What is Preferred Equity in a Senior Housing Capital Stack?

Preferred equity is a type of investment in a senior living company or senior housing real estate project that sits between common equity and debt in the capital stack. The capital stack represents the hierarchy of claims and rights to a company’s or project’s cash flows and assets. The position of each type of financing in the capital stack determines its priority in terms of risk and return.

Here’s a breakdown of preferred equity’s position and characteristics in the capital stack:

  1. Position in the Capital Stack: From the most senior (least risk) to the most junior (most risk), the capital stack typically consists of:
    1. Senior Debt: This is the most secure position, often secured by assets or other collateral. Lenders in this position have the first claim on the company’s or project’s assets and cash flows.
    2. Mezzanine Debt: This is subordinated to senior debt but has priority over equity. It often comes with higher interest rates due to its elevated risk compared to senior debt.
    3. Preferred Equity: This sits below all types of debt but has a priority claim over common equity. Preferred equity investors have a predetermined dividend, which must be paid out before any distributions are made to common equity holders.
    4. Common Equity: This is the most junior position in the capital stack and bears the highest risk. Common equity holders have rights to the residual value or profits of a company or project after all other obligations are met.
  2. Characteristics of Preferred Equity:
    • Dividend Priority: Preferred equity typically comes with a fixed or predetermined dividend, which is paid out before any dividends to common equity holders.
    • Liquidation Preference: In the event of a liquidation or sale, preferred equity holders are ahead of common equity holders in the line to receive their share but are behind debt holders.
    • Conversion Rights: Some preferred equity can be converted into common equity under certain conditions.
    • Voting Rights: Preferred equity might have limited or no voting rights, depending on the agreement.
    • Cumulative Dividends: If the company or project doesn’t pay dividends in a given period, some preferred equity accumulates those dividends and requires them to be paid out before any dividends go to common equity.
  3. Uses of Preferred Equity:
    • Real Estate: In senior housing real estate projects, developers might use preferred equity as a way to raise capital without adding more debt to the project.
    • Business Finance: Companies may issue preferred stock to raise capital without diluting the voting power of the existing common shareholders or taking on additional debt.

In essence, preferred equity offers a balance between risk and return, providing some protection like debt (in terms of payout priority) while also offering potential upside, albeit less than that of common equity.

Our Mission & Vision

Haven Senior Investments’ vision is to serve those who care for senior citizens and others in need of safe and nurturing housing.

Our mission is to serve the owners, operators, buyers, sellers, developers, and investors in the seniors housing and assisted living industry by offering a range of services to help them maximize their objectives and investment returns.

Our purpose is to glorify God by building profitable and sustainable businesses that advance His Kingdom and His children.

The Haven team brings a unique combination of finance, real estate, business development, operations, and healthcare experience to serve our varied senior housing clients. We operate on a team approach, which allows our clients to benefit from the experience and expertise of the whole Haven team. Our efforts are focused on the areas of independent living, assisted living, active adult, and communities that specialize in Alzheimer’s and memory care.

Related Posts

The Resilience and Inflation-Hedging Strength of Necessity-Based Commercial Real Estate: A Focus on Seniors Housing

In the realm of commercial real estate investment, necessity-based properties stand out for their robust performance across economic cycles. These assets, which encompass properties that deliver essential goods and services, offer a unique combination of recession resistance and inflation-hedging characteristics. Among these, seniors housing is particularly noteworthy, providing compelling benefits for investors seeking stability and

The Emerging Landscape of Senior Housing: Challenges and Opportunities

As healthcare infrastructure investor Welltower highlights, the senior housing market presents a unique investment landscape, shaped by significant supply and demand imbalances and a crunch in available capital. In recent years, senior housing has faced a dynamic shift. The COVID-19 pandemic severely affected the sector, with high mortality rates and shutdowns leading to a dramatic

The Imperative for Aggressive Growth in Seniors Housing Development

As the global population continues to age at an unprecedented rate, the demand for senior housing is becoming more urgent. By 2050, the number of people aged 60 years and older is expected to double, according to the World Health Organization. This demographic shift is pushing operators in the senior housing sector to adopt more

Scroll to Top

What are you looking for?

What is Preferred Equity in a Senior Housing Capital Stack?

Input information to download the file