C17 Direct Participation Programs (DPPs) Flashcards
Direct participation programs (DPPs)
Illiquid (money tied up) investments that pass income, gains, losses, and tax benefits directly to the limited partners.
What is the greatest disadvantage of limited partnerships?
Illiquid - Money is locked in for long periods of time. Difficult to sell quickly
What factors should an investor consider with when purchasing a limited partnership interest?
In Order of Importance:
a) Economic Viability
b) Tax Considerations
c) Management Ability
d) Lack of Liquidity
e) Time Horizon
What are the 3 important documents required for a limited partnership to exist?
a) Certificate of limited partnership
b) Partnership agreement
c) Subscription agreement
Certificate of limited partnership
+ Legally recognizes the partnership
+ Must be filed in the home state
Partnership agreement
+ Describes the roles of the general and limited partners
Subscription agreement
+ 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
Recourse Loans
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.
Nonrecourse Loans
Lender has no recourse to individual limited partners in event of entity defaulting on loan. secured by assets of partnership
General Partner
*Unlimited Liability.
Responsible for managing program and must contribute at least 1% of programs capital.
Limited Partner
- Liability is limited to his investment.
Passive investor who has no control over managerial decisions. relied on to contribute capital
Roles Of Limited Partner
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.
Roles of General Partner
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.
Preferential Tax Treatment Requirements
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
Two Easiest corporate characteristics to avoid
Continuity of Life
Freely Transferable Interest
Public Offering
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
Private Placement
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
Main Types of DPPs
a) real estate
b) oil and gas
c) equipment leasing
Types of Real Estate DPPs
a) raw land
b) new construction
c) existing properties
d) government-assisted housing
Types of Real Estate DPPs
a) raw land
b) new construction
c) existing properties
d) government-assisted housing
Real Estate DPP - Raw Land
a) no depreciation deductions
b) no periodic income from real estate
c) financing and carrying costs largest expenses
d) riskiest
Real Estate DPP - New Construction
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.
Real Estate DPP - Existing Properties
a) immediate cash flows from rents
b) immediate depreciation allowances.
Real Estate DPP - Government-assisted Housing
provide low cost housing for low income families. HUD
Types of Oil and Gas DPPs
a) exploration (wildcatting) programs
b) income programs
c) development programs
Oil and Gas DPPs - Exploration
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)
Oil and Gas DPPs - Income
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.
Oil and Gas DPPs - Development
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.
Intangible drilling and development costs (IDC)
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
Oil and Gas DPPs Sharing Arrangements
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
Oil and Gas DPPs Sharing Arrangements - Functional Allocation
The Most Common.
Limited Partners receive the deductions for the Intangible Drilling Costs (IDC)
General Partners receive Property write offs.
Revenue is shared.
Oil and Gas DPPs Sharing Arrangements - Overriding Royalty Interest
The holder of an Overriding Royalty Interest has no partnership risks, but receives royalty (payments) from the partnership
Oil and Gas DPPs Sharing Arrangements - Reversionary Working
Interest,
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
Oil and Gas DPPs Sharing Arrangements - Disproportionate Working Interest
The General Partner receives a large portion of the revenue but only incurs a small portion of the costs
Oil and Gas DPPs Sharing Arrangements - Net Operation profits
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
Oil and Gas DPPs Sharing Arrangements - Carried Interest
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.
Crossover point
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.
