Terms

Question 1

Agent

Answer 1

An agent or registered representative is a natural person who represents an issuer or a broker-dealer in the purchase and sale or the attempted purchase and sale of securities.

Question 2

Alternative Minimum Tax

Answer 2

The Alternative Minimum Tax is designed to ensure that high-income earners pay a minimum amount of tax on their overall income. The AMT is a tentative tax calculated by eliminating or reducing certain exclusions and deductions. Certain tax preference items may be added back to the high-income earner’s taxable income.

Deductions that may be added back:

• Accelerated Depreciation
• Accelerated Depletion
• Net income from oil or gas
• Investment Tax Credits
• interest income on private-purpose municipal bonds such as industrial development bonds.

Question 3

1031 Exchange

Answer 3

The property exchange must include properties of like-kind and must be held for investment purposes or for the use in the taxpayer’s business or trade. A 1031 exchange is applicable to investments in real estate. Investments in securities such as stocks, bonds, interest in limited partnerships, or other evidence of ownership interest or indebtedness do not qualify for the 1031 Exchange exemption.

Question 3

Affiliate

Answer 3

An affiliate is an individual who is controlled by or who controls a broker-dealer or a sponsor of a direct participation offering.

Question 3

Applicable Trade or Business

Answer 3

An applicable trade or business is any activity conducted on a regular continuous and substantial basis consisting in whole or in part of raising or returning capital and investing in or disposing of specific assets or developing specified assets.

Question 3

Carried Interest

Answer 3

A carried interest is an interest awarded to the sponsor of the program in exchange for their management of the program. The carried-interest is a participation in the profit or cash flows of the program awarded to the sponsor that have been received, not in exchange for a capital contribution, but in exchange for the efforts of the sponsor.

Question 3

Boot

Answer 3

The term boot is used to describe the value of a non-like-kind property received as part of a 1031 exchange. The fact that the exchange includes a non-like property does not disqualify the exchange, it merely results in a partially tax-deferred exchange. That is to say that the exchange will not be 100% tax-deferred.

Question 3

At Risk

Answer 3

The term “at-risk” is used to describe the partner’s capital contribution, plus the partner’s proportional liability for the limited partnership’s or LLC’s liabilities. Qualified non-recourse loans are specifically excluded from the calculation of ”at-risk.”

Question 3

Capitalization Rate

Answer 3

A program’s capitalization rate is a method used to determine the value of a property based on its net operating income. The future cash flows to be received are discounted to a present value to determine an appropriate valuation for real estate. The capitalization rate is determined by dividing the price of the property by its net operating income. Higher capitalization rates imply a higher expected rate of return and imply a higher degree of risk.

The figure also helps to determine the exit rate or terminal capitalization rate for a property when it is sold at the end of the projected holding period.

The capitalization rate indicates the property’s intrinsic, natural, and un-levered rate of return.

Question 4

Broker Dealer

Answer 4

A broker-dealer is a person or a firm that maintains a place of business and effects transactions in securities markets for its own account or for the account of others. A broker-dealer must be registered with the SEC and in the states where they have an office or transact business with retail customers.

Question 4

Cash Flow

Answer 4

For the purpose of the Series 22 exam, cash flow is cash provided from operations minus expenses, and prior to deducting depreciation, depletion or other non-cash allowances.

Should the partnership have outstanding leases made to builders, sellers, or other parties, cash flow will also include lease payments received on net leases prior to depreciation.

Question 4

Cash Available for Distribution

Answer 4

Cash available for distribution is the amount the partnership has available to distribute to interested parties.

Question 5

Certificate of Limited Partnership

Answer 5

A certificate of limited partnership filed with the state will include:

• the name of the partnership,
• the name and business address of each general partner
• the registered office of the limited partnership
• the mailing address for the limited partnership
• the latest date of termination for the partnership.

Should any of the above information change, an amendment to the certificate of limited partnership will be filed with the state department.

Question 6

Closing Date

Answer 6

The closing date for a limited partnership is the date when the investor’s interest in the limited partnership becomes effective. This date may be the day when the subscription agreement is accepted by the general partner or it may be a date stated in the subscription agreement or in the offering documents.

Question 7

Control

Answer 7

The term control as used in connection with an entity means any person or entity who owns a beneficial interest of 50% or more of the outstanding voting securities of a corporation or has a right to 50% or more of the profits and losses of a partnership or other non corporate entity.

Question 8

Springing Limited Liability Company

Answer 8

Should any of the limitations place the trust at a substantial risk, the DST may convert to a limited liability corporation in an effort to mitigate the risks associated with the limitations of a Delaware statutory Trust. The limited liability company created during the conversion is known as a springing limited liability company.

Question 9

Depreciation

Answer 9

Depreciation is an accounting method used to amortize the purchase price of an asset over the estimated useful life of the asset. Depreciation is a non-cash charge that reduces the value of a fixed asset on the balance sheet of the entity. The depreciation is then taken as a deduction to taxable income on the income statement.

Question 10

Depletion

Answer 10

Depletion is an accounting method used to reduce the value of natural resources carried on the balance sheet. Natural resources such as gas and oil cannot be depreciated; these resources must be depleted. The depletion allowance is used to reduce the value of the reserves to reflect the fact that, at some point, all of the natural resources will have been extracted, and the reserves extinguished.

Question 11

Direct Participation Program

Answer 11

an entity which provides for the complete flow through of all economic events and tax consequences.

For the Series 22 exam, a direct participation program includes any program regardless of its structure, whether a limited partnership, an S corporation, a limited liability company, a business development company or a program that is made up of multiple legal entities or structures.

Question 12

DPP Exclusions

Answer 12

Excluded from the definition of a direct participation program are:

• real estate investment trusts / REITS, - corporate pension and profit-sharing plans
• individual retirement accounts
• tax sheltered annuities
• investment companies
• and insurance company separate accounts.

Question 13

Dissenting Limited Partner

Answer 13

Limited Partner who casts a vote against a plan of merger, plan of exchange or plan of conversion, including a Roll-Up; except that, for purposes of a transaction which involves an exchange or a tender offer, Dissenting Limited Partner shall mean any person who files a dissent from the terms of the transaction with the party responsible for tabulating the votes or tenders to be received in connection with the transaction during the period in which the offer…

Question 14

Equity Interest

Answer 14

An equity interest as used in conjunction with a direct participation program refers to any person who has an interest in the capital, profits or losses of that partnership.

Question 15

Fair Market Net Worth

Answer 15

A partnership’s fair-market net worth is the total market value of the partnership’s assets minus any outstanding liabilities. The partnership’s fair market net worth is determined based on the fair market value of its assets without regard to the partnership’s actual cost and excluding any tax deductions or depletion allowances taken by the partnership.

Question 16

First User

Answer 16

First user is a term associated with a depreciation schedule. First user is the first fiscal year when a depreciable asset is put into use and the time when depreciation may begin.

Question 17

Funds from Operations

Question 18

General Partner

Answer 18

The general partner of a limited partnership is the individual or entity who provides management expertise and is responsible for the day-to-day operations of the limited partnership.

more often than not the general partner is a corporation or other legal entity that is designed to provide a level of legal protection to the natural persons who operate the partnership.

Question 18

General Partnership

Question 19

Joint Venture

Answer 19

A joint venture may be an incorporated or unincorporated entity and is usually designed to carry out a particular business goal.

Question 20

Limited Liability Company

Answer 20

The financial and management arrangements agreed to by the members of a limited liability company will be set forth in the operating agreement.

Question 21

Limited Liability Partnership

Answer 21

A limited liability partnership, as the name implies, affords the partners protection from liabilities of the limited liability partnership. However, this form of business structure may only be used by professional organizations such as accountants, attorneys, architects, and physicians.

Question 22

Limited Partnership

Question 23

Limited Partner

Question 24

Limited Partnership Agreement

Answer 24

The limited partnership agreement is the foundation for the limited partnership. It spells out the business purpose of the partnership and all of the terms under which the partnership will operate.

Question 25

Master Limited Partnership

Answer 25

A master limited partnership combines the tax benefits of a partnership with liquidity provided by the public exchanges. The MLP must receive at least 90% of its revenue from production, processing, storage, or transportation of natural resources such as oil and gas.

Question 26

Master Tennant

Answer 26

A master tenant is often used as part of a Delaware statutory trust where the trust leases the entire property to a master tenant. The master tenant in turn then manages, operates and subleases the property to the ultimate tenants who will occupy the property.

Question 27

Modified Funds from Operations

Answer 27

To determine a limited partnership’s modified funds from operations one must first calculate the partnership’s funds from operations by adding depreciation, amortization, or depletion allowances back to the earnings of the partnership.

Question 28

Participant

Answer 28

A participant in a direct participation program is a purchaser of an interest of beneficial ownership in the direct participation program.

Question 29

Payout Ratio

Answer 29

The partnership’s payout ratio is determined by looking at the distributions made to partners in relationship to the funds from operations. The higher the payout ratio, the greater the percentage of the partnership’s funds from operations that are being distributed. Income-oriented programs will have a much higher payout ratio than those that are designed to produce capital appreciation.

Question 30

Publicly Traded Partnership (PTP)

Answer 30

A publicly traded partnership effectively acts in the same capacity as a master limited partnership. However, the publicly traded partnership may be organized as a limited liability company, whereas a master limited partnership is always organized as a limited partnership.

Question 31

Qualified Institutional Buyer

Answer 31

A qualified institutional buyer or a QIB is an institution that has at least one hundred million dollars in investable assets.

A broker-dealer meets the definition of a qualified institutional buyer if it has $10 million in investable assets.

Qualified institutional buyers may purchase shares of restricted securities prior to the expiration of the six-month holding period under Rule 144.

Question 32

Qualified Purchaser

Answer 32

A qualified purchaser is an individual, family-owned business, or trust with 5 million dollars in investments.

Question 33

Real Estate Investment Trust (REIT)

Answer 33

A real estate investment trust or REIT is an entity that is organized to manage, operate or finance real estate.

The REIT is organized under Internal Revenue Code Subchapter M and allows for the flow through of net investment income to the investors.

The REIT may be organized as a trust, a corporation or as an unincorporated entity.

Unlike a direct participation program, the REIT does not pass through losses, deductions, or credits

Question 34

Registration Statement

Answer 34

An issuer’s registration statement, formerly known as an s-1 or as an s-1a is the full disclosure document for the SEC.

The registration statement will be on review with the SEC for a minimum of 20 days; this is known as the cooling off period. During the cooling-off period, sales may not take place.

Question 35

Solicitation Expenses

Answer 35

Solicitation expenses include any direct marketing expenses incurred by the FINRA member in connection with a DPP rollup transaction. A member’s legal fees, phone bills, fact sheets, expenses and direct compensation paid to agents or other members for solicitation all constitute solicitation expenses.

Question 36

Sponsor

Answer 36

The sponsor of a direct participation program is any person or entity that directly or indirectly provides management services to the direct participation program.

The sponsor may be a general partner or other entity contracted to provide such services to the program or partnership.

The sponsor may also be the entity who acquires the property and subsequently forms the program for the distribution of interest in the property to investors.

Question 37

Specified Assets

Answer 37

As defined by the Internal Revenue Service, specified assets include securities, commodities, real estate held for rental or investment, options and derivatives, cash, cash equivalents, and an interest in a partnership.

Question 38

Subchapter S Corporation

Answer 38

A entity organized as an S corporation allows for the flow through of income to the shareholders.

The income distributed to the shareholders will be taxed as ordinary income to the recipient. Interest in an S corporation may be distributed as part of a direct participation program.

Ownership in an S corporation is limited to 100 shareholders and the S corporation must be organized as a domestic corporation within that state.

Question 39

Tenants In Common

Answer 39

Entities organized as tenants-in-common provide a vehicle for real estate investors to defer taxation by pooling their proceeds from the sale of real estate to purchase a larger investment property.

Owners of an entity organized as tenants-in-common own an undivided fractional interest in the entire property or portfolio of properties are held as tenants-in-common.

Question 39

Substitute Limited Partner

Answer 39

Should the partnership allow for the transfer of partnership interests, any successor partner to whom an interest is transferred from the existing partner will become known as a substitute limited partner.

Question 40

Triple Net Lease

Answer 40

With a triple net lease, the tenant pays a pro rata share of property taxes, common area maintenance, and insurance providing the landlord with a “net” rental income.

Triple net leases are traditionally commercial leases and are quoted as a base rent, plus a charge for taxes, common common area maintenance, and insurance.