C17 Direct Participation Programs (DPPs)

Question 1

Direct participation programs (DPPs)

Answer 1

Illiquid (money tied up) investments that pass income, gains, losses, and tax benefits directly to the limited partners.

Question 2

What is the greatest disadvantage of limited partnerships?

Answer 2

Illiquid - Money is locked in for long periods of time. Difficult to sell quickly

Question 3

What factors should an investor consider with when purchasing a limited partnership interest?

Answer 3

In Order of Importance:

a) Economic Viability
b) Tax Considerations
c) Management Ability
d) Lack of Liquidity
e) Time Horizon

Question 4

What are the 3 important documents required for a limited partnership to exist?

Answer 4

a) Certificate of limited partnership
b) Partnership agreement
c) Subscription agreement

Question 5

Certificate of limited partnership

Answer 5

+ Legally recognizes the partnership

+ Must be filed in the home state

Question 6

Partnership agreement

Answer 6

+ Describes the roles of the general and limited partners

Question 7

Subscription agreement

Answer 7

+ Must be completed by investors interested in becoming a limited partner
+ Agreement appoints one or more General Partner to act on behalf of the limited partners

Question 8

Recourse Loans

Answer 8

When limited partner accepts responsibility for repayment of partnerships debt. Lender has recourse to limited partner for required funds. Added to a partners
cost basis.

Question 9

Nonrecourse Loans

Answer 9

Lender has no recourse to individual limited partners in event of entity defaulting on loan. secured by assets of partnership

Question 10

General Partner

Answer 10

*Unlimited Liability.

Responsible for managing program and must contribute at least 1% of programs capital.

Question 11

Limited Partner

Answer 11

• Liability is limited to his investment.

Passive investor who has no control over managerial decisions. relied on to contribute capital

Question 12

Roles Of Limited Partner

Answer 12

a) Put up investment capital.
b) losses are LIMITED to their investment.
c) Receives the benefits from the operation.
d) May not exercise management.
e) May vote to change the objective of the partnership.
f) May vote to switch or remove general partner.
g) May sue the general partner if he general partner does not act in the best interest of the partnership.

Question 13

Roles of General Partner

Answer 13

a) Runs the day to day of the business.
b) Buy and sell property for managing the partnership.
c) Receive Compensation for running the partnership.
d) Enter into legally binding contracts for the partnership.

Question 14

Preferential Tax Treatment Requirements

Answer 14

In order to get the tax benefits of a DPP, it cannot act like a corporation. Must NOT do at least two of the following things a corporation does.

a) Continuity of Life
b) Profit Motive
c) Central Management
d) Limited Liability
e Associates
f) Freely Transferable interst

Question 15

Two Easiest corporate characteristics to avoid

Answer 15

Continuity of Life

Freely Transferable Interest

Question 16

Public Offering

Answer 16

Has to be registered with SEC -

General Partner will register DPP’s interests with SEC. the sponsor will hire an underwriter to market the program to public. Disclosure is made to investors through offering prospectus

Question 17

Private Placement

Answer 17

Sponsor will attempt to locate investors without assistance of an underwriter. type of offerings are conducted under Regulation D of securities act of 1933 and are exempt from registration

Question 18

Main Types of DPPs

Answer 18

a) real estate
b) oil and gas
c) equipment leasing

Question 19

Types of Real Estate DPPs

Answer 19

a) raw land
b) new construction
c) existing properties
d) government-assisted housing

Question 20

Types of Real Estate DPPs

Answer 20

a) raw land
b) new construction
c) existing properties
d) government-assisted housing

Question 21

Real Estate DPP - Raw Land

Answer 21

a) no depreciation deductions
b) no periodic income from real estate
c) financing and carrying costs largest expenses
d) riskiest

Question 22

Real Estate DPP - New Construction

Answer 22

a) capital appreciation
b) large financial commitment which is usually accomplished through leverage. use of leverage can magnify any errors in judgment.
c) long duration.

Question 23

Real Estate DPP - Existing Properties

Answer 23

a) immediate cash flows from rents

b) immediate depreciation allowances.

Question 24

Real Estate DPP - Government-assisted Housing

Answer 24

provide low cost housing for low income families. HUD

Question 25

Types of Oil and Gas DPPs

Answer 25

a) exploration (wildcatting) programs
b) income programs
c) development programs

Question 26

Oil and Gas DPPs - Exploration

Answer 26

EXPLORING for New Areas.

Searching for oil and gas in unproven areas.
High-risk ventures.

high risk involved correlates to high potential rewards.

provides significant tax advantages. (Most Tax Dedications of all types)

Question 27

Oil and Gas DPPs - Income

Answer 27

Operating EXISTING wells

Acquires interests in already produced wells. acquired from oil and gas operators that have completed drilling and prefer to sell reserves rather than hold and operate sites for life of production.

cash flow oriented.

Question 28

Oil and Gas DPPs - Development

Answer 28

Developing KNOWN areas.

leases are acquired for right to drill proven area.

lower risk equates to lower potential return than possible through a successful wildcat program.

Question 29

Intangible drilling and development costs (IDC)

Answer 29

IDC as usually 100% tax deductible.

Examples of IDC -

a) Geological Surveys
b) drill site prep costs
c) labor utilized in drilling wells,
d) chemicals
e) testing and core analysis costs,
f) costs of supplies

Question 30

Oil and Gas DPPs Sharing Arrangements

Answer 30

Different ways of sharing risks and rewards:

a) functional allocation
b) overriding royalty interest

c) reversionary working
interest,

d) disproportionate working Interest
e) Net Operation profits
f) Carried Interest

Question 31

Oil and Gas DPPs Sharing Arrangements - Functional Allocation

Answer 31

The Most Common.

Limited Partners receive the deductions for the Intangible Drilling Costs (IDC)

General Partners receive Property write offs.

Revenue is shared.

Question 32

Oil and Gas DPPs Sharing Arrangements - Overriding Royalty Interest

Answer 32

The holder of an Overriding Royalty Interest has no partnership risks, but receives royalty (payments) from the partnership

Question 33

Oil and Gas DPPs Sharing Arrangements - Reversionary Working
Interest,

Answer 33

The Limited Partners have all the costs of the program. The General Partner receives no payments until the Limited Partners have recovered all their money

Question 34

Oil and Gas DPPs Sharing Arrangements - Disproportionate Working Interest

Answer 34

The General Partner receives a large portion of the revenue but only incurs a small portion of the costs

Question 35

Oil and Gas DPPs Sharing Arrangements - Net Operation profits

Answer 35

The Limited partners have all the costs. The general partner bears no costs but is entitled to a percentage of the net profits.

Only can be done in private placements

Question 36

Oil and Gas DPPs Sharing Arrangements - Carried Interest

Answer 36

The Limited Partners receive the IDC and immediate write offs. The general partner will share in tangible drilling costs and will receive the property deprecation.

Question 37

Crossover point

Answer 37

a) Reached once the programs revenue exceed its expenses and it begins to generate profits for partner
b) also happens when a fully depreciated asset is sold for a profit. Previous tax credits maybe recalled.