Direct Participation Programs and Limited Partnerships

Vocabulary and key concepts regarding Direct Participation Programs (DPPs), Limited Partnerships, and Real Estate Limited Partnerships based on lecture notes.

Direct participation programs (DPPs)

Investments in businesses that allow participants to share directly in the business’s profits and losses based on its business structure.

Pass-through of losses

The defining feature of a DPP that allows business losses to be passed to investors as tax deductions to reduce taxable income.

Limited partnerships

A common type of DPP business entity consisting of one or more general partners and one or more limited partners.

General partners

The managers of a limited partnership who run the business, must act in a fiduciary capacity, and assume unlimited liability.

Limited partners

The investors in a limited partnership who provide funding, have no management authority, and have risk limited to the amount they invest.

Limited liability

The restriction of an investor’s potential loss to the specific amount they contributed, such as a maximum loss of $100,000$ for a $100,000$ investment.

Unlimited liability

The condition where a general partner’s personal assets are at risk in legal proceedings because they manage the venture.

Liquidity risk

A significant risk in limited partnerships where selling the investment is difficult because there is typically no secondary market.

Certificate of limited partnership

A document issued by the state that recognizes a partnership as a legitimate business entity after necessary paperwork is filed.

Agreement of limited partnership

A written contract describing the rights, duties, and restrictions of each partner and explaining how revenues and losses are allocated.

Fiduciary capacity

The legal obligation of general partners to act in the best interest of the partnership, prohibiting them from competing with or borrowing from it.

Subscription agreement

An application to invest in a partnership used to evaluate an investor’s suitability and require acknowledgment of risks.

Suitability determination

The process where a registered representative gathers information such as net worth, annual income, and investment goals to recommend a limited partnership.

Regulation D private placements

A method of offering limited partnerships privately where an unlimited number of accredited investors can participate.

Dissolution

The process of ending a limited partnership, which may be voluntary or required due to circumstances like bankruptcy.

Order of Liquidation

The priority of cash distribution during dissolution: $1.$ Secured creditors, $2.$ Unsecured creditors, $3.$ Limited partners, and $4.$ General partners.

Real estate limited partnerships (RELPs)

Entities structured as limited partnerships that invest in commercial real estate, are typically illiquid, and can pass through losses to investors.

RELPs vs. REITs (Pass-through)

While REITs are structured as trusts and cannot pass through losses, RELPs are structured as limited partnerships and can pass through losses.