Structuring Preferred Equity Investments in Real Estate Ventures: Impact of True Equity vs. Debt-Like Equity
Negotiating Deal Terms, Investor Return, Change in Control Provisions
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
Intermediate
- work Practice Area
Real Property - Finance
- event Date
Tuesday, April 15, 2025
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
-
This 90-minute webinar is eligible in most states for 1.5 CLE credits.
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.
Mr. Fawer focuses his practice on the representation of institutional, fund and private capital sources in every aspect of senior and subordinate real estate financing and equity investment, including stretch senior, bridge and mezzanine lending, B-notes and preferred equity and joint venture investments, covering every major asset type, such as rental and for sale residential, hospitality, retail, office, student housing, mixed use and industrial properties. In his practice, Mr. Fawer has helped structure cutting edge financings and investments in some of the most challenging contexts.
Mr. Maira advises real estate private equity funds, investors, buyers, developers, borrowers, sellers, and lenders in connection with joint venture and preferred equity investments, acquisitions, development, mortgage and mezzanine loans, workouts and dispositions in connection with various asset classes (including multifamily, industrial, office, and retail) nationally. He previously led, in a general counsel role, a large multinational investment company’s commercial real estate legal group, including involvement with legal and business strategy, as well as transaction origination, structuring, negotiation and execution.
Mr. Clark focuses his practice on commercial lending, real estate and structured finance, leveraged leasing, building and construction loans, and mezzanine lending and preferred equity. He has significant experience handling loans secured by LLC interests (mezzanine loans) and deposit accounts.
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 PEIs are economically and functionally the equivalent of a mezzanine loan including being 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.
- Total return for the investor
- Preferred equity vs. mezzanine debt
- Structuring the preferred equity deal
- Remedies for default
- Change in control issues
The panel will review these and other key issues:
- What are the primary benefits and risks of PEIs compared to other equity investments or mezzanine financing?
- What are the key provisions that counsel to the investor, or the financing recipient must understand and negotiate when structuring the PEI agreement?
- Letters of intent, cost-sharing agreements
- How should preferred equity investor counsel address potential default, change in control, or bankruptcy by the financing recipient?
- Importance of recognition by mortgage and/or mezzanine lenders with respect to cure and control rights
- Guaranties: bad acts recourse completion, carry, environmental indemnities
