This page of our SIE Study Guide covers the alternative investment vehicle known as direct participation programs. DPPs are legal entities that allow investors to invest directly into a business and then, in exchange, participate in the business’s tax benefits and cash flows.
Most DPPs are legally organized as limited liability corporations (LLCs), real estate investment trusts (REITs)—which are covered in the next section—or limited partnerships. They all act as limited partnerships in reality; investors become limited partners by buying into the program and then the general partner invests the pooled money into different businesses. During the lifespan of the limited partnership, a period of five to ten years, the DPP’s income and tax benefits all pass through to the investors.
- Tax Advantages: Unlike regular corporations that are subject to double taxation, DPP profits are taxed only once at the investor level. This single taxation model is referred to as pass-through and it means that the individual investors report the profits as income rather than the DPP entity itself.
- Liquidity/Marketability: DPP ownership units, which are similar to shares, are generally not listed nor traded on stock exchanges and any limited partner who wishes to get out of the DPP (sell their units) may find it difficult to do so. This illiquidity makes these investments suitable only for investors who don’t need readily sellable investments.
- Suitability: DPPs are not suitable investments for all. Investors that meet specific income and/or net worth requirements and can handle the illiquid nature of DPPs might be considered suitable, and these requirements can vary across states and sometimes even across different programs. In general, DPPs are only sold to accredited investors.
- Limited Liability: Like other passive investment vehicles, each investor’s maximum possible loss in the event of legal or financial troubles is capped at the amount they invested.
Tenants in Common (TIC)
Investors can obtain fractional ownership interests in real estate through TIC investments. Fractional ownership interests, also referred to as co-ownership interests, allow investors to pool their money together to acquire a larger real property asset than any of them could acquire on their own. These investments are illiquid, tax-deferred securities and are typically structured as DPPs. Similar to other DPPs, TIC investments carry due diligence and suitability requirements for brokers, specifically “reasonable-basis” and “customer-specific” suitability.