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23 Cards in this Set
- Front
- Back
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What are the advantages to a limited partnership?
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Favorable Tax Treatment Limited Liability as the GP has more liability Diversification - assets with little correlation to stocks or bonds |
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Disadvantages of limited partnerships
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Lack of Control Illiquidity Tax Issues Possible Capital Call Alternative Minimum Tax |
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What three documents are required to create a limited partnership?
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Certificate of Limited Partnership, Agreement of Limited Partnership, Subscription Agreement
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Certificate of Limited Partnership
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Sets the terms of the business relationship created. Includes name/purpose of partnership, name and address of each general/limited partner, conditions under which partnership will be created, priority provisions in the event of liquidation
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Agreement of Limited Partnership
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Defines the relationship between the general partner and limited partners, including sharing arrangements, withdrawal terms, priority provisions in case of liquidation
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Subscription Agreement
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Specifies amount required for investment, suitability standards, to whom checks are written, the parties who must sign
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When is a limited partner recognized?
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When the general partner signs the subscription agreement
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The subscription agreement also includes what which ensures the purchaser understands the risks? |
The suitability obligation
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What can a limited partner not do? |
They cannot engae in daily management; if they take an active role they may be considered general partners
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At dissolution of a partnership state law provides the following priority for settling accounts:
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Secured Creditors General Creditors Limited Partners General Partners |
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Managed versus Non-Managed DPP Offerings
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In a managed offering the underwriter may form a syndicate by soliciting other B-Ds to sell securities. In non-managed, the sponsor hires a wholesaler to market the program to B-Ds rather than the public
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Many DPP offerings are conducted on what basis?
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A min-maxi requiring a minimum amount of money to be raised or the whole offering is cancelled
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What is the depletion deduction? |
As natural resources are depleted (oil, gas, timber) depletion can be marked as a loss
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Passive Income Tax Rules |
Losses that are generated by passive activities may only be deducted against income from passive activities. But when a passive activity is sold, the taxpayer can deduct losses against any income
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What is the only type of income that cannot be treated as passive income?
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Portfolio Income
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What typically represents a partner's risk in a DPP? |
Cash contributed Tax basis of property contributed by partner Partnership gains/losses not realized Debt for which investor is liable Non-Recourse debt in real estate programs |
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What is the difference between Recourse and Non-Recourse Debt?
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Recourse debt is when a limited partner has recourse to the limited partners for the required funds. Non-recourse is when the lender has no recourse to partners in the event of the entity defaulting
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What is the cash flow benefit of a DPP?
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Non-cash expenses can be counted against cash revenues meaning the amount of taxable income is minimized
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Types of Real Estate Limited Partnerships
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Raw Land - potential capital appreciated (very risky) New Construction - Could be much cash flow but long duration and many risks with building Existing Properties - Safe for investors with depreciation but not as high returns Government Housing - Receive tax credits, but lack of appreciation potential |
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Types of Oil and Gas Limited Partnerships
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Exploratory - Riskiest but with significant tax advantages due to Intangible Drilling/Dev Costs Developmental - Leases for the right to drill in proven areas, lower risk and lower return Balanced Program - Has both exploratory and developmental to balance out Income - Acquire interest in already producing wells, very cash flow oriented |
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Different Sharing Arrangements in Oil and Gas Programs between GP and LP
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Functional Allocation: Deductible expenses charged to investors and non-deductible to the sponsor Overriding Loyalty Interest: Sponsor does not share in program's cost but shares in revenues typically between 5-10% Reversionary Working Interest: Sponsor does not share in any costs and does not share in revenues until investors have recovered their costs Disproportionate Sharing: Sponsor takes on up to 25% of program's cost in return for a percentage (~50%) of program's revenues |
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Equipment Leasing Programs
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A manufacturer sells equipment to a syndicate who has obtained capital from investors. Equipment is leased out for fixed rental fee. Rental payments cover loan and provides cash flow to investors, and accelerated depreciation of equipment. Consistent income from lease payments, but major disadvantage is no appreciation in value since equip isn't owned
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Suitable Investors
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Need to have money to withstand the long wait it may take to reach crossover point (where revenues exceed expenses and profits are generated)
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