Unit 11 Flashcards
- A company that sells stock without specifying how invested money will be spent
- A DPP that does not state in advance all of the specific properties in which the GP will invest that partnerships money. At least 25% of the proceeds of the offering are kept in reserve for the purchase of non specified properties
Blind Pool
A transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor corporation
Roll-Up
The money received by a business minus the money paid out. Equal to net income plus depreciation or depletion
Cash Flow
Means there is a potential for returns from cash distributions and capital gains
Economic Viability
Formula for Tax Basis
Investment in partnership + share of recourse debt (+ no recourse debt in real estate DPPs) - cash or distributions
LPs basis consists of
- Cash contributions
- No cash property contributions
- Recourse debt
- Non recourse debt
Represents the upper limit on deductibility of losses
Amount at risk used to determine the gain or loss upon the sale of their partnership interest
Tax Basis
A tax deduction that compensates a business for the decreasing supply of the natural resource that provides its income
Ex: oil, gas, coal, gold
Depletion
- A tax deduction that compensates a business for the cost of certain tangible assets
- A decrease in the value of a particular currency relative to other currencies
Depreciation
Costs incurred that have salvage value. These costs are not immediately deductible but are deductible over several years
Ex: storage tanks and wellhead equipment
Tangible Drilling Costs
In an oil and gas limited partnership, a tax deductible cost. Usually this is for a non physical asset such as labor or fuel that does not depreciate
Has no salvage value
Intangible Drilling Cost
The careful investigation by the underwriting participants necessary to ensure that all material information pertinent to an issue has been disclosed to prospective investors
Due Diligence
A DPP that purchases equipment for leasing to other businesses on a long term basis. Tax sheltered income is the primary objective
Equipment Leasing Limited Partnership
A limited partnership program that invests in producing oil or gas wells for the purpose of generating income and taking advantage of the depletion allowance
Low risk
Income sheltering from depletion allowances
Oil prices; wells stop producing
Immediate cash flow
Income
A limited partnership that drills for oil, gas or minerals in areas of proven reserves or near existing fields
Medium to high risk
Medium intangible drilling costs, immediate tax sheltering
Few new wells produced
Less discovery risk
Developmental
A limited partnership that aims to locate and recover undiscovered reserves of oil, gas or minerals. (Income program)
High risk (most risky)
High intangible drilling costs
Few new wells produced
High rewards for discovery
Exploratory (wildcatting)
A DPP formed to locate new oil and gas reserves, develop existing reserves or generate income from producing wells
Oil and gas DPP
A real estate DPP that aims to provide capital appreciation from historic sites for commercial usage
Similar risk to new construction
Tax credit and deductions for expenses and depreciation
Potential cost overruns
Tax credits for preserving historic structure
Historic rehabilitation structure
A real estate DPP that aims to provide capital appreciation from building new property.
Less risky than new land
Potential cost overruns
Depreciation and expense deductions after completion and income is generated
New construction program
A real estate DPP that sims to provide capital appreciation for low income and retirement housing
Relatively low risk
Tax credits and losses
Low appreciation potential
Tax credits and rent subsidies
Government assisted housing programs
A real estate DPP that sims to provide capital appreciation from existing structures
Relatively low risk
Deductions for mortgage interest and depreciation
Greater maintenance or repair expenses
Immediate cash flow
Existing Property Program
A real estate DPP that aims to provide capital appreciation by investing in undeveloped land
Most speculative
Not considered tax shelter
No income or depreciation deductions
No income distributions or tax deductions
Raw Land Programs
A DPP formed to build new structures, generate income from existing property or profit from the capital appreciation of undeveloped land
Real Estate Limited Partnership
LPs cannot
- Act on behalf of partnership
- Knowingly sign a certificate containing false information
- Have their names appear as part of the partnerships name
GPs cannot
- Compete against partnership
- Borrow from partnership
- Commingle funds
- Admit new GPs or LPs or continue the loss of a GP unless specified in agreement
- Has partial liability
- No management responsibility
- May sue GP
- Votes on changes
- Votes on sale or refinancing
- Receives cash distributions
- Inspects books and records
- Exercise partnership democracy
Limited Partner (LP)
- Has complete liability
- Management responsibility
- Fiduciary responsibility
- Makes legally binding decisions
- Buys and sells property
- Maintains financial interest (min of 1%)
- Receives compensation
General Partner (GP)
What is the order of dissolution?
- Secured lenders
- Other creditors
- LP
- GP
Debt incurred for a partnership that does not hold the limited partners personally liable
Non recourse loans
Debt incurred for the purchase of an asset and that which holds the borrower personally liable for the debt
Recourse loan
Appoints one or more GPs to act on behalf of the investors and is only effective when the GP signs it
Must include: investors net worth, investors annual income, statement attesting that the investor understands the risk involved, a power of attorney appointing the GP as the agent of the partnership.
Subscription agreement
Describes the roles of the GP and LP and guidelines for the partnerships operation
Partnership agreement
Where must the certificate of Limited Partnerships be filed?
In the home state of the partnership
What are the three important documents required for Limited Partnerships?
- Certificate of limited partnership
- Partnership agreement
- Subscription agreement
Oversees the swing and promotion of the partnership
Responsible for the preparation of any paperwork necessary for the registration of the partnership
Fees limited to 10% of the gross dollar amount of securities sold
Syndicator
Invokes a small group of investors each contributing a large sum of money
Investors must be accredited
Private Placement Memorandum
A business formed by filing a partnership agreement with a state that consists of a GP and one or more LP.
Sold through private placements or public offerings
Limited Partnership
A form of business organization requiring a minimum of two participants
Cannot be: an organization that refers to itself as incorporated or as a corporation, an insurance company, a REIT, an organization classified as a trust or otherwise subject to special treatment under the IRC
Partnership
Investments that pass income, gains, losses and tax benefits (such as depreciation, depletion and tax credits) directly to the limited partners
Ex: oil and gas programs, real estate programs, agricultural programs, motion pictures and cattle programs
Direct Participation Program (DPP)
A REIT is generally not subject to corporate tax if it distributes to its shareholders substantially all of its table income for each year.
How much is substantially all?
By receiving 75% or more of its income from real estate and distributing 90% or more of its table income to its shareholders
Owns commercial property and owns mortgage on commercial property
Combination of both mortgage and equity REITS
Hybrid REITs
Owns mortgage on commercial property
They make real estate loans
Their earnings come from the interest payments on those loans
Mortgage REITs
Owns commercial property
They take an ownership position in the properties
They receive rental income and possible capital gains upon a future sale of the properties
Equity REITs
A corporation or trust that uses the pooled capital of many investors to invest in direct ownership of either income property or mortgage loans. If trades on exchanges or OTC they are very liquid. Real estate is not.
Organized as trusts, not redeemable and have liquidity of listed stocks.
Compute a NAV per unit
Real Estate Investment Trust (REIT)
