Preferred Equity and Joint Ventures are alternatives to Mezzanine Finance and Stretch Senior pieces to increase the total project finance. For example, when the senior debt (i.e. the primary loan secured by a first mortgage) plus the developer’s equity is not enough to cover the total development cost of the project.
While similar to Mezzanine Finance, 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 mezzanine finance for development projects.
The capital partner providing the preferred equity will usually receive a fixed percentage of the profit on completion of the profit, sometimes coupled with a small interest component. The capital partners’ capital amount and return is secured in priority to the developer, but behind the senior debt provider.
Typical Lending Parameters for Preferred Equity and Joint Ventures
Provide up to 90%
of required equity
Receives 10% to 15%
Coupon (interest component) on all monies invested
Receives % Profit Share
Capital partners will usually provide the bulk of the project equity required. The capital partners will then typically receive a percentage of the Profit Share 30% to 50% on completion plus 10% to 15% coupon (interest component).
Typical Contributions for Projects with Preferred Equity
Total Development Cost
5% Developer Equity
25% Preferred Equity
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