Preferred equity is a form of investment that is common in large real estate projects for the leverage of sponsors, which are usually groups of investors who pool their funds to buy real estate.

Here’s how it works: Investors who contribute preferred capital receive a priority fixed return before the profits are distributed among the other investors. In addition, in the event of liquidation, they have priority to recover their investment.

Sponsors can also use this funding to create investment opportunities. It’s ideal for people looking to earn consistent returns with minimal risk.

Below we present the main characteristics for you to understand what preferred capital is, its most outstanding benefits and some ideas to increase the profitability of properties through this financing.

What are the main characteristics of preferred capital?

These are the main characteristics that differentiate common and preferred capital, with respect to types of real estate investments (Moussa, 2022):

  • It is a type of investment in which the investor receives priority over common shareholders in terms of dividends and return on capital.
  • It can be structured in a number of different ways, depending on the terms of the investment, the needs of the issuer, and the preferences of the investor. Some of the usual modalities are: participatory, non-participatory, cumulative, non-cumulative, and convertible preferred shares.

Benefits of Preferred Capital

It provides various benefits for both sponsors and investors, such as:

1. Priority to receive dividends

Investors have the right to receive payments or benefits before those who participate with common equity. They also have priority when distributing income (De la Cruz, 2023).

2. Lower Risk

By having a preference for return on capital, investors take on lower investment risks compared to other investors (Moussa, 2022).

3. Increased performance

Investors earn a higher return, compared to investors with common equity (Caro Mora, 2023).

4. Increased fundraising

This type of capital guarantees the return on investment, which increases investor demand and fundraising (De la Cruz, 2023).

5. Flexibility in the investment structure

It provides greater flexibility in the structuring of real estate investment, since priority levels and conditions can be established for the distribution of income. At the same time, it allows the investment to be adapted to the specific needs and objectives of investors and developers (Caro Mora, 2023).

Ideas to increase the profitability of properties

In this sense, the following preferred capital alternatives can be considered examples (Moussa, 2022):

  • Invest in property improvements and renovations. This improves your cap rate and increases your value and profitability.
  • Diversify the property portfolio. In addition to securing capital, it allows you to guarantee expansion and its return.
  • Consider properties in growth areas. It is important that they have commercial, industrial and tourist interest. For example, investing in Miami.
  • Offer incentives to tenants, in order for tenants to renew their long-term lease and ensure stability and steady flow of income.
  • Stay informed about the real estate market to stay on top of available or developing properties and choose the most convenient ones, such as investing in Miami.

In conclusion, preferred equity is a type of financing in which some investors have priority over others, both in the distribution of profits and in the recovery of the investment in the event of liquidation. As a result, it is very cost-effective, because it provides greater security and there is a high chance of a return on investment.

References

Caro Mora, C. (2023). What are preferred and common stock? Admirals World Stock Market.

De la Cruz, I. (2023). What are preferred shares and their characteristics? Investing Magazine.

Moussa. F. (2022). Taking a closer look at preferred equity and why it’s so powerful in real estate. Entrepeuner Magazine.