What preferred equity ahead of the sponsor's own money actually buys on a single tenant development deal
Consider development risk through a single tenant urgent care build, roughly 4,800 square feet on an outparcel in a suburb with a lot of new rooftops, total project cost 3.6 million. In a structure worth studying, the lease is signed before the land even closes, 15 years with a regional operator running roughly 30 clinics, rent commencing at certificate of occupancy, so the building has a tenant before it has a foundation. An investor might take 40,000 dollars as preferred equity at 11 percent accruing, ahead of the common, with a hard maturity at 30 months, while the sponsor signs a completion guaranty personally and the pref sits above his money in the waterfall. That structure means overruns hit the sponsor before they hit the pref holder. That is exactly the scenario where the structure gets tested. Say at month 11 the tenant asks for a different canopy detail and a change to the drive through window, a change order around 61,000 dollars, with the contingency already half spent on rock in the footings. Because the pref sits above him, the sponsor funds that overage out of his own pocket rather than calling capital. That is the moment the structure proves what it bought. In the common position, that 61,000 comes straight off the investor's side. Certificate of occupancy at month 15, rent commencing, refinance into permanent debt at month 20, pref returned plus the accrued 7,700. The common equity typically does better on a percentage basis in a case like this, which is the trade for taking less risk. What holds up as good practice: a signed lease before funding, the pref sitting above the sponsor's own money rather than beside it, and a hard maturity date with real remedies rather than a vague expectation of a refinance. What is closer to luck is an operator staying solvent through the full build and lease up period, since a pref position offers no real protection if the tenant does not.
