We are seeing many investor and institutions in the market shifting to deploying Preferred Equity as the CRE market has tightened in the last two years. I have outlined below some benefits and restrictions of Preferred Equity to the investor:
Priority
Preferred Equity holders typically receive a fixed or priority distribution from the properties net cash flow. This gives investors an additional level of predictability and security when compared to a common equity position.
Risk Adjusted Return
Preferred Equity tends to yield lower returns in comparison to common equity however are compensated for their reduced risk exposure through the assurance of priority in distributions and repayment.
Participating VS Non Participating
Preferred Equity investments can be structured as Participating or Non Participating. The difference being that Participating Preferred Equity has an additional profit share structure in addition to the fixed yield where as Non Participating doesn't participate in any additional distributions.
Position in the Stack
Preferred Equity sits in between Senior Debt and the Common Equity in a real estate investment. This means that the Preferred Equity investor will be subordinate to a senior lender and sits in higher priority than the Common Equity.
Limited Control
Preferred Equity holders often have limited control over the management and decision-making processes of the project. Their role is primarily financial contribution and they rely on the sponsor to make all operational decisions.
