Preferred equity financing guide

The most important part of any property development project is securing the finance.

To give yourself the best chance of securing finance, and on the best terms, you need to be open to a mix of funding solutions from a diverse range of financiers.

Crowd Property Capital has built a strong reputation with property developers, because it has the skill, experience and connections to help them solve finance problems.

One of CPC’s funding solutions is preferred equity finance, whereby lenders provide building loans in return for taking a stake in the projects they’re supporting.

How does preferred equity finance work?

The best way to understand preferred equity finance is to compare it to other types of development finance.

With a traditional debt finance loan, you repay the principal plus interest. With an equity finance loan, you have to repay some or all of the principal, pay interest and also surrender a stake in your development project. With a preferred equity finance loan, you have to:

Repay some or all of the principal
Pay interest
Surrender a stake in your development project
Give the lender a place in the queue ahead of ‘common equity’ shareholders like yourself – that means letting your preferred equity partner collect profits and have their debts repaid before common equity shareholders

With preferred equity finance, you have to give a lot away to the lender – but if it’s the only way to secure funding, you may feel it’s a price worth paying.

There’s another type of funding option, called mezzanine finance, which is a hybrid of debt finance and equity finance.

With mezzanine loans (which are generally interest-only), if you make all your interest payments on time and repay the principal on time, you don’t have to surrender any equity. If you have a highly profitable project you want to ensure that you maintain all the profits and control of the project so a mezzanine loan instead of preferred equity would be a better funding solution. Here are the difference between the two:

Preferred equity financing vs mezzanine financing

One key difference between mezzanine and preferred equity financing is that mezzanine is regarded as debt and preferred equity as – naturally – equity. So if your project fails, a mezzanine lender can seize the property whereas a preferred equity partner can’t.

However, preferred equity may eat into your profits and will generally work out a higher overall cost than mezzanine finance. Also, preferred equity may have stricter conditions on when you can take revenue out of the project and the equity provider may want to get more involved in your project given they have a profit share.

What they have in common is that they give property developers a way to secure more finance than if they were to limit themselves to traditional debt finance options.

Preferred equity financing with CPC

Preferred equity finance is not suitable for every developer and every scenario. But under the right circumstances, it can be the difference between getting your project off the ground – or being denied finance.

Crowd Property Capital will take the time to understand your unique financial circumstances and the details of your project, and will then:

Explain the pros and cons of different finance solutions
Recommend a preferred equity financing partner (if that’s the solution you choose)
Help you understand the terms of the preferred equity arrangement

Need development finance?

CPC is a development finance expert. We’ve helped property developers secure funding for projects throughout Australia, using a range of solutions, including preferred equity financing.

To discuss your preferred equity finance options, book a free strategy session with David Lovato.

Phone: 0434 932 634
Email: [email protected]

Get Finance

“CPC is a professional outfit, Dave displays all the top characteristics of a quality finance broker. Highly effective communication and prompt provision of requested information greatly assists in the loan assessment process benefiting both the client and the lender. His end to end knowledge of the loan application and settlement process is invaluable when navigating through sometimes complex and time sensitive scenarios”

Greg Turner - Trilogy Funds ManagementLender Testimonial

“CPC’s grounding in development management sets them apart from other finance brokers in the construction lending space. Initial assessment of project risks and deep understanding of their developer clients needs allows Solido to quickly assess his deals. Dave stays involved in the projects after initial settlement which is invaluable in assisting both developer and lender on the way through and at loan exit.”

Beau Quarry - Solido Capital Lender Testimonial

“David is highly responsive, always professional, kind and patient. We were impressed with the detail and updates provided by David throughout the lending process. David has shown a high degree of understanding in the structuring and brainstorming of an optimal funding solution, finding a suitable solution for both the capital provider, and the client”

Lender TestimonialSouth Yarra VIC

Frequently asked questions

How does preferred equity work?

Preferred equity works by giving the lender a stake in the developer’s project. The investor or lender’s stake is ranked ahead of the developer in the queue for capital return and profit/interest distributions.

The equity investor may get their share of the profits before the developer, or have their capital repaid prior to the developer if the project is ultimately not profitable.

The other owners will only get what’s left after the preferred equity partner has been paid.

What is the meaning of preferred equity?

Preferred equity means you own part of the project and your investment is ranked ahead of the other shareholders but behind the senior lender.

The person with preferred equity will have preference shares, and the other owners will have ordinary shares.

What is an example of a long term preferred equity investment?

An example of a long term preferred equity investment would be when a developer builds an office park with the intent of retaining all the units but renting them out.

An investor with a preferred equity investment could take a 30% share in this business and be entitled to 30% of the profits the developer makes from the future rental income.

What is the difference between equity and preferred equity?

Equity and preferred equity both indicate a share of the company. But the person with preferred equity is first in line and will get paid first.

The other owners will only get paid if there’s money left after the creditors and preferred equity shareholders have been paid.

Why would an investor use preferred equity?

An investor would choose preferred equity when they foresee more advantages to owning part of a company than having a loan repaid.

Once an investor’s loan is repaid, their money stops working for them. In contrast, owning a share of a company may earn the investor profits for many years.

Because the equity is preferred, if the company does go under, the investor is more likely to get some of their investment back than the other owners.

Legal & Compliance

Crowd Property Capital Pty Ltd (CPC)

A registered company under the Corporations Act 2001, ACN 600 539 544

An accredited member of the Finance Brokers Association of Australia (FBAA) Member No M-352808

A licensed Corporation under the Property, Stock and Business Act 2002, Corporation License No. 10065109.

A member of the Real Estate Institute of NSW (REINSW)

David Lovato (Sole Director) holds a Certificate IV in Finance and Mortgage Broking and Property Services (Real Estate Agents License No 201 604 57 )