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Preferred Equity: My Current Outlook and Reasons Behind It

Over the past year, we've consistently expressed our optimism regarding preferred equity and identified a brief window of opportunity to capitalize on its asymmetric risk/return profile.


Given the rising interest in preferred equity among investors, we wanted to provide you with insights into our most recent preferred equity investment.


Preferred equity occupies a unique position in the capital stack, offering potentially lower risk compared to equity and higher returns than debt.


In December, after thorough due diligence, we finalized a $4 million preferred equity investment in a multifamily project located in the Atlanta area. This investment aligns with Atlanta's reputation as one of the strongest multifamily markets in the United States.


What sets this investment apart are the compelling factors underlying it. The multifamily project focuses on workforce housing and is spearheaded by an operator with extensive experience in the local multifamily sector. Additionally, the senior loan, secured through Fannie Mae at 6.61% with three years of interest-only payments, adds another layer of stability.


Here's a summary of our preferred equity investment:


9% current pay cash flow

8% upside accruing and compounding monthly (17% total coupon)

Reserved funds of $355,122 for current pay and $2.55 million for capital improvements, held in a cash sweep account earning an additional 4.5% or more

Total IRR projections of 19.4%, including interest on the cash sweep

MOIC projected at 1.62x over 36 months, with potential for increase through early refinance

Other noteworthy aspects of the investment include priority in cash flow distributions, full return of capital before common equity, and protections in the event of foreclosure on the senior loan.


While this investment presents an attractive opportunity, it's worth noting that such deals are typically inaccessible to individual investors without significant resources. Ho

ver, there are reputae operators offering preferred equity opportunities currently. It's important to act swiftly, as th

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