Preferred Equity for Real Estate Developers
Fill capital stack gaps and reduce sponsor equity requirements—flexible structured capital for development and value-add projects.
When Senior Debt Isn't Enough
Most commercial real estate transactions require more capital than senior lenders will provide. Banks and institutional lenders typically finance 65-75% of a project's cost, leaving sponsors to fill the remaining gap with equity.
For developers and investors who want to reduce their cash equity contribution—or who need additional capital to close a deal—preferred equity offers a solution. Positioned between senior debt and common equity in the capital stack, preferred equity provides the capital you need while preserving more of your upside.
Brookmont Capital Ventures connects sponsors with preferred equity providers, structuring investments that align with your project goals and return targets.
What Is Preferred Equity?
Preferred equity is an investment in the ownership entity that controls a property—not a loan secured by the real estate itself. Preferred investors receive priority distributions ahead of common equity holders (typically the sponsor), but behind all debt.
Key characteristics:
- Equity position – Structured as membership interest or partnership interest
- Priority return – Receives distributions before common equity
- No lien – Not secured by the property (unlike mezzanine debt)
- Flexible structure – Terms negotiated deal-by-deal
When Sponsors Use Preferred Equity
Filling the Capital Stack Gap
Senior debt covers 65-75% of project cost. Your common equity covers 10-20%. Preferred equity fills the 10-20% gap in between, reducing how much cash you need to close. See our preferred equity case study for a real-world example.
Agency Loan Restrictions
Fannie Mae and Freddie Mac often restrict subordinate debt but permit properly structured preferred equity. If you're using agency financing, preferred equity may be your only option for gap capital.
Reducing Sponsor Exposure
Rather than committing 25-30% equity to a single deal, preferred equity lets you spread your capital across multiple projects while maintaining control.
Partner Buyouts and Recapitalizations
Need to buy out an existing partner or restructure your capital stack? Preferred equity can provide the capital without refinancing your senior debt.
Increasing Returns Through Leverage
By reducing your common equity contribution, preferred equity can increase your return on invested capital—assuming the project performs as planned.
Typical Preferred Equity Terms
| Parameter | Typical Range |
|---|---|
| Investment Size | $500K – $20M+ |
| Position | Senior to common equity, junior to all debt |
| Preferred Return | 10-15% (accruing or current pay) |
| Term | 2-5 years (aligned with project timeline) |
| Exit | Refinance, sale, or redemption |
| Control Rights | Varies—may include approval rights over major decisions |
*Terms vary significantly based on deal risk, sponsor experience, and market conditions.
Preferred Equity vs. Mezzanine Debt
Both fill similar positions in the capital stack, but they're structured differently:
| Factor | Preferred Equity | Mezzanine Debt |
|---|---|---|
| Structure | Equity investment | Loan |
| Security | Unsecured (contractual rights) | Pledge of ownership interests |
| Default Remedy | Take control of entity | UCC foreclosure on interests |
| Tax Treatment | Partnership income allocation | Interest (often deductible) |
| Agency Compatibility | Usually permitted | Often restricted |
| Bankruptcy Treatment | Equity holder | Secured creditor |
Choose preferred equity when:
- Senior lender prohibits subordinate debt
- You want flexibility in payment timing
- Tax treatment as partnership income is preferred
- You're working with agency financing
Choose mezzanine debt when:
- You want interest deductibility
- Secured creditor rights are important
- The senior lender permits subordinate debt
Capital Stack Example
$10M Multifamily Acquisition
| Layer | Amount | % of Capital | Source |
|---|---|---|---|
| Senior Debt | $7,000,000 | 70% | Agency lender |
| Preferred Equity | $1,500,000 | 15% | Institutional investor |
| Common Equity | $1,500,000 | 15% | Sponsor + LPs |
In this structure, the sponsor controls the deal with only $1.5M in common equity. The preferred investor receives a 12% priority return, paid before any distributions to common equity. Upon sale or refinance, the preferred investor receives their capital back plus accrued return before common equity participates in profits.
Preferred Equity Providers
We work with various preferred equity sources:
Institutional Investors – Pension funds, insurance companies, and investment managers seeking yield with downside protection.
Family Offices – Private capital seeking real estate exposure with priority returns.
Debt Funds – Many debt funds also deploy preferred equity as part of their investment strategy.
Real Estate Operating Companies – Strategic investors who may also provide operational expertise or co-investment.
What Preferred Investors Evaluate
Preferred equity providers underwrite carefully because their position is junior to all debt. Expect scrutiny of:
- Sponsor track record – Experience with similar projects and execution capability
- Project fundamentals – Location, market dynamics, and business plan viability
- Senior debt terms – Loan-to-value, debt service coverage, and lender quality
- Exit strategy – Realistic path to refinance or sale within the investment term
- Downside protection – Cushion between preferred position and potential loss scenarios
Our Preferred Equity Advisory
Capital Stack Structuring – We help you design a capital structure that balances leverage, cost, and control—optimizing for your specific project and return targets.
Investor Introductions – We connect you with preferred equity providers actively seeking opportunities that match your deal profile.
Term Negotiation – We advocate for sponsor-friendly structures including reasonable control provisions, flexible payment terms, and fair promote structures.
Documentation Support – We coordinate between your legal counsel and the preferred investor to ensure clear, balanced documentation.
Ready to Discuss Preferred Equity?
If you're structuring a development, value-add acquisition, or recapitalization and need gap capital, preferred equity may be the right solution. Brookmont Capital Ventures can help you evaluate options and connect with the right capital partners.
Questions? Contact our team at info@brookmontcapital.net
Brookmont Capital Ventures is a capital advisory firm. We do not provide direct lending or investment services. All financing is subject to investor approval and underwriting.