Why preferred equity fits medical office
Preferred equity is an ownership interest in the property-owning entity that receives a preferred return ahead of the common equity. It is not a loan: its rights come from the operating agreement rather than from a lien or a pledge.
Medical office preferred equity typically supports acquisitions of credit-tenanted buildings or a development with a health-system lease in hand, where the senior lender restricts additional debt.
Medical Office market context
Medical outpatient buildings have separated from traditional office fundamentals. MOB occupancy reached 92.3% by year-end 2025 compared to 80.2% for conventional office, while MOB rents rose 6.2% versus a 3.4% decline in office rents over 2023-2025. Cap rates compressed from 7.47% at end of 2024 to 6.49% at end of 2025, signaling strong institutional demand.
The demand drivers for medical office are structural rather than cyclical. An aging population, the shift from inpatient to outpatient care, and health system expansion into community-based settings all support long-term occupancy. Healthcare job postings in medical and social assistance rose from 88,630 in mid-2020 to 205,437 by mid-2025, tracking service expansion.
Underwriting considerations for medical office
H Equities recognizes medical office as a standout asset class with durable fundamentals and needs-based demand. Our approach focuses on MOBs with strong health system tenancy, proximity to hospitals and population centers, and demographic tailwinds that support long-term occupancy. For preferred equity specifically, the request is evaluated against the asset-level factors below and the structural questions that follow.
- Tenant credit matters enormously: the spread between a hospital-affiliated health system lease and a small specialty practice lease can be enormous in terms of risk.
- Evaluate reimbursement and policy exposure -- healthcare economics run through Medicare/Medicaid dynamics and insurer negotiations that can impact tenant stability.
- MOB deliveries have remained relatively stable (-5.3%) compared to a 54.1% drop in traditional office deliveries, but pockets of overbuilding exist in certain markets.
- Assess proximity to hospitals, major medical centers, and population density -- these fundamentals drive patient volume and tenant demand.
- Lease structures in medical office often include higher tenant improvement allowances due to specialized build-out requirements for clinical use.
- The senior loan documents and any restrictions on transfers, subordinate financing, or changes of control
- The waterfall: preferred return, accrual, redemption timing, and what happens if the preferred return is missed
Situations where medical office sponsors use preferred equity
Sponsors bring in preferred equity when they need capital above the senior loan and either the senior lender prohibits mezzanine debt or the deal is better served by an equity instrument with negotiated governance and redemption terms.
- Capital Stack Completion: 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.
- Recapitalization: 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.
- Development Projects: 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.
- Avoiding Intercreditor Restrictions: 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.
Alternatives and structures nearby
Preferred equity sits above common equity and below all debt. It is the usual substitute for mezzanine debt when the senior lender will not sign an intercreditor agreement.
For medical office, H Equities also publishes bridge loans, mezzanine loans, and co-gp equity. The right choice depends on the senior lender's requirements, the sponsor's ownership goals, and how much of the plan's value has already been created.
Risks and trade-offs
Preferred equity carries equity risk with debt-like return expectations. If the property underperforms, the preferred return accrues and can compress or eliminate the common equity. Because remedies live in the operating agreement, a sponsor should understand exactly what control shifts, and when, before signing. It also raises the total cost of capital compared with a lower-leverage structure.
How to start
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. For medical office, include the rent roll or sales plan, the capital budget, and the exit assumptions. H Equities responds with questions or a view on fit, not an automated decision.