Blog: The Precarious Preston Manor

[Link to full presentation below]

UDF’s Ponzi-like real estate scheme continues to unravel as it tries to create liquidity through the dissipation of collateral to repay various creditors or to satisfy other financial obligations. Undisclosed and in the background, UDF management has been trying to generate sufficient liquidity to repay its creditors and avoid bankruptcy – something it has struggled to do despite having assets (stated book value) far in excess of liabilities and notably a financial reality that does not comport with its stated financial position.  As part of this effort to generate liquidity, UDF – and many related and “unrelated” borrowers – have been trying to coordinate, directly or indirectly, the sale of assets which serve as collateral to a number of UDF’s subordinate or pledged “loans.” While it is unclear how it maximizes value to dissipate collateral while under considerable duress and outside a formal bankruptcy process, notably amidst (i) the acknowledgement of certain events of default, (ii) the pressure from creditors to repay debts on an accelerated basis and (iii) the backdrop of multiple federal investigations, these efforts to dissipate collateral have consistently occurred over the past six months and have not been publicly disclosed by management, despite the added scrutiny.

One of these precarious examples involves Preston Manor, a residential real estate development outside Lubbock, Texas which UDF I financed and which failed leading up to the great financial crisis, and upon which UDF I ultimately foreclosed. Coinciding with the foreclosure and over the subsequent years, UDF management directed the capital of public companies, including UDF III and UDF IV, to be lent to this development. Nearly a decade after the foreclosure, UDF finally sold the foreclosed property in July (2016) for an amount estimated by Hayman to be far below obligations previously disclosed to be owed to UDF III related to Preston Manor, implying considerable impairment.

Despite this example and other evidence that would suggest otherwise, UDF management claims to have "identified the housing bubble and avoided lending in frothy markets."

Hayman’s latest presentation outlines how UDF’s disclosures regarding this situation are opaque at best and, in aggregate, misleading. The relevant omissions in disclosures, and the ultimate outcome (an apparent impairment), lead to questions regarding the intent of the parties in structuring investments and the substantive nature of UDF loans and when considered with other irregular patterns and red flags (documented at length by Hayman through various case studies), there is a reasonable basis to question whether a number of UDF loans are appropriately characterized as debt. If it is determined that any, if not a material number, of UDF’s loans are equity investments rather than debt, then there could be significant tax consequences (including potential REIT qualification consequences) and financial disclosure consequences.

The information in this presentation is relevant to investors, regulators, tax authorities as well as former and current auditors and is being made public for any and all interested stakeholders to review.