Preferred equity or common equity in a syndication

[Penny Peng]

Hi,

I’m starting out to look for investment opportunities in real estate syndications. Some funds offer preferred equity and common equity in the capital stack. What are the pros and cons of each option and in what scenarios would you pick one over the other? 

Many thanks in advance for the discussion! 

Penny

[Chris Seveney]

@Penny Peng

Big piece missing here - what is the best component ? Debt sits in front of equity on the capital stack. So if there is no debt common equity may look a lot more appealing than a deal with 90% debt

This also depends on your investment strategy.

For example I would take 10% pref with no upside over 5% pref and 50% upside every day. Why? Because know the sponsor in the former has so work a lot harder to overcome the 10% pref. Also the investment typically has less risk.