Series 7 top-off - Chapter 18 **copy**

When evaluating a direct participation program, which type of analysis would be used most frequently by an analyst? [A] Cash flow. [B] Return on capital. [C] Inventory turnover. [D] Current ratio.

[A] Cash flow. Cash flow is a good indicator of the profitability to the limited partner. Return on capital, inventory turnover and current ratio are analyses used to determine credit-worthiness of corporations.

Limited partners have which two rights in a DPP? I. The right to inspect partnership books II. The right to sue the General Partner for damages if the General Partner wrongfully spends the proceeds of the project III. The right to fix the compensation of the General Partner IV. The right to all of the tax benefits from the operations of the project [A] I and II [B] I and IV [C] II and III [D] III and IV

[A] I and II I correct - to inspect the books and records II correct - to sue general partners for good cause III incorrect - LP's do not determine the GP's compensation IV incorrect - LP's would not receive "All" tax benefits - some would go to the GP.

Which two of the following are true of exploratory oil and gas drilling programs? I. The programs represent drilling on unproven properties with a high risk of not discovering reserves. II. The programs represent producing oil and gas properties purchased for additional exploration. III. The programs are suitable for high risk investors only. IV. If the program is successful, potential profits realized are normally less than for other types of oil and gas programs. [A] I and III [B] II and IV [C] II and III [D] I and IV

[A] I and III I correct - drilling on unproven properties II incorrect III correct - suitable for high risk investors. IV incorrect

The document which specifies the areas that an individual condominium owner has exclusive use of and the common areas which are shared with all other unit owners is the: [A] Unit Deed [B] Association's By Laws [C] Offer Sheet [D] Master Deed

[A] Unit Deed

An investor who wishes to invest in a limited partnership that purchases undeveloped land would have as his primary objective: [A] Operating expenses. [B] Appreciation. [C] Depletion. [D] Depreciation.

[B] Appreciation. Limited partnerships that invest in raw land do not have depletion or depreciation expenses and there would not be any operating costs. Appreciation should be the investor's primary objective.

Which of the following are reasons why Direct Participation Programs are formed as Limited Partnerships? I. The partnership is taxed at a lower rate than the rate of the partners II. The advantages of limited liability for the limited partners III. The tax advantages of the pass-through of profits and losses to the limited partners [A] I and II [B] II and III [C] I and III [D] All

[B] II and III Limited partnerships have pass-through taxation. This creates a tax advantage when compared to a corporation, while also offering limited liability to limited partners. The partnership is not taxed as an entity and partners, both general and limited, are responsible for their own taxes related to the partnership after gains and losses are passed through.

INCOME STATEMENT ABC Limited Partnership Gross Income $9,480,000 Deductible Items: Operating Expenses = $3,650,000 Management Fees = 225,000 Interest on Mortgage = 3,100,000 Allowance for Depreciation = 3,300,000 What is the cash flow? [A] $795,000 negative [B] $570,000 negative [C] $2,505,000 positive [D] $2,730,000 positive

[C] $2,505,000 positive To figure the Cash flow, take the Gross Income and subtract out all deductibles except depreciation. This gives the company a positive cash flow of $2,505,000.

Which of the following are true regarding a limited partner who has invested in a limited partnership tax shelter? I. The limited partner flexibility concerning the types of investment made by the partnership II. Limited liability for the limited partners. III. Possible tax write offs against other passive income for the limited partner. IV. The limited partner has considerable control over management. [A] I and II [B] III and IV [C] II and III [D] All

[C] II and III Limited Partners must be "silent" partners and would NOT have control over the types of investments made by the partnership and limited partners DO NOT have control over the management of the partnership. Limited Partners would have limited liability and the possibility of tax write-offs.

Which of the following will be treated as income from a passive activity for federal tax purposes? [A] Dividends received from ordinary corporate stock. [B] Interest received from corporate bonds. [C] Income a limited partner receives from a direct participation program which owns an equity interest in real estate. [D] Capital gains realized on the sale of preferred stock.

[C] Income a limited partner receives from a direct participation program which owns an equity interest in real estate. Interest and dividends from stock and bonds are considered ordinary income for tax purposes. Income from Direct Participation Programs is considered passive income.

In a limited partnership, which one of the following would represent the least potential for a conflict of interest? [A] The general partner is allowed to lend money to the limited partnership. [B] The general partner owns leases next to leases owned by the limited partnership. [C] The general partner has a substantial amount of funds at risk in the limited partnership. [D] The general partner is allowed to borrow money from and lend money to the limited partners.

[C] The general partner has a substantial amount of funds at risk in the limited partnership. If the general partner has a substantial amount invested in the partnership that would not be a conflict of interest, it would help assure that the general partner will work toward the success of the partnership.

If a general partner in a limited partnership also registers limited partnership interests for sale in a state(s) as securities, he may be called a(n) [A] underwriter [B] managing underwriter [C] syndicator [D] manager

[C] syndicator

When a partner in a limited partnership makes a bona fide loan to a partnership, he would: [A] Have the larger liability as a general partner [B] Have a larger share of the profits [C] Have added to his proportionate interest in the partnership [D] Be a general creditor

[D] Be a general creditor When a partner in a limited partnership makes a bona fide loan to a partnership, he does so as an individual, not as a partner. Therefore, he would be considered a general creditor of the partnership, and his interest in the partnership would not change.

When investing in a DPP, proceeds may be used to meet which expenses? I. Selling costs II. Offering costs III. Organization costs IV. Acquisition costs [A] I and II only [B] I and IV only [C] II and III only [D] I, II, III, and IV

[D] I, II, III, and IV

When an investor decides to invest in a Limited Partnership which of the following documents would have to be signed? [A] Partnership Agreement [B] New Account Report Form [C] Investment Letter [D] Subscription Agreement

[D] Subscription Agreement

Which of the following is true of a triple net lease relating to a real estate investment? [A] All major repairs and improvements on the property are paid by the tenant. [B] The owner of the property is guaranteed a yearly return of three times his annual investment. [C] The tenant pays a percentage of sales as rent, in addition to a fixed amount per month on the property. [D] The tenant is responsible for paying property taxes, insurance, and operating expenses relating to the property.

[D] The tenant is responsible for paying property taxes, insurance, and operating expenses relating to the property. The tenant is responsible for paying their proportionate share of property taxes, insurance, operating, and maintenance expenses relating to the property. However, debt service on the property is paid by the new owner.