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Is a REIT a DPP?

Limited Partnerships, Direct Participation Programs, Direct Investments, and Alternative Investments are some terms used interchangeably to describe certain types of investments. Only one of these terms is specifically defined by FINRA. If you took the Series 22 exam you probably recognize Direct Participation Programs (DPPs) as the title of your study materials.

FINRA Rule 2310 defines DPPs as an investment program that provides for flow-through tax consequences. An investor in a DPP owns a share of a company or entity.

Entities with flow-through tax structure are not subject to corporate income taxes. The partners or shareholders pay individual income tax on their allocated share of profits and can deduct business losses against other sources of income.

LLCs, LPs and S-Corporations are the most common entity types for DPPs with a separate entity acting as manager of the offering. Investors are often limited partners with limited liability, however, sometimes may elect to invest as a general partner to profit from certain tax benefits.

The most common DPP investments include: oil and gas programs, real estate programs (excluding REITs), leasing programs, agricultural programs, and mineral programs. Investors in these programs directly own a proportionate share of the actual asset, thus the term Direct Investments.

Not all direct investments are direct participation programs. Why? FINRA has excluded certain entities from the definition of DPPs such as Real Estate Investment Trusts (REITs). REITs are similar to DPPs in that the entity may avoid taxation by meeting certain requirements pursuant to Internal Revenue Code 856. Since investors directly own or have an interest in an asset, REITs are considered Direct Investments just like DPPs.

The DI Wire reports the news and opinions on Direct Investments such as DPPs and REITs.