Chapter 5

Q: What is a key difference between a limited partnership (LP) and a master limited partnership (MLP)?
A: An MLP is exchange-traded and has more easily transferable interests.
✅ Explanation: MLPs are publicly offered limited partnerships, traded on exchanges with freely transferable interests and many limited partners.

Flashcard 2

Q: Which of the following best describes depreciation?
A: An accounting procedure, governed by the IRS, that spreads the cost of a tangible asset over its useful life.
✅ Explanation: Depreciation accounts for wear and tear of physical assets like vehicles or equipment over time and reduces taxable income.

Flashcard 3

Q: What is the typical compensation structure for a hedge fund manager?
A: I and IV — 1–2% of assets under management and 20% of the fund’s profits.
✅ Explanation: Hedge fund managers earn both a management fee (1–2%) and a performance fee (typically 20% of profits).

Flashcard 4

Q: What is the typical compensation paid to a private equity fund manager?
A: 2% of invested capital and 20% of the fund’s net profits.

Flashcard 5

Q: A share of a REIT has a current NAV of $10.00. What does this NAV represent?
A: II and IV — It is the per share measure of the market value of the company’s net assets, but not necessarily the price investors will receive when they sell shares.
✅ Explanation: REIT shares may trade at a premium or discount to NAV based on market conditions.

Flashcard 6

Q: Which two characteristics best describe Local Government Investment Pools (LGIPs)?
A: I and IV — They are equity securities and were established as a safe and liquid investment option for cash held by municipal entities.
✅ Explanation: LGIPs operate similarly to mutual funds and are designed for safety and liquidity.

Flashcard 7

Q: What are the investment objectives of private equity funds?
A: Long-term capital appreciation and diversification.
✅ Explanation: Private equity funds focus on long-term growth by investing in non-public companies and aim for high returns over extended periods.

What is a key risk associated with hedge funds?
A: Lack of liquidity, high fees, and being unregistered.

Flashcard 2

Q: What type of investors are hedge funds typically suitable for?
A: Financially sophisticated investors.

What distinguishes municipal fund securities?
A: They are issued by local governments for local gov. and can be liquidated prior to maturity by selling on exchange

What does an Equity REIT invest in?
A: Real property, such as hospitals, apartment buildings, and shopping malls.

Flashcard 2

Q: What does a Mortgage REIT invest in?
A: Mortgages and mortgage-backed securities (MBS).

Flashcard 3

Q: What is a Hybrid REIT?
A: A REIT that invests in both real property and mortgages.

Flashcard 4

Q: What are three benefits of investing in REITs?
A:

1. Diversification – Lower correlation with the stock market

2. Dividends – Consistent income stream

3. Liquidity – Easily bought and sold on exchanges

Flashcard 5

Q: Do REITs pass through gains and losses to investors?
A: REITs pass through gains but not losses.

Flashcard 6

Q: How do DPPs differ from REITs in terms of gains and losses?
A: DPPs pass through both passive gains and passive losses to investors, while REITs only pass through gains.

Flashcard 7

Q: What can passive losses from DPPs be used to offset?
A: Only passive gains.

Flashcard 8

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

• Blind pool structure (lack of transparency)

• High illiquidity (no guaranteed secondary market)

• High risk, suitable only for sophisticated or institutional investors

Flashcard 9

Q: What is the most common business structure for DPPs?
A: Limited partnership (LP)

Flashcard 10

Q: What is the role and liability of general partners in a DPP?
A: They actively manage the business and have personal liability.

Flashcard 11

Q: What is the role and liability of limited partners in a DPP?
A: They play a passive role and have limited liability (liable only up to their investment).

Flashcard 12

Q: What protection do limited partners have in a DPP?
A: Their personal assets are protected from business liabilities.

Flashcard 13

Q: What is an S corporation in the context of DPPs?
A: A type of DPP for small businesses where income and losses are passed through to shareholders and the entity is not taxed.

Flashcard 14

Q: How does a C corporation differ from a DPP or S corp?
A: A C corp is a taxable entity; dividends are taxed at both the corporate and shareholder level (double taxation).

Flashcard 15

Q: What are some examples of limited partnerships used in DPPs?
A: Hedge funds, oil and gas programs, and real estate programs.

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

1. Secured lenders

2. General creditors (e.g., unsecured lenders)

3. Limited partners

4. General partners

Flashcard 2

Q: Who gets paid first during the liquidation of a limited partnership?
A: Secured lenders

Flashcard 3

Q: In the liquidation of a limited partnership, what is the payment order?
A: Secured lenders, General creditors, limited partners, general partners

Flashcard 5

Q: Who is paid last in the liquidation of a limited partnership?
A: General partners

Depletion is a tax deduction that compensates a limited partnership as it uses up a natural resource such as oil or gas. Because real estate is not a natural resource it cannot be depleted. Instead, real estate can be depreciated, which is a deduction that accounts for the loss of value of a physical asset over time.

Depreciation is a tax deduction that reflects the loss of value of a hard asset. A limited partnership that invests in raw land does not benefit from depreciation, as raw land is not a hard asset. Instead, investors in a raw land limited partnership seek appreciation in the value of the land

Master limited partnerships (MLPs) are limited partnerships offered to the public and traded on exchanges. MLPs are particularly common in industries such as natural resources, financial services, and real estate

MLPs are exchange-traded, they are more liquid and therefore less risky than other DPP investments. Therefore, they are appropriate for a wider range of investors, including retail investors, rather than just institutional and sophisticated investors.146

Q: Which one of the following is not generally traded on exchanges?
A. Public REIT
B. MLP
C. LP
D. ETF
A: C. LP
✅ Explanation: Limited partnerships are not generally traded on exchanges, making them less liquid than other managed products.

Flashcard 2

Q: To achieve tax pass-through status, what is the minimum percentage of fund assets a REIT must invest in real estate?
A. 75%
B. 85%
C. 90%
D. 95%
A: A. 75%
✅ Explanation: REITs must invest at least 75% of total assets in real estate to qualify for pass-through tax status.

Flashcard 3

Q: For REIT investors, what is the advantage of tax pass-through status?
A. No federal income tax due on dividend income
B. No federal income tax due on capital gains
C. Avoidance of tax at the state and local levels
D. Avoidance of double taxation of earnings
A: D. Avoidance of double taxation of earnings
✅ Explanation: REITs avoid being taxed at both the corporate and investor levels, unlike typical corporations.

Flashcard 4

Q: Which of the following is not one of the tests REITs must pass to achieve tax pass-through status?
A. Invest at least 75% of total assets in real estate
B. Be profitable in four out of five years
C. Distribute at least 90% of taxable income to shareholders annually
D. Derive at least 75% of gross income from rents or mortgages
A: B. Be profitable in four out of five years
✅ Explanation: Profitability is not a requirement for REIT tax status.

Flashcard 5

Q: Which type of managed investment product can serve as a tax shelter by passing through business losses to investors?
A. Exchange-traded note
B. Direct participation program (DPP)
C. Public REIT
D. Private REIT
A: B. Direct participation program (DPP)
✅ Explanation: DPPs pass through both income and losses, making them potential tax shelters.

Flashcard 6

Q: What does it mean when a DPP is a "blind pool"?
A. It is not required to disclose financial data
B. Its business activities or holdings are not yet known
C. The amount of cash investors must invest is unknown
D. It is prohibited from selling any property in the first five years
A: B. Its business activities or holdings are not yet known
✅ Explanation: Blind pools lack transparency and add risk, as investors cannot evaluate the underlying investments.

Flashcard 7

Q: In a limited partnership, who is responsible for managing the business with personal liability and full authority?
A. Managing director
B. Limited partner
C. Board of directors
D. General partner
A: D. General partner
✅ Explanation: General partners manage operations and bear personal liability.

Flashcard 8

Q: Which document binds the partners together in a limited partnership?
A. Certificate of limited partnership
B. Articles of incorporation
C. Partnership agreement
D. Subscription agreement
A: C. Partnership agreement
✅ Explanation: The partnership agreement outlines roles and binds the general and limited partners legally.