In one sentence
An equity position with priority over common equity for returns, often used alongside or instead of mezzanine debt.
The longer version
Preferred equity sits above common equity in the capital stack, taking its return before common holders but behind all debt. It fills gaps like mezzanine debt but is structured as equity, changing the lender's intercreditor considerations.
Whether a gap is filled with mezzanine debt or preferred equity affects the senior lender's rights and the overall structure lenders diligence.
Common questions
- What is preferred equity in real estate?
- An equity investment with priority over common equity for distributions and return of capital, often used alongside or instead of mezzanine debt.
- How does preferred equity differ from mezzanine debt?
- Preferred equity is an ownership interest with remedies under the operating agreement, such as taking control. Mezzanine is a loan secured by a pledge of equity, foreclosed through a UCC sale.
- Why do senior lenders review preferred equity?
- Because its control rights can change who manages the property, which the senior lender wants to approve or limit.
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