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

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

Recording of a 90-minute CLE webcast with Q&A


Conducted on Tuesday, August 29, 2017

Recorded event now available

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Program Materials

This CLE webinar will discuss structuring preferred equity investments (PEIs) from the perspectives of both the sponsor and investor and explain the advantages and disadvantages of 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 key agreement terms and trends in the current market, and outline approaches for negotiating terms and provisions.

Description

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 of any capital appreciation. The PE investor generally has consent over “major decisions,” may have buy-sell rights, forced sale rights or put rights, and typically has the right to remove and replace the managing member or general partner under certain circumstances. Removal rights can be performance-based or may be limited to bad acts of the general partner.

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. In addition, counsel must anticipate and address tax implications for the entity and the investor in the PEI agreement.

Listen as our authoritative panel discusses how to structure 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 for the equity investor and the real estate developer, including remedies for default, change in control, exit strategy, impact of bankruptcy, and tax implications.

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Outline

  1. Preferred equity vs. mezzanine debt
  2. Structuring the preferred equity deal
  3. Remedies for default
  4. Change in control issues
  5. Relationship to mortgage lender
  6. Impact of entity bankruptcy on preferred equity holder
  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 important tax consequences that can arise out of preferred equity financing and how can counsel anticipate and mitigate those consequences?

Faculty

Fawer, Mark
Mark S. Fawer

Partner
Arent Fox

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

Weber, Benjamin
Benjamin R. Weber

Partner
Sullivan & Cromwell

Mr. Weber has experience in a broad range of commercial real estate, corporate finance, and private and public...  |  Read More

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