Structuring Preferred Equity Investments in Real Estate Ventures: Impact of True Equity vs. Debt-Like Equity

This CLE course will discuss structuring preferred equity investments (PEIs) from the perspective of both the sponsor and investor and explain the advantages and disadvantages of using preferred equity as a component of a capital stack. The panel will review how PEIs compare and contrast with mezzanine financing and other equity investments, discuss the critical agreement terms and trends in the current market, and outline approaches for negotiating terms and provisions.

Description

PEIs, together with mortgage loans and mezzanine loans, are often a critical part of the capital structure used by sponsors to fund real estate ventures. The terms of PEIs can vary considerably. On one end of the spectrum are PEIs, though structured as equity rather than debt, which are financially and functionally equivalent to a mezzanine loan. On the other end of the spectrum are PEIs that are pari passu with the sponsor's equity. In any context, the equity of a preferred equity investor is structurally subordinate to all of the real estate venture's debts.

PEIs typically earn a higher rate of return than debt financing. They may earn a share of cash flow beyond a stated rate of return and capital appreciation. The preferred equity investor generally has an extensive suite of rights and remedies related to its investment, including: consent rights over "major decisions" (which can range from a small handful of items to an extensive list), buy-sell rights, forced sale rights, put rights, and management removal rights. Tigger events for the exercise of a preferred equity investor’s management removal rights can run the gamut from being limited to bad acts or performance-based metrics.

Given the varying complexities of PEIs, counsel to investors and the recipient entity must also negotiate and structure additional key terms that address matters such as exit strategy, remedies in the event of the entity's default, issues surrounding a change in control, and interaction between the preferred equity investor and others in the capital stack.

Listen as our authoritative panel prepares counsel to real estate lenders, investors, and borrowers to structure, enforce, or challenge PEI agreements in the current real estate market. The panel will compare and contrast PEIs vs. mezzanine financing and common equity. The panel will also outline the key points of negotiation for the preferred equity investor and the real estate developer, including remedies for default, change in control, and exit strategy.

Outline

1. Overview of preferred equity in real estate transactions
2. Preferred equity vs. mezzanine debt vs. common equity
3. Structuring the preferred equity deal
4. Preferred equity economics and management
5. Exercise of remedies

Benefits

The panel will review these and other key issues:

• What are the primary benefits and risks of PEIs compared to other equity investments or mezzanine financing?
• What are the key provisions that counsel to the investor or the financing recipient must understand and negotiate when structuring the PEI agreement?
• How should preferred equity investor counsel address potential default, changes in control, and the exercise of remedies?