Alternative Pooled Investments Flashcards
What does “pooled investment” mean?
Investors combining their money together towards a common goal
What are REITs similar to?
They are like mutual funds that only invest in real estate
What are REITs legally structured as?
Trusts
What two things are typical REIT portfolios comprised of?
- Commercial properties
- Commercial mortgages
What are residential REITs?
Investments in single-family home and associated mortgages
What do Equity REITs invest in?
Directly into real estate properties
What are the two ways Equity REITs make money?
- leases
- selling property
What type of real estate do Equity REITs focus on?
Commerical
What do Mortgage REITs buy and offer?
They buy and offer mortgages on commercial properties
How do Mortgage REITs make money differ from Equity?
Instead of investing directly in real estate, they make income from the mortgages they own or offer.
What do hybrid REITs invest in?
A combination of real estate properties and mortgages
In what markets can REITs be bought and sold?
Primary and secondary
Why can you use REITs as a hedge?
Because when stock market values fall, real estate usually maintains its value
Why are investors in private REITS typically wealthy?
Because its a challenge to liquidate and is risky
What do Mortgage REITs primarily seek as apposed to Equity REITs?
Mortgage: Seek Income
Equity: Seek capital appreciation
Where do non listed REITS trade?
only in OTC market
3 ways REIT qualify for Subchapter M rule
- 75% invested in real estate
- 75% income from real estate
- 90 net investment income distributed
What is the minimum investment for hedge funds?
1 million
What does limiting investment to wealthier investors due for hedge funds?
Less supervision regulations from SEC
Which two risk do hedge funds have a large amount of?
- liquidity risk
- legislative
What is a hedge fund lock up period?
Investors not allowed to request withdrawals for a lengthy period of time
What is the purpose of lock up periods?
Allows fund managers to invest their customers’ money without worrying about keeping cash available for redemptions
How often can customers withdrawal from hedge funds?
Few times a year
What two things are hedge fund managers paid based upon?
- assets under management
- capital gains
What do Direct Participation Programs allow?
The investor to directly participate in the profits and losses of the business
What is the defining feature of a Direct Participation Program?
Its ability to pass through losses to its owners
What benefit does passing through losses to DPPs investors have?
It provides tax deduction
How does passthrough in DPP differ from normal ivnestments?
Normal investments can only pass through income and gains to their investors but DPP pass income gains and losses
Who is required for a limited partnership
One or more general partners plus one or more limited partners
What are the general partners in a limited partnership responsible for?
Actually running and managing the business
WHat are the limited partners of a limited partnership responsible for and what cannot thy do?
Just investing, no managing
Who takes on the role of the limited partner in a DPP?
The investors take on th erole of the limited partner
What does the “limited” part mean for the limited partner?
The risk is limited to their investment
What is the difference in liability between general partners and limited partners?
General partners have unlimited liability and limited partners are limited to their investment
What type of risk do limited partnerships come with and why?
liquidity risk because there is no secondary market that trades limited partnership units
What are two important limited partnership programs?
- Real estate partnerships RELPs
- Oil and gas programs
what RELP limited partnership investments aim to do?
make market returns based on real estate holdings
What are three investment goals of RELPs?
- capital appreciation
- income
- tax benefits
What are two kinds of tax benefits RELPs can achieve?
- tax credits
- tax deductions
What two ways can tax credits be achieved by RELPs?
- low income housing
- rehabilitation of historic properties
How are RELPs tax deductions achieved? (2 ways)
- Mortgage interest payments
- depreciation of properties
How do RELPs and REITs differ in liquidity risk and passing through losses to investors?
RELPs: liquidity risk and CAN pass through losses
REITs: Avoid liquidity risk but DO not allow losses to pass through
Match REITs and RELPs and Limited Partnerships and Trust Units
REITS and Limited Partnership
REITs Trust Units
What are the three general types of oil and gas limited partnerships?
- income wells
- developmental wells
- exploratory wells
What are intangible drilling costs IDC?
Tax-deductibl expenses that are not associated with actual drilling
What tax benefits can limited partners have in their first year of operation ?
They can fully write off intangible drilling costs and pass them through to the limited partners (passing losses)
What are depletion allowances?
Tax deductions for every barrel of oil pulled from the ground
What costs do depletion allowances cover?
Losses of income when an oil well begins to run dry
What are income wells also known as?
stripper wells
What do income wells invest in?
proven oil wells
What are mineral rights?
Fees charged by the owner of the land
Why are mineral rights high for income wells?
Because the land owner knows there is oil in the ground
Why do income wells not have to spend money on IDCs?
Because the will already exists and doesn’t need to be searched for
What do developmental wells invest in?
Drilling projects that are near proven oil wells
What are developmental wells also known as?
step-out wells
What level risk are developmental wells?
mid-level risk
What do exploratory wells invest in?
Unproven areas
What is the hierarchy of wells in terms or risk?
- Income Wells
- Developmental wells
- Exploratory wells
What is the hierarchy of rewards for wells?
- wildcat
- step-out
- income wells
What two things make an investor suitable for DPP?
- comfortable with liquidity risk
- seeking tax benefits
What are three investment goals of RELPs?
- capital appreciation
- income
- tax benefits
What two things are tax credits available for in RELPs?
- low-income housing
- historic rehabilitation
What two things do oil and gas programs gain tax reductions through?
- intangible drilling costs IDC
- Depletion allowances
REITS pass through _____ while RELPS pass through _____
gains; losses and gains
Which oil and as program is ineligible for deductible IDCs and why?
Income wells because drilling is already complete
What are three intangible drilling costs?
- labor
- fuel
- insurance
