Direct Participation Program (DPP)

What Is a Direct Participation Program (DPP)?

A direct participation program (DPP) is a pooled entity that offers investors access to a business venture's cash flow and tax benefits. Otherwise called a "direct participation plan," DPPs are non-traded pooled investments in real estate or energy-related ventures throughout an extended time period.

Understanding a Direct Participation Program (DPP)

In most direct participation programs, limited partners put up money (their stake is measured in "units"), which is then invested by a general partner. Most DPPs are managed latently and have a life expectancy of five to 10 years. During that time, all tax deductions, as well as the DPP's income, are passed to partners. In view of the income they create and their pooled nature, DPPs have turned into a well known way for average investors to access investments that have regularly been held for rich investors, however for certain limitations.

A direct participation program is typically organized as a limited partnership, a subchapter S corporation, or an overall partnership. Such structures permit the DPP's income, losses, gains, tax credits, and deductions to transfer however to the underlying partner/taxpayer on a pre-tax basis. Accordingly, the DPP itself covers no corporate tax.

DPPs are not traded, and that means that they lack liquidity and a dependable pricing component — especially compared to equities that trade on a stock market. Thusly, DPPs will more often than not need that clients meet asset and income limits to invest. These requirements can differ by state.

Types of Direct Participation Programs

The most common DPPs are non-traded REITs (around 66% of the DPP market), non-recorded business development companies (BDC) (which act as debt instruments for small businesses), energy exploration and development partnerships, and equipment leasing corporations.

A DPP might have the legal structure of a corporation (like a REIT), a limited partnership or a limited liability corporation (LLC), yet in practice, all act as a limited partnership. A DPP gives an investor partial ownership of a physical asset, for example, the underlying property in a REIT, the machinery in an equipment leasing venture or wells and income from oil sales in an energy partnership.

Special Consideration: Direct Participation Program Structure

In DPPs, limited partners are the investors. Should the DPP lose money, their downside is limited to what they invested. The general partner deals with the investment; limited partners have nothing to do with the management and receive no benefit from the DPP's operations. Limited partners can, in any case, vote to change or fire a general partner, or sue one for not acting in the best interest of the partnership.

Direct participation programs have their origin in the Securities Act of 1933 and the Financial Industry Regulatory Authority (FINRA) Rule 2310. Series 7 competitors can hope to see several inquiries on DPPs on their exam.

Features

• A DPP requires a buy-in from the individuals in order to access the program's benefits.
• A direct participation program, or DPP, offers investors access to a business' cash flow and tax benefits.
• Most DPPs are real-estate investment trusts (REITs) and limited partnerships.