SIE for Dummies: DPPs & REITs

2025-2026

Direct Participation Program (DPPs)

Can raise money to invest in real estate, oil and gas, equipment leasing, etc. aka Limited Partnerships, these businesses are somewhat similar to corporations (stockholder-owned companies). Specific tax advantages (and disadvantages). Aren’t taxed directly; the income or losses are passed directly through to the investors. Once known as tax shelters because of the tax benefits, but tax law changes have taken away a lot of these.

DPPs Identity

Limited (and general) partners are owners of a DDP. Investing in DPP is illiquid, so investors can expect that their investment dollars will be tied up for a long period of time, though they receive tax advantages for doing so. Most DPPs are set up for real-estate projects, oil and gas projects, or equipment leasing.

Limited Partnership Characteristics

To be considered a limited partnership, it has to avoid at least two of the corporate characteristics (usually the last two) - Having a centralized management, providing limited liability, having perpetual (never-ending) life (limited partnerships are dissolved at a predetermined time, such as when their goals are met or after some years), having free transferability of partnership interest (DPPs are difficult to get in and out of, need to pass scrutiny of registered rep and require approval of the general partner, must show they have enough money to invest initially and have liquidity in other investments in the event that the partnership needs a loan).

Limited Partnership Characters

By law, limited partnerships require at least one limited partner and one general partner. Limited partners are investors, and general partners are the managers.

General Partners

Legally bound to make decisions in the best interest of the partnership; make all the day-to-day decisions. Buy and sell property for the partnership; manage the partnership’s assets. Have unlimited liability (can be sued and held personally liable for all partnership debts and losses). Maintain a financial interest in the partnership. Receive compensation for managing the partnership. Can’t borrow money from the partnership; can’t compete against the partnership (ex. can’t manage two buildings for two different partnerships in close proximity).

Limited Partners

Have voting rights but can’t make decisions for the partnership. Provide capital; vote; can keep general partners in check by reviewing books. Have limited liability; can inspect all the books; can sue the general partner or can sue to dissolve the partnership. Provide money contributed to the partnership, recourse debt of the partnership, and nonrecourse debt for real-estate DPPs. Received their proportion of profits and losses. No conflicts of interest; can invest in competing partnerships.

Tenants in Common (TIC)

Partnerships are usually set up as this. Each limited partner owns an undivided interest in the property held by the partnership. If one limited partner dies, their partnership interest will be passed to a beneficiary or to their estate.

Partnership Agreement

Document that includes the rights and responsibilities of the limited and general partners. Include name of partnership, location, name(s) of general partner(s), etc. Addresses general partner’s rights 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.

Certificate of Limited Partnership

Legal agreement between the general and limited partners, which is filed with the SEC for public offerings and the secretary of state in the home state of the partnership. Includes basic information such as name of partnership and primary place of business, names and addresses of limited and general partner(s), objectives and how long the partnership is to last, amount contributed by each partner plus future expected investments, how profits are distributed, roles, how can it be dissolved, and whether a limited partner can sell or assign their interest in the partnership. If any significant changes are made (ex. Adding new limited partners) this must be amended accordingly.

Subscription Agreement

Application form that potential limited partners have to complete. The general partner uses this to determine whether an investor is suitable to become a limited partner. The general partner has to sign this to officially accept an investor into the DPP. Include investor’s payment, net worth and annual income, statement explaining the risks of investing in the DPP, and a power of attorney that allows the general partner to make partnership investment decisions for the limited partner. Typically sent in with some form of payment from the potential limited partner.

Registered Rep

Person who prescreen the potential limited partner to make sure that the partnership is a good fit for that person. “Does the investor have enough money to invest (net worth and annual income)?”, “enough cash or liquidity in other investments in case the partnership needs more money?”, “okay with typing up money for a long period of time?”, “can they handle the risks?” Review the subscription agreement to ensure information provided is complete and accurate.

DPP Taxes

DPPs flow through income and losses to investors. (Corporations flow through only income). Before 1986, investors could write off these losses against other investment income. But then Congress gave DPPs their own tax category. Now, taxes on DPPs are classified as passive income and passive losses. Investors can write off passive losses against passive income from other DPP investments.

DPP Offering

DPPs can be offered publicly or privately. Public offerings must be registered with the SEC, whereas private offerings (mostly wealthy investors) are not. Typically, public DPPs have a lower unit (buy-in) cost.

Evaluating DPPs

For recommending DPPs, consider the economic soundness of the program (will it be profitable?), expertise (track record) of the general partner, basic objectives of the program, and start-up costs. For some types of DPPs, investors should have the ability to tie up their money for a long time and be able to recover from loss of all the money in case the partnership never becomes profitable.

Real-Estate Limited Partnership (RELP)

Programs that invest in raw land, new construction, existing properties, or government-assisted housing. Depending on the type, they can provide appreciation, cash flow from rentals, tax deductions for mortgage interest, depreciation, and capital improvements, and/or tax credits (for government-assisted housing DPPs).

Public Housing DPPs

Government-assisted housing programs. Type of real-estate DPP that develops low-income and retirement housing. Focus is to earn consistent income and receive tax credits. The US government (through subsidies), via the US Department of Housing and Urban Development (HUD), makes up any deficient rent payments. Appreciation potential is low, and maintenance costs can be high, but does benefit from some level of government security. Safest real-estate DPPs.

Existing Properties DPPs

This DPP purchases existing properties with the intent of generating a regular stream of rental income. Because properties already exist, DPP generates immediate cash flow. Risks are that the maintenance or repair expenses will eat into the profit and that tenants won’t renew their leases; relatively low risk.

New Construction DPPs

This DPP purchases property for the purpose of building. After construction is completed, the goal is to sell the property and structure at a profit after all expenses. Building costs may be more than expected, and the partnership doesn’t receive income until the property is sold. But DPP can benefit from appreciation on both the land and the structure. Speculative (risky), not as risky as raw-land DPP.

Raw-Land DPP

This DPP invests in undeveloped land in anticipation of long-term capital appreciation, and doesn't actually build on or rent out the property. Hopes that the property will appreciate in value so that the DPP can sell it for more than the purchase price plus all expenses. Riskiest of real-estate DPPs because there’s no cash flow (rental or sales income) and the value of the land may not increase (may actually decrease).

Equipment Leasing Programs

DDPs that purchase equipment (trucks, heavy machinery, computers, etc.) and lease it out to other businesses. The objective is to obtain a steady cash flow and depreciation write-offs. Two types - operating lease and full payout lease.

Operating Lease

Type of equipment leasing program that purchases equipment and leases it for a short period of time. Doesn’t receive the full value of the equipment during the first lease. Allows DPP to lease the equipment several times during the life of the machinery. Riskier, because equipment becomes less valuable or outdated over time, and less rentable.

Full Payout Lease

Type of equipment leasing program that purchases the equipment and leases it out for a long period of time. DPP receives enough income from the first lease to cover the cost of the equipment and any financing costs. Usually, the initial lease lasts for the useful life of the equipment.

Intangible Drilling Costs (IDCs)

Oil and gas partnership tax advantage. Write-offs for drilling expenses, including wages for employees, fuel, repairs, hauling of equipment, insurance, etc. Not actual equipment, intangible. Usually completely deductible in the tax year in which the intangible costs occur (current year). Deductions are only for drilling and preparing a well for the production of oil and gas.

Tangible Drilling Costs (TDCs)

Oil and gas partnership tax advantage. Write-offs on items purchased that have salvage value (can be resold). All oil and gas DPPs have TDCs, which include costs for purchasing items such as storage tanks and well equipment. Aren’t written off immediately but depreciated over several years, claimed on a straight-line basis or an accelerated basis (more in early years).

Depletion

Oil and gas partnership tax advantage. Tax dedication that allows ONLY partnerships that deal with natural resources (such as oil and gas) to take a deduction for the decreasing supply of the resource. Can claim this only on the amount of natural resources sold (not extracted and put in storage for future sale).

Exploratory (Wildcatting) DPPs

Type of oil and gas DPP. The objective is to 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 - Riskiest because new oil reserves may never be found; high IDCs because the DPP isn’t working with producing wells.

Developmental DPPs

Type of oil and gas DPP. The objective is to drill near producing wells with the hope of finding new reserves. Advantages - long-term capital appreciation potential with less risk than exploratory; oil will likely be found. Risks - property’s expense; drilling costs may be higher than expected; risk of dry holes (nonproducing wells) is still somewhat high; medium level IDCs.

Income DPPs

Type of oil and gas DPP. The objective is to provide immediate income by purchasing producing wells. Advantage - generates immediate cash flow; least risky; no IDCs. Risks - high initial costs; well could dry up; gas prices could go down.

Combination DPPs

Combined types of oil and gas DPP. The objective is to provide income to help pay for the cost of finding new oil reserves. Advantage - ability to offset the costs of drilling new wells by using income generated by existing wells. Risks - carries the risk of all the programs combined.

Dissolving DPPs

DPPs are dissolved by vote or predetermined date or project completion. When dissolved, paid out in order of 1) secured creditors; 2) general creditors; 3) limited partners; 4) general partners.

Real-estate Investment Trust (REIT)

Invests in real-estate-related projects such as properties, mortgage loans, and construction loans. REITs pool capital from many investors to manage property and/or purchase mortgage loans, then issue shares representing each investor’s interest in the trust. May be listed on an exchange or can trade OTC. Provide real-estate diversification and liquidity.

REIT Shares

Initially distributed in the primary market at the IPO price. Unlike mutual funds, REITs aren’t redeemed with the issuer; they have a finite number of shares like closed-end funds and trade with other investors in the secondary market. Thus, market price can be above or below NAV depending on profitability and investor sentiment.

Equity REITs

Take equity positions in real-estate properties. Income comes from rent and profits when properties are sold. Typically hold income-producing properties such as apartments, shopping malls, and vacation resorts.

Mortgage REITs

Purchase construction loans and mortgages. Income comes from interest paid on those loans and is passed to the REIT’s investors.

Hybrid REITs

Combine equity and mortgage REIT strategies. Generate rent and capital gains from owned properties as well as interest from mortgages and construction loans.

REIT Tax Requirements

To avoid being taxed like a corporation, at least 75% of income must come from real-estate activities, at least 75% of assets must be in real estate, government securities, and/or cash, and at least 90% of net income must be distributed to shareholders (who pay taxes on the income).

REIT Tax-advantaged Income

When qualification rules are met, distributed income isn’t taxed at both the REIT (corporate level) and shareholder levels (corporate shareholders taxed on dividends). Only shareholders pay tax on their distributions, thus not double taxed.

REITs vs. RELPs

RELPs pass income and losses through to investors. REITs pass through income and gains, but not losses or write-offs.

Private (Private Placement) REITs

Exempt from SEC registration under Regulation D of the Securities Act of 1933 and don’t trade on a national exchange. As such, they’re not subject to the same disclosure requirements as exchange-listed or public nonlisted REITs. Generally sold only to accredited and institutional investors. Because they aren't on exchanges, these are illiquid.

Registered Nonlisted REITs (Public Nonlisted REITs or PNLRs)

Registered with the SEC but don’t trade on a major exchange. Similar to traded REITs, including disclosure requirements, except not as liquid. May trade OTC, and some issuers periodically (daily or less frequent) repurchase options that allow investors to sell shares back to the issuer at NAV.

Public (Listed) REITs

Registered with the SEC and listed on one or more national securities exchanges. Provide the highest degree of REIT liquidity.