What is preferred equity in real estate financing?
Preferred equity is a financing structure that gives investors priority over common equity holders in receiving returns, while still ranking below debt in the capital stack, offering a balance of risk and reward.
Key Features of Preferred Equity
- Receives fixed or preferred returns before common equity holders
- Ranks below debt but above common equity in repayment priority
- May include negotiated rights in case of underperformance
Why Developers Use Preferred Equity
- Provides additional capital without diluting common equity ownership significantly
Investor Appeal
- Offers more predictable returns than common equity, with less risk exposure
In summary, preferred equity offers investors priority returns and reduced risk compared to common equity, while still ranking below debt. This structure is commonly used to fill funding gaps in real estate capital stacks.
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