If you’re looking to invest in a commercial real estate project but don’t want to take on the risk of issuing loans backed by an asset, preferred equity may be the right option. Unlike common equity, preferred equity offers investors a secure and guaranteed return. It eliminates the need for additional financial institutions and allows investors to invest with one or more people.
Preferred equity can be structured in many ways. Most typically, preferred equity investors receive a fixed rate of return. This pay rate is determined by a capital event, such as net cash flow. Preferred equity investors can also benefit from capped returns. In this way, common equity investors can reap the biggest profits after the preferred equity investors are paid, but preferred equity investors can protect their downside and cap their upside.
A preferred equity investment can be a good option for many reasons. It can provide better yields than common stock and has tax advantages in the U.S. Another advantage is that it doesn’t require companies to pay dividends. If a company defaults on its obligations, preferred equity investors can simply postpone payments until the company regains profitability.
Preferred equity is an investment option that allows a commercial real estate project to move forward without requiring the project’s sponsors to put up the full amount. In return, preferred equity investors receive a higher yield and a steady flow of cash during interest payments. Preferred equity investments are also less risky than common equity investments because the preferred equity investors are paid before the common equity investors. Additionally, the fixed rate of return provides a reliable income stream, but there is less upside potential.
