Preferred Equity, Explained
What are the Potential Advantages of Preferred Equity?
In today’s low-interest rate environment, many investors are seeking opportunities to achieve higher yields than what their traditional investment options may offer, while hedging against potential negative externalities. To this end, iintoo seeks to address this perennial issue by offering its members preferred equity on the investment opportunities listed on its platform.
Generally, investors find preferred equity real estate investments attractive for two key reasons:
1. Higher payment priority relative to common equity holders
Since preferred equity sits between the senior debt and common equity in the capital stack, this form of investment is imbued with a hybrid risk/return profile. As a result, many investors interested in making a foray into commercial real estate but are unwilling to take additional risks with their capital prefer to be positioned earlier in line when exiting a deal and having some recourse provisions in the case of borrower default. As a result, preferred equity can be a good fit for investors looking for prioritized annual returns. And from the developer’s standpoint, preferred equity often offers them a higher amount of leverage at a lower cost than common equity.
2. Potential earnings beyond fixed-term rates
Preferred equity enables passive investors to share some of a project’s potential upside upon exiting an investment. In most cases, preferred equity investments offer a fixed term, flat annual rate of return in addition to an opportunity to accrue additional earnings in accordance with project performance. At the end of the investment term or in the event a contractual triggering event takes place, the Sponsor is typically required to redeem the preferred equity interest to preferred equity investors for a redemption price equal to the unreturned capital up to that point, in addition to any accrued but undistributed interest earnings.
It’s also important to note that preferred equity is not synonymous with preferred return. The preferred return is a preference in the returns on capital, while a preferred equity position is one that receives a preference in the return of capital. At iintoo, we typically offer preferred equity investments to our investors in addition to a preferred returns payment schedule on exit profits.
Helping Achieve the Right Balance
At iintoo, we’ve chosen to offer preferred equity because we believe this approach enables a well-calibrated balance of investor risk and reward. Rather than serving as a marketplace, iintoo is a highly selective conduit for investors which rigorously vets every deal on its platform in order to protect our members to the best of our abilities.
Our uncompromising requirements result in fewer than 1% of the deals we review being approved and featured on our platform, and we stand by our choices to the extent that we actively underwrite every deal offered to our members on a firm commitment basis.
If our value proposition meshes with your investment goals, you’re welcome to take a look at our latest offerings.