{"id":170376,"date":"2024-04-10T11:57:22","date_gmt":"2024-04-10T17:57:22","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=170376"},"modified":"2024-06-27T11:24:02","modified_gmt":"2024-06-27T17:24:02","slug":"why-im-bullish-on-preferred-equity-right-now","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/why-im-bullish-on-preferred-equity-right-now","title":{"rendered":"I&#8217;m Bullish on Preferred Equity Right Now\u2014Here&#8217;s Why"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC5689401288\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">If you\u2019ve been reading our stuff for the past year or so, you know we\u2019re bullish on&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/preferred-equity-can-improve-your-returns-in-this-environment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">preferred equity<\/span><\/a><span data-preserver-spaces=\"true\">. And we believe there is a short window of opportunity to achieve this asymmetric risk\/return opportunity.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Investors are asking a lot of questions about preferred equity, so we thought you might be interested in some details on the most recent preferred equity opportunity our fund invested in.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As a reminder, preferred equity sits in the middle of the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/multifamily-capital-stack\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">capital stack<\/span><\/a><span data-preserver-spaces=\"true\">. It offers theoretically lower risk than equity and higher returns than debt, though it shares features of both.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"620\" height=\"601\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/image1-1.jpeg\" alt=\"graph of the capital stack\" class=\"wp-image-160838\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/image1-1.jpeg 620w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/10\/image1-1-300x291.jpeg 300w\" sizes=\"auto, (max-width: 620px) 100vw, 620px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Our Most Recent Preferred Equity Deal<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In December, after months of due diligence, we closed on a $4 million preferred equity investment on an Atlanta-area&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/finding-multifamily-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multifamily<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;project. You may have heard that&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/atlanta-real-estate-market\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Atlanta<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;was recently rated as&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/conticapital.com\/news\/top-10-markets-for-multifamily-investment\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">one of America\u2019s strongest multifamily markets<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But there are a lot of more important reasons we like this investment. This workforce housing multifamily project is being acquired by an operator with years of experience owning and operating multifamily assets in that area. The senior loan was procured through Fannie Mae at 6.61% with three years interest-only.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Overview of the deal<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Here is an overview of our preferred equity investment:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">9% current pay cash flow<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">8% upside accruing and compounding monthly (17% total coupon)<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Our fund held back $355,122 in current pay reserves plus $2.55 million in reserves for capital improvements.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">All reserves are held in a cash sweep account, currently earning an additional 4.5% or more.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Total&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/internal-rate-return-irr\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">IRR<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;projections of 19.4% (including interest on cash sweep)&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">MOIC is projected at 1.62x over 36 months, which could be increased through early refinance.<\/span><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Here are some other important considerations:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Current pay is senior to all other equity on distributions of cash flow after debt service.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Full return of capital to preferred before common gets distributions from capital events.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Full payment of all compounded accruals to preferred before common gets distributions from capital events, including return of capital.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Pari passu depreciation with common.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Forced sale rights to protect preferred capital and returns prior to a potential senior loan foreclosure.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">All common equity would be forfeited before the preferred capital, and full return is affected.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Holdback of capital improvements budget to be released in draws as work is completed, per our unilateral approval.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Annual budget approval rights.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">While we don\u2019t technically have control rights due to FNMA requirements, the budget approval process gives our fund the \u201cpower of the purse.\u201d<\/span><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The operator plans to secure a supplemental loan in three years to take us out. We negotiated a MOIC floor of 1.50x, meaning that if we are taken out early (but there are no guarantees), we could receive an even higher annual return.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As we\u2019ve mentioned, these types of deals are effectively unavailable to individual investors unless you are a family office with a lot of legal and negotiating horsepower. There are some great operators providing preferred equity investment opportunities right now. But this window will likely close when interest rates drop and lender restrictions relax.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I\u2019d love to hear from you if you have questions.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_d173247e5077f2ce60e1623f213fa29a\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_c2e498c00bfcfac7586786a557461870\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<div id=button-custom-event-block_6df723af3005209727251a3933fd30e0 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/why-im-bullish-on-preferred-equity-right-now&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/why-im-bullish-on-preferred-equity-right-now&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Mr. Moore is a partner of Wellings Capital Management, LLC, the investment advisor of the Wellings Real Estate Income Fund (WREIF), which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (\u201cPPM\u201d) with this and other information about the Wellings Real Estate Income Fund, please call 800-844-2188, visit wellingscapital.com, or email invest@wellingscapital.com. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisors before investing.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you\u2019ve been reading our stuff for the past year or so, you know we\u2019re bullish on&nbsp;preferred equity. And we believe there is a short window of opportunity to achieve [&hellip;]<\/p>\n","protected":false},"author":214608,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"tags":[],"class_list":["post-170376","post","type-post","status-publish","format-standard","hentry"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/170376","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=170376"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/170376\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=170376"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=170376"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=170376"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}