overview of nasaa guidelines direct participation programs

Overview of NASAA Overview of NASAA GuidelinesGuidelines

Direct Participation ProgramsDirect Participation Programs

Real Estate Investment Trusts SOPReal Estate Investment Trusts SOP

► DefinitionsDefinitions AffiliateAffiliate Independent Trustee(s)Independent Trustee(s)

►Associated if Trustee for more than 3 REITs organized by Associated if Trustee for more than 3 REITs organized by the Sponsor or advised by the Advisorthe Sponsor or advised by the Advisor

►Associated if Trustee owns an interest in the Sponsor, Associated if Trustee owns an interest in the Sponsor, Advisor, or any of the AffiliatesAdvisor, or any of the Affiliates


► Capital RequirementsCapital Requirements Unconditional contribution of Sponsor/Affiliate to Unconditional contribution of Sponsor/Affiliate to

REITREIT The lesser of 10% of total net assets upon The lesser of 10% of total net assets upon

completion of the offering or $200,000completion of the offering or $200,000


► Election of TrusteesElection of Trustees Minimum of 3, elected annuallyMinimum of 3, elected annually Majority Independent from Advisor & SponsorMajority Independent from Advisor & Sponsor

► VacanciesVacancies Independent Trustees must nominate replacements for Independent Trustees must nominate replacements for

Independent Trustee vacancies Independent Trustee vacancies

► CommitteesCommittees Made up of a majority of Independent TrusteesMade up of a majority of Independent Trustees


► Majority Independent Trustee ApprovalMajority Independent Trustee Approval

Minimum capitalMinimum capital The advisory contract with the SponsorThe advisory contract with the Sponsor Liability & indemnification provisionsLiability & indemnification provisions All fee, compensation & expense itemsAll fee, compensation & expense items Affiliated transactions Affiliated transactions Investment policiesInvestment policies Excess leverageExcess leverage Investments in mortgage loansInvestments in mortgage loans Notice of annual & special meetingsNotice of annual & special meetings

Real Estate Investment Trusts SOPReal Estate Investment Trusts SOP► Trustee DutiesTrustee Duties

Review & ratify Declaration of TrustReview & ratify Declaration of Trust Establish written investment & borrowing policiesEstablish written investment & borrowing policies Monitor administrative procedures, investment operations & Monitor administrative procedures, investment operations &

performance of the REIT & Advisorperformance of the REIT & Advisor

► Trustee ExperienceTrustee Experience Non-Independent Trustees: 3 yrs. relevant experienceNon-Independent Trustees: 3 yrs. relevant experience 1 Independent Trustee: 3 yrs. relevant R.E. experience1 Independent Trustee: 3 yrs. relevant R.E. experience

► Fiduciary DutiesFiduciary Duties Catch-all provisionCatch-all provision


► Advisory AgreementAdvisory Agreement 1 year contract1 year contract Terminable by majority of Independent Trustees or Advisor Terminable by majority of Independent Trustees or Advisor

upon 60 day written notice w/o cause or penaltyupon 60 day written notice w/o cause or penalty

► Advisor CompensationAdvisor Compensation Mandatory review by Independent Trustees as they must Mandatory review by Independent Trustees as they must

supervise the performance of the Advisorsupervise the performance of the Advisor


► IndemnificationIndemnification REIT shall not provide for indemnification of Trustees, REIT shall not provide for indemnification of Trustees,

Advisors & Affiliates nor hold harmless unless certain Advisors & Affiliates nor hold harmless unless certain elements are met elements are met

► Investor SuitabilityInvestor Suitability 70/70/250 test70/70/250 test Some states have adopted enhanced suitability standardsSome states have adopted enhanced suitability standards


► Subscription AgreementSubscription Agreement No required SH representations that are subjective, No required SH representations that are subjective,

unreasonable & might cause SH to believe he/she unreasonable & might cause SH to believe he/she surrendered rights entitled to under state/federal lawsurrendered rights entitled to under state/federal law

No required SH representations that have effect of shifting No required SH representations that have effect of shifting duties regarding suitability from B-D to SHduties regarding suitability from B-D to SH

► Completion of SaleCompletion of Sale 5 business days after SH received final Prospectus 5 business days after SH received final Prospectus


► Fee StructureFee Structure Annual determination by Independent Trustees that fees & Annual determination by Independent Trustees that fees &

expenses are reasonableexpenses are reasonable

► Organizational & Offering ExpensesOrganizational & Offering Expenses Reasonable and may not exceed 15% of offering proceedsReasonable and may not exceed 15% of offering proceeds

► Acquisition Fees & ExpensesAcquisition Fees & Expenses Reasonable and may not exceed 6% of contract price of RE Reasonable and may not exceed 6% of contract price of RE

or mortgage loan acquiredor mortgage loan acquired


► Operating ExpensesOperating Expenses Excessive if exceed greater of 2% of Average Invested Assets Excessive if exceed greater of 2% of Average Invested Assets

or 25% of Net Income in any fiscal yearor 25% of Net Income in any fiscal year

► Real Estate CommissionReal Estate Commission Paid if provide substantial amount of services to sell propertyPaid if provide substantial amount of services to sell property Up to ½ of the brokerage commission paid, but not to exceed Up to ½ of the brokerage commission paid, but not to exceed

3% of sales price 3% of sales price When added to sums paid to unaffiliated parties, shall not When added to sums paid to unaffiliated parties, shall not

exceed the lesser of the Competitive Real Estate Commission exceed the lesser of the Competitive Real Estate Commission or 6% of sales price or 6% of sales price


► Incentive FeesIncentive Fees

Interest in gain from the sale of assets of the REITInterest in gain from the sale of assets of the REIT

Reasonable if does not exceed 15% of the balance of net Reasonable if does not exceed 15% of the balance of net proceeds after distribution to Shareholdersproceeds after distribution to Shareholders


► LeverageLeverage

Maximum in relation to Net Assets not to exceed 300%Maximum in relation to Net Assets not to exceed 300%

Approval from a majority of the Independent Trustees Approval from a majority of the Independent Trustees required to exceed the 300% thresholdrequired to exceed the 300% threshold


►Conflict of InterestConflict of Interest

Some prohibitions unlessSome prohibitions unless

►Approved by a majority of Trustees (including a majority of Approved by a majority of Trustees (including a majority of Independent Trustees) not otherwise interestedIndependent Trustees) not otherwise interested

►Fair, reasonable & on conditions not less favorable to REIT Fair, reasonable & on conditions not less favorable to REIT as those available from 3rd parties as those available from 3rd parties


► Statement of ObjectivesStatement of Objectives In prospectusIn prospectus Reviewed by Independent TrusteesReviewed by Independent Trustees

► Multiple ProgramsMultiple Programs

► Roll-up transactionRoll-up transaction Appraisal of REIT assets by independent expertAppraisal of REIT assets by independent expert


►Other Limitations of REITOther Limitations of REIT Unimproved real property: 10%Unimproved real property: 10% Mortgage loans, construction loans, on any 1 Mortgage loans, construction loans, on any 1

property: 85% of appraised valueproperty: 85% of appraised value Issuance of redeemable equity securitiesIssuance of redeemable equity securities Options/warrants to the Advisor, Trustees, Options/warrants to the Advisor, Trustees,

Sponsors, or AffiliatesSponsors, or Affiliates►only on same terms as publiconly on same terms as public►not exceed 10% of outstanding sharesnot exceed 10% of outstanding shares


►Voting Rights of ShareholderVoting Rights of Shareholder

►Offering other than voting shares looked upon with Offering other than voting shares looked upon with disfavordisfavor

►Changes to investment or financing policies requires a Changes to investment or financing policies requires a majority vote of the Shareholdersmajority vote of the Shareholders

►Sale of all or subst. all of REIT’s assets requires a majority Sale of all or subst. all of REIT’s assets requires a majority vote of the Shareholdersvote of the Shareholders

►Merger, Reorganization, Liquidation, etc.Merger, Reorganization, Liquidation, etc.


► Other ItemsOther Items► Escrow provisionsEscrow provisions► Risk Factor re: Economic DownturnRisk Factor re: Economic Downturn► DistributionsDistributions► Commissions/Fees re: reinvestment plansCommissions/Fees re: reinvestment plans► ReportsReports► Access to records Access to records ► Distribution Reinvestment Plans generallyDistribution Reinvestment Plans generally► Items to be contained in Declaration of TrustItems to be contained in Declaration of Trust

Registration of Registration of Equipment ProgramsEquipment Programs

Registration of Equipment ProgramsRegistration of Equipment Programs

Current programs may have asset backed Current programs may have asset backed characteristicscharacteristics►Acquire leases rather than equipmentAcquire leases rather than equipment

Waiver languageWaiver language►Similar to REIT and Commodity Pool SOPsSimilar to REIT and Commodity Pool SOPs


►Sponsor RequirementsSponsor Requirements

ExperienceExperience►Like other DPP = minimum of 3 yrs. relevant experienceLike other DPP = minimum of 3 yrs. relevant experience

Net WorthNet Worth►Sponsor’s NWSponsor’s NW

Greater of $50,000 or 5% of contributions in all existing Greater of $50,000 or 5% of contributions in all existing programs in which Sponsor has potential liability plus 5% of programs in which Sponsor has potential liability plus 5% of the Program Interests being offeredthe Program Interests being offered


►Compensation & ExpensesCompensation & Expenses

O & O E = Reasonable w/ deferral to O & O E = Reasonable w/ deferral to state statutesstate statutes

Investment in Equipment = Greater of:Investment in Equipment = Greater of:►75% Capital Contributions or75% Capital Contributions or►80% Capital Contributions reduced .0625%/1% 80% Capital Contributions reduced .0625%/1%

indebtednessindebtedness


►Compensation & Expenses Cont.Compensation & Expenses Cont.

Investment in Equipment ExampleInvestment in Equipment Example

50% leverage 50% leverage => 80% - .0625(50) = => 80% - .0625(50) =

76.875% investment in equipment76.875% investment in equipment



Carried Interest for excess commitmentCarried Interest for excess commitment

►Each 1% excess = Promotional interest of 1% Each 1% excess = Promotional interest of 1% distributions after 100% return of capital; ordistributions after 100% return of capital; or

►1% interest for first 2.5% excess commitment, 1% interest for first 2.5% excess commitment, 1% for next 2%, and 1% for each 1% thereafter1% for next 2%, and 1% for each 1% thereafter

►The only Carried Interest AllowedThe only Carried Interest Allowed

Registration of Equipment ProgramsRegistration of Equipment Programs► Compensation & Expenses Cont.Compensation & Expenses Cont.

ExampleExample

50% leverage = 76.875%50% leverage = 76.875%Commits 82% = 5.125% excessCommits 82% = 5.125% excess

A. 5.125% interest in distribution after return of capital; orA. 5.125% interest in distribution after return of capital; or

B. 1% for 2.5%B. 1% for 2.5% 2.52.5 1%1% 1% for 2.0%1% for 2.0% 4.54.5 1%1%

1% for 1.0%1% for 1.0% 5.1255.125 (5.125-4.5) (5.125-4.5) = .625%= .625%

Total Carried Interest of 2.625%Total Carried Interest of 2.625%



►Promotional InterestPromotional Interest

5% Cash Available for Distribution and 1% Net 5% Cash Available for Distribution and 1% Net Disposition Proceeds until 100% plus 8% per annum Disposition Proceeds until 100% plus 8% per annum return. Thereafter = 15%; orreturn. Thereafter = 15%; or

20% Cash Available for Distribution & Net 20% Cash Available for Distribution & Net Distribution Proceeds after return of capital plus 8% Distribution Proceeds after return of capital plus 8% per annumper annum



Additional FeesAdditional Fees Must be competitiveMust be competitive Usually verbatim from the GuidelinesUsually verbatim from the Guidelines

Expense ReimbursementExpense Reimbursement►Lower of cost or independent 3rd partyLower of cost or independent 3rd party►No duplicate feesNo duplicate fees


►Conflicts of InterestConflicts of Interest

Mandatory DisclosureMandatory Disclosure

Sales/Leases to/from the ProgramSales/Leases to/from the Program►Independent 3rd Party termsIndependent 3rd Party terms►Program may lease to Sponsor under lease Program may lease to Sponsor under lease

agreementagreement►May only purchase from Sponsor if Specified May only purchase from Sponsor if Specified

ProgramProgram


►Conflicts of Interest Cont.Conflicts of Interest Cont.

Multiple ProgramsMultiple Programs►Unlike REITsUnlike REITs►Prohibited unless different investment Prohibited unless different investment

objective or Specified Programobjective or Specified Program

Minimum CapitalizationMinimum Capitalization►$1,000,000$1,000,000

Registration of Registration of Commodity PoolsCommodity Pools

Registration of Commodity PoolsRegistration of Commodity Pools

►Net Worth/InvestmentNet Worth/Investment

Sponsor’s net worth must = 5% of Capital Contributions Sponsor’s net worth must = 5% of Capital Contributions in all existing programs in which Sponsor has potential in all existing programs in which Sponsor has potential liability + 5% of the Program Interests being offeredliability + 5% of the Program Interests being offered

In no case < $50,000 permittedIn no case < $50,000 permitted In no case > $1,000,000 requiredIn no case > $1,000,000 required

Registration of Commodity PoolsRegistration of Commodity Pools►Capital ContributionCapital Contribution

The Sponsor must make a The Sponsor must make a permanentpermanent investment in the investment in the Program equal to the greater of 1% of Capital Contributions Program equal to the greater of 1% of Capital Contributions or $25,000or $25,000

►Minimum Program CapitalMinimum Program Capital Any minimum less than $500,000 presumed inadequate to Any minimum less than $500,000 presumed inadequate to

spread the riskspread the risk Provision must be made for escrow & return of 100% of paid Provision must be made for escrow & return of 100% of paid

subscriptions if min. not metsubscriptions if min. not met

Registration of Commodity PoolsRegistration of Commodity Pools►Tax Ruling/OpinionTax Ruling/Opinion

If Program organized as a LP, it must obtain a favorable tax If Program organized as a LP, it must obtain a favorable tax ruling from IRS or an opinion of qualified tax counsel ruling from IRS or an opinion of qualified tax counsel concerning tax status of a LP in an acceptable formconcerning tax status of a LP in an acceptable form

►Fees, Compensation & ExpensesFees, Compensation & Expenses Generally, only those items of compensation set forth in Generally, only those items of compensation set forth in

Guidelines are permissible, unless variance can be Guidelines are permissible, unless variance can be adequately justifiedadequately justified

All Program expenses shall be billed directly to and paid by All Program expenses shall be billed directly to and paid by the Program the Program

Registration of Commodity PoolsRegistration of Commodity Pools►Organizational & Offering ExpensesOrganizational & Offering Expenses

shall be reasonable and shall not exceed 15% of the Capital shall be reasonable and shall not exceed 15% of the Capital Contributions of the offering, regardless of source of Contributions of the offering, regardless of source of payment and including redemption feespayment and including redemption fees

►Net Asset FeeNet Asset Fee All fees are classified as Net Asset Fee, unless specifically All fees are classified as Net Asset Fee, unless specifically

excluded (i.e. incentive fees & brokerage commissions)excluded (i.e. incentive fees & brokerage commissions) Shall not exceed ½ of 1% of net assets per month/6% Shall not exceed ½ of 1% of net assets per month/6%

annuallyannually Neither the Sponsor nor Advisor may receive a management Neither the Sponsor nor Advisor may receive a management

or advisory fee if participates in brokerage commissionsor advisory fee if participates in brokerage commissions


►Incentive FeesIncentive Fees Shall not exceed 15% of the new trading profits, calculated Shall not exceed 15% of the new trading profits, calculated

not more often than quarterlynot more often than quarterly

► Interplay b/t Net Asset Fee & Incentive FeeInterplay b/t Net Asset Fee & Incentive Fee Sponsor or Advisor entitled to additional 2% Incentive Fee for Sponsor or Advisor entitled to additional 2% Incentive Fee for

each 1% by which the Net Asset Fee is reduced below 6% each 1% by which the Net Asset Fee is reduced below 6% annually annually

Registration of Commodity PoolsRegistration of Commodity Pools►Multiple Advisor ProgramsMultiple Advisor Programs

Disclosure in summary & text of Prospectus that Incentive Disclosure in summary & text of Prospectus that Incentive Fee may be paid to Advisor(s) for a given period despite Fee may be paid to Advisor(s) for a given period despite aggregate Program lossesaggregate Program losses

►Brokerage CommissionsBrokerage Commissions Disclosure of estimate of range of round turn commissions to Disclosure of estimate of range of round turn commissions to

be paid-brokerage rate as a % of avg. Net Assets annuallybe paid-brokerage rate as a % of avg. Net Assets annually Presumptively reasonable if satisfies 1 of 2 testsPresumptively reasonable if satisfies 1 of 2 tests


►Annual/Periodic ReportingAnnual/Periodic Reporting Compliance with CFTC reporting regulations suffices Compliance with CFTC reporting regulations suffices

►Trading Advisor ContractsTrading Advisor Contracts 1 year contract & terminable w/o penalty upon 60 days 1 year contract & terminable w/o penalty upon 60 days

written notice by Programwritten notice by Program


►Conflicts of InterestConflicts of Interest

Mandatory disclosure of Conflicts of InterestMandatory disclosure of Conflicts of Interest Mandatory disclosure of steps Program will take to alleviate Mandatory disclosure of steps Program will take to alleviate

real/potential conflicts real/potential conflicts Presumptively unreasonable for Advisor to be affiliated w/ Presumptively unreasonable for Advisor to be affiliated w/

Program Broker & w/ Sponsor if Sponsor receives any portion Program Broker & w/ Sponsor if Sponsor receives any portion of the brokerage commission, directly or indirectly, including of the brokerage commission, directly or indirectly, including trail commissionstrail commissions

Tips for New ExaminersTips for New Examiners

How to: Get up to Speed in a Short Time

► Knowledge sharing►Gaining access to/gathering sample comment letters►Understanding the deal generally► Requesting copies of comment letters from other

departments►Working through the SOP/Guidelines and

understanding the spirit behind such► Researching the laws of incorporation► Learning to spot issues that arise more frequently

Knowledge Gathering Tips

► Understand filing requirements (SEC and internal department/agency requirements)

► Understand spirit behind the Guidelines, Statutes, Regulations, Positions, Orders, etc. and not simply the letter of the law

► Ascertain what other regulatory bodies are reviewing the offering documents and understand the roles of such

► Understand internal review process

Review Materials for Use by Examiners

►NASAA Statements of Policy/Guidelines

► State Statutes, Regulations, Positions, Orders, etc.

► Analyst notes

►Outside media sources

overview of nasaa guidelines direct participation programs

Documents