Preferred equity is considered a hybrid of common equity and debt investments as it shares characteristics unique to both.
Within the capital structure, preferred equity has higher payment priority to common equity, while subordinate to debt. This means that preferred equity holders will receive principal and any cash flows before common equity holders.
Preferred equity sits higher up in the capital structure compared to common equity. This means that in the event of liquidation or bankruptcy, preferred equity holders are paid back their principal and any cash flows before common equity holders.
Due to their higher priority in the capital structure, preferred equity investments offer some protection against potential losses. In the event of financial distress related to the investment property, common equity can serve as a “buffer” to cover any losses.
Preferred equity tends to target similar returns to common equity with the added benefit of downside protection due to its priority in the capital structure.
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