Chapter 5

What is a key difference between a limited partnership (LP) and a master limited partnership (MLP)?

An MLP is exchange-traded and has more easily transferable interests.

Which of the following best describes depreciation?

An accounting procedure that spreads the cost of a tangible asset over its useful life.

What is the typical compensation structure for a hedge fund manager?

1–2% of assets under management and 20% of the fund’s profits.

What is the typical compensation paid to a private equity fund manager?

2% of invested capital and 20% of the fund’s net profits.

What does the current NAV of a REIT share represent?

It is the per share measure of the market value of the company’s net assets.

Which two characteristics best describe Local Government Investment Pools (LGIPs)?

They are equity securities and were established as a safe and liquid investment option for cash held by municipal entities.

What are the investment objectives of private equity funds?

Long-term capital appreciation and diversification.

What is a key risk associated with hedge funds?

Lack of liquidity, high fees, and being unregistered.

What type of investors are hedge funds typically suitable for?

Financially sophisticated investors.

What distinguishes municipal fund securities?

They are issued by local governments and can be liquidated prior to maturity by selling on exchange.

What does an Equity REIT invest in?

Real property, such as hospitals, apartment buildings, and shopping malls.

What does a Mortgage REIT invest in?

Mortgages and mortgage-backed securities (MBS).

What is a Hybrid REIT?

A REIT that invests in both real property and mortgages.

What are three benefits of investing in REITs?

1. Diversification 2. Dividends 3. Liquidity.

Do REITs pass through gains and losses to investors?

REITs pass through gains but not losses.

How do DPPs differ from REITs in terms of gains and losses?

DPPs pass through both passive gains and passive losses to investors, while REITs only pass through gains.

What can passive losses from DPPs be used to offset?

Only passive gains.

What are the key risks of Direct Participation Programs (DPPs)?

Blind pool structure, high illiquidity, and high risk.

What is the most common business structure for DPPs?

Limited partnership (LP).

What is the role and liability of general partners in a DPP?

They actively manage the business and have personal liability.

What is the role and liability of limited partners in a DPP?

They play a passive role and have limited liability.

What protection do limited partners have in a DPP?

Their personal assets are protected from business liabilities.

What is an S corporation in the context of DPPs?

A type of DPP for small businesses where income and losses are passed through to shareholders.

How does a C corporation differ from a DPP or S corp?

A C corp is a taxable entity; dividends are taxed at both the corporate and shareholder level.

What are some examples of limited partnerships used in DPPs?

Hedge funds, oil and gas programs, and real estate programs.

What is the correct order of priority for claims in the liquidation of a limited partnership?

1. Secured lenders 2. General creditors 3. Limited partners 4. General partners.

Who gets paid first during the liquidation of a limited partnership?

Secured lenders.

In the liquidation of a limited partnership, what is the payment order?

Secured lenders, General creditors, limited partners, general partners.

Who is paid last in the liquidation of a limited partnership?

General partners.

What is depletion in the context of a limited partnership?

A tax deduction that compensates for the use of a natural resource.

What is depreciation in the context of a limited partnership?

A tax deduction that reflects the loss of value of a hard asset.

What is a tax pass-through requirement for REITs?

REITs must invest at least 75% of total assets in real estate.

Which type of managed investment product can serve as a tax shelter by passing through business losses?

Direct participation program (DPP).

What does it mean when a DPP is a 'blind pool'?

Its business activities or holdings are not yet known.

Who is responsible for managing the business in a limited partnership?

General partner.

Which document binds the partners together in a limited partnership?

Partnership agreement.