What is Preferred Equity?
Preferred Equity refers to a capital position in a property transaction that ranks ahead of regular equity but behind mortgagees on a title. Returns to a preferred equity holder are usually fixed or based on a coupon interest rate rather than profit sharing, although profit sharing is also possible.
For a developer, offering preferred equity can be a useful way of raising capital for a project without the requirement of lodging a second mortgage and the associated documentation. This structure is sometimes preferred by senior funders as it removes the requirement for priority deeds and other documentation.
From an investor’s point of view there is a higher risk than a mortgage investment and should only be undertaken with a trusted financial partner.
What's the difference between preferred equity and mezzanine debt finance?
While the two work in similar ways and offer the same desired outcome (which is to achieve project goals that require capital beyond senior debt availability), the mezzanine structure is typically offered as a preferred loan and involves a registered mortgage on title.
Preferred equity, on the other hand, doesn't necessarily hold any security for the asset but secures the return through a share issuance.
What are the key features that preferred equity offers?
- Preference in dividends: The amount of payment you'll receive (and how quickly you receive it) is determined by the size of your investment. The bigger the investment, the quicker you get to collect profits.
- In case of liquidation, the investors get preference of assets: A valuable fail-safe for peace of mind in the event that the venture doesn't work out. As an investor, you get to collect your money back when assets are liquidated.
- Convertibility: With preferred equity, assets can be freely negotiated, sold and transferred without limitation.
- High dividend yields: If the venture works out, all financing partners collect dividends.
The benefits of a preferred equity structure:
- Preferred equity is both more flexible and cost-efficient than traditional debt.
- Gain access to bank funding without delays or setbacks, so you can focus on the development rather than financing.
- Enter a dynamic and fast-moving market. With such a high number of relatively small investors vying for preferred equity options, it's possible to enter the market even without a lot of money.
- Given that preferred equity establishes the real-time value of a project, it can potentially put property in an agreeable price-point for more people
Am I eligible for preferred equity financing?
There aren't too many investment options available with this kind of leverage. At MFEG, we’ll work closely alongside you to assist with all your preferred equity needs and find the best structure possible. Here are the questions we’ll go through with you:
- What’s the current financial situation of your development project?
- Is preferred equity the most optimal avenue for securing additional funding?
The rate in which the preferred equity market is expanding demonstrates a promising and lucrative future for investors in this space. To discuss your options, don't hesitate to contact MFEG for a consultation today.