Unit 11

A different way to invest in a business rather than buying the company's stock

A DPP is just

Real Estate Investment Trust (REIT)

A company that manages a portfolio of real estate investments to earn profits and/or income for its shareholders

Syndicator

A general partner is also known as the

Receiving 75% or more of its income from real estate and distributing 90% or more of its taxable income to shareholders

A reit can avoid being taxed as a corporation by

Dividends and gains upon disposition of reit shares

A reit shareholder is generally only taxed on

Roll-up

A transaction involving the combination and reorganization of one or more limited partnerships into securities of a successor corporation Benefit is turning an illiquid DPP into a more liquid security

Packaged Product

An investment that relieves the investor of daily decision making

upper limit on deductibility of losses

An investor's tax basis represents the

Subscription Agreements

Appoints one or more GPs to act on behalf of the investors and is only effective when the GPs sign it Must be completed by all investors in the company

Tangible Drilling Costs

Costs incurred that have salvage value Depreciate over several years Ex: storage tanks, wellhead equipment

Equipment Leasing Programs

Created when DPPs purchase equipment leased to other businesses Investors receive income from lease payments and also a proportional share of write offs from operating expenses, interest expenses, and depreciation Primary investment objective is tax-sheltered income

lack of liquidity

DPPS have

Partnership Agreement

Describes the roles of the GPS and LPs and guidelines for the partnerships operation Each partner receives a copy

Internal rate of return

Determines the present value of estimated future revenues and sales proceeds to allow comparison to other programs

Direct Participation Program (DPP)

Investments that pass income, gains, losses, and tax benefits (such as depreciation, depletion, and tax credits) directly to the limited partners

Accredited investors

Investors in a private placement must be

Tax laws

Legislative risk is important for DPPs in particular because of

Blind pool or nonspecific program

Less than 75% of the assets are specified as to use

Private placements or public offerings

Limited partnerships may be sold through

Functional Allocation

Limited partnerships receive the IDCs, which allow immediate deductions GPs receive the tangible drilling costs, which are depreciated over several years Revenues are shared

Recourse loan

Loan made to the partnership in which subscribers may assume responsibility for repayment

Nonrecourse loan

Loan made to the partnership in which the GPs may assume responsibility for repayment

Private Placements

Most DPPs are sold through

Cash Flow

Net income or loss plus noncash changes (depreciation)

Have a predetermined date of dissolution

One example in which partnerships avoid corporate characteristics is that they

Secured Lenders, other creditors, LPs, GPs

Order of dissolution for limited partnerships

Syndicator

Oversees the selling and promotion of the partnership Responsible for the preparation of any paperwork necessary for the registration of the partnership

Equity Reits

Own commercial property Take ownership position in the properties Receive rental income and possible capital gains upon a future sale of the properties

Hybrid Reits

Own commercial property and own mortgages on commercial property A combination of both mortgage and equity reits

Mortgage Reits

Own mortgages on commercial property Make real estate loans (mortgages) Earnings come from interest payments on those loans

Passive income

Passive losses from DPPs can be used to shelter

Supply and demand

REIT prices are based on

Direct Participation Programs (DPP)

REITS are not

Investment companies

REITS are not

Opposite Directions

Real estate prices and the stock market frequently move in

Exchanges and the OTC

Reits trade on

Investment in partnership + share of recourse debt ( + nonrecourse debt in real estate DPPs) - cash or distributions

Tax basis formula

Government-assisted housing and historic rehabilitation projects

Tax credits are offered for

10% of gross proceeds

The compensation to a member firm of a DPP purchase may not exceed

Due diligence

The exercise of reasonable care to determine that the offering disclosures are accurate and complete

Mutual fund

The most common example of a packaged product is a

Functional Allocation

The most common sharing arrangement in an oil and gas DPP is

Limited partnership

The most common type of DPP is

Real Estate Partnerships

The most popular type of partnerships are

15% of the gross proceeds

The organization and offering expenses for purchasing DPPs may not exceed

Crossover Point

The point at which the program begins to generate taxable income instead of losses

The certificate of limited partnership, the partnership agreement, and the subscription agreement

Three important documents required for limited partnerships to exist are

Cash flow analysis and Internal rate of return

Two methods used in evaluating DPPs are

Passive income and save on taxes

When a corporation loses money, there is no tax benefit to the shareholders. But when a DPP shows a loss, that loss can be used to offset

Drilling for oil or gas where none had occurred previously

Wildcatting refers to

Intangible Drilling Costs (IDCs)

any cost that, after being incurred, has no salvage value Allow for immediate deductions

Cash flow analysis

compares income (revenues) to expenses

Economic Viability

there is potential for returns from cash distributions and capital gains