Preferred Equity is part of the CRE Capital Stack. It provides sponsors and developers higher leverage at a lower cost than common equity. Preferred Equity can be structured in many different ways, but it usually involves a fixed rate, a preferred return and sometimes an upside coupon that is typically paid upon a capital event (sale or refinance).




Preferred Equity Investors are paid before the common equity but after the Senior Lender. Since Preferred Equity is junior to the Senior Lender, it carries a higher degree of risk and warrants a higher rate of return than the interest rate charged by Senior Lenders.




How can you Invest in Preferred Equity?




Developers




In order to secure Senior Financing, many developers/sponsors are in need of extra capital. Investors can help developers to fill that gap. If the project is an income produce property, PE Investors can get a preferred return after Mortgage, Tax, Insurance and OpEx has been paid and before developers get paid. PE Investors would also receive a coupon once the property gets sold or refinanced. Expected returns for PE Investors would be 14% to 16% IRR 




Private Funds




Investing in Private Funds offer multiple options. Some Funds specialize in acquisition, rehab, stabilizing and selling the projects. Investors will have a lockup period to give the Manager the necessary time to complete the cycle. 




Another option is the Mortgage Funds – Private Lenders might participate as Equity partners with developers/sponsors. Those projects are smaller when compared with the ones PE Firms participate in. Since the cycle of these projects will be shorter, this will allow the Investors to obtain early redemptions. Mortgage Funds will usually offer a prefer return to the PE Investors of 16% with the possibility of upside.




To summarize, investors find Preferred Equity CRE Investments attractive for the following reasons:






	
Payment priority over common equity holders


	
More upside than senior debt-based 


	
Downside protection (common Equity is subordinated to PE Investors)






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