What Are DPPs?

Direct participatꦫion programs (DPPs) involve a group of investors who pool their money, which is then invested in real estate or energy-related projects for an extended period of time. They are non-traded, passive investments.

DPPs typically areܫ organized as limited partnerships or REITs and are considered alternative investments for those seeking higher returns.

Understanding DPPs

When DPPs are organized as limited partnerships, investors become limited partners. A general partner is in charge of the venture and invests the pooled funds in a target project. As that project produces income, it's passed on to the limited partners. A DPP normally has a finite life of five to 10 years, and sometimes more.

The partnership structure can be appealing because it provides 澳洲幸运5官方开奖结果体彩网:pass-through tax benefits and investors don't have any management responsibilities𝔉.

Income Stream

Most DPPs provide investors with a stream of income from the cash flow of the ventures underlying them. These dividend payments might arꦫise from real estate rental payments, mortgage payments, ಞequipment leases, oil and gas lease payments or other income streams based upon the DPP’s underlying business.

Investor Participation Rules

DPPs usually require that investors have minimum levels of income and net worth. In some cases, DPPs will fall under the 澳洲幸运5官方开奖结果体彩网:accredited investor rules of a particular state and the 澳洲幸运5官✤方开奖结果体彩网:Securiti🐭es and Exchange Commission (SEC).

DPP program representatives may also be restricted in who they may attract as investors in other ways. For example, Rule 2310 of the 澳洲幸运5官方开奖结果体彩网:Financi🌸al Industry Regulatory Author🃏ity (FINRA) regulates DPPs' underwriting terms and arrangements, including the suitability of participants for a DPP.

These restrictions are generally in place due to the illiquid nature of DPPs rather than their investment risk.

FINRA also administers an examination of DPP representatives to ensure that they properly represent the risks of a DPP to potential investors.

Non-Traded and Illiquid Investments

DPPs are mostly non-traded investment vehicles. That means that they aren't traded on the 澳洲幸运5官方开奖结果体彩网:New York Stock Exchange or any similar public investment exchange. As a result, they are🍬 not liquid investments and cannot be sold easily (or at all) once an investment is made.

While DPPs are intended to provide investors with an income stream, investment capital normally is tied up for years. Funds aren't available until the DPP is liquidated and investors' money is distributed back to them plus any gains not previously paid out.

澳洲幸运5官方开奖结果体彩网:Non-traded REITs are an example. They generally make distributions but money is not available to invest🎀ors until the fund lists its shares publicly or liquidates the fund.

Types of DPPs

澳洲幸运5官方开奖结果体彩网: The most common types of DPPs a🗹re:

• Non-listed REITs
• Non-listed business development companies (BDCs)
• Oil and gas projects
• Equipment-leasing companies

Advantages and Disadvantages of DPPs

Advantages

• DPPs that are managed properly can provide returns that may be higher than those offered by other markets and investments, typically return 5% to 7%.
• Because DPPs are limited partnerships, an investor's loss is limited to the amount of their investment.
• The regular stream of income offered by DPPs can meet the investment objective of many investors.

Disadvantages

• The entry bar for investors is high: a net worth of more than $1 million or at minimum, a $200,000 per year income for two years.
• DPPs lack of liquidity can mean investors' funds may be tied up for the run of the venture.
• A badly managed DPP could lead to a loss of money for investors.

Financial Advisors and DPPs

DPPs serve as alternative investments due 𒐪to their higher yield potential and their relatively low correlation to traditional investments in stocks and bonds. There is substantial demand for alternative investments of all types.

Investing in DPPs can be a good route to take for investors who seek higher yield and who have the financial wherewithal to invest a sizeable amount of money in a security that lacks liquidity.

However, financial advisors must ensure that tꦕhe investments that they recommend are appropriate for an investor. They must carefully research alternative investment products to be sure of the credibility and history of those offering such investments, their track records, and the economic viability of the project underlying the venture.

The Bottom Line

DPPs can offer a solid yield and cash flow stream, which is very desirable to many investors. On the other hand, they lack liquidity because they aren't traded on any public exchange. It is incumbent on financial advisors to ensure that a DPP is right for their clients before suggesting them as an investment option.