Pref Equity & The Capital Stack Explained

[Justin Goodin]

When a sponsor uses pref equity in a real estate deal, they are putting limited partners higher in the capital stack.
(higher = more risk)

The capital stack explained:
The sources financing that are used to fund a real estate project.

Typically arranged in a hierarchical order based on their position in terms of risk and priority for repayment (important).

Limited partners are included in common equity.

Common equity comes with HIGHEST risk, but also more potential upside in returns.

Common equity gets paid after the lender.

But if the sponsor adds Mezz or Preferred Equity to the stack, this adds yet another layer.

Meaning the Mezz or Preferred Equity has to get paid BEFORE common equity.

Good or bad? There's certainly pros and cons.

Either way, the higher you are in the stack, the more risk you have in the deal.

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I thought this simple explanation of the capital stack would be helpful for people in this forum. Let me know if you have any questions about the capital stack!