Structuring Preferred Equity Investments in Real Estate Ventures: Impact of True Equity vs. "Debt-Like" Equity

Negotiating Deal Terms, Investor Return, Change in Control Provisions; Assessing Remedies, Tax, Bankruptcy Issues

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE webinar with Q&A


Conducted on Thursday, August 15, 2019

Recorded event now available

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Program Materials

This CLE webinar will discuss structuring preferred equity investments (PEIs) from both the perspective of the sponsor and investor and explain the advantages and disadvantages to using preferred equity as a component of a capital stack. The panel will review how PEIs compare and contrast with mezzanine financing and other equity investments, discuss the critical agreement terms and trends in the current market, and outline approaches for negotiating terms and provisions.

Description

Preferred equity investments (PEIs), together with mortgage loans and mezzanine loans, are often a critical part of the capital structure used by sponsors to fund real estate ventures. The terms of PEIs can vary considerably. On one end of the spectrum are PEIs that are economically and functionally equivalent to a mezzanine loan, though structured as equity and not debt. On the other end of the spectrum are PEIs that are pari passu with the sponsor's equity. In any context, a PEI's equity is subordinate to all of the real estate venture's debts.

PEIs typically earn a higher rate of return on the investment than debt financing and may earn a share of cash flow beyond a stated rate of return and any capital appreciation. The preferred equity investor generally has consent over "major decisions" (the list of which can range from a small handful of items to an extensive list), may have buy-sell rights, forced sale rights or put rights, and typically has removal rights (the right to remove the managing member or general partner of the real estate venture and replace it with the PEI or its designee). Removal rights can run the gamut from being limited to bad acts or being performance based.

To achieve all the benefits of PEIs and mitigate the risks, counsel to investors and the recipient entity must negotiate and structure key terms that address matters such as exit strategy, remedies in the event of the entity's default, issues surrounding change in control, and the impact of an entity bankruptcy. Also, counsel must anticipate and address tax implications for the entity and the investor in the PEI agreement.

Listen as our authoritative panel prepares counsel to real estate lenders, investors, and borrowers to structure, enforce or challenge PEI agreements in the current real estate market. The panel will compare and contrast PEIs vs. mezzanine financing. The panel will also outline the key points of negotiation and agreement provisions for the equity investor and the real estate developer, including remedies for default, change in control, exit strategy, the impact of bankruptcy, and tax implications.

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Outline

  1. Total return for the investor
  2. Preferred equity vs. mezzanine debt
  3. Structuring the preferred equity deal
  4. Remedies for default
  5. Change in control issues
  6. Bankruptcy ramifications
  7. Tax ramifications

Benefits

The panel will review these and other key issues:

  • What are the primary benefits and risks of PEIs compared to other equity investments or mezzanine financing?
  • What are the key provisions that counsel to either the investor or the financing recipient must understand and negotiate when structuring the PEI agreement?
  • How should counsel to a preferred equity investor address potential default, change in control or bankruptcy by the financing recipient?
  • What are the most crucial tax consequences that can arise out of preferred equity financing and how can counsel anticipate and mitigate those consequences?

Faculty

Austin, Carolyn
Carolyn Austin

Partner
Greenspoon Marder

Ms. Austin focuses her practice on matters including the representation of institutional, fund and private capital...  |  Read More

Fawer, Mark
Mark S. Fawer

Partner
Greenspoon Marder

Mr. Fawer is a partner in the firm’s Real Estate group, where he focuses on representing senior and mezzanine...  |  Read More

Mann, James
James B. Mann

Partner
Greenspoon Marder

Mr. Mann has over 25 years of experience serving as a trusted advisor to a broad range of stakeholders in the energy...  |  Read More

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