SECURED LINE OF CREDIT PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, United Development Funding, L.P., a Delaware limited partnership, formerly a Nevada limited partnership (the “ Borrower ”), hereby makes this Secured Line of Credit Promissory Note (this “ Note ”) and promises to pay to the order of United Development Funding III, L.P., a Delaware limited partnership, or its assigns (the “ Lender ”), the sum of up to Forty-five Million and NO/100 Dollars ($45,000,000.00) in Principal (as hereinafter defined), or, if greater or less, the aggregate unpaid Principal amount advanced to Borrower under this Note, together with accrued, unpaid interest thereon, pursuant to the terms and conditions set forth in this Note.  All amounts are payable to Lender in lawful money of the United States of America at the address for Lender provided in this Note, or at such other address as from time to time may be designated by Lender.

1.           This Note shall be subject to the following terms:

Date of this Note :                                  August 20, 2008

Borrower :                                                United Development Funding, L.P., a Delaware limited partnership

Borrower’s Address

       Bedford, Texas 76021   

       Fax:           (817) 835-0383

Lender :                                                   United Development Funding III, L.P., a Delaware limited partnership

Lender's Address

Bedford, Texas 76021

Fax:           (817) 835-0383

2.            Definitions .  In addition to the terms which are defined elsewhere in this Note, the following terms have the meanings indicated for purposes of this Note:

(a)           “ Advance ” means any advance of funds by Lender to Borrower pursuant to the terms of this Note.

(b)           “ Borrowing Base Report ” shall mean, at any time, the calculation of the Borrowing Base prepared by Borrower and approved by Lender in its reasonable discretion, including a detailed summary of (i) the Retail Appraised Value of all loans and equity interests for land development and/or land acquisition owned by Borrower, to the extent such loans and equity interests are included in the calculation of the Borrowing Base, (ii) the date of the last payment made on the Loan and confirmation that all regular payments have been made in a timely manner, (iii) all asset-specific debt senior to such loans and equity interests owned by Borrower, (iv) all outstanding Senior Debt, (v) all amounts outstanding under this Note, and (vi) the remaining Principal amount available under this Note.

(c)           “ Borrowing Base ” shall mean, at any time, an amount equal to the outstanding balances of all secured land acquisition and development loans made by Borrower and all equity interests owned by Borrower, the repayment of which is secured; in each case, whether payment or priority of liens is subordinate to payment or priority of liens in favor of any other creditor, provided that the Borrowing Base shall at no time exceed a Combined Loan-to-Value Ratio of 90% of the Retail Appraised Value of all subordinate loans and equity interests for land development and/or land acquisition owned by Borrower and 90% of the Retail Appraised Value for first lien secured loans for land development and/or land acquisition owned by Borrower.

(d)           “ Combined Loan-to-Value Ratio ” shall mean the ratio of (i) all Senior Debt and all other debt (senior or subordinated to this Note) issued by Borrower to (ii) the Retail Appraised Value of the Borrowing Base.  For purposes of the definition of Combined Loan-to-Value Ratio, Senior Debt shall include all asset-specific debt, including any asset specific Senior Debt and indebtedness senior to the loans and equity interests owned by Borrower and shall exclude any unfunded portions of the Senior Debt.

(e)           “ Indebtedness ” shall mean and shall include by way of example, but not by way of limitation:  (i) all indebtedness, obligations and liabilities of Borrower and/or any Guarantors under the Loan or arising under any of the Loan Documents, of whatsoever kind, nature and description, primary or secondary, direct, indirect or contingent, due or to become due, and whether now existing or hereafter arising, and including without limitation of the generality of the foregoing, all indemnities, defenses and hold harmless obligations of Borrower and/or any Guarantor(s) to Lender in connection with the Loan as evidenced by this Note; (ii) all present and future Advances made by Lender in connection with the Loan and the Loan Documents, and whether made at Lender’s option or otherwise, from time to time; (iii) all future Advances made by Lender for the protection or preservation of Lender’s rights and interest in the Collateral (as defined in the Security Agreement), as provided herein or in the Loan Documents, including, without limitation, advances for taxes, levies, assessments, insurance or maintenance of the Collateral; (iv) all costs and expenses incurred by Lender in connection with or arising out of the protection, enforcement or collection of any of the foregoing, including, without limitation, Lender’s actual attorney fees; and (v) all costs and expenses incurred by Lender in connection with, or arising out of, the sale, disposition, liquidation or other realization including, but not by way of limitation, the taking, retaking or holding, and all proceedings (judicial or otherwise) of the Collateral, including, without limitation, Lender’s actual attorney fees.

(f)           “ Material Adverse Effect ”) shall mean any material adverse effect whatsoever upon:  (a) the validity, performance, or enforcement of any Loan Documents; (b) the properties, contracts, business operations, prospects, profits, or condition (financial or otherwise) of Borrower; or (c) the ability of Borrower to fulfill its obligations under the Loan Documents.

(g)           “ Principal ” shall mean the principal amounts outstanding from time to time pursuant to the terms of this Note.

(h)           “ Retail Appraised Value ” means the value (determined by an appraiser if such value was so determined in connection with Senior Debt or otherwise requested by Lender) of the real property securing the loans and equity interests for land development and/or land acquisition owned by Borrower based on the market value of the finished sites sold to a merchant builder reflecting all estimated costs to carry and sell the finished building lots.

(i)           “ Senior Debt ” shall mean, collectively, all indebtedness due and owing by Borrower pursuant to (i) a line of credit provided by Textron Financial Group in the amount of $30,000,000, and (ii) all other indebtedness of Borrower to any national or state chartered banking association or other institutional lender that is approved by Lender in writing to be Senior Debt for purposes of this definition.

2.            Applicable Interest Rate .  The outstanding Principal amount shall bear interest on each day outstanding at the Base Rate in effect on such day, unless the Default Rate shall apply.  Upon the occurrence and during the continuation of an Event of Default, the outstanding Principal amount, and all past-due interest thereon, shall bear interest on each day outstanding at the Default Rate automatically and without the necessity of notice, until such delinquent amount is paid or such breach or default is otherwise cured to the satisfaction of Lender or waived by Lender in writing.  Notwithstanding anything to the contrary contained in this Note, (a) this Note shall never bear interest in excess of the Highest Lawful Rate, and (b) if at any time the rate at which interest is payable on this Note is limited by the Highest Lawful Rate by the foregoing clause (a) or by reference to the Highest Lawful Rate in the definitions of Base Rate and Default Rate, then this Note shall bear interest at the Highest Lawful Rate and shall continue to bear interest at the Highest Lawful Rate until such time as the total amount of interest accrued on this Note equals (but does not exceed) the total amount of interest which would have accrued on this Note, had there been no Highest Lawful Rate applicable to this Note.  As used in this Note, the term “ Highest Lawful Rate ” shall mean the lesser of (a) 18%, or (b) the maximum lawful rate of interest which may be contracted for, charged, taken, received or reserved by Lender in accordance with the applicable laws of the State of Texas (or applicable United States federal law, to the extent that it permits Lender to contract or charge, take, receive or reserve a  greater amount of interest than under Texas law), taking into account all fees and expenses if any, contracted for, charged, received, taken or reserved by Lender in connection with the transaction relating to this Note and the indebtedness evidenced hereby or by the other Loan Documents which are treated as interest under applicable law.

3.            Security; Loan Documents .  This Note is secured by, and entitled to the benefits of, a security agreement dated the date of this Agreement (the “ Security Agreement ”) between Borrower and Lender, pursuant to which the Borrower has granted to Lender, a security interest in the Collateral (as defined in the Security Agreement).  This Note, the Security Agreement, all UCC financing statements, amendments thereto and continuation statements (collectively, “ Financing Statements ”) filed by or in favor of Lender, all Advance Requests (herein so called) and any instruments, agreements, or certificates executed, entered into or delivered by any party in connection with this Note, are collectively referred to in this Agreement as the “ Loan Documents ”.

4.            Use of Proceeds .  The proceeds of this Note shall be used solely for business and commercial purposes and shall be used to acquire assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code.  In no event shall any funds advanced under this Note be used, directly or indirectly, by any person for personal, family, household or agricultural purposes or for the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any “margin stock” (as such term is defined in Regulation U promulgated by the Board of Governors of the Federal Reserve System).  Further, no funds advanced under this Note may be used by Borrower to either:  (a) finance indebtedness associated with any real estate development project to the extent such indebtedness, including indebtedness financed by funds advanced hereunder and indebtedness financed by funds advanced from any other source, including without limitation Senior Debt, exceeds 90% of the Retail Appraised Value of such real estate development project; or (b) finance indebtedness associated with any real estate development project upon which Borrower has a junior priority lien to the extent such indebtedness, including indebtedness financed by funds advanced hereunder and indebtedness financed by funds advanced from any other source, including without limitation Senior Debt, exceeds 90% of the Retail Appraised Value of such real estate development project.

5.            Advances and Advance Procedures .

(a)            Advance Request .  Borrower may request, upon and at any time after the date of this Note until 30 days prior to the Maturity Date, that Lender advance an amount of Principal to Borrower under this Note by presenting an Advance Request to Lender in the form attached as Exhibit “A” .  Subject to the other provisions of this Note, within three business days after its receipt of the Advance Request, Lender shall fund the requested Advance.  At no time shall the amount of an Advance cause the outstanding Principal to exceed the Borrowing Base as set forth in the immediately preceding Borrowing Base Report delivered by Borrower to Lender.  At any time that the outstanding Principal exceeds the Borrowing Base, Borrower shall immediately pay Lender an amount equal to such excess.

(b)            Advance Schedule .  Attached to this Note as Schedule 1 is a list of the Advances by type made under this Note, any payments applied to reduce Principal  outstanding under this Note, and the aggregate amount of Principal outstanding under this Note (the “ Advance Schedule ”). The amount of Principal owing on this Note at any given time shall be equal to (i) the aggregate amount of all Principal advanced by Lender under this Note, minus (ii) all payments made on this Note and applied by Lender to reduce the Principal amount of this Note in accordance with Section 6(c) . The Advance Schedule shall be revised by Lender from time to time as appropriate.

(c)            Advances .  Subject to the terms of this Note, Lender agrees to make one or more advances to Borrower from time to time from the date hereof to and including the Maturity Date, provided that the aggregate amount of all Advances at any time outstanding shall not exceed the lesser of the Borrowing Base or the maximum amount of Principal Amount of this Note.

(a)            Mandatory Payments .  Mandatory payments equal to the amount of unpaid accrued interest on the outstanding Principal balance of this Note from time to time shall be due and payable on the 15 ^th day of each month for the prior calendar month interest due during the term of this Note, commencing on September 15, 2008.

(b)            Maturity .  Subject to any acceleration of this Note, the outstanding Principal, together with accrued, unpaid interest thereon, shall be due and payable on the Maturity Date.

(c)            Application of Payments .  Payments made on this Note will be applied first to unpaid, accrued interest, next, to any unpaid collection costs, fees and other charges permitted under this Note, and last, to reduce the Principal outstanding under this Note, subject , however , to any adjustments required or permitted by this Note or applicable law.

(d)            General .  Borrower will make each payment that it owes under this Note to Lender (interest, any applicable fees and charges, and outstanding Principal) in full and in lawful money of the United States, without set-off, deduction or counterclaim.  All payments shall be made by check or wire transfer of immediately available funds.  Should any such payment become due and payable on a day other than a business day, the date for such payment shall be extended to the next succeeding business day, and, in the case of a payment of Principal or past-due interest, interest shall accrue and be payable on such amount for the period of such extension.  Each such payment must be received by Lender not later than 5:00 p.m., Dallas, Texas time on the date such payment becomes due and payable.  Any payment received by Lender after such time will be deemed to have been made on the next succeeding business day.

7.            Prepayment; Lender's Rights .  Borrower may prepay this Note, or any portion of this Note, at any time and from time to time, without the payment of any fee or penalty.

8.            Representations and Warranties .  Bor