Preferred Equity

Preferred equity is a hybrid financing position in the capital stack that sits between senior debt and common equity, offering investors a priority return (preferred return) before common equity holders receive any distributions. In a typical CRE deal, preferred equity investors receive an 8-12% preferred return paid before the sponsor or common equity partners see any profit. Unlike mezzanine debt, preferred equity does not create a lien on the property - instead, the preferred equity holder's rights are governed by the operating agreement. If the deal underperforms, preferred equity holders get paid before common equity but after the senior lender. This makes preferred equity less risky than common equity but riskier than debt. For NNN investors evaluating syndication deals, understanding where preferred equity sits in the waterfall is essential to assessing risk-adjusted returns.