Preferred equity is an investment that sits above your ordinary equity and behind all debt in the capital stack. It lets you fund a project with less of your own cash, in return for a defined preferred return to the capital partner, paid ahead of your residual profit.
Preferred equity is capital contributed to a project that ranks behind the debt for risk and repayment but ahead of the developer's ordinary equity. The capital partner receives a preferred return, a defined entitlement paid before the developer takes residual profit, rather than interest on a loan. It is more flexible than debt and carries more risk for the investor, which is why it sits lower in the stack and is priced for that position.
The drivers are the size of the preferred equity relative to the total stack, the development margin and forecast profit, the term to completion and sell-down, and how the preferred return and any profit share are set. Because it ranks behind the debt, preferred equity targets a higher return than senior or mezzanine debt. The exact structure, return and any equity kicker are negotiated deal by deal, so there is no standard figure; we frame it around the feasibility and the risk.
Mezzanine is subordinated debt with a fixed cost and second-ranking security; preferred equity is an equity investment with a preferred return and no mortgage security. Preferred equity sits lower in the stack than mezzanine, so it carries more risk and targets a higher return, but it can reach further up the funding requirement where debt has run out. Which suits depends on how much leverage the senior lender allows and how the developer wants to share risk and reward.
Preferred equity is about partnering with capital, not just borrowing it. We aim to structure it so it preserves the developer's control and upside while giving the capital partner a fair, defined return, and we take it to investors who back the sector and the sponsor.
No. It is an equity investment that ranks ahead of the developer's ordinary equity but behind all debt. It is rewarded with a preferred return rather than interest, and is not secured by a mortgage.
It is usually structured to preserve the developer's day-to-day control, with the capital partner taking a defined preferred return rather than running the project. The exact governance is negotiated per deal.
Generally it targets a higher return, because it sits lower in the capital stack and carries more risk. The trade is that it can fund a project with less of the developer's own cash.
When the senior and mezzanine debt have reached their limit but the project still needs funding, or when the developer prefers to share risk and return rather than over-gear with debt.
Tell us about the project, the numbers, and the timeline. We will give you an honest read on whether we can fund it and what a suitable structure could look like. Email loans@bottomlinefinance.com.au or send the form.
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