Is Preferred Equity much more risky than 1st lien?

[Yun Chu]

I need some advise about this first time into a preferred equity deal after some exposure to 1st lien investments which is assumed to be secured by the house. That preferred equity funding presented me with an opportunity to participate in the development and sale of 23 townhouses located in Reynoldstown, Georgia, approximately 3 miles outside of the Atlanta CBD. I was offered to receive an 8.0% annualized cash on cash return paid quarterly, with a 9.0% accrued annualized exit fee. Sounds like very attractive deals if the bubble would not burst in next couple of years like what happened in 2008. But Atlanta area was one of the top 10 in the county to grow faster than rest of USA based on the BP report. So I hope the risk could be relatively small:).

The project Sponsor is a leading privately-owned real estate investment company specializing in residential investments. They seek to capitalize on the mega-trend of re-urbanization of city cores. Their long-term strategy is to pursue development opportunities in Class-A infill locations in secondary and tertiary US markets, primarily in the Sunbelt, that boast strong employment and economic fundamentals. The Principals have been vetted by institutional investors through which they have raised up to $75 million to pursue other residential strategies and have developed an institutional platform to execute real estate acquisitions. But why they have to pay me dearly for that small amount (min. $5000) instead of using their own money?