FAQ
Preferred equity, plainly explained
The questions Greater Boston developers ask us most. If yours isn't here, reach out — we'd rather talk it through than have you guess.
Preferred Equity is equity, which is senior to common equity in the capital stack, but junior to debt. The preferred equity investment is paid back after your lender’s debt, but before the GP or any other investors.
Our preferred equity is generally limited to 80% of final building value, and 50-60% of the common equity stack. You are able to bring in capital from other investors as common equity.
Our preferred equity investment is not debt, and is not structured as a traditional loan/mortgage. We structure our investment in an operating agreement for the LLC that owns the property. We have a standard form operating agreement that replaces or amends your current OA, and stipulates our rights and protections, and the terms of the investment.
Yes, since we do not require a traditional junior lien, we are very compatible with most lenders.
Yes, we can recommend various local and regional lenders that are familiar and comfortable with our structure.
Yes, in most cases we can also provide the debt for your project. We do this in partnership with local lenders. This is the Origin Funding business and is separate but complementary to our investment from the Origin Funds. This allows us to be a “one-stop shop” for both your debt and equity. In these instances, we may provide a personal guarantee (either on your behalf or in conjunction with your guarantee), and charge a fee for this service. In return, we’ll bring a local commercial lender to the table, and will facilitate and handle most aspects of the loan. You would indemnify Origin Funding for any losses related to the loan. This provides the developer with excellent overall capital terms, and easy execution. These loans come with standard covenants.
We are not a lender. We are affiliated with a development company, and are principally investing preferred JV equity into real assets (real estate projects and buildings). We are developers ourselves. Once we are invested, our incentive is to make you and the project successful. Our main goal is to help you grow your business and become more profitable. We can help with underwriting support, project review, sub-contractor contacts, sales support, etc. We maintain certain controls and management rights.
It’s most common that we come in at the purchase closing. However we can also invest mid-project, if capital is needed because of a cost overrun or other reason. In these instances we would need to underwrite the project as it currently stands, and then upon completion.
Developers use our preferred equity investments for many purposes, but here are some of the most common uses:
- Reducing your initial down payment / cash requirement to close
- Additional equity investment to cover a construction budget overrun (without having to restructure your current loan)
- Tap equity that you have created in a project, before it sells, which can allow you to buy another deal
- Complement your existing capital/investor base, allowing you to build larger projects
- To have a more reliable / consistent source of capital
Our equity investments are a much lighter lift than a loan. If your project is in order, we can close in just a few days.
Yes.
We love projects from 1 unit (i.e., a single family) up through 20 units but are open to reviewing any project. Our partners have invested in projects up to 175 units.
Yes.
Some of our investments are structured as a single investment at closing, and some are structured with requisitions based on construction progress. This is primarily driven by the situation and how much construction is being done.
Yes, we can invest in existing stabilized assets, or new construction rental projects. All of our projects require a fixed term so each investment must have a clearly defined exit.
Yes, once we grow more confident with the developer.
Yes, the preferred equity can be more expensive than debt because equity carries a higher risk. We are paid back after the lender. That said, the preferred equity investment is typically much smaller in size than your loan, so it has a smaller impact on the project P&L.
Each deal varies, however we typically charge a minimum annualized return, plus a small share of back-end profits, plus an admin / commitment fee.
The legal costs for a preferred equity investment are usually much less than when closing a loan.
