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. Investors whose subscriptions are accepted by the general partner will be admitted as our limited partners. Under Delaware law, limited partners generally have no personal liability for our debts or obligations in excess of their capital contributions.
      Units acquired by investors will be fully paid and nonassessable. (Section 8.5(d).) Limited partners will not have a right to withdraw any of their capital contributions until a complete winding up of the partnership and liquidation of our business, except as provided in our unit redemption program. (Section 8.10(b).)
Other Activities of the General Partner
      Our general partner may participate in various other business ventures, some of which may compete with us, including the syndication, ownership or management of other mortgage loan program. The general partner will not be liable to us or to our limited partners as a result of engaging in other business ventures.
      Our general partner is prohibited from reinvesting our cash flow (excluding any proceeds from the sale, disposition or refinancing of a mortgage or foreclosed property or from principal repayment of a mortgage). Our general partner shall have the authority to reinvest proceeds from the return of loan principal from our loans or the sale, disposition or refinancing of our properties; provided, that a portion of such proceeds sufficient to cover any increase in our limited partners’ federal and state income taxes attributable to the sale, disposition or refinancing (assuming a 30% combined federal and state tax bracket) shall be distributed in time to pay such increase. (Section 11.3(f).)
      The aggregate real estate commission paid to all parties involved in the sale of a foreclosed property shall not exceed the lesser of: (a) the reasonable, customary and competitive real estate brokerage commission normally and customarily paid for the sale of a comparable property in light of the size, type and location of the property, or (b) 6.0% of the gross sales price of such property. Notwithstanding the foregoing, neither our general partner nor any of its affiliates will be granted an exclusive right to sell or exclusive employment to sell any property on our behalf. (Section 12.4.)
      Our general partner or any of its affiliates may provide insurance brokerage services in connection with obtaining insurance on our properties so long as the cost of providing such service, including the cost of the insurance, is no greater than the lowest quote obtained from two unaffiliated insurance agencies and the coverage and terms are likewise comparable. In no event may such services be provided by our general partner or any of its affiliates unless they are independently engaged in the business of providing such

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services and at least 75% of their insurance brokerage service gross revenue is derived from persons other than our affiliates. (Section 12.2.)
      Other than as specifically provided in our partnership agreement or in this prospectus, neither our general partner nor its affiliates will be compensated for services rendered to us. Our general partner and its affiliates cannot receive any fees or other compensation from us except as specifically provided for in our partnership agreement or as described in this prospectus.
      Our general partner and its affiliates are prohibited from receiving any rebates or participating in any reciprocal business arrangements that would circumvent the provisions of our partnership agreement. (Section 12.5(a).)
      Nothing in our partnership agreement or the subscription agreement shall be deemed to require the mandatory arbitration of disputes between a limited partner and us or our general partner. (Section 22.9.)
Rights of Limited Partners to Participate in Management
      Our limited partners generally are not permitted to participate in the management or control of our business.
Voting Rights of the Limited Partners
      Our limited partners may, with the affirmative vote of limited partners holding more than 50.0% of the units, take action on the following matters without the concurrence of our general partner:
  •  the approval or disapproval of any sale of all or substantially all of our investments;
 
  •  our dissolution;
 
  •  the removal of a general partner or any successor general partner;
 
  •  the election of a new general partner upon the retirement, withdrawal or removal of a general partner or the occurrence of another event of withdrawal of a general partner; and
 
  •  any amendment to our partnership agreement, except as to certain matters specified in our partnership agreement, including amendments (a) to avoid the characterization of partnership income as UBTI, (b) to reflect the addition or substitution of limited partners, (c) to add to the duties of the general partner or surrender any rights of the general partner to the limited partners, (d) to cure any ambiguity or inconsistency in the partnership agreement, (e) to make changes required by the Securities and Exchange Commission or any state securities commission, or (f) to facilitate our operation in order to qualify as a REIT, corporation or other tax status, which the general partner alone may amend without a vote of the limited partners. (Section 16.1.)
      In addition, the approval of limited partners holding more than 50.0% of the units (or a higher percentage if required by our general partner) is required to authorize a proposed merger or plan of conversion or exchange of our units under certain circumstances. (Section 11.5(d).) Units held by our general partner or its affiliates will not be voted or included in the calculation of the percentage vote required to approve any such transaction.
      Our partnership agreement may not be amended to change the limited liability of the limited partners without the consent of all limited partners. In addition, limited partners holding a majority of any class of units that would be adversely affected by a proposed amendment to the partnership agreement must consent to any such amendment. (Section 16.2.) Amendments to our partnership agreement receiving the requisite vote will be executed by our general partner on behalf of all limited partners acting pursuant to the power of attorney contained in our partnership agreement. (Section 19.1.)

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Mergers, Consolidations and Conversions
      Our partnership agreement contains a provision prohibiting our general partner from entering into a transaction in which we are merged or consolidated with another partnership or corporation in which our units would be exchanged for securities of another partnership, real estate investment trust, or other entity, which type of transaction is commonly referred to as a “partnership roll-up” unless (1) we obtain a current appraisal of all of our assets by an independent appraiser, and (2) limited partners who vote against or dissent from any such proposal are given the choice of either accepting the securities offered in the proposed roll-up or any one of the following: (a) remaining as limited partners and preserving their interests in us on the same terms and conditions as existed previously; or (b) receiving cash in an amount equal to their pro rata share of the appraised value of our net assets. (Section 11.3(t).)
      Our partnership agreement further provides that, in order to adopt a plan of merger pursuant to which we are merged with or into any other entity, a plan of exchange pursuant to which all of our units are exchanged for cash or securities of another entity, or a plan of conversion whereby we are converted into another entity, the transaction generally must be approved by limited partners owning at least 50.0% of our units (or a higher percentage if required by our general partner), not including units held by our general partner or its affiliates. Limited partners who dissent from any merger, conversion or exchange which is submitted to limited partners for their approval will be given the right to dissent from the transaction and to receive payment for their units based on the appraised value of our net assets. Limited partner approval is not required for any of the following transactions: (1) in the case of a plan of exchange, if we are the acquiring entity, (2) if the surviving entity in a merger or conversion is a limited partnership that has a substantially identical partnership agreement and limited partners holding units immediately before the date of the merger or conversion will hold the same interests in the same proportions immediately after the effective date of the merger or conversion, or (3) if the transaction involves our conversion to corporate, trust or association form and, as a consequence of the transaction, there will be no significant adverse change in investors’ voting rights, the term of existence of the surviving or resulting entity, sponsor compensation, or our investment objectives. In the event that federal tax legislation is enacted that results in another form of organization having superior tax advantages to our limited partnership structure, our general partner has the ability under these provisions to cause us to convert to a corporation or other organizational form without limited partner approval, if it determines that such a conversion is in our best interest. (Sections 11.5 and 11.6.)
Removal or Withdrawal of General Partner
      Our general partner may be removed generally by a vote of limited partners holding more than 50.0% of the units. (Section 17.1(d).) If our general partner withdraws with the consent of the limited partners or is removed, the fair market value of the general partner’s interest will be paid to it or as provided in Section 20.4 of our partnership agreement. If we and the former general partner cannot agree on the value of the general partner’s interest, the value will be determined by independent appraisers. (Section 20.4.) We may pay this amount by issuing a promissory note to the former general partner. If the former general partner retired or withdrew voluntarily, the promissory note will bear no interest, but if the former general partner was removed by the limited partners, the promissory note will provide for annual installments over a period of five years or more and provide for interest at the greater of 9.0% per annum or the prime rate of interest plus 1.0% per annum.
      We may, with the consent of limited partners holding more than 50.0% of the units, sell the former general partner’s interest to an affiliate of the general partner and admit such person or entity to us as a substitute general partner. The purchase price to be paid to us for the partnership interest of the former general partner must be at least equal to the fair market value determined by the appraisal described above and may be paid in installments in the manner described above.

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Assignability of General Partner’s Interests
      A general partner may designate a successor or additional general partner with the consent of any general partners and limited partners holding more than 50.0% of the units, provided that the interests of limited partners are not adversely affected. Except in connection with such a designation, our general partner generally does not have a right to withdraw voluntarily from us or to sell, transfer or assign these interests without the consent of the limited partners holding more than 50.0% of our units. (Section 17.2.)
Books and Records; Rights to Information; Annual Audits
      Our general partner is required to maintain full and accurate books and records at our principal office. Limited partners have the right to inspect, examine and obtain copies of our books and records at reasonable times and at their expense. An alphabetical list of the names, addresses and business telephone numbers of all limited partners, along with the number of units owned by each of them, shall be available for inspection and copying by our limited partners or their designated representatives, and shall be mailed to any limited partner requesting such list within ten days of the request. (Section 15.1.) Annual audits of our affairs will be conducted by our independent registered public accounting firm. (Section 15.2(b).)
Meetings of Limited Partners
      There will not be any regularly scheduled annual or periodic meetings of our limited partners. Our general partner is, however, required to call a meeting of the limited partners upon the written request of limited partners holding at least 10% of the units. In such event, a detailed statement of any action proposed and the wording of any resolution proposed for adoption or any proposed amendment to our partnership agreement is required to be included with the notice of the meeting. (Section 16.4.)
Transferability of Units
      There are a number of restrictions on the transferability of our units, including the following:
  •  except in certain limited circumstances, the proposed transferee must meet the minimum suitability standards set forth in this prospectus;
 
  •  investors may only transfer a number of units such that, after the transfer, both the transferor and transferee shall own at least the minimum number of units required to be purchased by an investor; provided, there is no such requirement for transfers made on behalf of a retirement plan or by gift, inheritance or divorce, or to an affiliate;
 
  •  investors who desire to transfer their units must pay a reasonable transfer fee in an amount sufficient to cover transfer costs (pursuant to our partnership agreement, a fee of $50 per transfer shall be deemed reasonable);
 
  •  all transfers of units must be made pursuant to documentation satisfactory in form and substance to our general partner, including, without limitation, confirmation by the transferee that the transferee has been informed of all pertinent facts relating to the liquidity and marketability of the units; and
 
  •  no unit may be sold or assigned if the sale of such unit, when added to the total of all other sales of units within the period of 12 consecutive months prior to the proposed date of sale, would, in the opinion of our counsel, result in our termination as a partnership under Section 708 of the Internal Revenue Code, unless we receive a ruling from the Internal Revenue Service that the proposed sale would not cause such a termination.
      Additional restrictions on transfers of units may be imposed on the residents of various states under the securities laws of such states. In addition, our partnership agreement contains restrictions on the transfer or assignment of units in order to prevent us from being deemed a “publicly traded partnership.” These provisions are based on restrictions contained in the Section 7704 Regulations described in the “Federal Income Tax Considerations” section of this prospectus. The most significant transfer restriction prohibits the transfer during any taxable year of more than 10% of the total interests in our capital or

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profits excluding transfers by gift, transfers at death, transfers between family members, distributions from a qualified retirement plan and block transfers. Our partnership agreement also provides that any transfer or assignment of units that the general partner believes will cause us to be treated as a publicly traded partnership will be void and not recognized. See “Federal Income Tax Considerations — Publicly Traded Partnership Status” and Section 17.4(g) of our partnership agreement.
      An assignee of units will not become a substituted limited partner unless the assignee expressly agrees to adopt and become a party to our partnership agreement. (Sections 17.4 and 17.5.) An assignee of units who does not become a substituted limited partner will be entitled to receive distributions attributable to the units properly transferred to him, effective no later than the first day of the month in which the assignment is recognized. (Sections 17.5 and 17.6.) Any such assignee will not have any of the other rights of a limited partner, such as the right to vote as a limited partner or the right to inspect and copy our books. Assignments of units are restricted in the same manner as transfers of units.
      Limited partners who wish to transfer units will be required to pay us a transfer fee of $50 or more, as deemed reasonable by our general partner, to cover costs to us associated with the transfer. The payment of such fee will be a condition to any proposed transfer.
Unit Redemption Program
      The Securities and Exchange Commission has granted us exemptive relief from rules restricting issuer purchases during distributions with respect to our unit redemption program. As a result, our general partner has adopted a unit redemption program that enables our limited partners to sell their units in us in limited circumstances. This program permits you to sell your units back to us after you have held them for at least one year, subject to the significant conditions and limitations described below.
      Our limited partners who have held their units for at least one year may receive the benefit of limited liquidity by presenting for redemption all or portion of their units 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 units 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 limited partner, (wherein the minimum holding period may be waived by our general partner), the purchase price for the redeemed units, for the period beginning after a limited partner has held the units for a period of one year, will be (1) 92% of the purchase price actually paid for any units held less than two years, (2) 94% of the purchase price actually paid for any units held for at least two years but less than three years, (3) 96% of the purchase price actually paid for any units held at least three years but less than four years, (4) 98% of the purchase price actually paid for any units held at least four years but less than five years and (5) the lesser of the purchase price actually paid for any units held at least five years or the then-current fair market value of your units as determined by the most recent annual valuation of our units. The price we will pay for redeemed units will be offset by any net proceeds from capital transactions previously distributed to the redeeming limited partner in respect of such units as a return of his or her capital contributions. In no event will the total amount paid for redeemed units, including any net proceeds from capital transactions previously distributed to the redeeming limited partner in respect of the redeemed units 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 units. 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 limited partners and would offset the price we will pay for redeemed units. Our general partner reserves the right in its sole discretion at any time and from time to time to (1) waive the one-year holding period in the event of the death or bankruptcy of a limited partner or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend and/or reestablish our unit redemption program.
      In addition, and subject to the conditions and limitations described below, we will redeem units, upon the death of a limited partner who is a natural person, including units held by such limited partner through

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an IRA or other retirement or profit-sharing plan, after receiving written notice from the estate of the limited partner or the recipient of the units through request or inheritance. We must receive such written notice within 180 days after the death of the limited partner. If spouses are joint registered holders of units, the request to redeem the units may be made if either of the registered holders dies. If the limited partner 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 units redeemed upon the death of a limited partner will be the lesser of (1) the price the limited partner actually paid for the units or (2) the then-current fair market value of the units as determined by the most recent annual valuation of our units. The price we will pay for units redeemed upon the death of a limited partner will be offset by any net proceeds from capital transactions previously distributed to the deceased limited partner, or his or her estate, in respect of such units as a return of capital contributions. In no event will the total amount paid for redeemed units, including any net proceeds from capital transactions previously distributed to the deceased limited partner, or his or her estate, in respect of the redeemed units 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 units. 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 limited partners and would offset the price we will pay for redeemed units.
      We will redeem units upon the death or bankruptcy of a limited partner 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 unit redemption program, including the redemption upon the death of a limited partner, is available only for limited partners who purchase their units directly from us or certain transferees, and is not intended to provide liquidity to any limited partner who acquired his or her units by purchase from another limited partner. In connection with a request for redemption, the limited partner or his or her estate, heir or beneficiary will be required to certify to us that the limited partner either (1) acquired the units to be repurchased directly from us or (2) acquired such units from the original subscriber by way of a bona fide gift not for value to, or for the benefit of, a member of 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 units monthly under the program. We will not redeem in excess of 5.0% of the weighted average number of units outstanding during the prior twelve-month period immediately prior to the date of redemption. Our general partner will determine from time to time whether we have sufficient excess cash from operations to repurchase units. Generally, the cash available for redemption will be limited to 1% of the operating cash flow from the previous fiscal year, plus any net proceeds from our distribution reinvestment plan. Our general partner, in its sole discretion, may choose to terminate or suspend our unit redemption program at any time it determines that such termination or suspension is in our best interest or to reduce the number of units purchased under the unit redemption program if it determines the funds otherwise available to fund our unit redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions upon the death of a limited partner. See “Risk Factors — Risks Related to Our Business in General.”
      We cannot guarantee that the funds set aside for the unit 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 limited partner or his or her estate, heir or beneficiary can (1) withdraw the request for redemption, or (2) ask that we honor the request at such time, if any, when sufficient funds become available. Such pending requests will be honored among all requesting limited partners in any given redemption period, as follows: first, pro rata as to redemptions upon the death of a limited partner; next, pro rata as to redemptions to limited partners who demonstrate, in the discretion of our general

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partner, another involuntary exigent circumstance, such as bankruptcy; and, finally, pro rata as to other redemption requests, if any, until all other requests for redemption have been met.
      A limited partner or his or her estate, heir or beneficiary may present to us fewer than all of its units then-owned for redemption, provided, however, that the minimum number of units that must be presented for redemption shall be at least 25% of the holder’s units. A limited partner who wishes to have units redeemed must mail or deliver to us a written request on a form provided by us and executed by the limited partner, its trustee or authorized agent. An estate, heir or beneficiary that wishes to have units redeemed following the death of a limited partner must mail or deliver to us a written request on a form provided by us, including evidence acceptable to our general partner of the death of the limited partner, and executed by the executor or executrix of the estate, the heir or beneficiary, or their trustee or authorized agent. If the units 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.
      Our unit redemption program is only intended to provide limited interim liquidity for our limited partners until our liquidation, since there is no public trading market for your units and we do not expect that any market for your units will ever develop. Units owned by our general partner or its affiliates will not be redeemed pursuant to our unit redemption program. Neither our general partner nor any of its affiliates will receive any fee on the repurchase of units by us pursuant to the unit redemption program. For a discussion of the tax treatment of redemptions, see “Federal Income Tax Considerations — Sales of Limited Partnership Units.”
      We will cancel the units we purchase under the unit redemption program and will not reissue the units unless they are first registered with the Securities and Exchange Commission under the Securities Act and under appropriate state securities laws or otherwise issued in compliance with such laws and our partnership agreement.
      The foregoing provisions regarding the unit redemption program in no way limit our ability to repurchase units from limited partners by any other legally available means for any reason that our general partner, in its discretion, deem to be in our best interest.
Distribution Reinvestment Plan
      We currently have a distribution reinvestment plan that is designed to enable investors to have their cash distributions from us invested in additional units of our limited partnership interest during the offering period or in equity interests issued by subsequent United Development Funding programs that have substantially identical investment objectives as ours. (Section 8.15.) See “Summary of Distribution Reinvestment Plan” and the form of distribution reinvestment plan included in this prospectus as Exhibit D.
Dissolution and Termination
      Unless otherwise extended by our general partners and the majority vote of our limited partners, we will be dissolved upon the earlier of December 31, 2028, or the first to occur of the following:
  •  the decision by holders of more than 50% of the units to dissolve and terminate us;
 
  •  the retirement, withdrawal or removal of the general partner unless within 90 days from the date of such event:
  (1) the remaining general partner, if any, elects to continue our business; or
 
  (2) if there is no remaining general partner, a majority-in-interest of the limited partners elect to continue our business;
  •  the effective date of the occurrence of an event of withdrawal of the last remaining general partner unless, within 120 days from such event, limited partners owning more than 50% of our units elect to continue our business;

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  •  the sale or disposition of all our interests in real property unless our general partner determines to reinvest the sale proceeds consistent with the provisions of our partnership agreement; or
 
  •  the happening of any other event causing our dissolution under the laws of the State of Delaware. (Section 20.1.)
      In addition to the above events, our general partner may also compel our termination and dissolution, or restructure our affairs, upon notice to all limited partners and without the consent of any limited partner, if either (1) our assets constitute “plan assets,” as such term is defined for purposes of ERISA, or (2) any of the transactions contemplated in our partnership agreement constitute “prohibited transactions” under ERISA. (Section 20.1(h).) See “Investment by Tax-Exempt Entities and ERISA Considerations.”
      In the event we are dissolved, our assets will be liquidated and converted to cash. Our general partner will have a reasonable amount of time to collect any notes receivable with respect to the sale of our assets and to collect any other outstanding debts. Partnership cash will be distributed first to creditors to satisfy our debts and liabilities, other than loans or advances made by partners. Our general partner may also establish reserves deemed reasonably necessary to satisfy our contingent or unforeseen liabilities or obligations. Remaining cash will then be used to repay loans or advances made by partners and to pay any fees due the general partner or its affiliates. The balance will then be distributed to the partners in accordance with the positive balances in their capital accounts as of the date of distribution. Upon completion of the foregoing distributions, we will be terminated. (Section 9.3.)

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INVESTMENT BY TAX-EXEMPT ENTITIES AND ERISA CONSIDERATIONS
General
      The following is a summary of some non-tax considerations associated with an investment in our units of limited partnership interest by tax-qualified pension, stock bonus or profit sharing plans, employee benefit plans described in Section 3(3) of ERISA, annuities described in Section 403(a) or (b) of the Internal Revenue Code, an individual retirement account or annuity described in Section 408 or 408A of the Internal Revenue Code, an Archer MSA described in Section 220(d) of the Internal Revenue Code, a health savings account described in Section 223(d) of the Internal Revenue Code, or a Coverdell education savings account described in Section 530 of the Internal Revenue Code, which are referred to as Plans and IRAs, as applicable. This summary is based on provisions of ERISA and the Internal Revenue Code, including amendments thereto through the date of this prospectus, and relevant regulations and opinions issued by the Department of Labor and the Internal Revenue Service through the date of this prospectus. We cannot assure you that adverse tax decisions or legislative, regulatory or administrative changes that would significantly modify the statements expressed herein will not occur. Any such changes may or may not apply to transactions entered into prior to the date of their enactment.
      We are structured in such a manner so as to be an attractive investment vehicle for Plans and IRAs. However, in considering an investment in our units of limited partnership interest, those involved with making such an investment decision should consider applicable provisions of the Internal Revenue Code and ERISA. While each of the ERISA and Internal Revenue Code issues discussed below may not apply to all Plans and IRAs, individuals involved with making investment decisions with respect to Plans and IRAs should carefully review the rules and exceptions described below, and determine their applicability to their situation.
      In general, individuals making investment decisions with respect to Plans and IRAs should, at a minimum, consider:
  •  whether the investment is in accordance with the documents and instruments governing such Plan or IRA;
 
  •  whether the investment satisfies the prudence and diversification and other fiduciary requirements of ERISA, if applicable;
 
  •  whether the investment will result in UBTI to the Plan or IRA (see “Federal Income Tax Considerations — Investment by Qualified Plans and Other Tax-Exempt Entities”);
 
  •  whether there is sufficient liquidity for the Plan or IRA, considering the minimum and other distribution requirements under the Internal Revenue Code and the liquidity needs of such Plan or IRA, after taking this investment into account;
 
  •  the need to value the assets of the Plan or IRA annually; and
 
  •  whether the investment would constitute or give rise to a prohibited transaction under ERISA or the Internal Revenue Code, if applicable.
      Additionally, individuals making investment decisions with respect to Plans must remember that ERISA requires that the assets of an employee benefit plan must generally be held in trust, and that the trustee, or a duly authorized named fiduciary or investment manager, must have authority and discretion to manage and control the assets of an employee benefit plan.
Minimum Distribution and Other Distribution Requirements — Plan Liquidity
      Potential Plan or IRA investors who intend to purchase units should consider the limited liquidity of an investment in our units as it relates to the minimum distribution requirements under the Internal Revenue Code, if applicable, and as it relates to other distributions (such as, for example, cash out distributions) that may be required under the terms of the Plan or IRA from time to time. If the units are

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held in an IRA or Plan and, before we sell our properties, mandatory distributions or other distributions are required to be made to the participant or beneficiary of such IRA or Plan pursuant to the Internal Revenue Code, then this would require that a distribution of the units be made in kind to such participant or beneficiary or that a rollover of such units be made to an IRA or other Plan, which may not be permissible under the terms and conditions of the IRA or Plan making the distribution or rollover or the IRA or Plan receiving the rollover. Even if permissible, a distribution of units in kind to a participant or beneficiary of an IRA or Plan must be included in the taxable income of the recipient for the year in which the units are received at the then current fair market value of the units, even though there would be no corresponding cash distribution with which to pay the income tax liability arising because of the distribution of units. See “Risk Factors  — Federal Income Tax Risks.” The fair market value of any such distribution-in-kind can be only an estimated value per unit because no public market for our units exists or is likely to develop. See “— Annual Valuation Requirement” below. Further, there can be no assurance that such estimated value could actually be realized by a limited partner because estimates do not necessarily indicate the price at which units could be sold. Also, for distributions subject to mandatory income tax withholding under Section 3405 or other tax withholding provisions of the Internal Revenue Code, the trustee of a Plan may have an obligation, even in situations involving in-kind distributions of units, to liquidate a portion of the in-kind units distributed in order to satisfy such withholding obligations, although there might be no market for such units. There may also be similar state and/or local tax withholding or other tax obligations that should be considered.
Annual Valuation Requirement
      Fiduciaries of Plans are required to determine the fair market value of the assets of such Plans on at least an annual basis. If the fair market value of any particular asset is not readily available, the fiduciary is required to make a good faith determination of that asset’s value. Also, a trustee or custodian of an IRA must provide an IRA participant and the Internal Revenue Service with a statement of the value of the IRA each year. However, currently, neither the Internal Revenue Service nor the Department of Labor has promulgated regulations specifying how “fair market value” should be determined for this purpose.
      For the first two full fiscal years following the termination of the offering, the value of our units will be deemed to be $20, and no valuation or appraisal work will be undertaken. Thereafter, we will prepare annual valuations of our units based upon the average weighted units outstanding divided into the sum of: (1) the unpaid principal balance of our performing loans, plus (2) cash balances, plus (3) appraised value of real estate owned as of the close of our fiscal year. Such estimated property values will be based upon annual valuations performed by the general partner, and no independent property appraisals will be obtained. While our general partner is required under the partnership agreement to obtain the opinion of an independent third-party stating that its estimates of value are reasonable, the unit valuations provided by our general partner may not satisfy the technical requirements imposed on Plan fiduciaries under ERISA. Similarly, the unit valuations provided by our general partner may be subject to challenge by the Internal Revenue Service if used for any tax (income, estate and gift, or otherwise) valuation purpose as an indicator of the fair market value of the units.
      We anticipate that we will provide annual reports of our determination of value (1) to IRA trustees and custodians not later than January 15 of each year, and (2) to other Plan fiduciaries within 75 days after the end of each calendar year. Each determination may be based upon valuation information available as of October 31 of the preceding year, updated, however, for any material changes occurring between October 31 and December 31.
      There can be no assurance, however, with respect to any estimate of value that we prepare, that:
  •  the estimated value per unit would actually be realized by limited partners upon liquidation, because these estimates do not necessarily indicate that all loans will be paid in full;
 
  •  our limited partners would be able to realize estimated net asset values if they were to attempt to sell their units, because no public market for our units exists or is likely to develop; or

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  •  that the value, or method used to establish value, would comply with ERISA or Internal Revenue Code requirements described above.
Fiduciary Obligations — Prohibited Transactions
      Any person identified as a “fiduciary” with respect to a Plan incurs duties and obligations under ERISA as discussed herein. For purposes of ERISA, any person who exercises any authority or control with respect to the management or disposition of the assets of a Plan is considered to be a fiduciary of such Plan. Further, any transactions between a Plan or IRA and a “parties-in-interest” or a “disqualified person” with respect to such Plan or IRA are prohibited by ERISA and/or the Internal Revenue Code. ERISA also requires generally that the assets of Plans be held in trust and that the trustee, or a duly authorized investment manager, have exclusive authority and discretion to manage and control the assets of the Plan.
      In the event that our properties and other assets were deemed to be assets of a Plan or IRA, referred to herein as “Plan Assets,” our general partner then would be deemed a fiduciary of any Plans or IRAs investing as limited partners. If this were to occur, certain contemplated transactions between our general partner and us could be deemed to be “prohibited transactions.” Additionally, ERISA’s fiduciary standards applicable to investments by Plans would extend to our general partner as a Plan fiduciary with respect to investments made by us, and the requirement that Plan Assets be held in trust could be deemed to be violated.
Plan Assets — Definition
      A definition of Plan Assets is not set forth in ERISA or the Internal Revenue Code; however, a Department of Labor regulation, referred to herein as the “Plan Asset Regulation,” provides guidelines as to whether, and under what circumstances, the underlying assets of an entity will be deemed to constitute Plan Assets. Under the Plan Asset Regulation, the assets of an entity in which a Plan or IRA makes an equity investment will generally be deemed to be assets of such Plan or IRA unless the entity satisfies one of the exceptions to this general rule. Generally, the exceptions require that the investment in the entity be one of the following:
  •  in which equity participation by “benefit plan investors” is not significant;
 
  •  in securities issued by an investment company registered under the Investment Company Act;
 
  •  in “publicly offered securities,” defined generally as interests that are “freely transferable,” “widely held” and registered with the Securities and Exchange Commission; or
 
  •  in an “operating company,” which includes “venture capital operating companies” and “real estate operating companies.”
      The Plan Asset Regulation provides that equity participation in an entity by benefit plan investors is “significant” if at any time 25.0% or more of the value of any class of equity interest is held by benefit plan investors. The term “benefit plan investors” is broadly defined for this purpose.
Publicly Offered Securities Exemption
      As noted above, if a Plan acquires “publicly offered securities,” the assets of the issuer of the securities will not be deemed to be Plan Assets under the Plan Asset Regulation. The definition of publicly offered securities requires that such securities be “widely held,” “freely transferable” and satisfy registration requirements under federal securities laws. Although our units are intended to satisfy the registration requirements under this definition, the determinations of whether a security is “widely held” and “freely transferable” are inherently factual matters.
      Under the Plan Asset Regulation, a class of securities will be “widely held” if it is held by 100 or more persons independent of the issuer. Our general partner anticipates that this requirement will be easily

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met; however, even if our units are deemed to be widely held, the “freely transferable” requirement must also be satisfied in order for us to qualify for this exemption.
      The Plan Asset Regulation provides that “whether a security is ’freely transferable’ is a factual question to be determined on the basis of all relevant facts and circumstances,” and provides several examples of restrictions on transferability that, absent unusual circumstances, will not prevent the rights of ownership in question from being considered “freely transferable” if the minimum investment is $10,000 or less. The allowed restrictions in the examples are illustrative of restrictions commonly found in public real estate limited partnerships that are imposed to comply with state and federal law, to assure continued eligibility for favorable tax treatment and to avoid certain practical administrative problems. We have been structured with the intent to satisfy the freely transferable requirement set forth in the Plan Asset Regulation with respect to our units although there are no assurances that our units meet such requirement. For example, because certain adverse tax considerations can result if we are characterized as a “publicly traded partnership” under Section 7704 of the Internal Revenue Code (see “Federal Income Tax Considerations — Publicly Traded Partnership Status”), additional restrictions on the transferability of our units have been incorporated into the partnership agreement that are intended to prevent classification as a publicly traded partnership (Section 7704 Restrictions). The Plan Asset Regulation provides specifically, in this regard, that any “restriction on, or prohibition against, any transfer or assignment that would either result in a termination or reclassification of the entity for federal or state tax purposes” will ordinarily not affect a finding that the securities are “freely transferable.” Furthermore, the Department of Labor has expressed the written opinion that “a restriction against a transfer which is drafted to avoid reclassification of a partnership as a publicly traded partnership under sections 469(k)(2) and 7704(b) of the Code would qualify as the type of restriction contemplated by [such] regulation. . . .” Therefore, we should qualify for the freely transferable requirement and, thus, the “publicly offered securities” exemption.
Consequences of Holding Plan Assets
      In the event that our underlying assets were treated by the Department of Labor as Plan Assets, our general partner would be treated as a fiduciary with respect to each Plan or IRA limited partner, and an investment in our units might expose the fiduciaries of the Plan or IRA to co-fiduciary liability under ERISA for any breach by our management of the fiduciary duties mandated under ERISA. Further, if our assets are deemed to be Plan Assets, an investment by a Plan or IRA in our units might be deemed to result in an impermissible commingling of Plan Assets with other property.
      If our general partner or its affiliates were treated as fiduciaries with respect to Plan or IRA limited partners, the prohibited transaction restrictions of ERISA would apply to any transaction involving our assets. These restrictions could, for example, require that we avoid transactions with entities that are affiliated with our affiliates or us or restructure our activities in order to obtain an administrative exemption from the prohibited transaction restrictions. Alternatively, we might have to provide Plan or IRA participants with the opportunity to sell their units to us or we might dissolve or terminate.
Prohibited Transactions
      Generally, both ERISA and the Internal Revenue Code prohibit Plans and IRAs from engaging in certain transactions involving Plan Assets with specified parties, such as sales or exchanges or leasing of property, loans or other extensions of credit, furnishing goods or services, or transfers to, or use of, Plan Assets. The specified parties are referred to as “parties-in-interest” under ERISA and as “disqualified persons” under the Internal Revenue Code. These definitions generally include both parties owning threshold percentage interests in an investment entity and “persons providing services” to the Plan or IRA, as well as employer sponsors of the Plan or IRA, fiduciaries and other individuals or entities affiliated with the foregoing.
      A person generally is a fiduciary with respect to a Plan or IRA if, among other things, the person has discretionary authority or control with respect to Plan Assets or provides investment advice for a fee with

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respect to Plan Assets. Under Department of Labor regulations, a person shall be deemed to be providing investment advice if that person renders advice as to the advisability of investing in our units, and that person regularly provides investment advice to the Plan or IRA pursuant to a mutual agreement or understanding that such advice will serve as the primary basis for investment decisions, and that the advice will be individualized for the Plan or IRA based on its particular needs. Thus, if we are deemed to hold Plan Assets, our management could be characterized as fiduciaries with respect to such assets, and each would be deemed to be a party-in-interest under ERISA and a disqualified person under the Internal Revenue Code with respect to investing Plans and IRAs. Whether we are deemed to hold Plan Assets, if we or our affiliates are affiliated with a Plan or IRA investor, we might be a disqualified person or party-in-interest with respect to such Plan or IRA investor, resulting in a prohibited transaction merely upon investment by such Plan or IRA in our units.
Prohibited Transactions — Consequences
      ERISA forbids Plans from engaging in prohibited transactions. Fiduciaries of a Plan that allow a prohibited transaction to occur will breach their fiduciary responsibilities under ERISA, and may be liable for any damage sustained by the Plan, as well as civil (and criminal, if the violation was willful) penalties. If it is determined by the Department of Labor or the Internal Revenue Service that a prohibited transaction has occurred, any disqualified person or party-in-interest involved with the prohibited transaction would be required to reverse or unwind the transaction and, for a Plan, compensate the Plan for any loss resulting therefrom. Additionally, the Internal Revenue Code requires that a disqualified person involved with a prohibited transaction must pay an excise tax equal to a percentage of the “amount involved” in the transaction for each year in which the transaction remains uncorrected. The percentage is generally 15.0%, but is increased to 100.0% if the prohibited transaction is not corrected promptly. For IRAs, if an IRA engages in a prohibited transaction, the tax-exempt status of the IRA may be lost.
Unrelated Business Taxable Income
      Any investor which is an IRA or a Plan should be aware that there is a risk that income allocable to units owned by such IRAs and Plans may be subject to federal income tax in the event that any portion of our income is deemed to be UBTI. Fiduciaries of such IRAs and Plans should carefully consider whether an investment in our units is appropriate and responsible given the likelihood that UBTI will be incurred. See the discussion of UBTI under the section entitled “Federal Income Tax Considerations — Investment by Qualified Plans and Other Tax-Exempt Entities” for a more detailed discussion.

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FEDERAL INCOME TAX CONSIDERATIONS
      The following discussion is a summary of the federal income tax considerations material to an investment in our units of limited partnership interest. This summary is based upon the Internal Revenue Code, Treasury Regulations promulgated thereunder, current positions of the Internal Revenue Service contained in Revenue Rulings, Revenue Procedures and other administrative actions and existing judicial decisions in effect as of the date of this prospectus.
      Investors should realize that it is not feasible to comment on all aspects of federal, state and local tax laws that may affect each of our limited partners. The federal income tax considerations discussed below are necessarily general in nature, and their application may vary depending upon a limited partner’s particular circumstances. Further, no representations are made in this prospectus as to state and local tax considerations. The discussion below is directed primarily to individual taxpayers who are citizens of the United States. Accordingly, persons who are trusts, corporate investors in general, corporate investors that are subject to specialized rules such as Subchapter S corporations and any potential investor who is not a U.S. citizen are cautioned to consult their own personal tax advisors before investing in our units of limited partnership interest.
      Investors should note that we do not intend to request a ruling from the Internal Revenue Service with respect to any of the federal income tax matters discussed below, and on certain matters no ruling could be obtained even if requested. There can be no assurance that the present federal income tax laws applicable to limited partners and our operations will not be changed, prospectively or retroactively, by additional legislation, by new Treasury Regulations, judicial decisions or administrative interpretations, any of which could adversely affect a limited partner, nor is there any assurance that there will not be a difference of opinion as to the interpretation or application of current federal income tax laws.
      Each prospective investor is urged to consult with the investor’s personal tax advisor with respect to his or her personal federal, state and local income tax considerations arising from a purchase of our units. Investors should be aware that the Internal Revenue Service may not agree with all tax positions taken by us and that legislative, administrative or judicial decisions may reduce or eliminate anticipated tax benefits.
      Pursuant to our partnership agreement, our general partner has the authority to make any tax elections on our behalf that, in their sole judgment, are in our best interest. This authority includes the ability to elect to cause us to be taxed as a corporation or to qualify as a REIT for federal income tax purposes. Our general partner has the authority under our partnership agreement to make these elections without the necessity of obtaining the approval of our limited partners. In addition, our general partner has the authority to amend our partnership agreement without the consent of limited partners in order to facilitate our operations so as to be able to qualify us as a REIT, corporation or other tax status that they elect for us. Although we currently intend to operate so as to be taxed as a partnership, it is possible that as a result of future legislative changes, taxation as a partnership would no longer be an advantageous tax structure for investment in real estate, or that it could become more advantageous for a limited partnership to elect to be taxed as a corporation or a REIT for federal income tax purposes.
      Prospective investors who are fiduciaries of retirement plans should carefully read the section of this prospectus entitled “Investment by Tax-Exempt Entities and ERISA Considerations” and the section entitled “— Investment by Qualified Plans and Other Tax-Exempt Entities.”
      We will furnish to each limited partner and any assignee of units on an annual basis the information necessary for the preparation and timely filing of a federal income tax return. Investors should note that information returns filed by us will be subject to audit by the Internal Revenue Service and that the Commissioner of the Internal Revenue Service has announced that the Internal Revenue Service will devote greater attention to the proper application of the tax laws to partnerships. (See “— Audits” below.)

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Tax Opinion
General
      We retained Morris, Manning & Martin, LLP to render an opinion concerning the material federal income tax issues relating to an investment in our units of limited partnership interest. Potential investors should be aware that the opinions of our counsel are based upon the accuracy of the facts described in this prospectus and facts represented to our counsel by our general partner. The opinions of our counsel assume further that we will be operated strictly in accordance with our partnership agreement. The accuracy of such facts and representations is absolutely critical to the accuracy of the tax opinion of our counsel, and any alteration of the facts may adversely affect the opinions rendered.
      Furthermore, the opinions of our counsel are based upon existing law, applicable Treasury Regulations and current published administrative positions of the Internal Revenue Service contained in Revenue Rulings, Revenue Procedures and judicial decisions, all of which are subject to change, either prospectively or retroactively. Changes in the Internal Revenue Code and the Treasury Regulations subsequent to the date of the tax opinion of our counsel are not addressed in the tax opinion, and any such changes could have a material adverse effect upon the tax treatment of an investment in our units of limited partnership interest.
      Neither the tax opinion of our counsel nor this description of the tax considerations of an investment in our units of limited partnership interest will have any binding effect or official status of any kind, and no assurance can be given that the conclusions reached in the tax opinion will be sustained by a court if such conclusions are contested by the Internal Revenue Service. Accordingly, the tax opinion should not be viewed as a guarantee that the income tax effects described in this prospectus will be achieved, nor should it be viewed as a guarantee that a court would hold that there is “substantial authority” for the positions we take with respect to any income tax issue.
Specific Opinions
      In reliance on certain representations and assumptions described in this prospectus and in the tax opinion of our counsel, and subject to the qualifications set forth in this prospectus and in the tax opinion, our counsel in its tax opinion concludes that, for federal income tax purposes:
  •  we will be classified as a partnership for federal income tax purposes and not as an association taxable as a corporation; and
 
  •  we will not be classified as a “publicly traded partnership” under Section 7704 of the Internal Revenue Code. See “Risk Factors — Federal Income Tax Risks.”
 
  •  a limited partner’s interest in us will be treated as a passive activity;
 
  •  partnership items of income, gain, loss, deduction and credit will be allocated among our general partner and the limited partners substantially in accordance with the allocation provisions of the partnership agreement; and
 
  •  the activities contemplated by us will be considered activities entered into for profit.
      In addition, in reliance on the same representations and assumptions and subject to the same qualifications set forth in this prospectus and in the tax opinion, our counsel in its tax opinion concludes that, in the aggregate, substantially more than half of the material federal income tax benefits, in terms of their financial impact on a typical investor, will be realized by an investor in our units of limited partnership interest.
No Opinion on Some Issues
      You should further note that our counsel is unable to form an opinion as to the probable outcome of certain material federal income tax aspects of the transactions described in this prospectus if challenged by the Internal Revenue Service, litigated and judicially decided. The material federal income tax aspects of

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the transactions described in the prospectus to which our counsel is unable to opine are whether we will be considered to hold any or all of our loans primarily for sale to customers in the ordinary course of business, whether we hold any “tax-exempt use property” that results in the disallowance of a portion of deductions for any year, and the application of certain provisions of the Internal Revenue Code at the individual level or partner level rather than at the partnership level as discussed below. These matters are either fact specific and may only be determined on a transaction-by-transaction basis or based upon the individual circumstances of each limited partner, or are matters to which the application of the law is not settled to conclusively determine the application of such law to us or such partner.
      Potential investors should note also that the Internal Revenue Service may attempt to disallow or limit some of the tax benefits derived from an investment in us by applying certain provisions of the Internal Revenue Code at the individual or partner level rather than at the partnership level. In this connection, our counsel gives no opinion or conclusion as to the tax consequences to limited partners with regard to any material tax issue that impacts at the individual or partner level and is dependent upon an individual limited partner’s tax circumstances. These issues include, but are not limited to, (1) the potential imposition of the alternative minimum tax, (2) investment interest deductibility limitations and (3) the potential limitation on deductions attributable to activities not entered into for profit at the partner level.
      As of the date of our counsel’s tax opinion, we have not acquired, nor have we entered into, any contracts to acquire any loans. Therefore, it is impossible at this time for our counsel to opine on the application of the federal income tax law to the specific facts that will exist when we acquire loans.
Partnership Status Generally
      The income tax results anticipated from an investment in units will depend upon our classification as a partnership for federal income tax purposes rather than an association taxable as a corporation. In the event that, for any reason, we are treated for federal income tax purposes as an association taxable as a corporation, our partners would be treated as stockholders of a corporation with the following results, among others: (1) we would become a taxable entity subject to the federal income tax imposed on corporations; (2) items of income, gain, loss, deduction and credit would be accounted for by us on our federal income tax return and would not flow through to the partners; and (3) distributions of cash would generally be treated as dividends taxable to our partners, to the extent of our current or accumulated earnings and profits, and would not be deductible by us in computing our income tax. The effect of application of the corporate system of double taxation on us would result in a large increase in the effective rate of tax on such income because of the application of both corporate and individual tax rates to income and conversion of otherwise non-taxable distributions into taxable dividends.
      Regulations regarding entity classification have been issued under the Internal Revenue Code that, in effect, operate to allow a business entity that is not otherwise required to be classified as a corporation, i.e., an “eligible entity,” to elect its classification for federal income tax purposes. Under the Treasury Regulations, an “eligible entity” that has at least two members will be treated as a partnership in the absence of an election. Accordingly, while our general partner does not intend to request a ruling from the Internal Revenue Service as to our classification for income tax purposes, unless we are deemed to be taxable as a corporation pursuant to the application of the publicly traded partnership rules discussed below, we will qualify as an “eligible entity” and need not make any election to be treated as a partnership for federal income tax purposes.
      Based upon the entity classification Treasury Regulations, and Internal Revenue Service rulings and judicial decisions under Section 7701(a) of the Internal Revenue Code, all of which are subject to change, and based upon certain representations of the general partner and other assumptions, our counsel has concluded that we will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation. In rendering such opinion, our counsel has also relied upon the fact that we are duly organized as a limited partnership under the laws of the State of Delaware and upon the representation by our general partner that we will be organized and operated strictly in accordance with

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the provisions of our partnership agreement. The principal uncertainty as to our taxation as a partnership for federal income tax purposes is uncertainty arising from the potential application of the “publicly traded partnership” rules. Although we intend to operate in such a fashion so as to avoid the application of these rules, the application of such rules is uncertain and guidance is limited and ambiguous. In addition, we could inadvertently infringe the limitations imposed by these rules, thus subjecting us to such classification.
      The remaining summary of federal income tax considerations in this section assumes that we will be classified as a partnership for federal income tax purposes.
Publicly Traded Partnership Status
      If we were to be classified as a “publicly traded partnership,” then (1) we would be taxable as a corporation (see “— Partnership Status Generally” above), and (2) our net income would be treated as portfolio income rather than passive income (see “— Deductibility of Losses — Limitations — Passive Loss Limitation” below).
      A publicly traded partnership is generally defined under the Internal Revenue Code as any partnership whose interests are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. Treasury Regulations have been issued, which are referred to herein as “Section 7704 Regulations,” that provide guidance with respect to such classification standards, however, and they include certain safe harbor standards that, if satisfied, would preclude our being classified as a publicly traded partnership.
      The Section 7704 Regulations contain definitions of what constitutes an established securities market and a secondary market or the substantial equivalent thereof. They also set forth what transfers may be disregarded in determining whether such definitions are satisfied with respect to the activities of a partnership. The general partner does not believe that our units are traded on an established securities market or a secondary market or a substantial equivalent thereof as defined in the Section 7704 Regulations. Our general partner has also represented that they do not intend to cause the units to be traded on an established securities market or a secondary market in the future. Uncertainty as to our taxation as a partnership remains, however, arising from the potential application of the “publicly traded partnership” rules. The application of such rules is uncertain and guidance is limited and ambiguous. In addition, we could inadvertently infringe the limitations imposed, thus subjecting us to such classification.
Section 7704 Safe Harbors
      As noted above, the Section 7704 Regulations provide safe harbors, referred to herein as the “secondary market safe harbors,” that, after taking into consideration all transfers other than those deemed disregarded, may be satisfied in order to avoid classification of such transfers as being made on a secondary market or the substantial equivalent thereof. One of the secondary market safe harbors provides that interests in a partnership will not be considered tradable on a secondary market or the substantial equivalent thereof if the sum of the partnership interests transferred during any taxable year, other than certain disregarded transfers, does not exceed 10% of the total interest in our capital or profits. Disregarded transfers include, among other things, transfers by gift, transfers at death, transfers between family members, distributions from a qualified retirement plan and block transfers, which are defined as transfers by a partner during any 30 calendar day period of partnership units representing more than 10% of the total interest in a partnership’s capital or profits. A second safe harbor from classification as a publicly traded partnership, dealing with redemption and repurchase agreements, is also provided in the Section 7704 Regulations.
      The Section 7704 Regulations also make it clear that the failure to satisfy a safe harbor provision under the Treasury Regulations will not cause a partnership to be treated as a publicly traded partnership if, after taking into account all facts and circumstances, partners are not readily able to buy, sell or exchange their partnership interests in a manner that is comparable, economically, to trading on an established securities market.

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      Our partnership agreement limits unit transfers of all types to transfers of units that satisfy an applicable safe harbor contained in the Section 7704 Regulations or any other applicable safe harbor from “publicly traded partnership” status which may be adopted by the Internal Revenue Service. Our general partner has represented that we will be operated strictly in accordance with the partnership agreement, and it has also represented that they will void any transfers or assignments of units if they believe that such transfers or assignments will cause us to be treated as a publicly traded partnership under the Section 7704 Regulations or any other guidelines adopted by the Internal Revenue Service in the future.
      Based upon the representations of our general partner, and assuming we will be operated strictly in accordance with the terms of the partnership agreement, our counsel has concluded that we will not be classified as a publicly traded partnership under the Internal Revenue Code. Due to the complex nature of the safe harbor provisions contained in the Section 7704 Regulations, however, and because any determination in this regard will necessarily be based upon future facts not yet in existence at this time, no assurance can be given that the Internal Revenue Service will not challenge this conclusion or that we will not, at some time in the future, be deemed to be a publicly traded partnership.
Qualifying Income Exemption
      Even if we were deemed to be a publicly traded partnership, however, there is an exception under the Internal Revenue Code that provides that if 90.0% or more of our gross income for each taxable year consists of “qualifying income,” then we will not be taxed as a corporation. Qualifying income includes interest, real property rents and gain from the sale or other disposition of real property, but qualifying income does not include real property rents that are contingent on the profits of the lessees or income from the rental or lease of personal property.
      Our general partner intends to operate us in a manner that should generate income that will satisfy the 90.0% qualifying income exception. See “Investment Objectives and Criteria.” Investors should note, however, that even if we satisfy the qualifying income exception, being deemed to be a publicly traded partnership would result in other material adverse tax consequences to limited partners, including the treatment of our net income as portfolio income rather than passive income. See “— Deductibility of Losses  — Limitations — Passive Loss Limitation” below.
General Principles of Partnership Taxation
      Under the Internal Revenue Code, no federal income tax is paid by a partnership. Accordingly, if, as anticipated, we are treated as a partnership for federal income tax purposes, we will not be treated as a separate taxable entity subject to federal income tax. Each partner will, instead, be required to report on his federal income tax return for each year his distributive share of our items of income, gain, loss, deduction or credit for that year, without regard to whether any actual cash distributions have been made to him. Investors should note that the amount of taxable income allocated to a partner, and the income tax liability resulting from such allocation of taxable income, may exceed the amount of any cash distributed to such partner.
Anti-Abuse Rules
      As noted under “— General Principles of Partnership Taxation” above, partnerships are not liable for income taxes imposed by the Internal Revenue Code. The Treasury Regulations set forth broad “anti-abuse” rules applicable to partnerships, however, which rules authorize the Commissioner of the Internal Revenue Service to recast transactions involving the use of partnerships either to reflect the underlying economic arrangement or to prevent the use of a partnership to circumvent the intended purpose of any provision of the Internal Revenue Code. Our general partner is not aware of any fact or circumstance that could cause the Commissioner to exercise his authority under these rules; however, if any of the transactions entered into by us were to be recharacterized under these rules, or if we were to be recast as a taxable entity under these rules, material adverse tax consequences to all of our partners would occur as otherwise described in this prospectus.

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Deductibility of Losses — Limitations
      The ability of a limited partner to deduct his distributive share of our losses is subject to a number of limitations.
Basis Limitation
      A limited partner may not deduct his share of partnership losses and deductions in excess of the adjusted basis of his partnership interest determined as of the end of the taxable year. Allocated losses that are not allowed may be carried over indefinitely and claimed as a deduction in a subsequent year to the extent that such limited partner’s adjusted basis in his units has increased above zero. A limited partner’s adjusted basis in his units will include his cash investment in us along with his pro rata share of any partnership liabilities as to which no partner is personally liable. A limited partner’s basis will be increased by his distributive share of our taxable income and decreased, but not below zero, by his distributive share of our losses. Cash distributions that are made to a limited partner, if any, will also decrease the basis in his units, and in the event a limited partner has no remaining basis in his units, cash distributions will generally be taxable to him as gain from the sale of his units. See “— Sales of Limited Partnership Units” below.
Passive Loss Limitation
      The Internal Revenue Code substantially restricts the ability of many taxpayers to deduct losses derived from so-called “passive activities.” Passive activities generally include any activity involving the conduct of a trade or business in which the taxpayer does not materially participate, including the activity of a limited partnership in which the taxpayer is a limited partner, and certain rental activities, including the rental of real estate. In the opinion of our counsel, a limited partner’s interest in us will be treated as a passive activity. Accordingly, our income and loss, other than interest income that will constitute portfolio income, will generally constitute passive activity income and passive activity loss, as the case may be, to limited partners.
      Losses from passive activities are generally deductible only to the extent of a taxpayer’s income or gains from passive activities and will not be allowed as an offset against other income, including salary or other compensation for personal services, active business income or “portfolio income,” which includes nonbusiness income derived from dividends, interest, royalties, annuities and gains from the sale of property held for investment. Some of the interest we collect from our loans will be treated as generating portfolio income under special rules that characterize income, but not loss, from certain passive activities as portfolio income. In our case, these special rules apply to “equity-financed lending activities” as such term is defined in the Treasury Regulations. An equity-financed lending activity is one that involves a trade or business of lending money financed with equity rather than liabilities incurred in the activity. Generally, if our liabilities attributable to our lending activities are less than 80% of our loan assets, then we will have an “equity-financed lending activity,” and a portion of our interest income from our lending activities will be characterized as portfolio income. The portion to be characterized as portfolio income generally is the percentage of our interest income determined by dividing (a) the excess of the average daily balance of our loan assets during a calendar year over the average daily balance of our liabilities attributable to our lending activity during such calendar year, by (b) the average daily balance of our loan assets during such calendar year, but the amount to be characterized as portfolio income during any calendar year may not exceed our net income from our lending activities during such calendar year. Notwithstanding the characterization of our interest income as portfolio income, any net loss from our lending activities will still be treated as a passive loss and any net loss from our lending activities may be carried over and deducted against any future income from our activities despite its characterization as portfolio income. Passive activity losses that are not allowed in any taxable year are suspended and carried forward indefinitely and allowed in subsequent years as an offset against passive activity income in future years.

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      Upon a taxable disposition of a taxpayer’s entire interest in a passive activity to an unrelated party, suspended losses with respect to that activity will then be allowed as a deduction against:
  •  first, income or gain from that activity, including gain recognized on such disposition;
 
  •  then, income or gain for the taxable year from other passive activities; and
 
  •  finally, non-passive income or gain.
      Treasury Regulations provide, however, that similar undertakings that are under common control and owned by pass-through entities such as partnerships are generally aggregated into a single activity. Accordingly, it is unlikely that suspended passive activity losses derived from a specific partnership property would be available to limited partners to offset non-passive income from other sources until the sale or other disposition of the last of our properties. The determination of whether losses are subject to the passive loss limitation rules depends upon facts unique to each investor, including the investor’s level of activity in our business and affairs and the investor’s other investment activities with respect to activities subject to classification as passive activities. Therefore, each investor should evaluate the degree to which the passive activity limitations will limit the ability of the investor to utilize losses to offset other income.
      The Internal Revenue Code also provides that the passive activity loss rules will be applied separately with respect to items attributable to a publicly traded partnership. Accordingly, if we were deemed to be a publicly traded partnership, partnership losses would be available only to offset our future non-portfolio income. In addition, if we were deemed to be a publicly traded partnership that is not treated as a corporation because of the qualifying income exception, partnership income would generally be treated as portfolio income rather than passive income. See “— Publicly Traded Partnership Status” above.
At Risk Limitation
      The deductibility of partnership losses is limited further by the “at risk” limitations set forth in the Internal Revenue Code. Limited partners who are individuals, estates, trusts and certain closely held corporations are not allowed to deduct partnership losses in excess of the amounts that such limited partners are determined to have “at risk” at the close of our fiscal year. Generally, a limited partner’s “amount at risk” will include only the amount of his cash capital contribution to us. A limited partner’s “amount at risk” will be reduced by his allocable share of our losses and by distributions made by us and increased by his allocable share of our income. Any deductions that are disallowed under this limitation may be carried forward indefinitely and utilized in subsequent years to the extent that a limited partner’s “amount at risk” is increased in those years.
Impact of the American Jobs Creation Act of 2004 and tax-exempt use property.
      On October 22, 2004, President Bush signed into law The American Jobs Creation Act of 2004 (the “Act”). Among the items included in the Act is a new rule that disallows a portion of deductions for any “tax-exempt use loss for any taxable year.” Under a literal interpretation of this new rule, it would be applicable to any partnership with one or more partners that are tax-exempt entities (e.g., foreign investors that are not otherwise subject to U.S. taxation; a federal, state or local governmental unit or instrumentality; pension funds and other tax-exempt entities). The Internal Revenue Service, however, has issued transitional relief, which provides that this new rule will not apply for tax years ending before January 1, 2005 to any partnership, like us, that holds “tax-exempt use property” solely as a result of the application of Section 168(h)(6) of the Internal Revenue Code. So long as the Internal Revenue Service continues to take this position, this new rule will not be applicable to us. If, however, the Internal Revenue Service interprets this new rule to be applicable to partnerships like us for the 2005 or any subsequent taxable year and we have one or more tax-exempt entities who are partners, then some or all of the partners may be unable to claim losses generated from our operations that they otherwise would be able to claim if no tax-exempt entities were partners.

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Allocations of Profit and Loss
      Allocations of our net income, net loss, depreciation, amortization and cost recovery deductions and gain on sale are described in this prospectus in the section entitled “Distributions and Allocations.” The terms “net income” and “net loss” are defined in the partnership agreement to mean the net income or loss realized or recognized by us for a fiscal year, as determined for federal income tax purposes, including any income exempt from tax.
      Our general partner does not intend to request a ruling from the Internal Revenue Service with respect to whether the allocations of profits and losses in our partnership agreement will be recognized for federal income tax purposes. The Internal Revenue Service may attempt to challenge our allocations of profits and losses, which challenge, if successful, could adversely affect our limited partners by changing their respective shares of taxable income or loss. No assurance can be given that the Internal Revenue Service will not also challenge one or more of the special allocation provisions contained in our partnership agreement.
General Rules
      Section 704(a) of the Internal Revenue Code provides generally that partnership items of income, gain, loss, deduction and credit are to be allocated among partners as set forth in the relevant partnership agreement. Section 704(b) provides, however, that if an allocation to a partner under the partnership agreement of income, gain, loss, deduction or credit or items thereof does not have substantial economic effect, such allocation will instead be made in accordance with the partner’s interest in us determined by taking into account all facts and circumstances.
      Treasury Regulations issued under Section 704(b) of the Internal Revenue Code, referred to herein as “Section 704(b) Regulations,” provide complex rules for determining (1) whether allocations will be deemed to have economic effect, (2) whether the economic effect of allocations will be deemed to be substantial, and (3) whether allocations not having substantial economic effect will nonetheless be deemed to be made in accordance with a partner’s interest in us.
Economic Effect — General Allocations
      The Section 704(b) Regulations provide generally that an allocation will be considered to have economic effect if the following three requirements are met:
  •  partners’ capital accounts are determined and maintained in accordance with the Section 704(b) Regulations;
 
  •  upon our liquidation, liquidating distributions are made in accordance with the positive capital account balances of the partners after taking into account all capital account adjustments for the year during which such liquidation occurs; and
 
  •  the partnership agreement contains a “qualified income offset” provision and the allocation in question does not cause or increase a deficit balance in a partner’s capital account at the end of our taxable year.
      Our partnership agreement (1) provides for the determination and maintenance of capital accounts pursuant to the Section 704(b) Regulations, and (2) provides that liquidation proceeds are to be distributed in accordance with capital accounts. See “Distributions and Allocations.” With regard to the third requirement, Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations provides that a partnership agreement contains a “qualified income offset” if it provides that a partner who unexpectedly receives an adjustment, allocation or distribution of certain items that causes a deficit or negative capital account balance, which means generally that the sum of losses allocated and cash distributed to a partner exceeds the sum of his capital contributions to us and any income allocated to such partner, will be allocated items of income and gain in an amount and manner sufficient to eliminate the deficit balance as quickly as possible. Our partnership agreement contains a qualified income offset provision. The qualified income

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offset provision was added to the partnership agreement to satisfy the test for “economic effect” under the Section 704(b) Regulations. It should be noted in this regard that such qualified income offset provision will have the effect of prohibiting a limited partner from being allocated items of loss or deduction that would cause his capital account to be reduced below zero.
Substantiality
      Even if the allocations of profits and losses of a partnership are deemed to have economic effect under the Section 704(b) Regulations, an allocation will not be upheld unless the economic effect of such allocation is “substantial.” In this regard, the Section 704(b) Regulations generally provide that the economic effect of an allocation is “substantial” if there is a reasonable possibility that the allocation will affect the dollar amounts to be received by partners from a partnership, independent of tax consequences. Conversely, the economic effect of an allocation is presumed not to be substantial if there is a strong likelihood that the net adjustments to the partner’s capital account for any taxable year will not differ substantially from the net adjustments that would have been made for such year in the absence of such allocation and the total tax liability of the partners for such year is less than it would have been in the absence of such allocations.
      The economic effect of partnership allocations will also be presumed not to be substantial where:
  •  the partnership agreement provides for the possibility that the allocation will be largely offset by one or more other allocations;
 
  •  the net adjustments to the partners’ capital accounts for the taxable years to which the allocations relate will not differ substantially from the net adjustments that would have been recorded in such partners’ respective capital accounts for such years if the original allocations and the offsetting allocations were not contained in the partnership agreement; and
 
  •  the total tax liability of the partners for such year is less than it would have been in the absence of such allocations.
      With respect to the foregoing rule, the Section 704(b) Regulations state that original allocations and offsetting allocations will not be deemed to not be substantial if, at the time the allocations become part of the partnership agreement, there is a strong likelihood that the offsetting allocations will not, in large part, be made within five years after the original allocations are made. The Section 704(b) Regulations further state that for purposes of testing substantiality, the adjusted tax basis of partnership property will be presumed to be the fair market value of such property, and adjustments to the adjusted tax basis of partnership property such as depreciation or cost recovery deductions will be presumed to be matched by corresponding changes in the property’s fair market value.
Partners’ Interest
      If the allocations of profits and losses set forth in our partnership agreement are deemed not to have substantial economic effect, the allocations will then be made in accordance with the partners’ interests in us. The Section 704(b) Regulations provide in this regard that a partner’s interest in us will be determined by taking into account all facts and circumstances relating to the economic arrangement of our partners, including:
  •  the partners’ relative contributions to us;
 
  •  the interests of the partners in economic profits and losses (if different from those in taxable income or loss);
 
  •  the interests of the partners in cash flow and other nonliquidating distributions; and
 
  •  the rights of the partners to distributions of capital upon liquidation.
      Since our partnership agreement (1) provides for the determination and maintenance of capital accounts in accordance with the Section 704(b) Regulations, (2) provides that liquidation proceeds will be

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distributed to the partners in accordance with capital accounts, and (3) contains a qualified income offset provision, our counsel has concluded that partnership items of income, gain, loss, deduction and credit will be allocated among our general partner and the limited partners substantially in accordance with the allocation provisions of the partnership agreement. In reaching this conclusion, our counsel has made a number of assumptions, including the accuracy of various representations of our general partner and the assumption that we will be operated strictly in accordance with the terms of our partnership agreement. The tax rules applicable to whether allocations of items of taxable income and loss will be recognized are complex. The ultimate determination of whether allocations adopted by us will be respected by the Internal Revenue Service will turn upon facts that will occur in the future and that cannot be predicted with certainty. If the allocations we use are not accepted, limited partners could be required to report greater taxable income or less taxable loss with respect to an investment in us and, as a result, pay more tax and associated interest and penalties. Our limited partners might also be required to incur the costs of amending their individual returns.
Taxable Income Without Cash Distributions
      A limited partner is required to report his allocable share of our taxable income on his personal income tax return regardless of whether he has received any cash distributions from us.
      In the event of foreclosure on a partnership asset by a lender, the partnership would be treated as having sold the property to the lender for the amount of the loan secured by the property. This could also give rise to taxable income to limited partners but no cash distribution with which to pay the tax.
      Our partnership agreement also provides for a “qualified income offset,” as described above, which could result in the allocation of income or gain to a limited partner in the absence of cash distributions from us. We can offer no assurances that a limited partner will not be allocated items of partnership income or gain in an amount that gives rise to an income tax liability in excess of cash, if any, received from us for the tax year in question, and investors are urged to consult with their personal tax advisors in this regard.
Investment by Qualified Plans and Other Tax-Exempt Entities
Unrelated Business Taxable Income
      Any person who is a fiduciary of an IRA, Keogh Plan, qualified plan or other tax-exempt entity, which are collectively referred to as Exempt Organizations, considering an investment in units should be aware that it is likely that certain income allocable to units owned by Exempt Organizations may be subject to federal income tax. This would occur in the event that any portion of our income is deemed to be UBTI, generally defined as income derived from any unrelated trade or business carried on by a tax-exempt entity or by a partnership of which it is a member. A trustee of a charitable remainder trust should be aware that if any portion of the income derived from the trust’s ownership of units is deemed to be UBTI, the trust will lose its exemption from income taxation with respect to all of its income for the tax year in question. A tax-exempt limited partner other than a charitable remainder trust that has UBTI in any tax year from all sources of more than $1,000 will be subject to taxation on such income, only. See “— Investment by Charitable Remainder Trusts” below.
      If we are deemed to hold partnership loans primarily for sale to customers in the ordinary course of business, or we were deemed to own “debt-financed property,” i.e., property that is subject to “acquisition indebtedness,” as defined below, then a portion of such income or gain would constitute UBTI to investing Exempt Organizations.
      “Acquisition indebtedness” includes:
  •  indebtedness incurred in acquiring or improving property, including indebtedness incurred to fund a mortgage loan;

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  •  indebtedness incurred before the acquisition or improvement of property if such indebtedness would not have been incurred but for such acquisition or improvement; and
 
  •  indebtedness incurred after the acquisition or improvement of property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement.
      We anticipate we will likely incur acquisition indebtedness and will, therefore, give rise to UBTI. Exempt organizations should carefully consider the impact of the presence of UBTI on their investment performance relative to other investments that do not generate UBTI.
Minimum Distribution Requirements
      Any person who is a fiduciary of an Exempt Organization considering an investment in our units should also consider the impact of minimum distribution requirements under the Internal Revenue Code. Section 401(a)(9) of the Internal Revenue Code provides generally that certain minimum distributions from retirement plans must be made commencing no later than April 1 of the year following the calendar year during which the recipient attains age 701/2 . Accordingly, if units are held by retirement plans and, before we sell our properties, mandatory distributions are required to be made to an IRA beneficiary or a qualified plan participant, it is likely that a distribution of the units in kind will be required to be made. A distribution of units will be includable in the taxable income of said IRA beneficiary or qualified plan participant for the year in which the units are received at the fair market value of the units without any corresponding cash distributions from us with which to pay the income tax liability arising out of any such distribution.
      In certain circumstances, a distribution-in-kind of units may be deferred beyond the date set for required distributions, but only upon a showing of compliance with the minimum distribution requirements of the Internal Revenue Code by reason of distributions from other retirement plans established for the benefit of the recipient. Compliance with these requirements is complex, however, and potential investors are urged to consult with and rely upon their individual tax advisors with regard to all matters concerning the tax effects of distributions from retirement plans. No assurances can be given that our loans will be repaid, sold or otherwise disposed of in a fashion that would permit sufficient liquidity in any retirement plan holding units for the retirement plan to be able to avoid making a mandatory distribution-in-kind of units.
Investment by Charitable Remainder Trusts
      A charitable remainder trust, or CRT, is a trust created to provide income for the benefit of at least one non-charitable beneficiary for life or a term of up to 20 years, with the property comprising the trust corpus then transferred to a charitable beneficiary upon the expiration of the trust. Upon the creation of a CRT, the grantor would normally be entitled to a charitable income tax deduction equal to the current fair market value of the remainder interest that will ultimately pass to charity. A CRT is also exempt from federal income taxation if the trust is established and maintained in compliance with highly complex rules contained in the Internal Revenue Code and underlying Treasury Regulations. Among these rules is a provision that if any portion of the income recognized by a CRT is deemed to be UBTI, all of the CRT’s income for the taxable year in which UBTI is incurred, from whatever sources derived, will be subject to income taxation at the trust level. Our general partner anticipates our activities will give rise to income characterized as UBTI. See “— Investment by Qualified Plans and Other Tax-Exempt Entities” above.
Depreciation
      From time to time we may acquire equity or leasehold interests in real property by foreclosure. The cost of the improvements on any of these owned real property may be recovered through depreciation deductions over a period of 40 years.

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Original Issue Discount Rules
      The original issue discount rules under the Internal Revenue Code pertain to mortgage loans and obligations issued by us. The effect will be that we will realize as interest income the amount that economically accrues under a mortgage loan during the course of the year, using compound interest concepts, even where a lesser amount is actually paid or accrued under its terms. Identical concepts will be used for determining our interest deduction on our obligations, if any. This may result in us recognizing more income than the amount of cash that we receive and have available for distribution.
Market Discount
      We may purchase mortgage investments for an amount substantially less than the remaining principal balance of the mortgage investments. Each monthly payment that we receive from a mortgagor will consist of interest at the stated rate for the investment in a mortgage loan and a principal payment. If we purchase an investment in a mortgage loan at a discount, for federal income tax purposes the principal portion of each monthly payment will constitute the return of a portion of our investment in the investment in a mortgage loan and the payment of a portion of the market discount for the investment in a mortgage loan. We will recognize the amount of each monthly payment attributable to market discount as ordinary income, but the amount of each monthly payment representing the return of our investment will not constitute taxable income to us. The Internal Revenue Code also treats accrued market discount as ordinary income on the sale of an investment in a mortgage loan.
Syndication and Organizational Expenses
      Generally a current deduction is not allowed for expenses incurred in connection with either (1) organizing UDF III or (2) syndicating interests in UDF III. Amounts that qualify as organizational expenses, as well as other start-up expenditures, may be amortized ratably over 180 months. Syndication expenses are neither deductible nor amortizable and include costs and expenses incurred in connection with promoting and marketing the units such as selling commissions, professional fees and printing costs. The Internal Revenue Service may attempt to recharacterize certain costs and expenses that our general partner intends to amortize over 180 months as nondeductible syndication expenses.
Activities Not Engaged in For Profit
      Section 183 of the Internal Revenue Code limits deductions attributable to activities “not engaged in for profit.” The term “not engaged in for profit” describes any activity other than an activity that constitutes a trade or business or an activity that is engaged in for the production of income. In general, an activity will be considered as entered into for profit where there is a reasonable expectation of profit in the future, and the determination of whether an activity is engaged in for profit is based upon the facts and circumstances of each case.
      Based upon the following factors, our counsel has concluded that the activities contemplated by us will be considered activities entered into for profit:
  •  our investment objectives;
 
  •  the representations of our general partner that we will be operated in a business-like manner in all material respects and strictly in accordance with our partnership agreement and this prospectus; and
 
  •  the assumption that the determination as to whether our activities are activities entered into for profit under Section 183 of the Internal Revenue Code will be made at the partnership level.
      Notwithstanding any determination made with respect to us in this regard, however, the Internal Revenue Service may apply Section 183 of the Internal Revenue Code to our limited partners, individually. Since the determination of whether an activity is deemed to be engaged in for profit is based upon facts and circumstances that exist from time to time, no assurance can be given that Section 183 of the Internal Revenue Code may not be applied in the future at the partner level to limit deductions

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allocable to limited partners from our operations. The possible application of the Section 183 limitations at the limited partner level is unclear. Although unlikely and inconsistent with our investment objectives, we could, in certain circumstances, be forced into positions of liquidating our investments at a loss. Although this will not occur if we are able to achieve our investment objectives, in the event this were to occur, the application of the Section 183 not-for-profit limitation could become an issue. Our counsel gives no opinion as to the application of Section 183 of the Internal Revenue Code at the partner level. Accordingly, prospective investors should consult with their own personal tax advisors regarding the impact of Section 183 of the Internal Revenue Code on their individual situations.
Sales of Limited Partnership Units
      A limited partner investing in us may be unable to sell any of his units by reason of the nonexistence of any active trading market for the units. In the event that units are sold, however, the selling investor will realize gain or loss equal to the difference between the gross sale price or proceeds received from sale and the investor’s adjusted tax basis in his units. Assuming the investor is not a “dealer” with respect to such units and has held the units for more than 12 months, his gain or loss will be long-term capital gain or loss, except for that portion of any gain attributable to such investor’s share of our “unrealized receivables” and “inventory items,” as defined in Section 751 of the Internal Revenue Code, which portion would be taxable as ordinary income. Any recapture of cost recovery allowances taken previously by us with respect to personal property associated with partnership real properties will be treated as “unrealized receivables” for this purpose. Investors should note in this regard that the Internal Revenue Code requires us to report any sale of units to the Internal Revenue Service if any portion of the gain realized upon such sale is attributable to the transferor’s share of our “Section 751 property.”
Dissolution and Liquidation
      Our dissolution and liquidation will involve the distribution to the partners of the cash remaining after the sale of our assets, if any, after payment of all of our debts and liabilities. If an investor receives cash in excess of the adjusted basis of his units, such excess will be taxable as a gain. If an investor were to receive only cash, he would recognize a loss to the extent, if any, that the adjusted basis of his units exceeded the amount of cash received. No loss would be recognized if an investor were to receive property other than money, unrealized receivables and “inventory” as defined in Section 751 of the Internal Revenue Code. There are a number of exceptions to these general rules, including but not limited to, (1) the effect of a special basis election under Section 732(d) of the Internal Revenue Code for an investor who may have acquired his partnership interest within the two years prior to the dissolution, and (2) the effects of distributing one kind of property to some partners and a different kind of property to others, as determined under Section 751(b) of the Internal Revenue Code.
Capital Gains and Losses
      Ordinary income for individual taxpayers is currently taxed at a maximum marginal rate of 35%. Capital gains, however, are taxed at a maximum marginal rate of 15% for individuals, i.e., for gains realized with respect to capital assets held for more than 12 months. The Internal Revenue Code also provides, however, that the portion of long-term capital gain arising from the sale or exchange of depreciable real property that constitutes depreciation recapture will be taxed at a maximum marginal rate of 25% rather than 15%. Capital losses may generally be used to offset capital gains or may, in the absence of capital gains, be deductible against ordinary income on a dollar-for-dollar basis up to a maximum annual deduction of $3,000 ($1,500 in the case of a married individual filing a separate return).
Election for Basis Adjustments
      Under Section 754 of the Internal Revenue Code, we may elect to adjust the basis of our property upon the transfer of an interest in us so that the transferee of a partnership interest will be treated, for purposes of calculating depreciation and realizing gain, as though he had acquired a direct interest in our assets. As a result of the complexities and added expense of the tax accounting required to implement

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such an election, our general partner does not intend to cause us to make any such election. As a consequence, depreciation available to a transferee of units will be limited to the transferor’s share of the remaining depreciable basis of our properties, and upon a sale of a property, taxable income or loss to the transferee of the units will be measured by the difference between his share of the amount realized upon such sale and his share of our tax basis in the property, which may result in greater tax liability to him than if a Section 754 election had been made. The absence of such an election by us may result in investors having greater difficulty in selling their units.
Taxation of Mortgage Loan Interest
      Mortgage loans that we invest in or purchase may sometimes permit us to participate in the appreciation in the value of the properties or in the cash flow generated by the operation of the borrowers mortgaged properties.
      The Internal Revenue Service might then seek to recharacterize a mortgage loan as an equity interest. If a mortgage loan is recharacterized as an equity interest, we would be required to recognize an allocable share of the income, gain, loss, deductions, credits and tax preference items attributable to the mortgaged property. If you are a tax-exempt member, recharacterization of a loan as an equity interest also could result in your receipt of UBTI.
Alternative Minimum Tax
      Alternative minimum tax is payable to the extent that a taxpayer’s alternative minimum tax liability exceeds his regular federal income tax liability for the taxable year. Alternative minimum tax for individual taxpayers is a percentage of “alternative minimum taxable income,” or AMTI, in excess of certain exemption amounts. The first $175,000 of AMTI in excess of the exemption amount is taxed currently at 26.0%, and AMTI in excess of $175,000 over the exemption amount is taxed currently at 28.0%. AMTI is generally computed by adding what are called “tax preference items” to the taxpayer’s regular taxable income, with certain adjustments. While we do not anticipate that an investment in us will give rise to any specific tax preference items, the amount of alternative minimum tax imposed depends upon various factors unique to each particular taxpayer. Accordingly, each investor should consult with his own personal tax advisor regarding the possible application of the alternative minimum tax.
Penalties
      Under Section 6662 of the Internal Revenue Code, a 20% penalty is imposed on any “substantial understatement of income tax.” In general, a “substantial understatement of income tax” will exist if the actual income tax liability of the taxpayer exceeds the income tax liability shown on the taxpayer’s return by the greater of 10% of the actual income tax liability or $5,000. The amount of an understatement may be reduced by any portion of such understatement that is attributable to (1) the income tax treatment of any item shown on the return if there is “substantial authority” for the taxpayer’s treatment of such item on his return, or (2) any item with respect to which the taxpayer (a) adequately discloses on his return the relevant facts affecting the item’s income tax treatment, and (b) there is a reasonable basis for the item’s tax treatment by the taxpayer, unless the transaction is a “reportable transaction”. The Treasury Department is authorized to define a “reportable transaction” under Section 6011 of the Internal Revenue Code and has provided guidance as to certain transactions that are “reportable transactions.” Based on our good faith projections and assumptions concerning our performance, we do not believe that we constitute a “reportable transaction.”
      In general if we were to constitute a “reportable transaction,” the 20% substantial understatement penalty would be imposed on any understatement attributable to an investment in us, even if adequately disclosed, unless the investor taxpayer were able to show that there was reasonable cause for such understatement and the taxpayer acted in good faith. In order to show good faith, the taxpayer must (1) adequately disclose the facts affecting the transaction, in accordance with regulations promulgated under Internal Revenue Code Section 6111; (2) there must be substantial authority for such treatment;

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and (3) the taxpayer must have reasonably believed that such treatment was, more likely than not, the proper treatment. A taxpayer will be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief (1) is based on the facts existing at the time of the tax return that includes the items filed, and (2) relates solely to the taxpayer’s chance of success on the merits and does not take into account the possibility that the return will not be audited, the treatment will not be raised on audit, or the treatment will resolve through settlement.
      A taxpayer may, but is not required to, rely on the opinion of a tax advisor in establishing reasonable belief with respect to the tax treatment of the item. However, a taxpayer may not rely on the opinion of the tax advisor if the opinion is provided by a “disqualified tax advisor” or is a “disqualified opinion.” In general, a “disqualified tax advisor” is any advisor who (1) participates in the organization, management, promotion or sale of the transaction; (2) is compensated directly or indirectly by a material advisor with respect to the transaction; (3) has a fee arrangement with respect to transactions contingent on all or part of the intended tax benefits; or (4) is determined as disqualified under regulations to be promulgated. A “disqualified opinion” is one that is (1) based on unreasonable or legal or factual assumptions, (2) unreasonably relies on representations, statements, findings or agreements made by the taxpayer or other persons, (3) does not identify or consider all relevant facts or (4) fails to meet any other requirement prescribed by the Secretary of the Treasury.
      As noted above, we do not believe we constitute a “reportable transaction.” However, if we were found to be a “reportable transaction,” then because our counsel, Morris, Manning & Martin, LLP, has participated in our organization and is compensated by a material advisor in certain circumstances, Morris, Manning & Martin, LLP would be a “disqualified advisor” for these purposes and reliance on the opinions of Morris, Manning & Martin, LLP would not protect investors from potential liability for the 20% substantial understatement penalty.
      In addition to the substantial understatement penalty described above, the Internal Revenue Code also imposes a 20% penalty on any portion of an underpayment of tax attributable to (1) any substantial valuation misstatement, defined generally as a situation where the value or adjusted basis of a property claimed on a return is 200% or more of the correct value or adjusted basis, or (2) negligence, defined as any failure to make a reasonable attempt to comply with the Internal Revenue Code, or a careless, reckless or intentional disregard of federal income tax rules or regulations.
Disclosure of Reportable Transactions
      Under recent amendments to Sections 6111, 6112, 6707 and 6708 of the Internal Revenue Code, each material advisor with respect to any reportable transaction is required to file an information return with the Secretary of the Treasury in a manner and form to be prescribed by regulations that are to be issued. The penalties for failure to file are severe and include penalties of $50,000, which may be increased significantly if the reportable transaction is a “listed transaction.”
      We do not believe that we constitute or will constitute a reportable transaction, nor do we believe we constitute a listed transaction. Accordingly, we do not believe that these increased penalty provisions will apply. However, were they to do so, they could have severe adverse effect on the ability of our general partner and its affiliates to continue to operate successfully and continue to work with us.
Partnership Tax Information; Partner Tax Returns
      We will furnish to our limited partners sufficient information from our annual tax returns to enable the limited partners to prepare their own federal, state and local tax returns. Limited partners either must report partnership items on their returns consistently with the treatment on our information return or must file Form 8082 with their returns identifying and explaining any inconsistency. Otherwise, the Internal Revenue Service may treat such inconsistency as a computational error, recompute and assess the tax without the usual procedural protection applicable to federal income tax deficiency proceedings, and impose penalties for negligent or intentional failure to pay tax.

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Audits
      The Internal Revenue Service often audits partnership tax returns. Deductions that are claimed by us may be challenged and disallowed by the Internal Revenue Service. Any such disallowance may deprive investors holding units of some or all of the tax benefits incidental to an investment in us.
      An audit of UDF III could also result in the payment by us of substantial legal and accounting fees in our attempts to substantiate the reporting positions taken, and any such fees would reduce the cash otherwise available for distribution to the limited partners. Any such audit may result in adjustments to our tax returns that would require adjustments to each limited partner’s personal income tax return and may require such limited partners to pay additional taxes plus interest. In addition, any audit of a limited partner’s return could result in adjustments of other items of income and deductions not related to our operations.
      In the event of an audit of our tax return, our general partner will take primary responsibility for contesting federal income tax adjustments proposed by the Internal Revenue Service. Our general partner may also extend the statute of limitations as to all partners and, in certain circumstances, bind the limited partners to such adjustments. Although our general partner will attempt to inform each limited partner of the commencement and disposition of any such audit or subsequent proceedings, limited partners should be aware that their participation in administrative or judicial proceedings relating to partnership items will be substantially restricted.
      You should note that in the event our general partner causes us to elect to be treated as an “Electing Large Partnership” under the Internal Revenue Code, thereby enabling us to take advantage of simplified flow-through reporting of partnership items, any adjustments to our tax returns would be accounted for in the year such adjustments take effect, rather than the tax year to which such adjustments relate. Further, our general partner will have the discretion in such circumstances either to pass along adjustments to the partners, or to cause such adjustments to be borne at the partnership level, which could reduce the cash otherwise available for distribution to limited partners. Any penalties and interest could also be borne at the partnership level. Potential investors are urged to consult their own tax advisors with regard to the effect of simplified pass-through reporting and the changes to partnership audit procedures in effect as a consequence thereof.
Foreign Investors as Limited Partners
      Foreign investors may purchase our units of limited partnership interest. A foreign investor who purchases units and becomes a limited partner will generally be required to file a U.S. tax return on which he must report his distributive share our items of income, gain, loss, deduction and credit. A foreign investor must pay U.S. federal income tax at regular U.S. tax rates on his share of any net income, whether ordinary income or capital gains. A foreign investor may also be subject to tax on his distributive share of our income and gain in his country of nationality or residence or elsewhere. In addition, distributions of net cash from operations or proceeds from the sale of properties otherwise payable to a foreign investor or amounts payable upon the sale of a foreign investor’s units may be reduced by U.S. tax withholdings made pursuant to applicable provisions of the Internal Revenue Code.
      Foreign investors should consult their own personal tax advisors with regard to the effect of both the U.S. tax laws and foreign laws on an investment in us and the potential that we will be required to withhold federal income taxes from amounts otherwise payable to foreign investors.
Tax Legislation and Regulatory Proposals
      Significant tax legislation has been enacted in recent years containing provisions that altered the federal income tax laws relating to an investment in partnerships such as UDF III. In addition, legislative proposals continue to be made which could also significantly change the federal income tax laws as they relate to an investment in us. It is impossible at this time, however, to predict whether or in what form any such legislation will be enacted. Further, the interpretation of changes made in recent years is

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uncertain at this time. Each prospective investor is urged to consult his own personal tax advisor with respect to his own tax situation, the effect of any legislative, regulatory or administrative developments or proposals on an investment in our units, or other potential changes in applicable tax laws.
State and Local Taxes
      In addition to the federal income tax aspects described above, prospective investors should consider potential state and local tax consequences of an investment in us. This prospectus makes no attempt to summarize the state and local tax consequences to an investor in those states in which we may own properties acquired through foreclosure or carry on activities. Each investor is urged to consult his own tax advisor on all matters relating to state and local taxation, including the following:
  •  whether the state in which he resides will impose a tax upon his share of our taxable income;
 
  •  whether an income tax or other return must also be filed in those states where we will own properties; and
 
  •  whether he will be subject to state income tax withholding in states where we will own properties.
      Because we will conduct activities and own properties in different taxing jurisdictions, an investment in us may impose upon a limited partner the obligation to file annual tax returns in a number of different states or localities, as well as the obligation to pay taxes to a number of different states or localities. Additional costs incurred in having to prepare various state and local tax returns, as well as the additional state and local tax that may be payable, should be considered by prospective investors in deciding whether to make an investment in us.
      Further, many states have implemented or are in the process of implementing programs to require partnerships to file tax returns and withhold and pay state income taxes owed by non-resident partners with respect to income-producing properties located in those states. In the event that we are required to withhold state taxes from cash distributions otherwise payable to limited partners, the amount of the net cash from operations otherwise payable to such limited partners would be reduced. In addition, such withholding and return filing requirements at the state level may result in increases in our administrative expenses, which would likely have the effect of reducing returns to the limited partners.
      Each prospective purchaser of units is urged to consult with his own personal tax advisor with respect to the impact of applicable state and local taxes on his proposed investment in UDF III.

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REPORTS TO INVESTORS
      Within 75 days after the end of each of our fiscal years, our general partner will deliver to each limited partner such information as is necessary for the preparation of their federal income tax return. Within 120 days after the end of our fiscal year, our general partner will deliver to each limited partner an annual report that includes our financial statements, audited by independent certified public accountants and prepared in accordance with generally accepted accounting principles. Such financial statements will include a profit and loss statement, a balance sheet, a cash flow statement and a statement of changes in partners’ capital. The notes to the annual financial statements will contain a detailed reconciliation of our net income for financial reporting purposes to net income for tax purposes for the periods covered by the report. The annual report for each year will report on our activities for that year, identify the source of our distributions, set forth the compensation paid to our general partner and its affiliates and a statement of the services performed in consideration therefor, provide a category-by-category breakdown of the general and administrative expenses incurred, including a breakdown of all costs reimbursed to our general partner and its affiliates in accordance with Section 11.4(b) of our partnership agreement, and contain such other information as is deemed reasonably necessary by our general partner to advise the investors of our affairs.
      For as long as we are required to file quarterly reports on Form 10-Q with the Securities and Exchange Commission, financial information substantially similar to the financial information contained in each such report will be sent to limited partners within 60 days after the end of such quarter. Whether or not such reports are required to be filed, each limited partner will be furnished, within 60 days after the end of each of the first three quarters of our fiscal year, an unaudited financial report for that period including a profit and loss statement, a balance sheet and a cash flow statement. The foregoing reports for any period in which fees are paid to our general partner or its affiliates for services will set forth the fees paid and the services rendered. In addition, until all of the net proceeds from this offering are expended or committed, or in the discretion of our general partner used to establish a working capital reserve or returned to the limited partners, each limited partner will be furnished, within 60 days after the end of each quarter during which there are mortgage loans or placement or evaluation fees, a report containing a statement of the amount of the mortgage loans in which we have invested, the material terms of these loans, the identity of the borrower and the real property securing the mortgage loans and the appraised values of that real property.
      We will report the estimated value of our units annually to the limited partners in the next annual or quarterly report sent to limited partners following the valuation process. Such estimated value will be based upon the unpaid principal balances of our loans, our cash and annual appraisals performed by our general partner and not by an independent appraiser. Our general partner is, however, required under our partnership agreement to obtain the opinion of an independent third party that its estimate of the value of each unit is reasonable and was prepared in accordance with appropriate methods for valuing real estate investments. For the first two full fiscal years following the year in which this offering terminates, the value of the units will be deemed to be their initial purchase price of $20 per unit, and no valuation of our properties will be performed. See “Investment by Tax-Exempt Entities and ERISA Considerations — Annual Valuation Requirement.”
      Our general partner will cause to be filed with appropriate federal and state regulatory and administrative bodies all reports to be filed with such entities under then-currently applicable laws, rules and regulations. Such reports will be prepared on the accounting or reporting basis required by such regulatory bodies. We will provide without charge a copy of any such report upon request by a limited partner. In addition, upon request from any prospective investor or limited partner, we will provide without charge a copy of the NASAA Guidelines, as referred to elsewhere in this prospectus.

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PLAN OF DISTRIBUTION
The Offering
      We are offering a maximum of 12,500,000 units of limited partnership interest to the public through select members of the NASD. The units are being offered at a price of $20 per unit on a “best efforts” basis, which means generally that our selling group members will be required to use only their best efforts to sell the units, and they have no firm commitment or obligation to purchase any of the units. We are also offering 5,000,000 units for sale pursuant to our distribution reinvestment plan at a price of $20 per unit. Therefore, a total of 17,500,000 units are being registered in this offering. The offering of our units will terminate on or before May 15, 2008. However, we reserve the right to terminate this offering at any time prior to such termination date. At the discretion of our general partner, we may elect to extend the termination date of our offering of units reserved for issuance pursuant to our distribution reinvestment plan up to May 15, 2010, in which case participants in the plan will be notified. This offering must be registered in every state in which we offer or sell units. Generally, such registrations are for a period of one year. Thus, we may have to stop selling units in any state in which the registration is not renewed prior to its expiration.
Compensation We Will Pay for the Sale of Our Units
      Except as provided below, our selling group members will receive selling commissions of 7.0% of the gross offering proceeds (1.0% for sales under our distribution reinvestment plan). The selling group members will also receive up to 0.5% of the gross offering proceeds, excluding proceeds from our distribution reinvestment plan, for bona fide expenses incurred in connection with due diligence review of this offering. One of our selling group members, IMS Securities, also will receive a wholesaling fee of up to 1.2% of the gross offering proceeds. UMTH Funding, an affiliate of our general partner, will receive an amount equal to 0.8% of the gross offering proceeds for expenses incurred in connection with marketing and professional services for our selling group members. An additional marketing support fee will be paid directly to unaffiliated participating selected dealers in an amount to be determined in the sole discretion of our general partner, but which shall not exceed 1.0% of our gross offering proceeds. The amount of such additional marketing support fee will be commensurate with the participating broker-dealer’s level of marketing support and the success of its sales efforts in connection with sales under our primary offering, each as compared to those of the other participating broker-dealers. The marketing support fees paid in connection with this offering may be deemed to be compensation for services directly or indirectly performed on behalf of our selling group members and, therefore, would be considered underwriting compensation. We will not pay referral or similar fees to any accountants, attorneys or other persons in connection with the distribution of the units. Limited partners participating in our distribution reinvestment plan may designate the amount of the selling commission, up to 1.0%, and to whom it will be paid. To the extent that all or a portion of the 1.0% selling commission for sales under our distribution reinvestment plan is not designated for payment to a limited partner’s broker, the 1.0% selling commission, or balance thereof, will be retained and used by us for additional investments. See “Summary of Distribution Reinvestment Plan — Investment of Distributions.”

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            Wholesaling    
            Fee and    
        Selling Commissions   Marketing   Net Proceeds
    Price to Public   and Due Diligence Fee   Support Fee   (Before Expenses)
                 
Primary Offering
                               
 
Per Unit
  $ 20.00     $ 1.50     $ 0.60     $ 17.90  
 
Total Minimum
  $ 1,000,000     $ 75,000     $ 30,000     $ 895,000  
 
Total Maximum
  $ 250,000,000     $ 18,750,000     $ 7,500,000     $ 223,750,000  
Distribution Reinvestment Plan
                               
 
Per Unit
  $ 20.00     $ 0.20     $     $ 19.80  
 
Total Minimum
  $     $     $     $  
 
Total Maximum
  $ 100,000,000     $ 1,000,000     $     $ 99,000,000  
      We will not pay any selling commissions in connection with the following special sales: (1) the sale of the units to one or more select dealers and their officers and employees and some of their affiliates who so request; and (2) the sale of the units to investors whose contracts for investment advisory and related brokerage services include a fixed, assets under management or “wrap” fee feature. In addition, we may agree to reduce or eliminate selling commissions, wholesaling fees and/or marketing support fees generally or with respect to a particular investment to accommodate a prospective investor or a participating broker-dealer. Further, we may also negotiate a reduction in our obligation to reimburse our general partner for any component of organization and offering expenses applicable to such sales. The net proceeds to us will not be affected by any such reductions in selling commissions, wholesaling fees, marketing support fees and/or expense reimbursements.
      We or our affiliates may also provide non-cash incentives for registered representatives of our selling group members and participating broker-dealers that in no event will exceed the limits set forth in Rule 2710(i)(2) of the NASD Manual. Pursuant to such rule, non-cash incentives may include: a de minimus amount of gifts (currently $100 per person, per year), an occasional meal or ticket to a sporting or entertainment event, and payment or reimbursement of costs of attending training or educational meetings, provided, that all such incentives will not be preconditioned on achievement of sales targets. The value of any such non-cash incentive items will be considered underwriting compensation in connection with this offering.
      The offering will be made in compliance with Rule 2810 of the NASD Conduct Rules, which governs the amount of compensation that direct participation programs may pay for the services provided by NASD members. In no event will the total underwriting compensation to be paid to NASD members in connection with the offering, including selling commissions, wholesaling fees, marketing support fees, expenses relating to educational and training meetings, legal expenses relating to the NASD’s review of this offering, bona fide due diligence expenses and any non-cash sales incentives, exceed 10% of our gross offering proceeds plus 0.5% of our gross offering proceeds for bona fide due diligence expenses. In addition, no sales to discretionary accounts will be made without the specific written approval of the investor.
      Investors may agree with their participating brokers to reduce the amount of selling commissions payable with respect to the sale of their units down to zero (1) if the investor has engaged the services of a registered investment advisor or other financial advisor who will be paid compensation for investment advisory services or other financial or investment advice, or (2) if the investor is investing through a bank trust account with respect to which the investor has delegated the decision-making authority for investments made through the account to a bank trust department. The net proceeds to us will not be affected by reducing the commissions payable in connection with such transactions. All such sales must be made through registered broker-dealers. Neither our selling group members nor their affiliates will directly or indirectly compensate any person engaged as an investment advisor or a bank trust department by a potential investor as an inducement for such investment advisor or bank trust department to advise favorably for an investment in our units.

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      Some employees, consultants and others providing paid services to or on behalf of UMT Holdings, UMTH Funding or other affiliates of our general partner, including Mr. Etter, are also registered representatives affiliated with certain of our selling group members. Mr. Etter is affiliated with IMS Securities, an NASD member. Beth Wilson, an employee of UMTH Funding, is expected to become a registered representative of IMS Securities. Such persons may receive compensation from IMS Securities for services rendered to them that are unrelated to us or this offering.
      Our general partner has agreed to indemnify the participating broker-dealers, including our selling group members and selected registered investment advisors, against certain liabilities arising under the Securities Act. However, the Securities and Exchange Commission takes the position that indemnification against liabilities arising under the Securities Act is against public policy and is unenforceable.
      The broker-dealers participating in the offering of our units are not obligated to obtain any subscriptions on our behalf, and we cannot assure you that any units will be sold.
Units Purchased by Affiliates
      Our general partner and its affiliates, including their family members (including spouses, parents, grandparents, children and siblings), may purchase units offered in this offering at a discount. The purchase price for such units will be $17.90 per unit, reflecting that selling commissions and due diligence fees in the amount of $1.50 per unit, and wholesaling and marketing support fees in the amount of $0.60 per unit will not be payable in connection with such sales. The net offering proceeds we receive will not be affected by such sales of units at a discount. Our general partner and its affiliates will be expected to hold their units purchased at a discount for investment and not with a view towards distribution. Any units purchased by our general partner or its affiliates will not be counted in calculating the minimum offering. In addition, units purchased by our general partner or its affiliates will not be entitled to vote on any matter presented to the limited partners for a vote.
Subscription Process
      If you meet our suitability standards, you may subscribe for units by completing and signing a subscription agreement, like the one included in this prospectus as Exhibit C, according to its instructions for a specific number of units and delivering a check for the full purchase price of the units. Until we sell the minimum offering of 50,000 units, checks should be made payable to “United Development Funding III, L.P. Escrow Account.” Coppermark Bank will serve as our escrow agent, but it has not approved, endorsed or passed upon the merits of an investment in our units or reviewed or endorsed any disclosures made by us in this prospectus. Following sale of the minimum offering and the admission of limited partners, checks should be made payable to us. You should exercise care to ensure that the subscription agreement is filled out correctly and completely. By executing the subscription agreement, you will attest that you:
  •  have received this prospectus;
 
  •  agree to be bound by the terms of our partnership agreement;
 
  •  meet the suitability standards described in this prospectus;
 
  •  understand that, if you are a California resident or ever propose to transfer your units to a California resident, the State of California imposes transfer restrictions on our units in addition to the restrictions included in our partnership agreement;
 
  •  are purchasing the units for your own account;
 
  •  acknowledge that there is no public market for our units;

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  •  understand that, if you are investing on behalf of any entity that is tax-exempt under the Internal Revenue Code, an investment in our units may to give rise to UBTI, which is likely to result in the entity being subject to federal income tax; and
 
  •  are in compliance with the USA PATRIOT Act and are not on any governmental authority watch list.
      We include these representations in our subscription agreement in order to prevent persons who do not meet our suitability standards or other investment qualifications from subscribing to our units. See “How to Subscribe.”
      Subscriptions will be effective only upon our acceptance, and we reserve the right to reject any subscription in whole or in part. Following the date that you receive this prospectus, we may not accept a subscription for units for at least five business days. Subject to compliance with Rule 15c2-4 of the Securities Exchange Act of 1934, as amended (Exchange Act), broker-dealers participating in the offering will be required to ensure that a subscriber’s check will be delivered to the escrow agent by the end of the next business day following receipt of the subscriber’s subscription documents and check. In certain circumstances where the suitability review procedures are more lengthy, subscriber checks will be promptly deposited with the escrow agent in compliance with Exchange Act Rule 15c2-4. Until we have received and accepted subscriptions aggregating at least $1.0 million, the proceeds from your subscription will be deposited in a segregated escrow account with our escrow agent, and will be held in trust for your benefit, pending release to us.
      We intend to accept or reject subscriptions within 30 days after we receive them. If your subscription agreement is rejected, your funds, plus interest if such funds have been held for more than 35 days, will be returned to you within ten business days after the date of such rejection. If your subscription is accepted, we will send you a confirmation of your purchase after you have been admitted as an investor. After we have sold $1.0 million of our units and released the subscription proceeds from escrow, we expect to admit new investors at least monthly. We may, in our discretion, delay the release of funds from escrow beyond the date we receive subscriptions for the minimum offering. The escrow agent will not release your funds to us until we admit you as a limited partner. After release of the initial proceeds to us, funds received from prospective investors will be paid directly to us to hold in escrow pending our acceptance of you as an investor.
      The proceeds of this offering will be received and held in trust for the benefit of purchasers of units to be used only for the purposes set forth in the “Estimated Use of Proceeds” section of this prospectus.
Minimum Offering
      Subscription proceeds will be placed in escrow until such time as subscriptions aggregating at least $1.0 million have been received and accepted by us, which we refer to as the minimum offering. Any units purchased by our general partner or its affiliates will not be counted in calculating the minimum offering. Funds in escrow will be invested in short-term investments, which may include obligations of, or obligations guaranteed by, the U.S. government or bank money-market accounts or certificates of deposit of national or state banks that have deposits insured by the Federal Deposit Insurance Corporation (including certificates of deposit of any bank acting as a depository or custodian for any such funds) that mature on or before May 15, 2007 or that can be readily sold or otherwise disposed of for cash by such date without any dissipation of the offering proceeds invested. Subscribers may not withdraw funds from the escrow account.
      If the minimum offering has not been received and accepted by May 15, 2007 (one year after the date of this prospectus), our escrow agent will promptly notify us, this offering will be terminated and your funds (including interest if such funds have been held for at least 35 days) will be returned to you within ten days after the date of such termination. In the event that a subscriber has failed to remit an executed Internal Revenue Service Form W-9 to our escrow agent prior to the date our escrow agent returns the subscriber’s funds, our escrow agent will be required to withhold from such funds 30% of the earnings attributable to such subscriber in accordance with Treasury Regulations. Interest will accrue on funds in the escrow account as applicable to the short-term investments in which such funds are invested. During

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any period in which subscription proceeds are held in escrow, interest earned thereon will be allocated among subscribers entitled thereto on the basis of the respective amounts of their subscriptions and the number of days that such amounts were on deposit.
Special Notice to California Investors
      Subscription proceeds raised from residents of California will be placed in a separate interest-bearing escrow account with the escrow agent until subscriptions for shares aggregating at least $1.2 million have been received and accepted by us. We will not admit any investors from California until we have raised a minimum of $1.2 million in gross offering proceeds (including proceeds from sales made to residents of other jurisdictions).
Units Held by Assignment
      Where a bank, broker, custodian or other fiduciary holds units as assignor or nominee for persons who invest in us, such fiduciary will be granted the same rights as if they were limited partners, except as prohibited by law. The NASAA Guidelines require the assignment agreement between the assignor and the assignees to provide that the assignor’s management has fiduciary responsibility for the safekeeping and use of all funds and assets of the assignees, whether or not in the possession or control of the assignor’s management. Further, the assignor’s management must not employ, or permit another to employ, such funds or assets in any manner except for the exclusive benefit of the assignees. In addition, the assignment agreement must not permit the assignees to contract away the fiduciary duty owed to the assignees by the assignor’s management under the common law of agency.
Investments by IRAs and Qualified Plans
      If an investor elects to invest in our units through an IRA, such investor may designate an IRA custodian. Further information as to custodial services is available through your broker.
      We may sell units to retirement plans of broker-dealers participating in the offering, to broker-dealers in their individual capacities, to IRAs and qualified plans of their registered representatives or to any of their registered representatives in their individual capacities without commission resulting in a purchase price of 93.0% of the public offering price in consideration for the services rendered by such broker-dealers and registered representatives to us in this offering. The net proceeds to us from such sales will be identical to net proceeds we receive from other sales of units. See “Federal Income Tax Considerations — Investment by Qualified Plans and Other Tax-Exempt Entities.”
Volume Discounts
      In connection with sales of certain minimum numbers of units to a “purchaser,” as defined below, volume discounts resulting in reductions in selling commissions payable with respect to such sales are available. Any such reduction will be credited by reducing the purchase price per unit payable by the investor. The following table illustrates the various discount levels available:
                         
        Commissions on Sales
        per Incremental Unit
    Purchase Price per    
Number of Units Purchased   Incremental Unit   Percentage   Amount
             
1 to 50,000
  $ 20.00       7.0 %   $ 1.40  
50,001 to 100,000
    19.60       5.0       1.00  
100,001 and over
    19.20       3.0       0.60  
      For example, if an investor purchases 600,000 units, he or she would pay (1) $1.0 million for the first 50,000 units ($20.00 per unit), (2) $980,000 for the next 50,000 units ($19.60 per unit), and (3) $9.6 million for the remaining 500,000 units ($19.20 per unit). Accordingly, he or she could pay as little as $11,580,000 (approximately $19.30 per unit) rather than $12.0 million for the units, in which event the commission on the sale of such units would be $420,000 (approximately $0.70 per unit) and, after payment of the wholesaling fee and the marketing support fee totaling $360,000 ($0.60 per unit), we would receive net proceeds of $11,220,000 ($18.70 per unit). The net proceeds to us will not be affected by volume discounts.

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      Because all investors will be deemed to have contributed the same amount per unit to us for purposes of tax allocations and distributions of net cash from operations and sale proceeds, investors qualifying for a volume discount will receive a higher return on their investment than investors who do not qualify for such discount.
      Regardless of any reduction in any commissions for any reason, any other fees based upon gross proceeds of the offering will be calculated as though the purchaser paid $20 per unit. The sales price for all such units will also be deemed to be $20 per unit for the purposes of determining whether we have sold units equal to the minimum offering.
      Subscriptions may be combined for the purpose of determining the volume discounts in the case of subscriptions made by any “purchaser,” as that term is defined below, provided all such units are purchased through the same broker-dealer. The volume discount shall be prorated among the separate subscribers considered to be a single “purchaser.” Any request to combine more than one subscription must be made in writing, submitted simultaneously with the subscription for units, and must set forth the basis for such request. Any such request will be subject to verification by our general partner that all of such subscriptions were made by a single “purchaser.”
      For the purposes of volume discounts, the term “purchaser” includes:
  •  an individual, his or her spouse and their children under the age of 21 who purchase the units for his, her or their own accounts;
 
  •  a corporation, partnership, association, joint-stock company, trust fund or any organized group of persons, whether incorporated or not;
 
  •  an employees’ trust, pension, profit sharing or other employee benefit plan qualified under Section 401(a) of the Internal Revenue Code; and
 
  •  all commingled trust funds maintained by a given bank.
      Notwithstanding the above, in connection with volume sales made to investors in our units, investors may request in writing to aggregate subscriptions, including subscriptions to public real estate programs previously sponsored by our general partner or its affiliates, as part of a combined order for purposes of determining the number of units purchased, provided that any aggregate group of subscriptions must be received from the same broker-dealer. Any such reduction in selling commission will be prorated among the separate subscribers. An investor may reduce the amount of his or her purchase price to the net amount shown in the foregoing table, if applicable. If such investor does not reduce the purchase price, the excess amount submitted over the discounted purchase price will be returned to the actual separate subscribers for units. As set forth above, all requests to aggregate subscriptions must be made in writing, and except as provided in this paragraph, separate subscriptions will not be cumulated, combined or aggregated.
      California residents should be aware that volume discounts will not be available in connection with the sale of units made to California residents to the extent such discounts do not comply with the provisions of Rule 260.140.51 adopted pursuant to the California Corporate Securities Law of 1968. Pursuant to this Rule, volume discounts can be made available to California residents only in accordance with the following conditions:
  •  there can be no variance in the net proceeds to us from the sale of the units to different purchasers of the same offering;
 
  •  all purchasers of the units must be informed of the availability of quantity discounts;
 
  •  the same volume discounts must be allowed to all purchasers of units that are part of the offering;
 
  •  the minimum amount of units as to which volume discounts are allowed cannot be less than $10,000;
 
  •  the variance in the price of the units must result solely from a different range of commissions, and all discounts allowed must be based on a uniform scale of commissions; and
 
  •  no discounts are allowed to any group of purchasers.
      Accordingly, volume discounts for California residents will be available in accordance with the foregoing table of uniform discount levels based on dollar volume of units purchased, but no discounts are allowed to any group of purchasers, and no subscriptions may be aggregated as part of a combined order for purposes of determining the number of units purchased.

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HOW TO SUBSCRIBE
      Investors who meet the applicable suitability standards and minimum purchase requirements as described in the section of this prospectus captioned “Suitability Standards” may purchase units of our limited partnership interests. See “Suitability Standards” for a description of the minimum purchase requirements. If you want to purchase our units, you must proceed as follows:
  (1)  Read the entire prospectus and the current supplement(s), if any, accompanying this prospectus.
 
  (2)  Complete the execution copy of the subscription agreement. A specimen copy of the subscription agreement, including instructions for completing it, is included in this prospectus as Exhibit C.
 
  (3)  Deliver the completed subscription agreement with a check for the full purchase price of the units being subscribed for, payable to “United Development Funding III, L.P. Escrow Account” to United Development Funding III, L.P. Investor Services, 1702 N. Collins Blvd., Suite 100, Richardson, Texas, 75080.
 
  (4)  After we sell the initial 50,000 units, your check should be made payable to “United Development Funding III, L.P.” Certain dealers who have “net capital,” as defined in the applicable federal securities regulations, of $250,000 or more may instruct their customers to make their checks payable directly to the dealer. In such case, the dealer will issue a check made payable to the escrow agent or us, as applicable, for the purchase price of your subscription.
 
  (5)  By executing the subscription agreement and paying the full purchase price for the units subscribed for, you will attest that you meet the suitability standards as stated in the subscription agreement and agree to be bound by the terms of the subscription agreement.

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SUPPLEMENTAL SALES MATERIAL
      In addition to this prospectus, we may utilize certain sales material in connection with the offering of the units, although only when accompanied by or preceded by the delivery of this prospectus. The sales material may include:
  •  investor sales promotion brochures;
 
  •  cover letters transmitting the prospectus;
 
  •  brochures containing a summary description of the offering;
 
  •  reprints of articles about us or the real estate industry generally;
 
  •  fact sheets describing the general nature of our business and our investment objectives;
 
  •  slide presentations and studies of the prior performance of entities managed by our general partner and its affiliates;
 
  •  broker updates;
 
  •  computer presentations;
 
  •  web site material;
 
  •  electronic media presentations;
 
  •  audio cassette presentations;
 
  •  video presentations;
 
  •  cd-rom presentations;
 
  •  seminars and seminar advertisements and invitations; and
 
  •  scripts for telephonic marketing.
      All of the foregoing material will be prepared by our general partner or its affiliates with the exception of third-party article reprints. In certain jurisdictions, some or all of such sales material may not be available. In addition, the sales material may contain certain quotes from various publications without obtaining the consent of the author or the publication for use of the quoted material in the sales material.
      The offering of units is made only by means of this prospectus. Although the information contained in the supplemental sales material will not conflict with any of the information contained in this prospectus, such sales material does not purport to be complete, and should not be considered a part of this prospectus or the registration statement of which this prospectus is a part, or as incorporated by reference in this prospectus or said registration statement or as forming the basis of the offering of the units.
LEGAL MATTERS
      The legality of the units being offered hereby has been passed upon for us by Morris, Manning & Martin, LLP, Atlanta, Georgia. The statements under the caption “Federal Income Tax Considerations” as they relate to federal income tax matters have been reviewed by Morris, Manning & Martin, LLP, and Morris, Manning & Martin, LLP has opined as to certain income tax matters relating to an investment in us. Morris, Manning & Martin, LLP has represented our general partner, as well as affiliates of our general partner, in other matters and may continue to do so in the future.

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EXPERTS
      The financial statements of UDF III, as of December 31, 2005 and for the period from June 13, 2005 (inception) through December 31, 2005, our general partner, as of December 31, 2005 and 2004 and for the years then ended, and the consolidated balance sheets of United Development Funding, L.P. and UMT Holdings, L.P. as of December 31, 2005 and 2004, and, United Development Funding II, L.P. as of December 31, 2005 included in this prospectus have been so included in reliance on the audit reports of Whitley Penn LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
      We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement under the Securities Act with respect to the units offered pursuant to this prospectus. This prospectus does not contain all the information set forth in the registration statement and the exhibits related thereto filed with the Securities and Exchange Commission, reference to which is hereby made. Copies of the registration statement and exhibits related thereto, as well as periodic reports and information filed by us, may be obtained upon payment of the fees required by the Securities and Exchange Commission, or may be examined at the offices of the Securities and Exchange Commission without charge, at the public reference facility in Washington, D.C. at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Securities and Exchange Commission maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission.

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INDEX TO FINANCIAL STATEMENTS
             
United Development Funding III, L.P.
       
 
Audited Financial Statements
       
        F-2  
        F-3  
        F-4  
        F-5  
UMTH Land Development, L.P.
       
 
Audited Financial Statements
       
        F-8  
        F-9  
        F-10  
        F-11