United Development Funding IV, a troubled Texas real estate investment trust under investigation by the FBI, has defaulted on a $35 million term loan and has suspended its distributions to shareholders.
UDF IV, with $684 million in assets, has been in trouble since December. That's when an anonymous post on an investor website claimed that UDF IV, a lender to real estate developers, was operating like a Ponzi scheme.
It was later revealed that hedge fund manager Kyle Bass, founder of Hayman Capital Management, was shorting UDF IV. Company shares plunged for months before they stopped trading at $3.20 in February, the day the FBI raided UDF's offices in suburban Dallas.
The loan was issued in July 2014 by Waterfall Finance 4. As part of the default, UDF IV has entered into a forbearance agreement with three lenders that were successors to Waterfall Finance 4.
The forbearance agreement was effective as of March 4, according to a filing Monday with the Securities and Exchange Commission. That's when UDF IV “acknowledged certain events of default,” according to the filing.
As part of the agreement, UDF IV has a little more than two months to repay the loan. The lenders have “agreed to forbear from exercising any of their default-related rights against the trust until Aug. 4,” according to the SEC filing. The REIT's distribution, which is similar to a dividend, is halted during the forbearance period.
UDF IV was marketed by Nicholas Schorsch’s now-defunct Realty Capital Securities and listed on the Nasdaq in June 2014. The $186.8 billion California State Teachers' Retirement System, West Sacramento; $178.3 billion New York State Common Fund, Albany; $126.6 billion Texas Teacher Retirement System, Austin; and $75 billion Ohio State Teachers' Retirement System, Columbus, are investors in UDF IV.
Last week, UDF IV moved to reassure investors and issued a statement that said it had conducted an independent investigation of its business and found no evidence of fraud.
A spokesman for UDF IV, Jeff Eller, had no immediate comment when asked about the default.
A series of REITs operate under the UDF brand. Those REITs control $1.3 billion in assets.
The default, which took the REIT more than 2½ months to report, is another disappointing event for UDF IV shareholders, said Alan Rosca, an attorney representing more than 150 shareholders who have invested more than $30 million in UDF IV and other UDF REITs.
“Very specific allegations have been made against UDF IV, and the response is platitudes and generalities,” said Mr. Rosca. “Last week, there was an inadequate and unacceptably vague news release based on a secret report. Now, there's a default.”
“Obviously, there are problems at the company,” Mr. Rosca said. “Why is it defaulting? Is it not being paid by its (developers)?”
