Preferred Equity is an equity investment which is superior in interest to common equity but subordinate to debt. Preferred equity is secured by a direct holding of equity interest in the property owning entity. An equity investment which is superior in interest to common equity but subordinate to debt. Preferred equity has a similar risk and return profile to mezzanine financing, but differs in its mechanics and enforcement. Preferred equity is a direct holding of an equity interest in a property owning entity. Preferred equity receives payments as a preferred return in a similar manner as debt receives payments and has a redemption date much like a maturity date of a loan. Preferred equity also often contains “equity kicker” provisions, allowing the preferred equity holders to participate in some of the upside of an investment. The rights and controls of the preferred equity investor are addressed in the owning entity’s operating agreement or other governing document. In the event of a breach or default, the preferred equity holder typically may take over management of the property owning entity and may force the sale of the underlying asset.
