Bridging the Gap: How Preferred Equity Helps in Refinancing

Understanding Preferred Equity

Preferred equity is investment that sits between debt and common equity in the capital stack. It offers investors a higher claim on assets and earnings than common equity but is subordinate to debt. This unique position makes preferred equity an attractive option for refinancing.

In refinancing, property owners often need to bridge the gap between the existing debt and the new loan. Preferred equity can fill this gap, providing the necessary capital to move forward with the refinancing process.

The Role of Preferred Equity in Refinancing

When property owners seek to refinance, they may face challenges in meeting the new loan requirements. Preferred equity can help by providing additional capital. This capital can be used to pay off the existing loan, cover closing costs, or even fund property improvements.

By using preferred equity, property owners can avoid the need for additional debt. This can help maintain a healthier balance sheet and improve the overall financial stability of the property.

Benefits of Preferred Equity

Preferred equity offers several benefits for property owners looking to refinance:

• Flexibility: Preferred equity can be structured to meet the specific needs of the property owner and the refinancing deal.
• Lower Cost: Preferred equity often comes with lower costs compared to other forms of financing, such as mezzanine loans.
• Non-Recourse: Preferred equity is typically non-recourse, meaning the property owner is not personally liable for the investment.

How Preferred Equity Works

Preferred equity investments are usually structured with a fixed return, often referred to as a "preferred return." This return is paid before any distributions to common equity holders. In some cases, preferred equity investors may also receive a share of the property's profits.

To secure preferred equity, property owners typically need to provide detailed financial information and projections. This helps investors assess the potential risks and returns of the investment.

Steps to Secure Preferred Equity

Securing preferred equity involves several steps:

1. Evaluate the property's financials and determine the capital needed for refinancing.
2. Identify potential preferred equity investors and present the investment opportunity.
3. Negotiate the terms of the preferred equity investment, including the preferred return and any profit-sharing arrangements.
4. Finalize the investment agreement and secure the capital.

Conclusion

Preferred equity can be a valuable tool for property owners looking to refinance. It provides the necessary capital to bridge the gap between existing debt and new loans, without adding additional debt to the balance sheet.

By understanding how preferred equity works and the benefits it offers, property owners can make informed decisions about their refinancing options. This can help them achieve their financial goals and maintain the long-term stability of their property investments.