What is a direct participation program (DPP)?
A direct participation program (DPP) is a pooled entity that provides investors with access to the cash flow and tax benefits of a commercial enterprise. Also known as a “direct ownership plan”, PPDs are joint, non-negotiated investments in real estate or energy-related businesses over a long period of time.
Key points to remember
- A direct participation program, or DPP, provides investors with access to a company’s cash flow and tax benefits.
- A DPP requires membership from members in order to access the benefits of the program.
- Most PLRs are real estate investment trusts (REITs) and limited partnerships.
Understanding a direct participation program (DPP)
In most direct participation programs, sponsors put money (their participation is quantified in “units”), which is then invested by a general partner. Most PPDs are passively managed and have a lifespan of five to 10 years. During this time, all tax deductions, as well as the PLR’s income, are transferred to the partners. Because of the income they generate and their common nature, PLRs have become a popular way for average investors to access investments that were normally reserved for wealthy investors, although with certain restrictions.
A direct participation program is generally organized like a limited partnership, a sub-chapter S company or a general partnership. These structures allow the DPP to transfer its income, losses, gains, tax credits and deductions to the underlying partner / taxpayer before tax. As a result, the DPP itself does not pay any corporate tax.
PLRs are not traded, which means that they lack liquidity and a reliable pricing mechanism, especially compared to stocks that trade on the stock exchange. As such, PLRs tend to demand that clients reach the asset and income thresholds for investing. These requirements may vary by state.
Types of direct participation programs
The most common PLRs are non-negotiated REITs (around two-thirds of the PLR market), unlisted business development companies (BDCs) (which act as debt instruments for small businesses), exploration partnerships and energy development and equipment rental companies. .
A DPP may have the legal structure of a company (such as a REIT), a limited partnership or a limited liability company (LLC), but in practice all of them behave like a limited partnership . A PLR gives an investor partial ownership of a physical asset, such as the underlying property in a REIT, the machinery in an equipment or well leasing business, and the income from the sale of oil in an energy partnership.
Special Consideration: Structure of the Direct Participation Program
In DPP, the sponsors are the investors. If the DPP loses money, its disadvantage is limited to what it has invested. The general partner manages the investment; the sponsors have no say in management and derive no benefit from the operations of the DPP. The limited partners may, however, vote to change or dismiss a general partner, or prosecute one for not having acted in the best interest of the company.
Direct participation programs have their origins in the Securities Act of 1933 and the Financial Industry Regulatory Authority (FINRA) Rule 2310. Series 7 applicants can expect to see several questions on PPSs during their examination.