Chapter 5 - DPPs Flashcards
What is the order of dissolutions for limited partnerships?
Secured lenders
other creditors
limited partners (first - their claims to shares of profits; second - their claims to a return of contributed capital)
GPs ( first - fees and other claims not involving profits; two - for a share of profits; three - for capital return;)
What are the benefits of a Real Estate DPP?
- capital growth potential with property appreciation
- cash flow via rents
- tax deductions from mortgage interest rate and depreciation allowances
- tax credits for gov’t-assisted housing and historic rehab
What are the three types of oil and gas DPPs?
Exploratory (Wildcatting) - High IDCs; very risky
Developmental - drill near existing wells; Medium IDCs; medium-high risk
Income - provides immediate cash flow; income sheltering from depletion allowances; low risk.
Combination (fourth type; combo between Developmental and Income)
how does an investor’s basis impact their taxes?
The investor’s max loss is their basis. If their loss exceeds their basis, the excess can be carried forward.
What are the penalties for DPPs that do not have a profit motive?
- back taxes
- recapture of tax credits
- interest penalties
- prosectution for fraud
What is one of the most common sharing arrangements?
Functional allocation - it gives the best benefits to both parties; LPs receives the immediate tax write-offs from the IDCs; GPs receive continued write-offs from tangible costs over the course of several years.
What type of debt gets added to an investor’s cost-basis?
a recourse note
What are the five different types of real estate DPPs?
raw land, new construction, historic rehab, existing property, & gov’t-assisted houseing programs (listed from most risky to least risky)
What are the rights of the GP?
- right to charge a mgmt fee for making business decisions for the partnership
- authority to bind the partnership into contracts
- right to determine which partners should be included in the partnership
- right to determine whether cash distributions will be made
What is the prospectus equivalent for DPPs?
The private placement memorandum
What documents are required for limited partnerships to exist?
Certificate of limited partnership- describes partnership logistics; changes must be made w/in 30 days of event
partnership agreement- describes roles of GP & LP
subscription agreement- appoints >=1 GP to act on behalf of the investors and is only effective when the GPs sign it.
What is a recourse note?
It’s a note that the limited partner agrees to pay back to matter what happens. It increases their cost basis and maximum loss
How is economic viability measured for DPPs?
Cash flow analysis & Internal rate of return (compares present value of estimated future revenues and sales)
what are depletion allowances based on?
The amount of oil that is sold, not extracted, in reserve, or lost via other means.
Why were DPPs originally purchased for?
As a tax shelter to offset income. Tax laws have changed and they are less common now
How is a limited partner’s basis calculated?
investment in partnership + share of recourse debt - cash distribution
basis is the liability assumed by the LP.
What are three types of unique tax advantages to Oil & Gas Partnerships?
Intangible drilling costs (IDCs) - 100% deductible in first year; any cost that has no salvage value
Tangible drilling costs (TDCs) - goods that have salvage value; deducted over several years
Depletion allowances - compensates partnership for decreasing supply of oil or gas; may only be taken once the oil or gas is sold
What is a syndicator?
The syndicator oversees the seller and promotion of the partnership. They are responsible for the preparation of any paperwork necessary for the registration of the partnership.
What are some advantagous tax features of DPPs?
Deductions (depreciation and depletion); tax credits (greatest benefits b/c they reduce dollar-for-dollar tax bills; very rare)
Do LPs have any liabillity for recourse loans?
Yes, in proportion to their share of ownership. They have no liability for nonrecourse loans.
What is a blind-pool offering?
it involves investment in a program without specific prospects or properties being identified (aka nonspecified program)
