Preferred Equity

Preferred Equity has similar economic traits to mezzanine debt with regard to pricing and pay structure. In situations where mezzanine financing is not possible due to lender prohibition, prior encumbrances of the partnership interest or regulatory requirements, preferred equity is a viable alternative.

Unlike a mezzanine loan, which is secured by the partnership interests of the borrowing entity, a preferred equity investment is a direct holding of equity interest in the property-owning entity. Additionally, rather than the mezzanine lender’s intercreditor agreement with the senior lender, the preferred equity investor negotiates a recognition agreement with the underlying senior debt lender.

Preferred Equity Capital Stack Notes

Development Preferred Equity:
  • Senior Preferred Equity will have an attachment point of 50% LTC +/- and a last dollar exposure of 65% LTC +/-
  • Junior Preferred Equity will have an attachment point of 65% LTC +/- and a last dollar exposure of 85-90% LTC +/-
  • Due to the common current pay requirement for Preferred Equity, the amount held back from proceeds will usually reduce the true Max LTC to 86-87%.
  • Pricing will tend to be in the low double to high double digits, with a possible equity kicker depending on first/last dollar exposure.
Long-Term Preferred Equity:
  • Senior Preferred Equity will have an attachment point of 55% LTC +/- and a last dollar exposure of 70% LTC +/-
  • Junior Senior Preferred Equity will have an attachment point of 70% LTC +/- and a last dollar exposure of 85-90% LTC +/-
  • Pricing will be in the mid-single digits on core and high single digits on lesser-quality assets. Low double digits for lower-quality / high LTC, Preferred Equity investments

We source, structure and help close preferred equity investments for the following situations:

  • Low-leverage preferred equity investments for core assets
  • Full/partial accrual pay options for transitional and development deals that go higher into the capital stack than traditional mezzanine loans
  • Long-term, co-terminus preferred equity investments behind CMBS loans, where an intercreditor is challenging to obtain post closing
  • Participating preferred equity structures, where a lower preferred return is given in exchange for an equity kicker on the back end

We maintain ongoing relationships with a large variety of preferred equity investors including:

  • Insurance Companies
  • Real Estate Funds
  • Crowdfunding Platforms
  • Private Equity Funds
  • Private Family Offices
  • Hedge Funds
  • EB-5 Regional Centers
  • Public and Private REITs
  • Investment Banks