在房地产投资中，应该选择优先股权还是次级债务？

Preferred equity is often thought of as having a hybrid risk/return profile similar to senior debt, but with a share of any upside when the project is sold. Preferred equity usually provides a fixed rate of return over a specified period of time, along with an upside when the property performs better than expected.

Even if the project does not have positive cash flow, the private equity investor may still receive regular income. Because payment to preferred equity holders is prioritized, investing with preferred equity can be attractive through all stages of the real estate market cycle. Although preferred equity investments are generally not secured by the real property, they can provide for the transfer of control and management rights should the general partner default. This allows the preferred equity investor to take control of the project – or assign management to a third party – to cure the default and keep the project on track.

For the real estate developer, sponsor, or general partner, preferred equity can be a good source of capital for large projects that require more funds than what a traditional lender is willing to provide. Rather than borrowing additional money in the form of second or third-position loans, a developer will offer preferred equity to real estate investors.

Developers and sponsors of private equity real estate investments with a proven track record of success may also offer an investor “hard” preferred equity.

In this context, hard preferred equity means the sponsor pledges its own equity in the joint venture to the private equity investor. Should the sponsor default, the preferred equity investor has the right to foreclose on the sponsor and remove it from the project’s ownership structure.

For the investor-lender, mezzanine debt can provide the opportunity to earn a higher rate of interest on the loan provided to the sponsor of a private real estate equity investment. In many instances, mezzanine debt can generate equity-like returns with minimal bond-like risk.

While investing in mezzanine debt is not entirely risk-free, there is a lower risk of loss because mezzanine debt takes repayment priority over preferred equity and common equity. The trade-off is that there is not the same potential return upside compared to investing in equity.

For the sponsor-borrower, mezzanine debt reduces the amount of equity needed to acquire a property.

Sometimes the borrower does not have access to enough equity and opts for mezzanine financing. Other times, a sponsor may choose to use mezzanine debt to avoid equity dilution. While mezzanine debt normally carries a higher interest rate than senior debt, that cost is usually below the cost of equity in a well-planned real estate development project.

Mezzanine debt can also be used to boost potential cash on cash returns to equity investors. For example, assume a $3 million multifamily property generates an annual NOI (before debt service) of $240,000.

The sponsor has two options.

It can use a capital stack consisting of $1.8 million in senior debt and $1.2 million in equity for a net cash flow of $105,000. Or, the sponsor can choose a capital stack of $1.8 million each in senior debt, $450,000 in mezzanine debt, and $750,000 in equity for a net cash flow of $75,000.

• No mezzanine debt: $105,000 net cash flow / $1.2 million equity = 8.75%

• Mezzanine debt: $75,000 net cash flow / $750,000 equity = 10%