Chapter 11 Direct Participation Programs(6)

Front 1

Settlement priority order for Limited Partnerships

Back 1

1) Secured lenders.

2) Unsecured creditors.

3) Limited partners profits.

4) Limited partners capital.

5) General partners profits.

6) General partners capital.

Front 2

When a General partner performs the function of organizing and registering the limited partnership, what capacity is the General Partner acting in?

Back 2

A Syndicator

Front 3

Front End Load of a Direct Participation Program

Back 3

Offering costs and organizational costs will be deducted from the proceeds of the offering of a Direct Participation Program prior to investment in the project.

Front 4

A Limited partnership

Back 4

Will have at least 1 General Partner and 1 limited partner.

Front 5

Benefits of Direct Participation programs

Back 5

In addition to profit motive, they offer ;

1) limited liability for investors.

2) pass through tax consequences.

3) possible write off against passive income.

4) flexibility in type of investment.

5) conversion of ordinary income into capital gain.

Front 6

Certificate of Limited Partnership

Back 6

The primary partnership document that is Filed in the office of the Secretary of State.

It may contain the partnership agreement.

Front 7

limited partnership Certificate 2

Back 7

Must be signed by all partners or a power of attorney is used by General Partner.

Front 8

Amendments to the Limited Partnership certificate

Back 8

Must be made within 30 days after adding or deleting subscribers.

Refinancing and losses don't require amendments.

Front 9

Limited partnership agreement

Back 9

A contract between the General Partner and Limited Partners. It fully describes the terms of the Limited Partnership.

It establishes the General Partner & Limited Partners rights duties and obligations.

It also describes each partners contribution.

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Take note 2

Back 10

Limited partners can be described as subscibers.

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Take note 3

Back 11

The partnership does not become active until the General Partner signs the Subscription page.

Front 12

Limited Partner rights

Back 12

Inspect & copy the books this is law and may not be in agreement.

Demand true & full info on Partnership affairs.

Dissolution by court decree.

Sue General Partner for damages.

Receive profit & compensation stated in Partnership agreement.

Removal of General Partner.

Return of contribution.

Non compete of General Partner with Limited partnership. conflict of interest.

Loans to any Partnership.

Partnership democracy.

Front 13

Loans to partners in a Limited Partnership

Back 13

1) Loans by a Limited Partner will be handled as a general creditor.

2) Loans by General Partner will be considered as a capital contribution.

Front 14

Liability in a Limited partnership

Back 14

General Partner has unlimited liability.

Limited Partner has limited liability.

1) capital contribution.

2) recourse loans.

Front 15

Rights powers and obligations of a General Partner

Back 15

The General Partner has control and managements of the Partnership. Legally bound to make decisions in the best interests of Partnership. Can make decision all day to day activities . Can Buy/Sell assets or enter into contracts on behalf of Partnership.

Front 16

Liability of the General Partner

Back 16

The General Partner has a fiduciary relationship to Limited Partner. They must disclose any material facts which can include facts about Partner changes. No self dealing or conflicts of interest unless Disclosed. They have unlimited liability.

Front 17

Factors in Evaluating the Direct Participation program

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1) Economic soundness of program.

2) Basic objectives of program.

3) Track record of General Partner.

4) Anticipated returns in investments.

5) Use of proceeds front end loads.

6) Risk factor of liquidity.

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Crossover point

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When the income exceeds expenses and the Partner is profitable resulting in taxable income.

Front 19

Types of loans available

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1) Recourse loans.

The Limited Partner is personally liable for the note signed.

2) Non Recourse loans the investor is NOT responsible for the note.

Front 20

Anticipation Cash Flow

Back 20

Cash flow analysis identifies the revenues and expenses and the

Amount of cash after deducting all Partnership real expenses.

Depreciation expenses are not deducted since they are not real and does not affect actual cash flow

Front 21

Liquidity factors of DIrect participation program

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Non liquid investment.

No effective secondary market.

Possible loss of principal.

Unpredictable income.

Tax risk & audits.

Assessments.

General Partner performance.

Leverage of recourse loans.

Rising operational cost due to general economic conditions.

Front 22

Suitability of investors in a DPP

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Net worth statement a written document of investors net worth must be obtained before offering a DPP. Investors should have substantial liquid assets.

Ability to commit money for long periods.

Financial ability to lose money.

Front 23

Oil and Gas DPPs

Exploratory wildcatting

Most risk

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The search for oil & gas in areas far away from proven fields and on unproven properties.

Inexpensive leases.

High risk high return.

Front 24

Oil and gas DPP

Development Programs

Risky

Back 24

Drilling operations are conducted in or near proven areas.

High deductibility.

Good tax shelter.

Return potential less returns then wildcatting.

Lower risk but higher costs.

Front 25

Oil and Gas DPP

Income Program

Least risk

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usually does not involve drilling instead partnership acquires existing wells or reserves.

Often combined with development programs.

Least amount of risk.

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Advantages of Oil & Gas DPP

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Excellent returns over short run.

Appreciation due to rising costs of oil.

Tax benefits.

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Tax benefits of Oil& Gas DPP

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Depletion deductions apply when oil is sold

Intangible Drilling Costs

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Intangible Drilling costs

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Deductions primarily available in 1st year.

1) drilling fees.

2) payroll.

3) expenses that can't be depreciated.

These don't apply to Income programs

Front 29

Equipment Leasing Programs

Advantage

Back 29

The probability of cash flow which may be non taxable because of deductions such as depreciations. Examples of equipment

Airplanes yachts trucks and railroad

Front 30

4 types of Real Estate Direct participation programs

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1) Public housing.

2) Existing properties.

3) New construction.

4) Raw land.

Front 31

Public Housing DPPs

Section 8

Back 31

This DPP develops low income and retirement housing. The focus is to earn consistent income and receive tax credits.

Appreciation is low and maintenance costs are high.but these DPPs have Federal backing making them the safest RE DPP

Front 32

Existing Housing DPP

Back 32

This DPP buys existing housing and intent is to generate steady stream of rental income. Advantage is immediate cash flow. Low risk

Front 33

New construction DPP

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This DPP buys new property and develops it. They want to sell property for a profit. Can benefit from land and building appreciation. Speculative but not as risky as raw land.

Front 34

Raw land DPP

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This DPP invests in raw land in anticipation of long term capital appreciation. They don't develop property and can't claim depreciation. Also suffers from low liquidity and no cash flow. Considered most risky of RE DPPs

Front 35

2 types of Equipment Leasing DPPs

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1) Operating Lease.

2) Full payout lease.

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Operating Lease DPP

Back 36

This program buys equipment and leads it out for a short period. They don't receive full value from the first lease. More risk than Full payout

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Full payout Lease DPP

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This program leases out equipment for a long period of time. DPP receives enough income from the first lease to cover cost of the equipment.

Front 38

Tangible Drilling costs

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These are write offs on items that have salvage value. They are depreciated over 7 years either straight line or accelerated.

Front 39

Depletion

Back 39

A tax deduction that allows Partnership that deal with natural resources to take a deduction for the decreasing supply of that resource.

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Overriding Royalty Interest

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Royalty in excess of the royalty provided in an Oil & Gas lease. It is usually added during an intervening assignment

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Reversionary Working Interest

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A revenue sharing arrangement with the GP shares in none of the costs and receives none of the revenue until LP s have gotten their payments back.

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Net Operating Profits Interest

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A share of the net profits of an Oil & Gas lease.

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Disproportionate Sharing arrangement

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A sharing agreement where the GP Bears a lower percentage of the costs but receives a huger portion of revenues.

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Functional Allocation

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A sharing arrangement in that the GP pays for the tangible drilling costs and the LPs absorb the Intangible drilling costs.

Front 45

Partnership Democracy of a limited partnership agreement.

Back 45

Partnership democracy protects a limited partner due to their lack of active voice in management. It requires detailed reports about business and provides for annual meetings. It also provides for majority rule before investments of entity can be sold or refinanced.

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Take note

Offering costs & organization costs

Back 46

These both are part of the front end load of a DPP offering.

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The primary consideration of a direct participation project.

Back 47

Since 1986 Tax Reform Act the primary concern for evaluating a DPP is the economic viability rather than the tax benefits.

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Take Note

Functional allocation

Back 48

The GP pays the tangible drilling costs which are non deductible while the all of the IDC are utilized by the investors as large front end write offs.

Front 49

Take Note

The right to inspect the books and records of a Limited partnership.

Back 49

This right is part of the Uniform Limited Partnership act. The right does not need to mentioned in a partnership agreement.

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Crossover Point

Back 50

This occurs when the income of a DPP exceeds deductions for tax purposes.