Term
| Direct Participation Programs (DPPs) |
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Definition
- A business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. DPPs are generally passive investments that investin real estate or energy-related ventures.
- more commonly known as limited partnerships, these businesses are somewhat similar to corporations
- have some specific tax advantages and disadvantages
- invstors of DPPs will be required to tie up their investment dollars for a long period of time, although they will receive tax advantages for doing so
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Term
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Definition
- the IRS determines whether an enterpirse is a corporation or a limited partnership
- For a limited partnership to actually be consiered (and taxed) like a limited partnership, its has to avoid at least 2 of the following corporate characteristics:
- Having a centeralized management
- Providing limited liability
- having perpectual (never ending) life
- Having fee transferablitly of partnership interest
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Term
| Having a Centeralized Management |
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Definition
- corporations have management in one place
- the challenges of having a limited partnership exist when its being managed from several locations make this corpoarte trait quite difficult for a partnership to avoid
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Term
| Providing Limited Liability |
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Definition
- Corporate shareholders have limited liability; well, so do limited partners
- corporate shareholders are limited to the amount invested, and limited partners are limited by the amount invested plus a portion of any recourse loans taken out by the partnership (if any)
- provoding limtied liability is pretty much unavoidable
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Term
| Having Perpetual (never-ending) Life |
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Definition
- Unlike corporations, which hope to last forever, limited partnerships are set up for a definite period of time.
- Limited partnerships are dissolved at a predetermined time - For example, when its goals are met or after a set number of years
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Term
| Having free transferability of parternship interest |
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Definition
- DPPs are difficult to get in and out of
- unlike with a stock purchase, where anyone can freely buy and sell shares, not only do limited partners have to pass your scrutiny, but they also require approval of the genreal partner
- DPP investors must show that they have enough money to invest initially, plus have liquidity in other investments in the event that the partnership needs a loan
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Term
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Definition
- You should remember that the easiest corporate characteristics for a partnership to avoid are perpetual life and having free transferability of shares
- the most difficult to avoid are providing limited liability and having a centralized management
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Term
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Definition
- by law, limited partnerships require at least one limited partner and one general partner
- limited partners are the investors
- the general partners are the managers
- general partners are responsible for the day-to-day decision making
- limited partners provide the bulk of the money for the partnership but, unlike general partners, can't make any of the partnerships investment decisions
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Term
| Comparing General Partners and Limited Partners in: |
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Definition
- Decision making
- Tasks
- liability and litigation
- financial involvement
- Financial rewards
- conflicts of interset
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Term
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Definition
- General Partners: are legally bound to make decisions in the best interest of the partnership, make all partnerships day-to-day decisions
- Limited Partners: have voting rights but cant make decisions for the partnership
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Term
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Definition
- Gneral Partners: buy and sell property for the partnership; manage the partnership assets
- Limtied Partners: Provide capital, vote, can keep general partners in chcek by reviewing books
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Term
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Definition
- General Partners: have unlimtied liability (can be sued and held personally responsible for all partnership debts and losses)
- Limited Partners: have limited liability (limited to the amount invested and a proportionate share of any recourse loans taken by the partnership). Can inspect all the partnership books; can sue the general partner or can sue to dissolve the partnership
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Term
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Definition
- General Partner: maintain a financial interest in the partnership
- Limited Partners: Provide money contributed to the partnership, recourse debt of the partnership, and non-recourse debt for real estate DPPs
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Term
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Definition
- General Partners: receive compensation for managing the partnership
- Limited Partners: receive their portion of profits and losses
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Term
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Definition
- General Partner: cant borrow money from the partnership; cant compete against the partnership
- Limtied Partners: none, can invest in competing partnerships
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Term
| 3 required documents necessary for a limited partnership to exist |
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Definition
- partnership agreement
- certificate of limited partnership
- subscription agreement
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Term
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Definition
- a document that includes the rights and responsibilites of the limtied and general parties
- included in the agreement are the general partners right to:
- 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
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Term
| Certificate of limited partnership |
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Definition
- the legal agreement between the general and limited partners filed in the home state of the partnership
- includes basic information (name, address) as well as:
- the objectives of the partnership and the length of time its expected to last
- the amount contributed by each partner, plus future expected investments
- how the profits are distributed
- the roles of the participants
- how the partnership can be dissolved
- whether a limited partner can sell or assign his or her interest in the partnership
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Term
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Definition
- 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
- One of your jobs as a registered representative is to review the agreement to ensure that the information the investor provides is complete and accurate
- the subscription agreement has to include items such as the investors income and net worth, 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
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Term
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Definition
- taxes on DPPs are classified as passive income and passive losses
- investors can write off passive losses only against passive income from other DPP investments
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Term
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Definition
- real estate
- equipment leasing
- oil and gas
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Term
| Real Esate Partnership info |
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Definition
- include programs that invest in raw land, new construction, existing properties, or government assisted housing
- 4 types of real estate DPPs (in order from riskiest to safest):
- Raw Land
- New Construction
- Existing Properties
- Public Housing (government-assisted housing programs)
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Term
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Definition
- invests in undeveloped land, looking for long-term capital appreciationl raw land DPPs dont build on or rent out the property
- this is the riskiest because there is not any cash flow and the value of the land may decrease and not increase
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Term
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Definition
- purchase property for the purpose of building
- after completing the construction, the partnership goal is to sell the property and structure a profit after all expenses
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Definition
- purchases existing properties, looking to generate a regular stream of rental income
- because the properties already exist the DPP generates immediete cash flow
- the risks associated are : maintenance or repair expenses will eat out the profit or that the tenants wont renew their leases
- relatively low risk
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Term
| Public Housing (government-assisted housing programs) |
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Definition
- develops in low-income and retirement housing
- goal is to earn consistent income and receive tax credits
- these are backed by the united states government are are therefore seen as the safest
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Term
| Equipment Leasing Parnership info |
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Definition
- purchase equipment and lease it out to other businesses
- the objective is to obtain steady cash flow and depreciation write-offs
- two types:
- operating Lease- purchases equipment and leases it out for a short period of time
- Full payout lease-purchases equipment and leases it out for a long period of time
- the operating lease is riskier because the equipment becomes less valuable or outdate over time and therefore less rentable
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Term
| Oil and Gas Partnership Info |
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Definition
- include programs that produce income, are speculative in nature, or a combination of the two.
- 3 tax advantages that are uniquie to oil and gas DPPs:
- Intangible drilling costs (IDCs)
- Tangible Drilling Costs (TDCs)
- Depletion
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Term
| Intangible Drilling Costs (IDCs) |
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Definition
- are write offs for drilling expenses
- these costs include wages for employees, fuel, repairs, hauling of equipment, insurance, ect
- IDCs are usually completely tax deductible in the tax year in which the intangible costs occurred
- when a well is not producing the write offs are not allowed
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Term
| Tangbile Drilling Costs (TDCs) |
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Definition
- write-offs on items purchased that have salvage value (items to be resold).
- these costs are not immedietly written off but are depreciated over several years
- depreciation may be claimed on a straight line or an accelerated basis
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Term
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Definition
- allows partnerships that deal with natural resources to deduct for the decreasing supply of the resource
- partnerships can claim depletion only on the amount of natural resources sold
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Term
| 4 types of oil and gas DPPs |
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Definition
- exploratory (riskiest)
- developmental
- income
- combination
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Term
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Definition
- locate and drill for oil in unproven, undiscovered areas
- advantages: long term capital appreciation potential, high returns for discovery of new oil or gas reserves
- risks: new oil reserves may never be found, high IDCs because the DPP isnt working with producing wells
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Term
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Definition
- to drill near producing wells with the hope of finding new reserves
- advantages: long term capital appreciation potential with less risk than exploratory programs
- risks: the property is expensive and the drilling costs may be higher than expected; the risk of dry holes is still somewhat high; medium level of of ICDs
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Term
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Definition
- to provide immediate income by purchasing producing wells
- advantages: the partnership generates immediate cash flow, no IDCs
- Risks: high initial costs. the least risky of oil and gas DPPs. there is the risk that the oil or gas well could dry up or gas/oil prices could be lower
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Term
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Definition
- to provide income to help pay for the cost of finding new oil reserves
- advantages: to be able to offset the new costs of drilling new wells by using income generated by existing wells
- Risks: has the risk of potential rewards of all the other programs combined
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