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Preferred Equity Real Estate

What is preferred equity in real estate?

Preferred equity real estate financing is a close cousin to mezzanine lending with one big difference: the lender generally has no foreclosure rights and there’s no inter-credit agreement with the first lien financier. The preferred equity lender (most often a private equity firm) instead establishes contract remedies written into the operating agreement with the partnership, trust, corporation, LLC, Delaware Corporation, estate, or foreign national entity borrowing the money. This gives it the right to step into managing control of the business and exercise their remedies if and when certain stated eventualities arise.

Preferred Equity Real Estate Financing

How does preferred equity work?

Preferred equity definition: the sum of money that the homeowner chooses to pay before they even begin making mortgage payments. This kind of equity work allows homeowners to avoid defaulting on their loan, which means they can sell their home or refinance at any time.

Preferred equity real estate lenders

You can find preferred equity real estate capital lenders in the form of private equity firms. Private equity firms who deal in real estate preferred equity are typically investors that purchase real estate with their own money, but also accept money from limited partners. The most common form of preferred equity commercial real estate lending comes from private equity funds.

How is preferred equity used in real estate?

Our preferred equity real estate definition is as follows: a term to describe ownership that maintains some sort of control or decision-making power over the property and its profits and losses.

With preferred equity real estate capital, an individual would keep some percentage of their rights as a shareholder but still have the ability to sell their allocation at any time. With common equity, investors who purchase shares in property don’t have as much control over the look, feel and operations of said property as those with preferred shares. On top of this, as with other savings accounts, those who invest in preferred equity real estate usually earn more interest than those with common share price types. This type of investment can come from either government initiatives or private firms to incentivize first-time home buyers into purchasing real estate although it’s also used often by preferred equity real estate lenders.

Preferred equity real estate investors

A preferred equity investor is someone who does their real estate investing in an entity without ownership interest, or with a very small ownership interest when it comes to real estate preferred equity — in simple terms, this is the cost of preferred equity. Preferred equity investors are not entitled to all of the rights and privileges of shareholders, but they do have some entitlements, usually given by contract. In preferred equity real estate investing, including preferred equity in multifamily real estate or mezzanine financing with preferred equity structuring, this is all possible.

Preferred equity real estate example

Preferred equity in real estate is a term that refers to the decreasing risk of the investor as they move through different stages of their investment. It also refers to financing for real estate projects wherein preferred interests are usually granted with priority over common interests. Preferred equity gives the preference of the lender to lend an investor funds first before considering any other investments.

One example is when you buy stocks, you may purchase some with preferred stock, which means that your shares will be worth more than the ones bought without rights (common stocks). Preferred returns typically costs more because it costs more for lenders to issue them due to the risks involved. So if you’re not interested in taking on any additional risk, then stick with common stocks. Preferred equity real estate lenders use this method often.

We offer preferred equity real estate financing

Preferred Equity Funding is one option amongst many that Clopton Capital, a nationwide commercial mortgage broker, can arrange from a menu that also covers commercial mortgages, construction loans, cash out leveraging, refinancing loan vehicles, CMBS, bridge lending, and real estate private equity. If you are looking to raise anything from $1 million to $40 million and trust the fact that we have multi $ billion of closed deals to show over 10 years, Clopton is the advisor to call. We have a well-earned reputation for giving private investors, small/middle market real estate entities, and family offices direct access to the most competitive preferred equity funds and private equity firms in the USA. This is a direct path to negotiating the easiest preferred equity terms and lowest interest rates possible. We reach every city, town, and rural area from coast to coast, in every state throughout the USA carried along by close relationships with the most important commercial real estate lenders in the business.

Preferred Equity Term Sheet
Loan Amounts$1,000,000 up to $50,000,000 +
Max LTV90%
TermsUp to 10 years, coterminus with senior mortgage
AmortizationTypically None, Principal in Kind
RecourseTypically Non-recourse
Lending AreaNationwide
Transaction TypesAcquistion, Refinance, Cash out, Bridge, Construction
Property TypesMultifamily, Office, Retail, Industrial, Hotels, Self Storage, Mixed Use, Mobile Home Parks

Clopton’s preferred equity guidelines

  • Starting at $1 million going up to loans of $50 million +
  • Up to 10 years term
  • Interest-only payments
  • Real estate asset classes to include commercial, industrial, and mixed-use
  • It excludes residential properties
  • Nationwide geography
  • Acquisitions, refinances, value-add, construction loans all considered
  • Restructuring, value-added, recapitalization, leveraged buyouts possible
  • No amortization interest payment for increased cash flow
  • Alternative to mezzanine loans, secured by preferred stock
  • Compared to the equity investor alternative – lower cost-of-capital
  • Diverse categories like offices, self-storage, mobile parks etc., qualify

Case studies of preferred equity financing with Clopton Capital

Here are a few case studies to help illustrate how equity financing works with Clopton Capital. Preferred equity in real estate is used in all of these cases in one way or another to help investors reach their goals.

Apartment Building Acquisition

A real estate corporation and borrower came to us looking to acquire a $37 million apartment building in Washington State. The sponsor had a value-add acquisition plan that they intended to execute and was looking for a piece of preferred equity to round out their capital stack. We were able to structure an $8 million preferred equity piece from a private equity fund, that gave them a 75/25 equity funding split with a 4-year investment term. This allowed them to execute their business plan and conserve their own capital for other projects.

Higher Cap Stack Positioning

A developer representing a partnership wanted to get a higher cap stack position for a development venture that he was implementing in New York. His bank debt financing disallowed secondary financing secured by the project collateral, so he needed an alternative solution. We were able to structure a preferred equity piece with a private equity fund, getting him an 80% loan-to-cost arrangement without triggering any problem with his first mortgage lender. The deal allowed the developer to construct the project and conserve his own capital for other potential projects. Once the new real estate investment was completed, the partnership would be positioned to repay the subordination piece based on the higher property valuation.

Preferred equity comparisons

In this section we’ll explore some common comparisons between preferred equity and other types of lending with similar principles. We hope this will help avoid confusion and clarify between the multiple types of lending available— including when it comes to syndication opportunities.

Preferred equity vs common equity real estate

Wondering about the differences between preferred equity and common equity? We have you covered. Preferred equity is a form of financing that is not a mezzanine loan, but has many terms and conditions that are similar to a mezzanine loan. Preferred equity is an instrument that is secured by the stock of preferred stock. With a mezzanine loan, the lender takes on the risk that there may not be an upside in the property. In contrast, with preferred equity, there is an expectation of appreciation because the investor only gets return from dividends distributed from profits generated or from liquidation events. Common shares have no such expectations for returns.

Preferred equity vs mezzanine debt real estate

Preferred equity and mezzanine debt are similar in some ways, and different in others. Mezzanine debt is a form of financing like preferred equity that is not a mezzanine loan, but has many terms and conditions that are very similar to a mezzanine loan. Mezzanine debt is an instrument that is secured by the stock of mezzanine debt. With a typical mezzanine loan, the lender takes on the risk that there may not be an upside in the property. In contrast, with mezzanine debt there is an expectation of appreciation from dividends from profits from the project or a liquidation event. Preferred equity shares have no such expectations for returns.

Subordinated debt vs preferred equity on real estate

Subordinated debt are loans that are secured by the stock of subordinated debt. With a typical mezzanine loan, the lender takes on the risk that there may not be an upside in the property. In contrast, with mezzanine debt there is an expectation of appreciation from dividends from profits generated or from liquidation events.

preferred equity investment

Preferred equity real estate FAQ

Here are some common questions we receive about preferred equity and their answers.

Is a preferred equity investment safe?

An equity investment is considered to be safe because it can serve as a valuable substitute to placing all of your funds in the stock market. Equity investments are also comparatively safer than other investments, such as bonds, which might have larger fluctuations in return rates. Preferred stocks are an example of an equity investment. For more information, find a real estate preferred equity term sheet. Investors who operate with preferred equity in real estate often rely on equity term sheets for guidance.

Why invest in preferred equity real estate?

It is important to start investing in this area right away because real estate preferred equity is the future of real estate. This is because all of the relevant trends point towards continued growth and prosperity. That is especially true in major metropolitan cities, where population growth and a strong economy are driving real estate demand. Another important trend is the large amount of money that investors need to allocate to their assets, which could lead them to consider preferred equity investments if they have significant capital but no other feasible investment options.

How does pref equity real estate work?

Preferred equity is the most common way of structuring a deal when one investor wants to buy 10% or more of another investor’s business. Preferred equity acts like debt in that it’ll be repaid before equity shares, but comes with some special features for larger investors.

An example will help illustrate how preferred equity works. Suppose Investor A buys $10 million worth of preferred equity in Investor B’s company and then invests an extra $5 million into the company directly (in addition to any loans they might make). The discount on their purchase price for the additional investment is 10%, which would normally equate to an increase in share value of 10%. Given that they purchased preferred equity, however, they’d wind up with 11% of the company.

Is preferred equity secured by real estate?

The answer to this question is no. In the case of preferred equity, there is no security for the owner as it is a purely economic term.

Is preferred equity debt or equity real estate?

No. Preferred equity also offers traditional dividends and capital gains, as well as some limited voting rights. Preferred equity is an ownership interest in an investment that provides some limited participation in governance, but overall it is less risky than debt.

Asset-backed preferred equity financing is a potently versatile funding tool that can assist investors in all kinds of property transactions. To learn more contact one of Clopton Capital’s commercial mortgage lenders by calling 866-647-1650 or using the Contact Us form available from the menu. You’re always welcome to work with us to find the right preferred equity-funding terms to suit your every possibility. And with low closing costs attached to a straightforward documentation and underwriting process, your commercial loan process will be stress-free.

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