Crowdfunding & FinTech Law Blog

What is Preferred Equity?

Preferred equity is equity that acts a lot like debt. The new investor puts money into the deal and receives a fixed rate of return over a specified period of time, like a loan. The fixed rate of return reflects the distressed nature of the asset. Most important, the new investor receives all its money back before other investors or the sponsor receive anything. The preferred equity isn’t secured by the real estate.

Can You Do It?

There are two reasons why a fund might not be allowed to accept preferred equity. The first is if the lender’s documents prohibit it. Some do, some don’t. Even if the lender’s documents prohibit preferred equity without lender consent, don’t despair. Lenders don’t lose anything by allowing a preferred equity investment.