Commercial
Real Estate Loans > When Preferred Equity Doesn't Get Paid
When Preferred Equity Doesn't Get Paid
Preferred
Equity is Like a Mezzanine Loan in Sheep's Clothing
The
preferred equity member in an LLC is a member, whose rights are guided
by the LLC Agreement. The agreement will dictate what happens if
the preferred return is not paid. Sometimes the preferred return
HAS to be paid (like interest on a mezzanine loan), other times it
could be accrued or paid when available.
If
it has to be paid, and is not, this will trigger a default under the
LLC Agreement and afford the preferred equity member certain rights
and remedies that may include some or all of the following: (1) immediate
replacement of the GP with a new GP of its choosing; (2) adjustment
of the ownership percentages within the LLC to give the preferred equity
member a higher ownership share and/or a higher preferred rate; (3)
the unpaid preferred distribution becomes a high-rate partnership loan
from the preferred equity member to the LLC which may have a due date
or not.
There
is no foreclosure procedure; the change is automatic as dictated by
the LLC agreement. This is sometimes the reason why some lenders are
choosing to making preferred equity investments rather than mezzanine
loans, but there are usually other factors involved as well.
C-Loans
would like to thank Arthur Nevid of Mountain Funding for contributing
this article. Mountain Funding makes construction loans, mezzanine
loans, and preferred equity investments on major commercial projects
nationwide. Developers and borrowers can apply to Mountain Funding,
as well as other structured finance lenders, by using C-Loans.com.