What preferred equity is
Preferred equity is an equity instrument that ranks ahead of the developer's ordinary equity for return and repayment, but behind all debt. It usually earns a fixed priority return — sometimes with a profit share — and is typically unsecured, which is why it prices above mezzanine finance.
When it's the right structure
Preferred equity fills the residual gap once senior debt and mezzanine are in place and the developer wants to limit the cash they contribute — or when second-mortgage capacity for mezzanine has been exhausted. It's the layer just beneath ordinary equity.
| Position in stack | Above ordinary equity, behind all debt |
|---|---|
| Security | Typically unsecured; priority return rights |
| Return | Fixed preferred return, sometimes plus profit share |
| Cost | Higher than mezzanine; lower than surrendering ordinary equity |
| Repaid by | Project cash flows, after debt is cleared |
On a $12m-cost project with an end value (GRV) of $16m, senior debt is capped at $9.6m and a $1.5m mezzanine layer lifts funding to $11.1m — leaving $0.9m to find against $12m of cost. Rather than contribute the full amount in cash, the developer places $0.7m of preferred equity on a fixed priority return, reducing their own cash in the deal to about $0.2m and improving return on equity. The preferred capital is repaid from settlements ahead of the developer's profit share. Brokerage would be from 1.0% + GST per facility — ≈ $96,000 (senior), ≈ $15,000 (mezzanine) and ≈ $10,000 (preferred equity, at the $10k minimum), all + GST. Figures are illustrative only.
Whether mezzanine or preferred equity is the better top layer depends on security capacity, the senior lender's appetite and the margin the project can carry. We model both and structure the combination that protects your return.
Worked example
The same reference deal runs across all our capital-stack pages: a 24-apartment project with an $18.0m end value and a $12.5m cost base (land, build, consultants and contingency, before finance). Here is how it looks funded with senior debt plus preferred equity — the preferred layer sits above the debt and takes a priority return before the developer's equity.
| Layer | Amount | % of cost |
|---|---|---|
| Senior debt @ 8.50% | $8.17m | 60% |
| Preferred equity @ 18.00% | $1.77m | 13% |
| Developer equity | $3.68m | 27% |
| Total development cost | $13.61m | 100% |
| End value (GRV) | $18.00m |
|---|---|
| Loan to value (LVR) | 55.2% |
| Loan to cost (LTC) | 73.0% |
| Blended cost of debt | 10.19% |
| Finance cost (interest) | $1,012,741 |
| Brokerage — BluCow (indic.) | $99,368 + GST |
| Development profit | $4.03m |
| Margin on cost | 29.6% |
| Return on equity | 109.6% |
| Equity multiple | 2.10x |
Illustrative only — a single $18.0m reference deal is used across our capital-stack pages so you can compare structures like-for-like. Actual figures depend on the lender, valuation, QS report and the deal.
Advantages and limitations
Advantages: minimises developer cash, can proceed where no further security is available, and is cheaper than diluting ordinary equity. Limitations: highest cost of the debt-and-preferred layers, requires a strong project margin, and needs careful documentation of priority and profit rights.
Related services
Frequently asked questions
What is preferred equity in property development?
Capital that ranks ahead of ordinary equity but behind all debt, earning a fixed priority return (sometimes with profit share). It fills the gap after senior and mezzanine, before the developer's own equity.
How is it different from mezzanine finance?
Mezzanine is subordinated debt with second-ranking security; preferred equity is an equity instrument behind all debt, usually unsecured, priced for that higher risk. The right choice depends on the stack, security and project margin.