Preferred Equity

Preferred equity is capital invested in a real estate deal that receives a priority (preferred) return and repayment ahead of common equity holders but ranks below all debt in the capital stack. It's used to fill funding gaps beyond what senior and mezzanine debt allow, typically carrying targeted returns in the mid-teens or higher, without diluting the sponsor's ownership as much as raising more common equity would.

Preferred equity functions like a hybrid between debt and equity: it isn't secured by a mortgage or UCC lien the way senior or mezzanine debt is, but it does sit ahead of common equity in the distribution waterfall and often has negotiated control rights (like the ability to take over management) if the deal underperforms or a preferred return isn't paid current.

Sponsors use preferred equity to close funding gaps that debt alone can't fill without triggering leverage covenants or lender restrictions, since preferred equity typically doesn't count against a senior lender's maximum LTV. It's especially common in development and heavy value-add deals where the total capital needed exceeds what debt and the sponsor's own equity can cover.

Because it carries more risk than debt (no lien, more subordinate, income-dependent), preferred equity investors demand higher returns than mezzanine lenders, often structured as a current-pay preferred return plus an accrual or kicker if the deal outperforms.

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