Preferred Returns Guaranteed

when you hear the words preferred return, which I’m seeing a little bit less and less now, just because things are getting a little bit tighter, but at least last year, it was very common to be offering a 7% preferred or an 8% preferred. When you hear that term, that is not a guarantee. A lot of past investors still think that if they’re offering a 7% preferred, that means I’m at least going to get 7% every year. And it’s critical to understand that the majority of the preferred returns, not all, but the majority simply means that the investors are going to get all the profits first before the sponsor shares up until they get that 7% or 8%. So if the first year of the property, because it’s a turnaround, maybe only spits off 3%, you’re going to get it all, but you’re only going to get 3%. It’s not like a note or a mortgage where even if the property isn’t producing, you’re going to get your mortgage payment or your note, you are equity. And so that’s another sort of mistake.

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