An Introductory Guide to Preferred Equity

If you are going to commercial property like multi-tenant office buildings and strip centres- preferred equity is something that enables you to buy the property with a smaller down payment.

It enables you to close commercial real estate deals much easier. It sounds good, right. Let’s understand what exactly preferred equity is.

A definition

Preferred equity is a measure of equity that only takes into account the preferred stockholders, and disregards the common stockholders. It is basically equal to shareholders’ equity minus common equity.

In other words

Preferred equity is an equity investment that is considered better option when it comes to interest to common equity but subordinate to debt. It is basically secured by a direct holding of equity interest in the property owning entity.

This has a risk and return profile similar to mezzanine financing, but differs in its mechanics and enforcement. It is a direct holding of an equity interest in a property owning entity and receives payments as a preferred return in a in the same way as debt receives payments and has a redemption date like a maturity date of a loan.

This also often contains an “equity kicker” provision that allows the preferred equity holders to participate in some of the upside of an investment. The rights and controls that preferred equity investor holds are addressed in the owning operating agreement of the entity or other governing document.

In the case of a breach or default, the preferred equity holder may take over management of the property owning entity and may force to sell the underlying asset.

For a real estate investor, preferred equity is a great method to access permanent financing without diluting shareholders. As mentioned earlier, it is quite similar to debt, thus organizations need to make coupon payments on preferred equity.

Unlike debt, the principal amount never requires to be paid. Plus, holders of such equity have no claim on assets, thus the organization cannot default.

To know more about preferred equity, approach Challis Capital right away.

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