What: Shares of United Development Funding (NASDAQ:UDF) were down 27.3% at 1:45 ET today as a short-seller described the company as something akin to a Ponzi scheme.

So what: United Development Funding IV is a real estate investment trust. The company primarily invests in real estate projects in Texas, noting in its filings that it has 123 loans on Texas projects. In addition, it has three loans in Florida and one in North Carolina.

The short-seller suggests that these REITs pay off old investors with proceeds from freshly raised debt and equity capital. United Development Funding IV's SEC filings reveal only 71% of its year-to-date distributions in 2015 came from cash from operations. The remaining 29% of the distributions paid were financed by credit facilities. In other words, a large portion of its 2015 distributions to shareholders were funded with borrowed money.

The short-seller also claims that the many different UDF REITs (they are distinguished by different Roman numerals) make loans against properties previously financed by other UDF entities. In one example, a development known as Shahan Prairie was financed first by UDF I, then received additional financing from UDF III, which slowly increased the loan balance through the financial crisis. Later, in 2015, UDF V issued an even larger loan to the same project, with the proceeds used to repay UDF III.

According to the report, land for the Shahan Prairie Estates project was first acquired in 2004. A picture taken in Nov. 2015 suggests little to no development work has been completed to date.

So what: Short reports often bring attention to cracks in company business models. A report on HVST points out that United Development Funding IV's largest borrower represented 67% of its loans and may be insolvent. Similarly, profits may be overstated, as the company has not made "any provision for loan losses despite a material outstanding balance of past due loans."

Suffice it to say, the market isn't pleased with the news. United Development Funding IV shares now trade for less than $8, after trading for more than $17 per share on Thursday.