Like mezzanine finance, preferred equity enables the client to bridge the gap between the first mortgage finance offered and the funds required to complete a transaction. It is also priced higher than a first mortgage loan due to the higher risk of the transaction.
Preferred equity can be structured in many forms, from registered mortgages on title, and company shares, to unregistered mortgages. Each client’s individual appetite and company structure will typically determine the form that preferential equity is applied to a project.
Preferred equity investments can commence at a 50% pari passu arrangement, or up to a disproportionate equity investment of 80% of the equity required to complete the project. Investor returns range from a straight coupon return on their equity to an apportionment of project profit.
Loan sizes for preferred equity typically commence from $2,000,000 – $100,000,000.
Key Features of Preferred Equity:
Priority Returns: Preferred equity holders are entitled to fixed or minimum returns before common equity holders.
Capital Stack Ranking: Sits between debt and common equity, offering a balance of risk and reward.
Non-Participatory or Participatory: Returns may be fixed or include a share of additional profits beyond a set threshold.
No Collateral: Unlike debt, preferred equity typically doesn’t require direct security, relying on contractual agreements.
Flexible Terms: Tailored agreements can include cumulative returns or priority over distributions.