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