Preferred Equity Investment
That portion of the capital stock represented by an equity investment
in the ownership entity, which is senior to the common equity. The
preferred equity typically doesn't have an ownership interest or stake
in the investment (unless there is a "kicker" or participation
interest), which is usually reserved to the common equity.
It is just preferred stock.
example from the web page how it might work:
Mezzanine loans and preferred equity investments only come into play
on very large commercial projects. Lenders will seldom make
mezzanine loans and preferred equity investments on commercial
projects worth less than $15 million.
Mezzanine loans and preferred equity investments are used to achieve
very high leverage on large commercial projects. Normally conduits,
banks, and life companies will not exceed 80% loan-to-value when
making commercial mortgage loans. Mezzanine loans and preferred
equity investments are stacked on top of big construction loans or a
big permanent loans to achieve loan-to-cost ratio's as high as 95% and
loan-to-value ratio's as high as 90%.
A mezzanine loan is a loan secured by the membership interests of a
limited liability company (LLC) that owns a commercial property. If
the LLC fails to make it's payments, the lender quickly does a UCC
foreclosure (a fast process) on the stock. If the lender owns the
stock, it owns the commercial project as well.
A preferred equity investment sounds quite different than a mezzanine
loan, but it accomplishes almost the exact same thing. The lender
makes an investment of equity with a preferred return in the LLC that
owns the big commercial project. If the managment of the LLC fails to
pay the preferred member the promised return, the old managment is
ousted and the common members of the LLC (the former owners) lose
their voting rights, dividends, and right to the distribution of any
profit.
Why would a lender make a preferred equity investment rather than a
normal mezzanine loan? Some permanent loan documents prohibit
mezzanine loans, so the lenders are forced to make a preferred equity
investment.
You can find scores of mezzanine loan lenders on C-Loans.com |
