How Preferred Equity Can Be Used For Your Next CRE Investment

A creative, alternative financing option that carries reasonable risk while providing steady returns on commercial real estate investments.

Preferred equity is an alternative form of financing commonly offered by private equity groups, or investment funds to be used in commercial real estate investments. Many general partners seek out preferred equity on commercial real estate investments because it reduces the amount of capital they’re required to bring to the table and can have a favorable impact on returns

It is important to understand the different layers of financing, referred to as capital stack. The layers that make up a capital stack are senior debt, mezzanine debt, preferred equity, and common equity. Generally all four components are not used concurrently, but it is useful to understand how each layer is prioritized when it comes to receiving returns.

The first to be paid is senior debt, which is the loan made by the bank or lender. If used, mezzanine debt would fall right behind senior debt, and would only come into play to displace some of the capital that would normally be invested from an equity partner. Preferred equity sits on top of all debt in a capital stack. This means that preferred equity investors will receive the highest priority regarding repayment after debt has been paid. Before the general partners or common equity investors can make any profit from the property, preferred equity investors must be paid. Although general partners and common equity investors are subordinate to all others in the capital stack, they are the ones reaping the greatest returns.

The main differences between debt and equity in a capital stack are risk and returns. Senior debt is the least risky option, however this also means that the bank/lenders have no chance for profit participation. Preferred equity, while more risky than debt, tends to be less risky than other forms of equity. Preferred equity has higher returns than debt to compensate for the added risk, but lower returns than common equity and limited profit participation.

When it comes to investing in commercial real estate, risk is often coupled with higher rewards. Investors must decide if the risk/return profile makes sense when compared with the risk tolerance and return expectation of the investment. In terms of risk, preferred equity is not as safe as senior debt, however, it is not as risky as common equity.

If you are an investor seeking creative options to structure your capital stack, preferred equity investing is worth looking into.

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About CALCAP Lending

A division of CALCAP Advisors, CALCAP Lending benefits from the expertise of a seasoned team of professionals with extensive, successful track-records covering a variety of disciplines and leading large, nationally-recognized institutions. A private money direct lender, CALCAP Lending provides short to mid-term financing for property investors and businesses looking to purchase, refinance, renovate, and construct residential or commercial properties.

Lending FAQs

You've got questions, we've got answers.

What is private money lending?

Private money lending is a collateral-based lending strategy that is often associated with shorter terms and more attractive features. A private money loan offers more flexibility than a conventional mortgage or bank loan.

How does a private money loan work?

Private money lenders provide financing using money from private entities. Private money loans often work as bridges to help investors gather funds to achieve their short term real estate goals, but long term, permanent options may also provide.

Why would I choose a private money lender?

There are many advantages to using a private money lender for your real estate investments! Private money lenders can be more lenient when it comes to borrower credit issues, often there are no prepayment penalties, you can leverage your cash to buy multiple properties, and private money loans are quicker when compared with institutional loans.

Can I get prequalified for a loan?

CALCAP has a responsive loan team who are able to prequalify you. Contact a loan specialist at 833.816.5580 to get started.

How long does the lending process take?

Private money lending can be a quick and painless process. From start to finish, 30 days is common, however, turn around times can be as short as 10 business days.

Can I still be approved for a loan if I have bad credit?

Generally yes, we understand that people have temporary financial issues that come up, and we want to work with you to help you rise up financially to a better place. Offsets to credit concerns may include experience as a real estate investor, good cash reserves, and/or larger down payments.

I am a broker or investor, how can I work with CALCAP?

Business is built on relationships. Ours is no different. CALCAP Value and Preferred Partners receive exclusive rates and services. For more details and to submit your application, visit our partners page.

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