Multifamily Preferred Equity Case Study
What an old banker can teach you about evaluating preferred equity deals
A looooong time ago, when borrowing money meant going to a bank, and I was bright-eyed and bushy-tailed, a mentor taught me the three Cs of credit: collateral, capacity, and character. As a banker, he evaluated each separately and famously said, “When you lend money, the only time you really need to worry is when the borrower lacks the last one.”
Why am I telling you this in an equity case study? Because preferred equity is like a mutant mezzanine loan: it has limited upside but no lien on the property. That means preferred equity deals should be evaluated based on the borrower’s ability to repay the obligation, and the collateral securing said obligation.
Today’s case study is another recapitalization (remember this case study? it was a recapitalization presented as a new purchase). The twist: proceeds will be used to pay off existing preferred equity. The structure of the capital stack remains the same—debt plus two classes of equity.
If you need a refresher on capital stacks, this will help:
Before we dive in:
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Just a friendly reminder: this is for educational purposes only, not financial advice. Numbers, location, and details have been changed to keep the sponsor’s identity confidential.
