Preferred Equity passive investing - multi-family. Is the Juice worth the Squeeze?

[Paul Azad]

Seeing many new opportunities for us passive investor types, including "Preferred Equity funds". For example only, Wellings Capital raising 5 mil for a one property specific syndication of a purchase and value add to a Multi-family property in Baltimore Maryland built in 1948, section 8 housing. The Sponsor needing 5 mil for project in addition to the common equity raise, will be in a preferred equity position ahead of common equity and of course behind the Lender with apparently no legal recourse to foreclose property. This Tranche will get an 8% preferred return and then up to projected 14% total annual return, the 6% above the first 8 will be split 75/25. I ran the numbers for any investment below 250k and for the 3 year hold period after 1% annual management fee and 1.25% startup fee, and the profit split, comes to 10% compounded return or an 11.2% avg annual return on a 1.33 EQM on 3 years. In others experience is this return worth the risk given Multi-family environment ie supply, interest rates, project specific risks, illiquidity risk, and more specifically the Preferred Equity subordinated tranche risk (this sounds like just a Mezzanine loan without recourse). This is not a rescue type situation nor a new development type situation but rather an existing high occupancy project, but why can't a sponsor raise enough common equity?

{This is a general question on preferred equity investing not Wellings specifically, they seem like well run/professional/experienced group.}