Other Managed Products Flashcards

This deck focuses on the characteristics of REITs, direct participation programs (DPPs), as well as other managed products.

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1
Q

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

A

90%

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2
Q

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

A

75%

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3
Q

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

A

75%

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4
Q

Where REIT shares can be purchased

A

OTC or on a stock exchange

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5
Q

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

A

REIT

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6
Q

Two investments that generate passive income

A

DPPs and REITs

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7
Q

Primary disadvantage of most limited partnership investments

A

Lack of liquidity

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8
Q

Unique tax advantage available to investors in limited partnerships

A

Pass through of losses

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9
Q

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

A

Passive income only

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10
Q

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

A

General partner

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11
Q

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

A

General partner

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12
Q

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

A

General partner

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13
Q

Silent partner in a limited partnership; has limited liability

A

Limited partner

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14
Q

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

A

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

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15
Q

Type of limited partnership that is exchange traded

A

Master limited partnership (MLP)

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16
Q

blind pool

A

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

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17
Q

direct participation program (DPP)

A

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

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18
Q

equity REIT

A

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.

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19
Q

exchange-traded note (ETN)

A

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.

20
Q

general partner

A

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.

21
Q

hedge fund

A

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.

22
Q

hybrid REIT

A

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

23
Q

limited partnership (LP)

A

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.

24
Q

limited partner

A

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.

25
Q

limited liability

A

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.

26
Q

local government investment pool (LGIP)

A

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.

27
Q

lock-up period

A

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.

28
Q

master limited partnership (MLP)

A

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.

29
Q

mortgage REIT

A

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.

30
Q

passive income

A

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.

31
Q

pass-throughs

A

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.

32
Q

partnership agreement

A

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.

33
Q

partnership

A

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

34
Q

performance fee

A

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.

35
Q

private equity

A

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.

36
Q

REIT

A

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.

37
Q

structured products

A

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.

38
Q

Who are the two members of a limited partnership?

A

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.

39
Q

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

A
  • 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
40
Q

What limitations do general partners usually have?

A
  • 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.
41
Q

What are the general rights of the limited partner?

A
  • 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
42
Q

What are some of the requirements of limited partnership?

A
  • 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
43
Q

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

A
  1. secured lenders
  2. general creditors
  3. the limited partners
  4. the general partner
44
Q

Are partnerships taxable like corporations?

A

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.

45
Q

Are partnerships taxable like corporations?

A

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.

46
Q

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

A
  • 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
47
Q

Do REITs pass through gains and losses to investors?

A

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