Introduction

REITs and Direct Participation Programs (DPPs) are two alternative investment structures that give investors access to real estate, oil and gas, equipment leasing, and other asset classes through pooled vehicles with unique tax treatment.

Exam Weight: Part of F3 73% (~18 questions for the Packaged Products chapter)

What You'll Learn

In this unit, you'll cover:

• Real Estate Investment Trusts (REITs): Structure, qualification requirements, types (equity, mortgage, hybrid), and how REIT dividends are taxed differently from regular stock dividends
• DPP General Characteristics: How direct participation programs work, the limited partnership structure, and the key differences between general partner and limited partner roles
• DPP Tax Treatment: Flow-through taxation, passive activity rules, oil and gas tax advantages, depreciation, and the crossover point where phantom income appears
• Types of DPPs: Real estate, oil and gas (exploratory, developmental, income), equipment leasing, and other program types with their risk/reward profiles
• Types of DPP Offerings: Private placements vs. public offerings and the key regulatory differences
• Evaluation of DPPs: FINRA Rule 2310 due diligence requirements, compensation limits, and the economic soundness test
• Suitability for DPPs and REITs: Which investors are appropriate for these products and which are not

Why This Matters

REITs and DPPs test your understanding of alternative investment structures, tax consequences, and suitability obligations. The exam frequently targets the inverse relationship between risk and tax benefits in oil and gas programs, the distinction between REIT dividends (ordinary income) and qualified dividends, and the passive activity rules that limit how DPP losses can be used. FINRA Rule 2310 due diligence requirements are also frequently tested.

Let's start with Real Estate Investment Trusts.