Does preferred equity work on a boarding house acquisition or does the year one coupon break it
Looked at from the capital side, the boarding houses that attract preferred equity are the 12 to 18 room properties where the operator understands licensing and management but cannot get a conventional lender comfortable, because the income reads as lumpy. Preferred equity looks like a fit on paper. A fixed coupon in the 9 to 11 percent range, control left with the operator, capital sitting senior to the common without taking a lien position. The modeling problem shows up in year one. Operating cash on these houses is usually too thin to service a current coupon without the operator drawing down reserves, and the reserves are already thin because licensing and code work tend to consume the contingency budget before the first tenant moves in. That pushes people toward a deferred coupon with a balloon at exit, and the price of that is holding unsecured paper on a specialty asset in a jurisdiction where the license may not survive a transfer at all. The open question is whether owners in this space have actually taken preferred equity into a deal, or whether it has always been a bank note stacked with seller carry. Anyone operating on the ownership side who has seen that structure attempted would be worth hearing from.
