How a preferred equity sleeve actually sits in the capital stack on a 20 MW build to suit

The "protected position" language on preferred equity in a capital stack that thin, $60M of equity cushion on a $240M deal, is basically marketing. Northern Virginia data center deals have gone sideways on entitlements and power delivery timelines far more often than on occupancy, so the risk profile is different from what you would price in traditional real estate. The PPA collateral on the second lien note is the more interesting asset here, especially if the offtaker is investment grade. A hyperscaler PPA in that Gainesville and Prince William corridor has real transferable value because power is the actual scarce resource right now, well ahead of the building. An extra 200 bps does not compensate you for sitting behind $180M versus sitting behind $60M with a lien on contracted revenue. Push the smaller sponsor hard on who the offtaker is and what the cure and assignment provisions look like in the PPA before you decide cleaner docs are not just cleaner because there is less to hide.

The 200 bps gap is probably the least of the problem here. The $60M senior on the 8 MW asset implies a loan to value that is actually pretty disciplined if the PPA counterparty is investment grade, whereas the preferred equity sleeve on the build-to-suit leaves you sitting behind 75 cents of every dollar in the stack before construction in Gainesville is even finished. Build-to-suit is the worst place to hold preferred equity, because a protected position only means something once the senior lender has been made whole, and on a 20 MW shell with no stabilized cash flow yet there is no floor under it. Structured deals of this shape have used that exact 14 percent preferred language while the waterfall in the operating agreement carried a pay-if-available carve-out that let the sponsor defer the preferred return whenever NOI missed a threshold. Read the operating agreement rather than the deck. The second lien note is a simpler instrument, and simpler instruments are easier to enforce when things go sideways.

The word protected does very little when the senior covers 75 percent of the stack. It tends to disappear from the conversation the moment there is a covenant breach on the construction loan and the senior lender controls the timeline. On the 20 MW build-to-suit, $200k sits inside a roughly $60M mezzanine slice, and if lease-up slips even six months, the 14 percent accrues while the negotiation runs through a senior lender with no incentive to move quickly for a pref holder. The second lien against the 8 MW with the PPA attached is a different animal. Power purchase agreements from AWS-tier offtakers anchor workouts in a way a general real estate lien does not, because the offtaker keeps paying even when the sponsor is in trouble. Two hundred basis points does not cover the difference between a lien on a cash-flowing contract and an equity claim sitting behind $180M, and cleaner documents on the smaller deal are rarely a coincidence. That is usually a sponsor who got burned once and fixed the paperwork.

The 14% looks better until you ask what the senior loan to cost actually is. $180M on a $240M stack is 75% LTC, which means the preferred tranche has maybe $60M of total equity cushion and you are absorbing first loss on all of it before common takes a hit. Protected in a sponsor deck usually means ahead of common and nothing more. It says nothing about real collateral. The PPA assignment on the second lien is what deserves pulling apart right now. Who is the offtaker and how many years are left on that contract? And does the lien actually attach to the revenue stream or only to the paper?

14% pref on a stack that thin is running closer to 11.5% net in Northern Virginia once you strip promote and fees.

Protected position is a marketing phrase with no legal standing behind it. In that stack you are unsecured equity sitting behind $180M. What is the LTV on the senior alone, and who is the construction lender?

The $60M first on the 8 MW asset is the number I'd pull apart before anything else. If that facility was capitalized at, say, $72M to $78M total and the first lien is already at $60M, you are looking at maybe $12M to $18M of cushion for your second lien position in a liquidation scenario, and that cushion has to absorb transaction costs, workout fees, and any impairment to the PPA before you see a dollar. PPA assignment in bankruptcy is not clean either. A lot of hyperscaler leases have termination-for-convenience clauses, and if the tenant exercises that in a distress event, the collateral package you are counting on as a floor just lost most of its value.

On the build-to-suit side, 75% LTV at senior alone before preferred equity even appears is the actual math on that $240M stack, and a 20 MW ground-up in Northern Virginia right now has real cost overrun exposure given where steel and electrical gear lead times are sitting. The 200 bps yield gap is almost secondary to what I would want to know first, which is whether that build-to-suit lease is fully executed or still at LOI stage. An executed 15-year NNN with a creditworthy cloud tenant at that scale changes the risk conversation entirely. A signed LOI with a colo operator does not, and I have seen sponsors call both the same thing in a deck.

What never works is assuming a PPA assignment survives a receivership cleanly. In every distressed data center situation I have read about, the hyperscaler tenant has termination rights or step-in rights that get exercised before a junior creditor can monetize that collateral, so the floor on the second lien disappears exactly when you need it.

That said, $180M of senior against a $240M stack on a build-to-suit that hasn't stabilized yet means your preferred equity cushion is basically the sponsor's equity, which on a 20 MW build-to-suit in NoVA could get eaten by construction overruns alone in 2024 dollars.

Two hundred bps doesn't move me given that both positions have a real scenario where you're waiting out a workout at 36 to 60 months with no distributions.