A Charlotte multifamily developer needed $42M for a 186-unit project. JV equity pitches had failed. We introduced a preferred equity structure and the deal closed on day 58.
01The Situation
The developer had the land, design, GC, and construction lender committed at 65% LTC. The problem was the remaining 35%, $14.7M in equity he could not raise entirely from his own capital. Two JV equity partners had passed, citing return expectations he could not meet. The project needed to close in 60 days or lose the GC's pricing commitment.
02What We Did
The problem with the prior JV pitches was structural: developers were asking for 50% of the upside in exchange for 35% of the capital. We proposed preferred equity: $8.4M at 14% preferred return, sitting senior to common equity, with no upside participation. The remaining $5.6M was the developer's own equity.
Preferred investors do not need to evaluate project upside, they evaluate coverage and project quality. We identified three preferred equity lenders in 18 days. The deal closed on day 58. Developer IRR at base case: 18.4%.
03Client Impact
The developer had been trying to raise all his equity as JV equity, sharing upside with partners who had cost-of-capital expectations he could not meet. Splitting the raise into preferred and common solved both problems simultaneously.
Breakdown
| Component | Amount | % of Stack | Cost | Priority | Status |
|---|---|---|---|---|---|
| Senior Construction Loan | $28,000,000 | 66.7% | SOFR+285bps | First lien | |
| Preferred Equity | $8,400,000 | 20.0% | 14% preferred | Senior to common | |
| Developer Equity | $5,600,000 | 13.3% | Residual | Common | |
| TOTAL | $42,000,000 | 100% | Blended 9.8% | — | |
| Land | $6,300,000 | — | — | Acquired | |
| Hard Construction | $28,140,000 | — | GMP contract | — |
What changed
Preferred Equity Structure Introduced
$8.4M preferred tranche at 14% return. No upside participation. Simpler raise than JV equity.
Project Closed on Day 58
2 days before GC pricing commitment expired. $42M total stack assembled.
Developer IRR: 18.4%
Base case return on $5.6M developer equity. Upside scenario: 24.2%.
Standard Structure for Future Projects
Developer has applied preferred equity + common equity split to two subsequent projects.
The developer had been trying to raise all his equity as JV equity, sharing upside with partners who had cost-of-capital expectations he could not meet. Splitting the raise into preferred and common solved both problems simultaneously.
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