Other Managed Products

Question 1

Percentage of net investment income that a REIT must distribute to avoid corporate taxation

Answer 1

90%

Question 2

For a REIT, the minimum percentage of investment assets that must be invested in real estate

Answer 2

75%

Question 3

The minimum percentage of gross income that a REIT must derive from rents or mortgage interest

Answer 3

75%

Question 4

Where REIT shares can be purchased

Answer 4

OTC or on a stock exchange

Question 5

Type of investment that passes through real estate income but not losses

Answer 5

REIT

Question 6

Two investments that generate passive income

Answer 6

DPPs and REITs

Question 7

Primary disadvantage of most limited partnership investments

Answer 7

Lack of liquidity

Question 8

Unique tax advantage available to investors in limited partnerships

Answer 8

Pass through of losses

Question 9

Type of income that passive losses generated from limited partnerships can shelter

Answer 9

Passive income only

Question 10

Has active management responsibility and acts as agent for a limited partnership

Answer 10

General partner

Question 11

Partner in a limited partnership that assumes unlimited liability for business losses and debts

Answer 11

General partner

Question 12

Manages limited partnership day-to-day operations, potentially has unlimited liability

Answer 12

General partner

Question 13

Silent partner in a limited partnership; has limited liability

Answer 13

Limited partner

Question 14

Investment requirement and pass-through requirement for REITs to qualify for favorable tax treatment

Answer 14

75% of assets invested in real estate and 90% of income passed through to investors

Question 15

Type of limited partnership that is exchange traded

Answer 15

Master limited partnership (MLP)

Question 16

blind pool

Answer 16

A direct participation program that does not fully disclose to investors the investments that will be made.

Question 17

direct participation program (DPP)

Answer 17

A business entity, such as a limited partnership, that passes through all gains and losses to its investors.

Question 18

equity REIT

Answer 18

A type of REIT that owns income-producing real estate. Equity REITs’ revenues typically come from rent on the property they own and from sales of the properties they hold.

Question 19

exchange-traded note (ETN)

Answer 19

Exchange-traded notes (ETNs) are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. They have a stated maturity date but pay no periodic coupon interest and offer no principal protection. ETNs may offer investors greater tax efficiency and make it easier to access certain types of trading strategies. With that efficiency and access come greater risks, including counterparty credit risk and illiquid trading.

Question 20

general partner

Answer 20

The active partner in a limited partnership. This partner manages the day-to-day operations. This role typically comes with personal liability for the debts of the partnership.

Question 21

hedge fund

Answer 21

Typically organized as a limited partnership, it is a professionally managed investment vehicle available to high-net-worth individuals and institutions that uses aggressive trading strategies to generate outsized returns at the risk of heightened losses.

Question 22

hybrid REIT

Answer 22

A type of REIT that combines the strategies of equity and mortgage REITs. They invest in both income-producing real estate and mortgages.

Question 23

limited partnership (LP)

Answer 23

A type of direct participation program that includes general partners, who actively manage the business, and limited partners, who contribute capital, but are not involved in the daily operations of the business. These programs pass through gains and losses to investors.

Question 24

limited partner

Answer 24

An investor in a limited partnership who contributes capital and from that point forward has a passive role in the business. Because this partner is not involved in the day-to-day management, this role comes with limited liability for the debts of the business.

Question 25

limited liability

Answer 25

An investor’s potential financial loss is limited to a fixed amount. Equity holders, for example, can only lose the amount invested and cannot lose more than that.

Question 26

local government investment pool (LGIP)

Answer 26

A type of municipal fund security that allows for pooled investment, similar to a mutual fund, but instead is used by state and local governments, rather than by individuals, to invest their cash.

Question 27

lock-up period

Answer 27

A hedge fund provision that prohibits investors from making a withdrawal from the fund for a certain period of time. This can create illiquidity for investors, as their assets are stuck in the fund during the period.

Question 28

master limited partnership (MLP)

Answer 28

A type of limited partnership that can be publicly traded on exchanges. Because they are exchange-traded, MLPs are more liquid than other direct participation program investments and thus are appropriate for a wider range of investors.

Question 29

mortgage REIT

Answer 29

A type of REIT that invests in mortgages or mortgage-backed securities. Their reve-nues are generated primarily by the interest they earn on the mortgages they hold as well as the sales of these mortgages to other investors.

Question 30

passive income

Answer 30

The earnings derived from a business in which the investor is not actively involved. Examples of entities that generate passive income are direct participation programs and REITs.

Question 31

pass-throughs

Answer 31

Investment vehicles that pay out both passive gains and losses to investors. Examples include hedge funds and direct participation programs. The advantage is that there is no taxation at the corporate level; instead, only the underlying partner pays taxes. REITs pass through gains, but not losses, to investors.

Question 32

partnership agreement

Answer 32

A document that legally binds a limited partnership. It identifies both the general and limited partners and defines how the partnership will function, as well as the conditions under which change or dissolution of the partnership will occur.

Question 33

partnership

Answer 33

A business organization formed by two or more individuals or entities, who manage the business and take on liability for its debts.

Question 34

performance fee

Answer 34

A fee charged by hedge funds that compensates the managers based on the increase in the fund’s net asset value year over year. This fee is typically about 20% of the profits, which helps to attract the best managers, but can also eat into investment returns.

Question 35

private equity

Answer 35

Focuses on investing in private companies that are typically underperforming. The goal of this investment is to improve the prospects of the business and then have some sort of exit strategy, such as a company sale, to generate a return for investors.

Question 36

REIT

Answer 36

An actively managed pool of capital that invests in real estate or real-estate-related assets (i.e., mortgages). These investments combine professional management, diversification, exchange-trading, and tax benefits, since gains (but not losses) are passed through to investors.

Question 37

structured products

Answer 37

An investment product that produces a return based on the performance of one or more underlying securities or markets, such as an exchange-traded note.

Question 38

Who are the two members of a limited partnership?

Answer 38

General Partner and Limited Partner

The general partner is the one who is directing the activites of the partnership and has unlimited liability. The limitied partners do not have personal liability for the actions of the general partner.

Question 39

What are the specific duties and powers of the general partner?

Answer 39

• can change the management fee
• determines when cash distributions are made to the partners
• makes all decisions
• can approve new limited partners and must approve transfer of interest of limited partners

Question 40

What limitations do general partners usually have?

Answer 40

• Must maintain some level of interest in the partnership - usually minimum of 1%.
• Has a non-compete with the partnership.
• If the GP dies, the partnership dissolves and a new agreement has to be submitted.
• The only thing the GP has to ask limited partner’s permission for is to accept a legal judgement against the partnership.

Question 41

What are the general rights of the limited partner?

Answer 41

• Has the right to inspect the books
• Has a right to vote for/against sale of partnership
• Can sue the GP if terms of agreement are violated
• Right to their income and share of assets as stated in the limited partnership agreement

Question 42

What are some of the requirements of limited partnership?

Answer 42

• capital contribution
• Must pay-in additional capital if the GP requires it
• Unlike the GP, the limited partner can be in competition with the partnership since they are making no control decisions

Question 43

If the partnership is dissolved, in what order are creditors paid off?

Answer 43

1. secured lenders
2. general creditors
3. the limited partners
4. the general partner

Question 44

Are partnerships taxable like corporations?

Answer 44

No - Partnerships are not taxed

A partnership is never taxed as an entity, but the income distributed to each of the partners is taxable to each of them individually.

Question 45

Are partnerships taxable like corporations?

Answer 45

No - Partnerships are not taxed

A partnership is never taxed as an entity, but the income distributed to each of the partners is taxable to each of them individually.

Question 46

In order for REITs to pass through gains to investors and avoid corporate taxes, which three qualifications must be met?

Answer 46

• At least 75% of the income must be derived from real estate
• At least 75% of all the assets must be invested in real estate
• At least 90% of net investment income must be distributed to shareholders

Question 47

Do REITs pass through gains and losses to investors?

Answer 47

REITs only pass through gains and not losses to shareholders. Losses are reflected by the value of the shares declining.