Understand How Preferred Equity Can Support Your Property Development Funding
When it comes to property development, there are a lot of different funding options available to you. You can get money from banks, from private investors, or from venture capitalists. But what if you want something in between? What if you want the security of a loan but also the potential for high returns?
That's where preferred equity comes in. This is a form of investment that can provide developers with the funds they need to get their projects off the ground. It's a way for investors to get in on the ground floor of exciting new developments while also enjoying some key benefits. In the points below, we'll take a closer look at preferred equity and how it can help you achieve your property development goals.
How does preferred equity work?
Preferred equity gives investors the opportunity to own a piece of the property development project. The investor provides the developer with the funds needed to get the project started in exchange for an ownership stake in the project, whereby they're typically entitled to a fixed return on their investment. This means the investor will receive a set percentage of the profits from the project once it is completed.
This return is usually higher than what the investor would receive if they had simply loaned money to the developer. Why? Because preferred equity investors are taking on more risk than lenders. They're investing in a project that may not yet be generating any income, so they're counting on the developer to deliver on their promises.
Preferred equity vs. common equity
One of the main benefits of preferred equity is that it gives investors priority over common shareholders. If a company goes bankrupt, preferred shareholders will be paid back before common shareholders. This makes preferred equity a less risky investment than common equity.
Preferred equity vs. mezzanine debt
Mezzanine debt is another type of financing that is often used in property development, and is a loan that is secured by the equity in a project. This means that if a project fails, the lender can take ownership of the property, and preferred equity does not have this risk because preferred shareholders are paid back before common shareholders in the event of bankruptcy.
How do you secure preferred equity finance for your property development?
If you're interested in securing preferred equity finance for your property development, there are a few things you can do to increase your chances of success.
- Make sure you have a strong business plan, and communicate this plan clearly to potential investors.
- Try to find an experienced preferred equity investor, as they'll be more likely to understand the implications of preferred equity for your particular development project.
- Finally, don't be afraid to negotiate. If you can demonstrate the development’s potential for success, they'll be more likely to lend the money you need.
Contact MFEG to discuss how preferred equity can support your property development funding
MFEG can help you secure the right preferred equity investment to help launch your property development into the skyline. To discuss your preferred equity needs, please get in touch and we’ll arrange a consultation. We also specialise in mezzanine finance, land finance and other forms of property development finance solutions.