Preferred equity is an investment strategy that has many benefits, but also carries some risks. While investors who buy preferred equity are rewarded with higher returns than those who buy common stock, they are also at a higher risk of losing their money. This is why it is important for investors to meet certain financial criteria in order to purchase preferred equity. These requirements include a minimum net worth and an annual income of at least $200,000.
Preferred stock has some similarities with bonds, including the fact that it is issued at a fixed face value that is not directly related to market price. However, unlike bonds, preferred equity is not usually repurchased. It may also offer recurring cash distributions, such as dividends. In some cases, the dividends on preferred stock may be delayed without penalty, although this may affect the company’s credit rating.
Preferred equity is a form of leverage that allows sponsors to take on riskier projects, such as those with significant upside potential. In exchange, investors receive cash flow generated from profits and an equity kicker upon the sale of the property. In addition to being higher up the capital stack, preferred equity investors join the project as limited partners. This shields them from any losses that are associated with the project.
Preferred equity is often subordinate to other loans, such as mezzanine debt. Therefore, when a company goes through bankruptcy, the preferred equity lender would receive their money before the senior lenders. As a result, investors who buy preferred equity should carefully read the deal documents to ensure they understand their rights and obligations.