Preferred Equity
Preferred equity is an equity investment that gets paid a fixed preferred return and, in many structures, priority distributions over common equity before the sponsor receives promote.
What it means
Preferred equity sits between mezzanine debt and common equity in the capital stack. It typically accrues at a fixed rate (often 8–12%) with distributions before common equity. On a sale, pref is returned plus accrued before the sponsor's promote is calculated.
Hard pref is contractually required; soft pref is paid only from available cash flow. Most CRE pref today is hard pref with some combination of current pay and accrued return.
Pref structures are common in syndication when the sponsor wants to limit senior dilution without taking on mezz debt.
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