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Fidelity Private CRE Fund

edited February 2023 in Fund Discussions
Fidelity has jumped into private commercial real estate (CRE). This FIDELITY CORE REAL ESTATE FUND fund requires investor accreditation, $25K initial minimum, +$5K additional monthly additions, ER 1.0% plus 12.5% of performance over +5%.

Fund will not be listed or traded on exchanges.

After 3 years of operations, quarterly redemptions up to 5% of fund assets allowed at the option of Fidelity.

It is suggested as an addition to traditional 60-40 stock-bond portfolios.

Note that Blackstone BREIT and Starwood SREIT have been in the news due to reaching their quarterly 5% redemption limits.

TIAA Real Estate Account VA QREARX is different in that it its Liquidity Guarantee (from TIAA) allows quarterly redemptions of any amount.

Listed real estate funds behave differently due to their leverage and market factors. Examples include VNQ, XLRE, FRESX, and hybrid FRIFX. Fidelity also has multi-asset FMSDX that combines stocks-bonds-alternatives.

An interesting time for Fidelity to enter private CRE area.

May be @TheShadow can find more information on its filing.

Video Transcript
Limited SEC/Edgar Info


  • Thanks @yogibearbull
    I'd need a lot of extra money that would classify as 'probably never needed' to lock monies into these private equity positions, as this one.

    From the song; 'Don't Fence me In'

    'I want to ride to the ridge where the west commences
    Gaze at the moon till i lose my senses
    I can't look at hobbles and i can't stand fences
    Don't..... fence me in.'
  • Yeah, not good for this cowboy either. I wonder how long one must keep up with those $5K monthly additions.
  • Real estate funds have been mentioned recently in monthly commentaries by @Devo, @msf, @David_Snowball, and possibly others.

    @Mark, additional amounts are optional. But they are allowed monthly.

    This should be treated as news of interest to some.

    FWIW, I have access to TIAA QREARX and have a position in it. But many don't have access to it and ask about possible alternatives, so I keep an eye on this area.
  • @YBB, thank you. I already hold a 7% position in a CEF real estate fund along with a couple of individual REIT's.
  • edited February 2023
    Private real estate has too much friction and illiquidity. Paying 1% management fee + 12.5% over 5% hurdle is a perfect product for advisors. Bond like returns, opaque pricing, low mark to market volatility. Meanwhile, the public real estate is too volatile. Wonder if the private guys use the public real estate as a hedge in turn increasing the volatility of the public. maybe just stay from it all till its becomes out of favor.
  • Fidelity CRE is really new to the scene. May be a while to find something on it. Did find DoubleLine has a registration filing for a commercial real estate ETF filed last month.

  • edited February 2023
    @TheShadow, thanks for DoubleLine finds.

    Filing shows 2 ETFs - DL CRE ETF (debt) and DL Mortgage ETF (also debt). Both are active and with some leverage (unspecified % or limits, but "borrowing" is mentioned a lot). IMO, DL CRE ETF name may be misleading as it is all debt, no equity (although they may use equity-linked debt instruments). Of course, being ETFs, they will be listed and trade on exchange.
  • I got burned decades ago on non traded real estate partnerships. The main reason for that crash was dramatic tax policy changes, but ever since I am very leery of buying something I can't sell, especially something where you depend on management to tell you what it's is worth.

  • I'll pass, thanks. I like to stay liquid...and not just in aged scotch!
  • A couple of clarifications (perhaps):
    - The termsheet that Shadow provided says that minimum additional investments are $5K, but doesn't say that these additional investments are required or that they can only be made on a monthly schedule.
    - The 3 years before redemptions are allowed start when the initial offering is closed (as opposed to when operations begin). The Form D filing says that the initial offering is expected to remain open for more than a year. So it could be much longer than three years before one could get one's money out.

    @sma3 - are you referring to the Tax Reform Act (TRA) of 1986?
    ONCE TOUTED AS THE INVESTMENT vehicle of the future, limited partnerships are seldom pitched to investors today. Instead, clients and the CPAs who advise them are looking back at the tax and financial factors that contributed to the downfall of LPs in areas such as oil and gas, real estate and equipment leasing.
    THE TAX REFORM ACT OF 1986, combined with increased Internal Revenue Service audit scrutiny spelled the beginning of the end for tax-oriented LPs. Extension of the at-risk limitations to real estate tax shelters and the passive loss provisions in the TRA [reducing the ability of individual taxpayers to offset income with losses from tax shelters] gave the IRS the weapons it needed.
    Journal of Accountancy, What Happened to Limited Partnerships?
  • I likely have the contra view here but this is a good time to start CRE funds. Lotsa defaults coming up in the next few months, solid opportunities to buy at 20-40% discounts.

    There's news on the interwebs today that some PE/VC firms are buying back their own debt from the banks at 20% discounts because banks are distressed sellers in the current market.

    The illiquidity of private CRE is a feature, not a bug so in theory at least there is an illiquidity premium earned by LP's but yes one has to be pretty careful here. There are sharks in the water.
  • I will pass too as I see many empty commercial real estate and that has not improve post-pandemic. Illiquid REIT, no thanks.
  • @msf

    Yes that is the vehicle I was referring to. I had an accountant sell us one. Fortunately it was a relatively small amount of money. If he had not made a big commission on it, he might have recommended MSFT instead!

    On my "never again " list along with CT real estate, whole life insurance
  • edited April 2023
    The Journal of Accountancy article from 1997 isn't relevant in today's world especially after the rise of crowdfunded CRE following the JOBS Act in the 2010's.

    Private CRE is not the right vehicle if liquidity is paramount but the major pro is being protected from "risk off" behavior during panic in the public markers. In general(certainly not always) private CRE offers higher tax advantaged yields(due to depreciation and 1031 exchange) and higher IRR than public REIT's.
  • The Journal of Accountancy article from 1997 isn't relevant in today's world especially after the rise of crowdfunded CRE following the JOBS Act in the 2010's

    That article discussed the alteration of tax benefits (notably pass through of losses) in 1986. Could you speak to the tax benefits that have since been restored or otherwise replaced that make the article irrelevant today?

    If it's the date of the article that's bothering you, here's a 2020 Tax Foundation piece bemoaning how the TRA extended depreciation periods (MACRS) and restricted the use of declining balance depreciation.
    Lessons for Today
    Long asset lives (for example, 27.5 years for residential buildings and 39 years for nonresidential buildings) in which deductions are spread over many decades mean that companies cannot deduct anywhere near the full value of their investments in structures, as inflation and the time value of money chip away at the value of those deductions. Shortening depreciation schedules to 15 or even 20 years, roughly where they were before TRA86, would lessen the magnitude of this problem, but it would not be the ideal policy.

    The current system of depreciation creates a bias against businesses that heavily invest in structures, as the effective marginal tax rates on investments in nonresidential and residential structures are much higher than those on equipment, software, and intellectual property.

    With respect to crowdfunding, that's a completely separate matter. It deals with who can invest, not how the investments are taxed. Whatever Regs A+ and CF and Rule 506(c) facilitate, they don't apply to the Fidelity offering. As stated in the Form D that yogi cited, Fidelity's offering gets its SEC exemption from Rule 506(b).
  • edited April 2023
    I should have been more specific. The article's claim of private LLC's dying isn't true in today's world, most certainly not after the passage of the JOBS Act.

    The ability of LP's in a real estate private LLC to get the benefits of depreciation that shields most of the tax impacts of the distributions is massive. I didn't fully realize the magnitude of this impact until I personally saw it on my tax returns. Easily 80%+ of cash flow is not subject to yearly tax due to depreciation and distributions from these partnerships are in general much higher than public REIT's -ranging from 6 - 12%.

    Another lever available to LP's in real estate LLC's is the ability to pair passive losses against passive income (known as the PIGS/PAL strategy) to basically shield even more of the cash flow from taxes.

    Investors in public REIT's do not directly get the benefits of depreciation. 1031 exchange(I have not done any) is another lever to execute a strategy colloquially referred to as defer, defer and die.

    I'm not condoning the system (it is what it is, individual investors have no control on tax policy) but tax rules imo are ridiculously stacked in favor of property investors. Same applies for carried interest, a tax benefit that is today entirely disproportionate vs. the benefits to society.

    The most public example of the benefits of tax rules to property investors is Trump -- New York Times has extensively covered how Trump got away(legally) with declaring massive (paper) losses on property that shielded his real cash flow income for many years(more than 15 if I recall correctly). At much smaller scales, LP's and GP's in real estate LLC's are basically doing the same thing.

    Investors in Fidelity CRE would not(my guess) get the benefits of 1031 exchanges but the benefits of depreciation should flow directly to the LP's in the fund **assuming** the fund is structured similar to how private funds in general work(getting a K1 is key).

    Fidelity in general as an org is a sharp cookie and they run a fairly large business as a custodian of private LLC's so they have a front row and insider view of the economics, consumer interest and ROI(to Fidelity). I'm speculating of course but I can't imagine that Fidelity is launching this fund on a whim.

    I see on the term sheet that tax reporting is 1099-DIV so what I stated above mostly won't apply to this particular fund but notwithstanding that, I stand by my other comments on the disproportionate advantages of being an LP in a real estate LLC.

    I don't get what advantage accredited investors will get from this fund without a K1 that provides depreciation benefit but perhaps Fidelity's target is the mass affluent market that does not want to spend time scouring for reliable sponsors and trust in the Fidelity brand. Fidelity looks to be somewhat replicating the wildly successful BREIT fund.

  • msf
    edited April 2023
    The ability of LP's in a real estate private LLC to get the benefits of depreciation that shields most of the tax impacts of the distributions is massive.

    I think you're talking about the LLC members who are not managing members. For clarity it might be simpler to call the companies partnerships, and the owners LPs and GPs. Especially since for federal tax purposes LLCs don't exist.
    A Limited Liability Company (LLC) is a business structure allowed by state statute. ... Owners of an LLC are called members.
    Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or [a sole proprietorship].

    A real estate private partnership (LLC) is able to get depreciation benefits, but so is a public partnership (LLC) such as an MLP. The key differentiator is taxation as a partnership vs. taxation as a corporation. As you wrote, getting a K1 is key.

    Another lever available to LP's in real estate LLC's is the ability to pair passive losses against passive income (known as the PIGS/PAL strategy) to basically shield even more of the cash flow from taxes.

    That's been available "forever". The JOBS Act did not introduce this. Rather, the limitation of writing off of passive loss against only passive income was introduced by the 1986 TRA. Prior to that, an investor could write off passive losses against active income as well as passive income.

    Reiterating what I wrote before, the amount of depreciation (and thus the amount of passive loss) also used to be larger (front loaded and with shorter depreciation schedules).

    Perhaps this 1986 Washington Post article will help to clarify. It is titled "Try a PIG or a PAL"
    ... Beginning Jan. 1, Americans who have sunk dollars into limited partnerships, rental condominiums, duplexes and other forms of real estate investment will find new restrictions on their ability to write off losses.

    They will be stuck with a surfeit of unanticipated PALs, and be in dire need of some really fat PIGs.
    The most controversial section of the 1986 tax legislation classified virtually all real estate investments [other than first and second homes] as "passive," no matter how active they may be in reality.
    PALs, the economic and paper losses produced by so-called passive real estate, no longer can be used to offset income generated by salaries, dividends, bank accounts and other "nonpassive" income sources.
    Many real estate-partnership investors, however, own no rental homes. But, fortunately for them, an entire new subsector of American real estate investment is rising from the ashes of tax revision.

    Good old-fashioned Yankee ingenuity is creating a bumper crop of PIG partnerships -- real estate investments designed to make money passively. ... So-called master limited partnerships (MLPs) are currently in [this] category.
    Appearances to the contrary notwithstanding, MLPs are bona fide limited partnerships. More than 25 MLPs, worth upwards of $ 4 billion, have either come to market since the summer or have been registered with the Securities and Exchange Commission. Most are real estate related.

    In short, looking strictly at tax rules, prior to 1987 one could front load depreciation of real estate in partnerships (or LLCs); so much so that one could have paper losses exceeding income generated. One could apply this massive paper loss against W2 income, 1099 income, etc. After TRA, one could not. This obviously made private real estate partnerships (LLC) less valuable and precipitated the crash in values that sma3 mentioned.

    There was a fairly recent tax change favoring real estate, but that came in 2017 after the JOBS Act. It's the Section 199A deduction.
  • edited April 2023
    We'll have to agree to disagree.

    I am referring to LP's in a partnership as you stated.

    I have owned publicly traded MLP's that generate K1's and they're nowhere close to the depreciation that private REIT's generate.

    I don't think 1031 exchanges are do-able with MLP'S so can't do defer, defer, die.

    I agree with your point of the passive losses of real estate not being useful to everyone but the depreciation benefit is so material that the limited utility of PAL is not relevant.

    The way I see it, the fact that prior depreciation rules were more beneficial than current ones is not material because what matters is the menu of investment options available today and what provides the highest after tax $$ in your pocket. And private real estate partnerships fare well amongst the choices.

    All of above of course are my views based on my tax situation, cash flow needs and risk appetite. Very rarely is there a one size fits all solution in investing so certainly someone could look at the same facts and come to the opposite conclusion.
  • msf
    edited April 2023
    I'm writing about tax code and generalities while you're presenting specific tax situations and experiences. We're simply talking at cross purposes. As we're coming from different perspectives, I'm fine with agreeing to disagree. That doesn't mean I can't ramble on a little more.

    I have owned publicly traded MLP's that generate K1's and they're nowhere close to the depreciation that private REIT's generate.

    FWIW, here are a couple more generalities I've managed to locate. Clearly, they don't represent your experience.
    Typically, 70-100% of MLP distributions have been considered a tax-deferred return of capital, which means one does not pay taxes on that portion of the distribution until the investor sells his or her position.
    Each individual MLP is different, but on average an MLPs distribution is usually around 80% to 90% a return of capital, and 10% to 20% ordinary income.

    I don't think 1031 exchanges are do-able with MLP'S

    Partners cannot to 1031 exchanges, because what they own are fractions of the partnership, not the real property itself. That's owned by the partnership. So it is technically it is the partnership that must do the exchange.

    Here are a couple of pages that talk about how a partnership can do an exchange:

    The simplest description is:
    All partners can sell their existing properties together and buy a replacement property together. This is because Section 1031 mandates that the same taxpayer must do all exchanges – so a multi-member LLC can also participate so long as it doesn’t change the structure.
    Typically MLPs have two tiers - (1) the MLP itself owned by the investors, and (2) the operating limited partnership (OLP) that is wholly owned by the MLP. It is the OLP that owns the actual real property.

    I'm not seeing how this has any effect on the ability of an OLP to do a 1031 exchange. An OLP looks like just another partnership (albeit with a single owner, the MLP). Is there anything you see in this structure that suggests an OLP cannot do a 1031 exchange?
  • edited April 2023
    I'm comparing private CRE partnerships(LP role) to publicly traded MLP's where one is an individual investor. I suppose there are partnerships that invest in energy/pipelines but to my knowledge these are far less in number than partnerships focussed on real estate.

    1031 exchange within a RE partnership is messy and complicated I agree but it is available as an option vs. not being available at all to an individual investor holding publicly traded MLP's(to the best of my knowledge).

    Here are a few articles(pre-Covid days so some of the ground reality has certainly changed) comparing REIT's and MLP's. The last link is a compare between public and private REIT's. REITs Vs. MLPs: Which Is The Better Investment?

  • msf
    edited April 2023
    It's easy to see that REITs and MLPs get different tax treatment. The former falls under corporate tax rules (with significant exceptions), while the latter falls under partnership tax rules.

    REITs are defined in the tax code (26 U.S. Code §856) as entities taxed as corporations with certain enumerated exceptions (26 U.S. Code §857), such as pass through income. In contrast, Master Limited Partnerships are partnerships taxed under Subchapter K - Partners and Partnerships

    There's nothing in the tax code that is specific to MLPs. Though, since the vast majority (but not all) of MLPs are publicly traded partnerships (PTPs) - a subcategory of partnerships - PTP special rules usually apply to MLPs.

    Here's an example of a restriction specific to PTPs (and thus to most MLPs): one cannot offset net income from a PTP (a PIG) with passive losses (PALs) from any other entity, whether PTP or not.
    CCH, Passive Activity Losses of Publicly Traded Partnerships

    Unless there's a similar special rule that prohibits PTPs from doing 1031 exchanges, then they have the same ability to do 1031 exchanges as do "regular" partnerships.

    As to the piece on private REITs, it says (emphasis in original):
    Private REITs technically don’t exist (except for a temporary designation given to a pre-public REIT). It is really just a marketing term to communicate to investors they are buying pools of real estate like a REIT, but in a private company.

    When most people refer to a ‘private REIT,’ what they mean is private equity real estate. Private equity real estate is another phrase investors may have heard, and mostly is interchangeable with Private REITs (except for those “pre-public” REITs).

    Private equity real estate investments are generally held in LLCs, meaning they are non-tax-paying, pass-through entities.
    Who'dve thunk that one could not have a private offering of a real, honest to goodness REIT? That it's all just marketing hype. If only we could find a counterexample - an actual private offering of a REIT. Where to look, where to look.

    How about the Fidelity offering?

    The cover page of the offering is titled in part: Private Placement Memorandum. And the Form D says that it is exempt from SEC registration under Rule 506(b). Clearly this is a private offering.

    The first paragraph of the memo ends with (emphasis in original): "We expect to qualify as a real estate investment trust (“REIT’) for federal income tax purposes."

    In a nutshell, this is why I look to the tax code, SEC regulations and the like. Anything coming from a company with a vested interest in a product may be helpful but is also suspect.
  • - I've never heard of a 1031 exchange for a MLP (does not mean it can't be done and based on a light skim I agree with you that there is no blocker) so perhaps there's not much benefit to it.
    - The PIG/PAL restriction for MLP's is quite material compared to no such restriction for real estate
    - Aspen article I agree is tilted towards private RE but imo it still paints a fair picture of public REIT's vs. private RE.
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