Overview of NASAA Guidelines Direct Participation Programs

1. Overview of NASAA GuidelinesDirect Participation Programs

2. Real Estate Investment Trusts SOP • Definitions • Affiliate • Independent Trustee(s) • Associated if Trustee for more than 3 REITs organized by the Sponsor or advised by the Advisor • Associated if Trustee owns an interest in the Sponsor, Advisor, or any of the Affiliates

3. Real Estate Investment Trusts SOP • Capital Requirements • Unconditional contribution of Sponsor/Affiliate to REIT • The lesser of 10% of total net assets upon completion of the offering or $200,000

4. Real Estate Investment Trusts SOP • Election of Trustees • Minimum of 3, elected annually • Majority Independent from Advisor & Sponsor • Vacancies • Independent Trustees must nominate replacements for Independent Trustee vacancies • Committees • Made up of a majority of Independent Trustees

5. Real Estate Investment Trusts SOP • Majority Independent Trustee Approval • Minimum capital • The advisory contract with the Sponsor • Liability & indemnification provisions • All fee, compensation & expense items • Affiliated transactions • Investment policies • Excess leverage • Investments in mortgage loans • Notice of annual & special meetings

6. Real Estate Investment Trusts SOP • Trustee Duties • Review & ratify Declaration of Trust • Establish written investment & borrowing policies • Monitor administrative procedures, investment operations & performance of the REIT & Advisor • Trustee Experience • Non-Independent Trustees: 3 yrs. relevant experience • 1 Independent Trustee: 3 yrs. relevant R.E. experience • Fiduciary Duties • Catch-all provision

7. Real Estate Investment Trusts SOP • Advisory Agreement • 1 year contract • Terminable by majority of Independent Trustees or Advisor upon 60 day written notice w/o cause or penalty • Advisor Compensation • Mandatory review by Independent Trustees as they must supervise the performance of the Advisor

8. Real Estate Investment Trusts SOP • Indemnification • REIT shall not provide for indemnification of Trustees, Advisors & Affiliates nor hold harmless unless certain elements are met • Investor Suitability • 70/70/250 test • Some states have adopted enhanced suitability standards

9. Real Estate Investment Trusts SOP • Subscription Agreement • No required SH representations that are subjective, unreasonable & might cause SH to believe he/she surrendered rights entitled to under state/federal law • No required SH representations that have effect of shifting duties regarding suitability from B-D to SH • Completion of Sale • 5 business days after SH received final Prospectus

10. Real Estate Investment Trusts SOP • Fee Structure • Annual determination by Independent Trustees that fees & expenses are reasonable • Organizational & Offering Expenses • Reasonable and may not exceed 15% of offering proceeds • Acquisition Fees & Expenses • Reasonable and may not exceed 6% of contract price of RE or mortgage loan acquired

11. Real Estate Investment Trusts SOP • Operating Expenses • Excessive if exceed greater of 2% of Average Invested Assets or 25% of Net Income in any fiscal year • Real Estate Commission • Paid if provide substantial amount of services to sell property • Up to ½ of the brokerage commission paid, but not to exceed 3% of sales price • When added to sums paid to unaffiliated parties, shall not exceed the lesser of the Competitive Real Estate Commission or 6% of sales price

12. Real Estate Investment Trusts SOP • Incentive Fees • Interest in gain from the sale of assets of the REIT • Reasonable if does not exceed 15% of the balance of net proceeds after distribution to Shareholders

13. Real Estate Investment Trusts SOP • Leverage • Maximum in relation to Net Assets not to exceed 300% • Approval from a majority of the Independent Trustees required to exceed the 300% threshold

14. Real Estate Investment Trusts SOP • Conflict of Interest • Some prohibitions unless • Approved by a majority of Trustees (including a majority of Independent Trustees) not otherwise interested • Fair, reasonable & on conditions not less favorable to REIT as those available from 3rd parties

15. Real Estate Investment Trusts SOP • Statement of Objectives • In prospectus • Reviewed by Independent Trustees • Multiple Programs • Roll-up transaction • Appraisal of REIT assets by independent expert

16. Real Estate Investment Trusts SOP • Other Limitations of REIT • Unimproved real property: 10% • Mortgage loans, construction loans, on any 1 property: 85% of appraised value • Issuance of redeemable equity securities • Options/warrants to the Advisor, Trustees, Sponsors, or Affiliates • only on same terms as public • not exceed 10% of outstanding shares

17. Real Estate Investment Trusts SOP • Voting Rights of Shareholder • Offering other than voting shares looked upon with disfavor • Changes to investment or financing policies requires a majority vote of the Shareholders • Sale of all or subst. all of REIT’s assets requires a majority vote of the Shareholders • Merger, Reorganization, Liquidation, etc.

18. Real Estate Investment Trusts SOP • Other Items • Escrow provisions • Risk Factor re: Economic Downturn • Distributions • Commissions/Fees re: reinvestment plans • Reports • Access to records • Distribution Reinvestment Plans generally • Items to be contained in Declaration of Trust

19. Registration of Equipment Programs

20. Registration of Equipment Programs • Current programs may have asset backed characteristics • Acquire leases rather than equipment • Waiver language • Similar to REIT and Commodity Pool SOPs

21. Registration of Equipment Programs • Sponsor Requirements • Experience • Like other DPP = minimum of 3 yrs. relevant experience • Net Worth • Sponsor’s NW • Greater of $50,000 or 5% of contributions in all existing programs in which Sponsor has potential liability plus 5% of the Program Interests being offered

22. Registration of Equipment Programs • Compensation & Expenses • O & O E = Reasonable w/ deferral to state statutes • Investment in Equipment = Greater of: • 75% Capital Contributions or • 80% Capital Contributions reduced .0625%/1% indebtedness

23. Registration of Equipment Programs • Compensation & Expenses Cont. • Investment in Equipment Example • 50% leverage • => 80% - .0625(50) = • 76.875% investment in equipment

24. Registration of Equipment Programs • Compensation & Expenses Cont. • Carried Interest for excess commitment • Each 1% excess = Promotional interest of 1% distributions after 100% return of capital; or • 1% interest for first 2.5% excess commitment, 1% for next 2%, and 1% for each 1% thereafter • The only Carried Interest Allowed

25. Registration of Equipment Programs • Compensation & Expenses Cont. • Example 50% leverage = 76.875% Commits 82% = 5.125% excess • A. 5.125% interest in distribution after return of capital; or • B. 1% for 2.5% 2.5 1% 1% for 2.0% 4.5 1% 1% for 1.0% 5.125 (5.125-4.5) = .625% Total Carried Interest of 2.625%

26. Registration of Equipment Programs • Compensation & Expenses Cont. • Promotional Interest • 5% Cash Available for Distribution and 1% Net Disposition Proceeds until 100% plus 8% per annum return. Thereafter = 15%; or • 20% Cash Available for Distribution & Net Distribution Proceeds after return of capital plus 8% per annum

27. Registration of Equipment Programs • Compensation & Expenses Cont. • Additional Fees • Must be competitive • Usually verbatim from the Guidelines • Expense Reimbursement • Lower of cost or independent 3rd party • No duplicate fees

28. Registration of Equipment Programs • Conflicts of Interest • Mandatory Disclosure • Sales/Leases to/from the Program • Independent 3rd Party terms • Program may lease to Sponsor under lease agreement • May only purchase from Sponsor if Specified Program

29. Registration of Equipment Programs • Conflicts of Interest Cont. • Multiple Programs • Unlike REITs • Prohibited unless different investment objective or Specified Program • Minimum Capitalization • $1,000,000

30. Registration of Commodity Pools

31. Registration of Commodity Pools • Net Worth/Investment • Sponsor’s net worth must = 5% of Capital Contributions in all existing programs in which Sponsor has potential liability + 5% of the Program Interests being offered • In no case < $50,000 permitted • In no case > $1,000,000 required

32. Registration of Commodity Pools • Capital Contribution • The Sponsor must make a permanent investment in the Program equal to the greater of 1% of Capital Contributions or $25,000 • Minimum Program Capital • Any minimum less than $500,000 presumed inadequate to spread the risk • Provision must be made for escrow & return of 100% of paid subscriptions if min. not met

33. Registration of Commodity Pools • Tax Ruling/Opinion • If Program organized as a LP, it must obtain a favorable tax ruling from IRS or an opinion of qualified tax counsel concerning tax status of a LP in an acceptable form • Fees, Compensation & Expenses • Generally, only those items of compensation set forth in Guidelines are permissible, unless variance can be adequately justified • All Program expenses shall be billed directly to and paid by the Program

34. Registration of Commodity Pools • Organizational & Offering Expenses • shall be reasonable and shall not exceed 15% of the Capital Contributions of the offering, regardless of source of payment and including redemption fees • Net Asset Fee • All fees are classified as Net Asset Fee, unless specifically excluded (i.e. incentive fees & brokerage commissions) • Shall not exceed ½ of 1% of net assets per month/6% annually • Neither the Sponsor nor Advisor may receive a management or advisory fee if participates in brokerage commissions

35. Registration of Commodity Pools • Incentive Fees • Shall not exceed 15% of the new trading profits, calculated not more often than quarterly • Interplay b/t Net Asset Fee & Incentive Fee • Sponsor or Advisor entitled to additional 2% Incentive Fee for each 1% by which the Net Asset Fee is reduced below 6% annually

36. Registration of Commodity Pools • Multiple Advisor Programs • Disclosure in summary & text of Prospectus that Incentive Fee may be paid to Advisor(s) for a given period despite aggregate Program losses • Brokerage Commissions • Disclosure of estimate of range of round turn commissions to be paid-brokerage rate as a % of avg. Net Assets annually • Presumptively reasonable if satisfies 1 of 2 tests

37. Registration of Commodity Pools • Annual/Periodic Reporting • Compliance with CFTC reporting regulations suffices • Trading Advisor Contracts • 1 year contract & terminable w/o penalty upon 60 days written notice by Program

38. Registration of Commodity Pools • Conflicts of Interest • Mandatory disclosure of Conflicts of Interest • Mandatory disclosure of steps Program will take to alleviate real/potential conflicts • Presumptively unreasonable for Advisor to be affiliated w/ Program Broker & w/ Sponsor if Sponsor receives any portion of the brokerage commission, directly or indirectly, including trail commissions

39. Tips for New Examiners

40. 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

41. 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

42. Review Materials for Use by Examiners • NASAA Statements of Policy/Guidelines • State Statutes, Regulations, Positions, Orders, etc. • Analyst notes • Outside media sources