Entity-level equity investment structured above common equity with a preferred return. H Equities provides preferred equity from $3MM to $15MM for capital stack completion, recapitalization, and development across all major CRE asset classes.
Overview
Preferred equity is an ownership interest in the entity that owns a commercial property, structured to receive a preferred return before the common equity participates in distributions. Unlike mezzanine debt, preferred equity is not a loan. It is an equity investment with a negotiated waterfall that gives the preferred equity investor priority on cash flow and capital events over the common equity holders. The preferred equity investor does not hold a lien on the property or a pledge of membership interests in the traditional sense.
The primary distinction between preferred equity and mezzanine debt lies in the remedies available in a default scenario. A mezzanine lender can foreclose on ownership interests through a UCC foreclosure, while a preferred equity investor typically has negotiated remedies within the operating agreement, such as taking control of the entity or forcing a sale. Because preferred equity does not involve a lien, it is not subject to intercreditor agreements with senior lenders in the same way mezzanine debt is, which can make it a more flexible tool in certain capital structures.
H Equities provides preferred equity investments from $3MM to $15MM. We structure preferred equity positions to align the interests of all parties in the capital stack, with clear waterfall mechanics, defined preferred returns, and negotiated governance and redemption rights.
Key Parameters
Use Cases
Fill the gap between senior debt and common equity when mezzanine debt is not available or not permitted by the senior lender. Preferred equity provides subordinate capital without the intercreditor complexity.
Return equity to existing investors or buy out a partner by introducing a preferred equity position into the capital stack. Restructure ownership without triggering a full refinance.
Provide subordinate capital for ground-up development where the sponsor has secured a construction loan but needs additional capital above common equity to complete the stack.
When the senior lender prohibits subordinate debt, preferred equity can fill the same role in the capital stack without requiring an intercreditor agreement, since it is structured as equity rather than debt.
Process
Share the deal structure, capital stack, business plan, and the preferred equity need. We evaluate the full picture including the senior debt terms and common equity structure.
We propose a preferred equity structure including preferred return, promote waterfall, governance rights, and redemption mechanics. Our term sheets are clear and deal-specific.
We work with counsel to document the preferred equity investment in the entity's operating agreement, defining all rights, preferences, and remedies. Closing is coordinated with any senior debt.
FAQ
Preferred equity is an ownership interest in the property-owning entity with a preferred return, while mezzanine debt is a loan secured by a pledge of ownership interests. Key differences include: mezzanine lenders have UCC foreclosure rights while preferred equity investors have entity-level remedies; mezzanine debt requires an intercreditor agreement while preferred equity typically does not; and mezzanine interest payments may be tax-deductible while preferred equity returns are structured as distributions.
Sponsors choose preferred equity when the senior lender prohibits subordinate debt, when they want to avoid intercreditor complexity, when the deal structure benefits from equity-like treatment for tax purposes, or when the preferred equity investor brings strategic value beyond capital such as governance experience or industry relationships.
Preferred equity investors receive a preferred return that is paid before any distributions to common equity. The preferred return is typically structured as a percentage return on invested capital. In addition, preferred equity investors may participate in the upside through a promote or profit participation above the preferred return, depending on the negotiated terms.
If the property underperforms, the preferred equity investor's preferred return may accrue rather than being paid currently. If the situation deteriorates further, the preferred equity investor typically has remedies outlined in the operating agreement, such as taking control of the entity's management, blocking certain decisions, or forcing a sale of the property.
Because preferred equity is structured as an equity interest rather than debt, it generally does not require the same level of senior lender approval that mezzanine debt does. However, senior loan documents may contain change-of-control or transfer restrictions that need to be reviewed. H Equities has experience structuring preferred equity to comply with senior loan requirements.
Preferred equity is documented in the operating agreement of the entity that owns the property. The operating agreement defines the preferred return, distribution waterfall, governance rights, redemption mechanics, and default remedies. There is no separate loan agreement or promissory note.
Tell us about your capital stack. We will structure a preferred equity position that works for all parties.