Preferred Equity Investments in Real Estate Ventures

This CLE course will discuss structuring preferred equity investments (PEIs) from both the perspective of the sponsor or developer and investor and explain the advantages and disadvantages of using preferred equity as a component of a capital stack. The panel will review how PEIs compare and contrast with mezzanine financing and other equity investments, discuss the critical agreement terms and trends in the current market, and outline approaches for negotiating terms and provisions.

PEIs, together with mortgage loans and mezzanine loans, are often a critical part of the capital structure used by sponsors to fund real estate ventures. The terms of PEIs can vary considerably. On one end of the spectrum are economically and functionally equivalent PEIs, though structured as equity and not debt, which are financially and functionally equivalent to a mezzanine loan but are not secured by a pledge of membership interest. On the other end of the spectrum are PEIs that are pari passu with the sponsor's equity. In any context, a PEI's equity is subordinate to all of the real estate venture's mortgage and mezzanine debts.

PEIs typically seek a higher projected rate of return on the investment than debt financing. They may earn a share of cash flow and/or capital proceeds from a sale or refinancing above a stated rate of return and capital appreciation. The preferred equity investor generally has consent over "major decisions" (the list of which can range from a small handful of items to an extensive list), may have buy-sell rights, forced sale rights, or put rights, and typically have removal rights (the right to remove the managing member or general partner of the real estate venture and replace it with the PEI or its designee). Removal rights can run the gamut from being limited to bad acts or performance-based.

To achieve all the benefits of PEIs and mitigate the risks, counsel to investors and the sponsor or developer entity must negotiate and structure key terms that address matters such as exit strategy, remedies in the event of such party's default, issues surrounding a change in control, and the impact of an entity bankruptcy. Also, counsel should involve tax counsel to review and address tax implications for the entity and the investor and the sponsor or developer in the PEI agreement.

Listen as our authoritative panel prepares counsel to real estate lenders, investors, and borrowers to structure, enforce, or challenge PEI agreements in the current real estate market. The panel will compare and contrast PEIs vs. mezzanine financing. The panel will also outline the key points of negotiation and agreement provisions for the equity investor and the real estate developer, including remedies for default, change in control, and exit strategy.