What Is a Direct Participation Program (DPP)?
Let me explain what a direct participation program (DPP) is: it's a pooled entity that gives you, as an investor, access to a business venture's cash flow and tax benefits. You might also hear it called a 'direct participation plan,' and these are non-traded pooled investments focused on real estate or energy-related ventures that run over an extended time frame.
Key Takeaways
- A direct participation program, or DPP, offers you access to a business's cash flow and tax benefits.
- A DPP requires a buy-in from members like you to access the program's benefits.
- Most DPPs are real-estate investment trusts (REITs) and limited partnerships.
Understanding a Direct Participation Program (DPP)
In most direct participation programs, you as a limited partner put up money—your stake is measured in 'units'—and a general partner invests it. These DPPs are managed passively and typically last five to 10 years. During that period, all tax deductions and the DPP's income pass directly to you and other partners. Because of the income they generate and their pooled structure, DPPs have become a popular option for average investors like you to tap into investments that were traditionally for the wealthy, though there are some restrictions.
A direct participation program is usually set up as a limited partnership, a subchapter S corporation, or a general partnership. These structures let the DPP's income, losses, gains, tax credits, and deductions flow through to you, the underlying partner or taxpayer, on a pre-tax basis. As a result, the DPP itself doesn't pay corporate tax.
DPPs aren't traded, so they lack liquidity and a reliable pricing mechanism—unlike equities on a stock market. That's why DPPs often require you to meet asset and income thresholds to invest, and these can vary by state.
Types of Direct Participation Programs
The most common DPPs are non-traded REITs, which make up about two-thirds of the DPP market, non-listed business development companies (BDCs) that serve as debt instruments for small businesses, energy exploration and development partnerships, and equipment leasing corporations.
A DPP might legally be a corporation like a REIT, a limited partnership, or a limited liability corporation (LLC), but in practice, they all function like a limited partnership. As an investor, a DPP gives you partial ownership of a physical asset, such as the 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, you and other limited partners are the investors. If the DPP loses money, your downside is limited to what you've invested. The general partner manages everything; you have no say in management and don't receive benefits from the DPP's operations. However, you can vote to change or fire a general partner, or sue if they're not acting in the partnership's best interest.
Direct participation programs originated from the Securities Act of 1933 and FINRA Rule 2310. If you're preparing for the Series 7 exam, expect several questions on DPPs.
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