Chapter 17 Flashcards
Direct Participation Programs (DPP's)
At dissolution, priority for settling accounts
- secured creditors
- general creditors
- limited partners
- general partners
Managed offering
underwriter may form a syndicate by soliciting other BD’s to sell the securities
Program sponsor -> managing underwrite -> syndicate ->public
Non-managed offering
sponsor hires a wholesaler to market the program
Program sponsor -> wholesaler -> BD -> public
DPP
A business venture designed to pass through both income and losses to investors
Examples of DPP’s
Limited Partnerships
General Partnerships
Subchapter S Corporation
Joint Ventures
Advantages of DPP
- flow through of income and expenses
- limited liability
- tax credits
- tax deductions
Disadvantages of DPP
- lack of liquidity
- GP’s approval may be required to sell
- limited voting power
- effects of tax law changes
- increased tax complexity
Subscription Agreement
Suitability determination is accomplished via this document
LP are not accepted until the GP signs
Ways to “endanger” limited status
- lending their name
- firing employees
- hiring employee
- negotiating contracts
Private Placement
Securities qualify for an exemption from registration
-Reg D offering to an unlimited number of accredited investors, no more than 35 non accredited investors
Recourse Loan
loan to the partnership for which the limited partner is responsible
Real Estate Programs
- Raw Land
- New Construction
- Existing
- Low Income (Government Assisted)
Raw Land
- no depreciation deductions
- little to no periodic income
- large potential capital appreciation upon sale
- no tax advantages
- financing and carrying cost are largest expenses
- riskiest form of REI
New Construction
- main goal is capital appreciation with some cash flow in future
- use of leveraging
- long duration
- risks of overbuilding, cost overruns, long duration, changes in economy, govn’t and tax laws
Existing Properties
- formed primarily to purchase existing commercial properties and apartments
- predictable and high degree of certainty
- immediate cash flow
- depreciation allwances
- risk of problematic tenant issues
Government-Assisted Housing
- qualify for tax credits
- some income to partnership
- historic lack of appreciation potential
- high risk of foreclosure
- high maintenance costs
Types of Oil and Gas Programs
- Exploratory programs
- developmental programs
- balanced programs
- income program
Exploratory Program (Wild Catting Program)
- drilling in unproven areas
- high risk, high potential
- no return can be determined until they are actually drilled
- significant tax advantages
- suitable for investors seeking passive write-offs and also willing to assume high degree of risk
Developmental Program
- leases required to drill in proven areas
- high deductible
- lower risk and return that wildcatting
Balanced program
Combination of exploratory and developmental program
Income Program
- acquires in already producing wells
- cash flow oriented
- produces passive income
- depletion allowance
- suitable for clients who are someone risk averse and are seeking to diversify a stock or bond portfolio with an income objective
Four basic types of sharing arrangements
- Functional Allocation
- Overriding Royalty Interest
- Reversionary or Subordinated Working Interest
- Disproportionate Sharing
