Preferred Equity and Joint Ventures are alternatives to Mezzanine Commercial Property Loans to increase the level of “Other People’s Money” on the property.
For example, when the senior debt (i.e. the primary loan secured by a first mortgage) plus the borrower or owner’s equity is not enough to cover the total value of the property.
While similar to a Mezzanine Commercial Property Loan, Preferred Equity is not secured by a second mortgage over the property, and eliminates the hurdle of a deed of subordination debt to be negotiated with senior lenders.
This means that banks are sometimes more willing to allow senior debt with Preferred Equity rather than Mezzanine Commercial Property Loans.
The capital partner providing the preferred equity will usually receive a fixed percentage of the income on the property and a Share of the Sales value, should the property be sold.
The capital partners’ capital amount and return is secured in priority to the borrower or owner, but behind the senior debt provider.
Typical Parameters for Preferred Equity and Joint Ventures
Provide up to 90%
of required equity
Receives a fixed component of income generated by the tenancies.
% Share of the Sales
Receives % Share of the Sales value upon the sale of the property
Typical Contributions for Properties with Preferred Equity
Total Development Cost
10% Borrower or Owner’s Equity
20% Preferred Equity
70% Senior Debt
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