Preferred Equity

Preferred equity is a class of ownership in a real estate project that sits above the common equity but below the debt in the capital stack in terms of payment priority. Preferred equity investors contribute capital in exchange for a priority claim on cash flows – often receiving a fixed preferred return (either current pay or accruing) that must be paid before common equity holders get any profit share. Unlike a debt lender, preferred equity typically does not have foreclosure rights on the property, but it may have rights to take over ownership or force a sale if the sponsor fails to meet certain agreed benchmarks (thus enforcing its priority). This investment acts somewhat like a mezzanine loan in practice: it provides a steady coupon-like return and has seniority over the sponsor’s own equity. For high-net-worth investors, preferred equity offers an opportunity to earn moderate, bond-like returns (for instance, an 8– 12% annual return) with lower risk than common equity – however, the trade-off is usually a capped upside, as preferred equity’s return is typically fixed or capped, and they usually do not participate in large residual profits beyond their priority return. Lightstone might use preferred equity in capital structures to finance projects with a lower cost of capital than common equity, or even offer preferred equity investments to investors looking for a more income-oriented, downside-protected position. Such offerings would align with Lightstone’s goal of providing diverse opportunities – for example, a high-net-worth investor might allocate to a Lightstone preferred equity tranche to receive stable distributions (with priority in the payout waterfall), complementing other higher-upside common equity investments in their portfolio.