Glossary
Preferred equity
Also called: pref equity
Preferred equity is an investment in a project entity that ranks behind all debt but ahead of the developer's ordinary equity. Instead of interest, it typically receives a priority return and sometimes a share of profit.
An example
A developer brings in a preferred equity investor who takes units in the project trust. When the project completes, the investor receives its capital and priority return before the developer receives any profit.
Why it matters
Because it is equity, preferred equity does not sit on title as a mortgage, but it often comes with control rights that can be extensive. Its cost and the circumstances in which the investor can take control should be understood before signing.
Points to check
Preferred equity sits between debt and ordinary equity, so it often carries a higher return than mezzanine debt. Read the agreement for the priority return, any profit share, control rights and what happens if the project underperforms. Check whether the senior lender permits it and how it interacts with the intercreditor terms. Model the effect on your share of profit under different outcomes.
Read about preferred equity and joint venture capital