United Development Funding III, LP

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

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

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

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

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