DPP & REIT's

Question 1

Direct Participation Programs

Answer 1

Direct participation programs (DPPs) can raise money to invest in real estate, oil and gas, equipment leasing, and so on. More commonly known as limited partnerships,

investing in DPPs is that they’re required to tie up their investment dollars for a specified period of time, though they receive tax advantages for doing so.

Question 2

Limited Partnerships - avoidance characteristics

Answer 2

1. Having Centralized Management
2. Providing Limited Liability
3. Having perpetual (never-ending) life
4. Having free transferability of partnership interest

Question 3

Limited Partnerships

Answer 3

By law, limited partnerships require at least one limited partner and one general partner. Limited partners are the investors, and general partners are the managers.

Question 4

Tenants in Common

Answer 4

Each limited partner owns an undivided interest in the property held by the partnership. In addition, in the event that one of the limited partners dies, his partnership interest will be passed to a beneficiary or to his or her estate.

Question 5

Partnership Agreement

Answer 5

The partnership agreement is a document that includes the rights and responsibilities of the limited and general partners.

Question 6

General Partners Rights

Answer 6

Charge a management fee for making decisions

Enter the partnership into contracts

Decide whether cash distributions will be made to the limited partners Accept or decline limited partners

Question 7

Certificate of Limited Partnership

Answer 7

The certificate of limited partnership is the legal agreement between the general and limited partners, which is filed with the U.S. Securities and Exchange Commission (SEC) for public offerings and the secretary of state in the home state of the partnership.

Question 8

Certificate of Limited Partnership

Answer 8

The objectives (goals) of the partnership and how long the partnership is expected to last

The amount contributed by each partner, plus future expected investments

How the profits are to be distributed

The roles of the participants How the partnership can be dissolved

Whether a limited partner can sell or assign his interest in the partnership

Question 9

Subscription Agreement

Answer 9

The subscription agreement is an application form that potential limited partners have to complete. The general partner uses this agreement to determine whether an investor is suitable to become a limited partner.

Besides the investor’s payment, the subscription agreement has to include items such as the investor’s net worth and annual income, a statement explaining the risks of investing in the partnership, and a power of attorney that allows the general partner to make partnership investment decisions for the limited partner.

Question 10

Taxes on DPP’s

Answer 10

taxes on DPPs are classified as passive income and passive losses.

Question 11

Evaluating DPP’s

Answer 11

DPPs can be offered publicly or privately. Public offerings of DPPs must be registered with the SEC, whereas private offerings (offerings to mostly wealthy investors) are not.

The economic soundness of the program. In other words, do you think it will be profitable? The expertise (track record) of the general partner. The basic objectives of the program. The start-up costs involved.

Question 12

Real Estate Limited Partnerships

Answer 12

include programs that invest in raw land, new construction, existing properties, or government-assisted housing.

Question 13

RELP - Public Housing

Answer 13

Public housing (government-assisted housing programs)

Public-housing DPPs are backed by the U.S. government and, therefore, are typically considered to be the safest real-estate DPPs.

Question 14

RELP - Existing Properties

Answer 14

This type of DPP purchases existing properties, and the intent is to generate a regular stream of rental income. Because the properties already exist, this DPP generates immediate cash flow.

Question 15

RELP - New Construction

Answer 15

This type of DPP purchases property for the purpose of building. After completing the construction, the partnership’s goal is to sell the property and structure at a profit after all expenses

Question 16

RELP - Raw Land

Answer 16

This type of DPP invests in undeveloped land in anticipation of long-term capital appreciation; raw-land DPPs don’t build on or rent out the property.

Question 17

Equipment Leasing - Operating Lease

Answer 17

This type of equipment leasing program purchases equipment and leases it for a short period of time.

Question 18

Equipment Leasing - Full Payout Lease

Answer 18

This type of equipment leasing program purchases the equipment and leases it out for a long period of time.

Usually, the initial lease lasts for the useful life of the equipment.

Question 19

Oil & Gas - Intangible drilling costs

Answer 19

IDCs are write-offs for drilling expenses. The word intangible is your clue that you’re not talking about actual equipment. These costs include wages for employees, fuel, repairs, hauling of equipment, insurance, and so on.

Question 20

Oil & Gas - Tangible Drilling Costs

Answer 20

TDCs are write-offs on items purchased that have salvage value (items that can be resold). All oil and gas DPPs have TDCs, which include costs for purchasing items such as storage tanks and well equipment.

Question 21

Oil & Gas - Depletion

Answer 21

Depletion: Depletion is a tax deduction that allows partnerships that deal with natural resources (such as oil and gas) to take a deduction for the decreasing supply of the resource. Partnerships can claim depletion deductions on only the amount of natural resources sold (not extracted and put in storage for future sale).

Question 22

REIT’s

Answer 22

A real-estate investment trust invests in real-estate–related projects such as properties, mortgage loans, and construction loans. REITs pool the capital of many investors to manage property and/or purchase mortgage loans. Like other trusts, they issue shares to investors representing their interest in the trust.

Question 23

Equity REIT’s

Answer 23

take equity positions in real-estate properties; the income is derived from rent collected or profits made when the properties are sold.

Question 24

Mortgage REIT’s

Answer 24

purchase construction loans and mortgages. The trust receives the interest paid on the loans and in turn passes it on to the owners of the trust (the investors).

Question 25

Hybrid REIT’s

Answer 25

are a combination of equity and mortgage REITs. Hybrid REITs generate income derived from rent and capital gains (like equity REITs) and interest (like mortgage REITs).

Question 26

REIT’s taxation

Answer 26

At least 75 percent of the income comes from activities related to real-estate. At least 75 percent of the REIT’s assets are in real estate, government securities, and/or cash. At least 90 percent of the net income received is distributed to shareholders (who pay taxes on the income).

Question 26

Private (private placement) REIT’s

Answer 26

Private REITs are exempt from SEC registration, and their shares don’t trade on a national securities exchange,

In general, private REITs can be sold only to accredited investors and institutional investors. Because they aren’t sold on an exchange and can’t be sold to just any investor, private REITs aren’t liquid investments.

Question 27

Registered non-listed REITs

Answer 27

also known as public nonlisted REITs (PNLRs). PNLRs are registered with the SEC but don’t trade on a major exchange. PNLRs are similar to listed REITs in every way, including disclosure requirements, except that they’re not as liquid.

Question 28

Listed REIT’s

Answer 28

listed REITs are ones that have to register with the SEC and are also listed on one or more national exchanges. So listed REITs provide the highest degree of liquidity to investors.