# Understanding Direct Participation Programs (DPPs): Key Benefits and Types

## What Is a Direct Participation Program (DPP)?

Direct participation programs (DPPs) are investment groups that let people share in a business’s cash flow and tax benefits. They are usually set up as limited partnerships, which means profits and losses pass directly to investors for tax purposes. DPPs are often long-term and don’t require active management, making them appealing to average investors. They may not be very liquid and may have strict investment requirements. Common examples include non-traded real estate trusts (REITs) and energy partnerships.

### Key Takeaways

*   Direct participation programs (DPPs) offer investors access to cash flow and tax benefits in ventures like real estate and energy.  
    
*   DPPs are often structured as limited partnerships and pass income, losses, and deductions directly to investors.  
    
*   Most DPPs are illiquid investments and require participants to meet specific asset and income thresholds.  
    
*   The majority of DPPs are non-traded real-estate investment trusts (REITs) and limited partnerships.  
    
*   Investors in DPPs, typically limited partners, have limited liability and can vote to change or remove general partners.

## How Direct Participation Programs (DPPs) Work

In most direct participation programs, limited partners put up money (their stake is quantified in "units"), which is then invested by a general partner. Most DPPs are managed passively and have a lifespan of five to 10 years. During that time, all tax deductions, as well as the DPP's income, are passed to partners. Due to the income they generate, DPPs are popular among average investors. They provide access to investment opportunities typically reserved for the wealthy, though some restrictions apply.

A direct participation program is usually organized as a [limited partnership](https://www.investopedia.com/terms/l/limitedpartnership.asp), a subchapter S corporation, or a general partnership. Such structures allow the DPP's income, losses, gains, tax credits, and deductions to transfer though to the underlying partner/taxpayer on a pre-tax basis. Accordingly, the DPP itself pays no corporate tax.

DPPs are not traded, so they lack liquidity and reliable pricing, unlike stocks that trade on the market. As such, DPPs tend to require that clients meet asset and income thresholds to invest. These requirements can vary by state.

## Exploring Different Types of Direct Participation Programs

The most common DPPs are non-traded REITs (about two-thirds of the DPP market), non-listed [business development companies (BDC)](https://www.investopedia.com/terms/b/bdc.asp) (which act as debt instruments for small businesses), energy exploration and development partnerships, and equipment leasing corporations.

A DPP may have the legal structure of a corporation (such as a REIT), a limited partnership or a limited liability corporation (LLC), but in practice, all behave as a limited partnership. A DPP gives an investor partial ownership of a physical asset, such as the underlying property in a REIT, the machinery in an equipment leasing venture or wells and income from oil sales in an energy partnership.

## Key Structural Considerations of Direct Participation Programs

In DPPs, limited partners are the investors. Should the DPP lose money, their downside is limited to what they invested. The general partner manages the investment; limited partners have no say in the management and receive no benefit from the DPP's operations. Limited partners can, however, vote to change or fire a general partner, or sue one for not acting in the best interest of the partnership. 

Direct participation programs have their origin in the Securities Act of 1933 and the Financial Industry Regulatory Authority (FINRA) Rule 2310.﻿﻿﻿﻿﻿ [Series 7](https://www.investopedia.com/terms/s/series7.asp) candidates can expect to see several questions on DPPs on their exam.

## The Bottom Line

DPPs let investors invest in companies like real estate and energy, and share in their cash flows and tax benefits. They are usually set up as partnerships, where investors provide money and managers run the business. While there are perks, they can also be risky since they are hard to sell and may require higher incomes to join. Common examples include non-traded REITs, business development companies, and energy partnerships. These programs are regulated, but if you want to invest in them, make sure you review your finances and speak to a financial professional before you commit any money.  

> **Article Sources**
>
> 1.  Financial Industry Regulatory Authority (FINRA). "[2310\. Direct Participation Program](https://www.finra.org/rules-guidance/rulebooks/finra-rules/2310)." Accessed Nov. 6, 2020.
>     
> 2.  U.S. Securities and Exchange Commission. "[The Laws That Govern the Securities Industry](https://www.sec.gov/answers/about-lawsshtml.html#secact1933)." Accessed Jan. 29, 2021.