Ch 8 - Alternative pooled investments

Question 1

Real estate investment trusts (REITs)

Answer 1

Invest directly in commercial real estate properties and mortgages
Negotiable securities
Qualify for conduit rule

Question 2

Equity REITs

Answer 2

Invest directly in commercial real estate properties
Income (from leases) and capital appreciation potential

Question 3

Mortgage REITs

Answer 3

Invest directly in commercial real estate mortgages
Primarily seek income

Question 4

Hybrid REITs

Answer 4

Combination of equity and mortgage REIT
Invest directly in commercial real estate properties and mortgages

Question 5

Non-listed REITs

Answer 5

Trade solely in the OTC markets
Can be subject to liquidity risk

Question 6

Private REITs

Answer 6

Offered to select investors
Avoids SEC oversight
High level of liquidity risk

Question 7

Subchapter M (conduit rule) for REITs

Answer 7

To qualify:
75%+ invested in real estate
75%+ income from real estate
90%+ net investment income distributed

Question 8

REIT suitability

Answer 8

Provides a hedge to the stock market
All REITs provide income potential
Equity REITs provide capital appreciation potential
Add diversification to portfolios
Unlisted and private REITs only suitable for sophisticated investors due to liquidity risk

Question 9

Regulation D

Answer 9

private placement

Question 10

Hedge funds

Answer 10

Unregulated investment funds
Only accredited (wealthy) investors participate
High risk and high gain potential
Subject to lock-up periods
Typically sold in Regulation D offerings

Question 11

Special purpose acquisition companies (SPACs)

Answer 11

Also known as a “blank check company”
Raise capital from investors with no defined business in place
Funds used to acquire or merge with a private business
Invested capital placed in trust into safe securities
Shareholders must approve proposed business acquisitions

Question 12

Blind pool companies

Answer 12

Similar to blank check companies, but provide more transparency
Typically disclose targeted industries or sectors

Question 13

Funds of hedge funds

Answer 13

Portfolio of several hedge funds (diversification)
Lower investment minimums than individual hedge funds
Not required to be accredited to invest
Potential lower liquidity risk (shorter lock-up periods)
Higher fees than individual hedge funds

Question 14

Hedge fund suitability

Answer 14

Benefits: Capital appreciation and diversification
Risks: Capital, liquidity, and legislative risk
Typical investor: Aggressive, wealthy investors in search of high levels of return &
Must withstand high levels of risk

Question 15

Hedge fund manager

Answer 15

compensated based on AUM and capital gains
common set up 2 and 20 =2% AUM and keep 20% gains of the portfolio

Question 16

Direct participation programs (DPPs)

Answer 16

Pass through business returns and losses to investors
Investor suitability:
Seeking tax benefits
Comfortable with liquidity risk

Question 17

Limited partnerships

Answer 17

The most common form of DPP
Must contain:
**At least one general partner
**At least one limited partner

Question 18

General partners

Answer 18

Manage and run the business
Have unlimited liability

Question 19

Limited partners

Answer 19

Provide funding for business
Have limited liability

Question 20

Capital calls

Answer 20

Requests for partners to provide more capital to the partnership

Question 21

Recourse notes

Answer 21

loan taken out by general partners…liability on all partners
Loans provided to the partnership
Limited partners are personally liable

Question 22

Certificate of limited partnership

Answer 22

Makes the business official
LP must file partnership documents with the state
Received from the state when LP is officially formed

Question 23

Agreement of limited partnership

Answer 23

Agreement between general and limited partners
Establishes rights, duties, and restrictions
General partners must act in a fiduciary capacity
Limited partners cannot manage

Question 24

Subscription agreement

Answer 24

Application to invest in LP
Establishes an investor’s suitability
May require certification of investor’s knowledge

Question 25

Liquidation priority of LP

Answer 25

Secured creditors Unsecured creditors Limited partners General partners

Question 26

Real estate limited partnerships (RELPs)

Answer 26

Invest in commercial properties Various investment goals: --Capital appreciation --Income --Tax benefits Tax credits available for: --Low-income housing --Historic rehabilitation --raw land is not subject to deprecitation benefits (lease tax benefits)

Question 27

REITS vs RELPs

Answer 27

rEITS can pass thru taxable and income to investors only RELPs are able to do income and losses

Question 28

Oil and gas programs

Answer 28

Seek profits and tax benefits Gain tax deductions through: -Intangible drilling costs (IDCs) -Depletion allowances

Question 29

Income (stripper) wells

Answer 29

Proven oil wells Investment potential: Low risk Low return Low IDCs （almost none）

Question 30

Developmental (step-out) wells

Answer 30

Drill near proven oil fields Investment potential: Intermediate risk Intermediate return Intermediate IDCs

Question 31

Exploratory (wildcat wells)

Answer 31

Drill in unproven lands Investment potential: High risk High return High IDCs

Question 32

GPs liable for tangible drilling costs LPs are liable for IDCs (and get deductions) GPs and LPs share revenue

Answer 32

GP liabilt for tangible DC LP liabble for IDC all shares revenue

Question 33

Revisionary working interset

Answer 33

GP - not liable for any expenses GP does not collect revenue until LP regains invested money

Question 34

Overriding royalty interest arragement

Answer 34

typical for non-partners (land owners, geologists, brokers) helping the partnership no liability for expenses obtain small portion of revenue immediately

Question 35

Disproportionate sharing

Answer 35

GPs are liable for a small portion of expenses GPs keep a larger portion of revenue

Question 36

Equipment leasing programs

Answer 36

Acquire various forms of equipment Rent out equipment to people and businesses Primary benefit is consistent rent income Equipment depreciation reduces taxes Little to no capital appreciation potential passes gains and loss

Question 37

DPP suitability

Answer 37

Typically subject to liquidity risk Pass through losses to investors Risk and benefit profiles vary by DPP

Question 38

Limited partnership basis

Answer 38

Keeps track of limited partner liability

Question 39

Adds to basis

Answer 39

Amount invested (including reinvestments) Recourse notes Non-recourse notes (for RELPs only)

Question 40

Reduces basis

Answer 40

Income or revenue received Passive losses

Question 41

Business development companies (BDCs)

Answer 41

Registered as closed-end investment companies (under IC Act 1940) Invests in small businesses (70% of portfolio < $250 million market cap) Purchases a wide range of small business securities Passes income to investors (Subchapter M) - at 90% attained income distributed to investors thru dividend then doesn't pay taxes on the income High dividend rates

Question 42

BDC suitability

Answer 42

High growth and dividend income potential High volatility and risk potential Suitable for aggressive investors with long time horizons