If you’re interested in real estate development, then you’ve probably heard of preferred equity finance before. This type of financing is becoming increasingly popular among developers, but it’s not without its risks. In this blog post, we’ll take a detailed look at all you need to know about preferred equity, and the pros and cons of opting for preferred equity finance, so that you can make an informed decision about whether or not it’s the right choice for your next development project.
The Pros of Preferred Equity Finance
There are several reasons why preferred equity finance might be the right choice for your next development project. Here are some of the biggest advantages of this type of financing:
- You can avoid diluting your ownership stake in the project.
- You can retain full control over the project.
- The cost of preferred equity financing is often lower than traditional debt financing.
- There are typically no personal guarantees required with this type of financing.
- You can structure the deal to minimise the risk to your lender.
The Cons of Preferred Equity Finance
Before you rush into a preferred equity deal, it’s important to understand the downside as well. Here are some potential drawbacks to this type of financing:
- Your upside potential may be capped.
- Your return on investment may be delayed if the project takes longer to complete than expected.
- You may be required to give up some control over the project in exchange for financing.
- The deal may be more complex to negotiate than a traditional debt financing deal.
- You may need to provide additional security for the loan, such as a second mortgage on your personal residence.
Is Preferred Equity Finance the Right Avenue for Your Individual Needs (and that of your project)?
Preferred equity finance can be a great way to finance a real estate development project, but it’s not without its risks. Before entering into a preferred equity deal, make sure you understand the pros and cons so that you can make an informed decision about whether or not it’s right for you. Good luck!