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Preferred Equity Financing

While preferred equity has become more mainstream in commercial real estate financing, many real estate developers and investors (sponsors) still find it challenging to access the right capital partners for their specific projects. Traditional lenders often have strict parameters that may not accommodate unique project requirements.

Today’s preferred equity market includes specialized investment funds, high net worth individuals, family offices, and institutional investors seeking attractive risk-adjusted returns. At NetLeaseX Capital, we help you navigate this landscape to structure preferred equity investments that align with your project goals and maximize your potential returns.

Understanding Preferred Equity

Preferred equity represents an ownership interest in the entity that owns the real estate, positioning it subordinate to all debt (including senior mortgages and any mezzanine loans) but senior to common equity. This seniority means preferred equity investors have a priority claim over common equity holders on the property’s distributable cash flows and proceeds from a capital event like a sale or refinancing.

Despite being legally classified as equity, preferred equity is often structured with debt-like characteristics, making it a hybrid instrument. Key debt-like features often include a fixed rate of return (the “preferred return” or “coupon”), mandatory redemption dates, and sometimes current payment obligations.

When to Use Preferred Equity

As a sponsor, you may want or need to increase leverage above the amount that you can borrow from a senior lender. You can fill the gap between the senior debt and common equity by raising mezzanine or preferred equity financing.

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    While mezzanine financing is a hybrid of debt and equity in which you retain ownership control over the property, preferred equity provides a secondary investor with an ownership and decision-making stake in the investment entity.

    Often, senior lenders may preclude the use of subordinate debt – such as mezzanine financing. In such a case, you need to raise preferred equity to address a lender’s prohibition.

    Our Preferred Equity Investment Program

    NetLeaseX Capital and its co-investors are seeking to make passive, preferred equity investments. We are looking to invest in profitable transactions and will consider non-institutional and even new sponsors who lack financial resources but have deep industry experience. Our funds can be used to:

    • Fund the ground-up development of real estate projects
    • Acquire profitable real estate investments
    • Acquire land, pay for entitlements and other pre-development expenses
    • Fund an interest reserve with your senior lender
    • Fund any required capital improvements and/or needed renovations
    • Fund a reserve to pay for any future tenant buildouts and/or leasing commissions
    • Acquire mortgage debt at a discount
    • Buy out existing limited partners
    • Cover unfunded capital calls from limited partners

    As discussed on the Loan Workouts/Rescue Financing page, our funds can also be used to infuse capital into an existing property to:

    • Cover any operating deficits for any reason
    • Gain leverage to facilitate favorable loan workouts to reduce interest rates, extend maturity dates, and/or release or otherwise reduce personal loan guarantees

    Our Joint Venture/Preferred Equity Program

    The information below provides a general outline of our joint venture/preferred equity program:

    1. Investment Amount: $1,000,000 minimum, no maximum
    2. Investment Structure: Preferred membership interest in the ownership entity
    3. Preferred Return: 10% per annum, cumulative from investment date
    4. Common Interests: We receive a 40-50% common membership interest in the development entity for a nominal amount, in consideration for our investing in your project.
    5. Sponsor Contribution: Approximately 20% of the total equity investment for which the sponsor receives the same 10% preferred return as ours, but subordinate to our interest.  If the sponsor is unable to invest 15% to 20% of the required equity, please click here to learn more about raising additional equity via a co-GP investment.
    6. Leverage: Low cost first mortgage debt from a third-party lender is needed.  Ideal leverage is 60 to 70%.  We can arrange the senior debt at a very competitive rate and terms if you need help in doing so.
    7. Development Entity Distributions:

    Net cash flow from the operation and resale of the project will be applied in the following manner:

    1. Pay debt service on any project-related loans;
    2. Pay 10% per annum cumulative preferred return on our preferred membership interest;
    3. Redeem our firm’s preferred membership interest;
    4. Pay 10% per annum cumulative preferred return on the sponsor’s preferred membership interest;
    5. Redeem the sponsor’s preferred membership interest, and
    6. After all of the preferred membership interests have been redeemed (and all cumulative preferred returns have been paid), all remaining cash flow from the operation and resale of the project will be distributed to us and the sponsor as the holders of the common membership interests.
    8. Term of Investment: Maximum 5 years
    9. Product Types: All real estate types, including land
    10. Market: Nationwide
    11. Decision Making: Major decisions (e.g. termination of manager, sale, or refinance) require our approval
    12. Senior Loan Recourse: The sponsor will be solely responsible for submitting financial statements and any necessary loan recourse and personal guarantees to the senior lender.
    13. Preferred Investment Recourse: Non-recourse, except for standard carve-outs. A completion guaranty may be required on development or rehab projects.
    14. Closing: Typically, 4 weeks. However, as fast as 10 days from the date of receipt of all requested due diligence items.

    Partner With NetLeaseX Capital

    Ready to explore preferred equity solutions for your commercial real estate project? Contact Ron Zimmerman at (513) 621-1031, via online chat on this website, or email us with your project summary at ronz@netleasex.com. Whether you’re seeking capital for acquisitions, development, or recapitalization, we’ll connect you with the right preferred equity partners.

    Using Preferred Equity to Increase Real Estate Investors’ Leverage and Enhance Returns
    White Paper
    Original:  September 2022
    Updated:  October 2024

    This whitepaper discusses how NetLeaseX works with real estate investors to structure investment relationships with “below the radar” high net worth investors, family offices, registered investment advisors, equity funds, and institutional investors to help such investors, including non-institutional sponsors and even new sponsors who lack financial resources, to raise preferred equity so that they can close more deals and earn more fees.

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    Strategize With Preferred Equity
    The Scotsman Guide
    December 2018

    This article gives an overview on how real estate investors can increase leverage by raising preferred equity to fill the gap between the amount an investor can raise in senior debt financing and the sponsor’s equity investment.  This article further discusses various ways preferred equity investments can be structured including, for example, creating one or more tiers, waterfall priority order (e.g. A/B structure vs. pari passu), recourse, repayment schedules, control rights, and capital shortfall requirements.

    Read Article | Download Reprint

    The Power of Stretch Loans for Family Office Investors

    This article explores how commercial real estate investors can secure custom stretch loans from high net worth and family office investors, combining senior debt and preferred equity features to obtain high-leverage, short-term bridge financing with favorable pay rates.
    Famcap.com | May 2024
    Read Article | Download Reprint

    Throw Out A Lifeline
    The Scotsman Guide
    July 2020

    This article discusses how real estate investors may be able to raise rescue financing to cover operating losses and/or mortgage payments during the Covid-19 crisis.  Raising rescue financing is especially important for real estate investors who may face substantial liability due to personal loan guarantys if their lender were to foreclose; thus, triggering a forced sale at a fire-sale price.

    Read Article | Download Reprint

    Ride To The Rescue
    The Scotsman Guide
    August 2020

    As a follow-on article to “Throw Out A Lifeline”, this article discusses how rescue financing, in effect, works like bridge equity, a temporary infusion of cash from an investor that well eventually be bought out via refinancing or sale when real estate markets normalize.  This article further lists various ways how rescue financing can be structured both as debt and equity investments.

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    NetLeaseX Capital Offers Family Offices Direct Access to Rescue Financing Investments in Real Estate
    Famcap.com
    October 2023

    This article discusses how family offices and other sophisticated real estate investors can access NetLeaseX’s platform to freely review NetLeaseX’s pre-screened, “investment-ready” transactions, including rescue financing, preferred equity and co-GP investment opportunities.  The article further discusses why NetLeaseX believes that a better way to invest in commercial real estate in today’s market is to provide rescue financing to sponsors, particularly in multifamily.

    Read Article | Download Reprint