Money & Finance › Commercial real estate lending › The capital stack: who gets paid first in a property deal
Preferred equity: paid after the lenders, before the sponsor
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
An equity investment in a property deal that collects its return after all the lenders but before the sponsor's common equity.
See it on the Money & Finance map →How it works
A preferred investor buys a priority slice of the property-owning company, often filling the gap from about 65% to 80–85% of value. It earns a fixed preferred return, recently about 10–15%, often part cash and part accrued, and must be redeemed by a set date. Because it is equity, not a loan, senior lenders that ban second liens often allow it. If the sponsor misses payments, a 'hard' pref can take over management or force a sale; a 'soft' pref mostly just accrues.
Why it matters
It lets an owner fill a funding gap, as in a cash-in refinance, without new debt, but it costs more than debt and can cost the sponsor control.
Facts, rules and data
Joint-venture operating agreements, mortgage REIT and debt-fund filings, and lenders' rules on 'permitted' preferred equity; return ranges come from industry surveys and deal reports.
Debates and risks
When pref behaves like debt, with fixed pay, a redemption date and takeover rights, courts and lenders differ over whether to treat it as debt or equity.
Connections (2)
▸Preferred equity: paid after the lenders, before the sponsor is the equity-side twin of Mezzanine loans secured by the owner's LLC interestsMainstream view
The connection
Both fill the same gap between the senior loan and the sponsor's cash, at similar costs of roughly 10–15%. Mezz is a loan secured by a pledge of the LLC interests and enforced by a UCC sale; pref is an ownership stake enforced through the operating agreement, by removing the sponsor. Senior lenders that forbid more debt often permit pref.
When and why
Across US commercial real estate, especially in refinancings since 2022 where an owner must fill a gap without adding debt.
How solid is the link?
Intercreditor and recognition agreements, joint-venture operating agreements, and debt-fund materials that quote both products side by side.
Debates and risks
Whether 'hard' preferred equity should count as debt for loan covenants and in bankruptcy is contested, so the twins are not treated alike everywhere.
▸Preferred equity: paid after the lenders, before the sponsor is often supplied by Private equity and leveraged buyoutsFact, law or data
The connection
Real estate private-equity and debt funds raise money from pensions, endowments and insurers and invest part of it as preferred equity, targeting returns in the low-to-mid teens with priority over the sponsor. Family offices and some insurers also invest directly.
When and why
Mostly in US private markets since the 2000s; fundraising for real estate credit and 'structured equity' strategies grew after 2022 as banks pulled back.
How we know
Fund offering documents and investor reports, and industry fundraising data compiled by trade publishers and data firms such as Preqin.
Debates and risks
How these funds' preferred positions perform through the 2023–26 office downturn, and whether returns justify the fees, is not yet known.