UBIT Implications for Preferred Equity Investment

[Michael Politi]

I am considering investing in a Preferred Equity Syndication. The pref equity would pay out a 7% (annualized) quarterly distribution and a 7% back end return when the pref equity capital is returned. The capital stack is approx 70% debt, 5% pref equity and 25% common equity. If I utilize qualified funds would this investment be subject to UBIT re UDFI? I know a common equity investment would be subject to UBIT but since there is no back end upside I wasn't sure if the pref equity would be viewed as a loan?

[Chris Seveney]

Quote from @Michael Politi:

I am considering investing in a Preferred Equity Syndication. The pref equity would pay out a 7% (annualized) quarterly distribution and a 7% back end return when the pref equity capital is returned. The capital stack is approx 70% debt, 5% pref equity and 25% common equity. If I utilize qualified funds would this investment be subject to UBIT re UDFI? I know a common equity investment would be subject to UBIT but since there is no back end upside I wasn't sure if the pref equity would be viewed as a loan?

 Not an expert on this but it appears YES this would be subject to UBIT and a good amount (70%). This is assuming the entity is not a C corporation or has some UBIT blocker involved. 

It does not matter if there is upside or not, since there is leverage its the case. Personally what type of investment is this? 7% pref with 70% leverage seems screaming low return for the risk you are taking on. (even with 7% on back end).