Being offered the pref piece in a refi gap: 8% current, 3% accrual, 1.25x minimum multiple, no lien

Say you do remove the managing member at month 20. Who runs a 190 unit value-add for you the next morning? I've watched a capital partner win that fight and then spend five months finding a manager who'd take a half-finished turn program. If your answer is "I'd hire a third party manager," price what that costs and how long the gap is, because it lands right on the numbers you just posted.

I was on the sponsor side of a pref recap on a 60 unit and the thing that nearly killed us was the definition of available cash. Ours let the senior fund reserves and the manager fund the approved capex budget before the pref current pay was calculated. The pref partner hated it and they were right to, but it's the reason we didn't blow a payment in month 7 when two roofs went. Read that waterfall definition line by line, orchard. It's where your $360k either exists or doesn't.

Adding to quarry from the management side. When a pref current pay eats every dollar above senior debt service, what actually happens is the turn schedule slows down. I've had owners tell me to hold units vacant rather than spend the $6,400 because the cash was committed elsewhere that month. Your sponsor's $1.85M depends on those 60 turns finishing roughly on schedule. If your own current pay is the thing starving them, you've built a loop into the deal.

Ran your multiple. Full 36 months, you collect 24 points of cash pay plus about 9.3 points of accrued 3% compounding, so roughly 1.33x on face. The 1.25x minimum never comes into play. It bites on an early exit. At month 18 you've got 12 points cash and about 4.6 accrued, call it 1.166x, so the minimum owes you another 8.3 points, roughly $375k of make-whole. So the 1.25x is really a prepayment floor, not a return floor, and the honest way to think about it is what you'd want if they refinance you out at month 14 because rates moved.

For anyone else reading who had to look it up like I did: current pay is the part they wire you every month, accrual is the part that stacks up unpaid and gets settled at exit. 8 plus 3 is 11% total but only 8 is cash in hand. So orchard's cushion problem is only about the 8, the 3 rides along.

Before you counter on anything, get the senior lender's position in writing. Two documents matter. One is whether the loan documents permit pref equity at the JV level at all, plenty of agency and CMBS deals restrict or condition it. The other is a recognition agreement or something like it, where the senior acknowledges your right to replace the managing member and step in without triggering a default or an assumption fee. If the senior won't sign something, your remedy is theoretical and you should price the position as if you have no remedy. I'd also ask for the rate cap terms, because a cap on a fixed 30 year amortizing loan makes no sense and I suspect that quote is actually floating.

canton's catch on the rate cap seems big? If it's floating at SOFR plus a spread then the $1.26M debt service is a snapshot, not a number. orchard, is the 6.4% fixed for the whole term or is that today's index plus spread.

I thought pref equity did have a lien, just a second one behind the mortgage. Isn't that what subordinate means?

vellum, subordinate here means paid later in line, not secured later. No mortgage recorded for the pref at all.

The number that's wrong is the cushion, and it's worse than you wrote. Trailing NOI of $1.62M is a look back through a period when the property carried $880k of interest-only. Under the new loan you're at $1.26M with amortization, so free cash is $360k against $360k of current pay, coverage of exactly 1.00x on your own piece. A 3% miss on revenue is a $50k hole. Your $250k reserve covers roughly five months of a hole that size, and it also has to absorb any tax or insurance reset. What's the current insurance renewal doing? On the multifamily deals I look at that line has moved more than rates have, and nobody's trailing 12 has it right.

Ask for the full LLC agreement, not the term sheet, and go find four things.

One, whether your pref is redeemable at the sponsor's option and at what price. If they can take you out at par plus accrued and the 1.25x sits in a different section, lawyers will argue about which one governs.

Two, the cure rights. A 10 day monetary cure with a 30 day non-monetary cure is normal. A 90 day cure with a right to fund from a future capital call means your remedy is a year away in practice.

Three, capital call dilution. You're a member, so if the agreement has a pro rata call with dilution for non-funding, and your pref units are dilutable, that's a hole in the priority you think you bought. I've seen it drafted both ways in the same firm's forms.

Four, whether the sponsor personally guarantees the current pay or just a completion obligation on the capex. Those are very different documents and the term sheet you posted says neither.

On the remedy mechanics, the piece to nail down is how the pledge is perfected and what steps stand between a default and you actually voting the interests. If the LLC interests are certificated and treated as securities you're in a different part of the UCC than if they're general intangibles, and the transfer restrictions in the operating agreement have to be drafted to permit the transfer you're counting on. Also worth knowing that LLC statutes and charging order rules differ meaningfully by state, so what your remedy is worth depends on the state of formation and where you'd be enforcing. That's a question for a lawyer who does these, not something to settle from a term sheet.

Reading this thread as someone still on the licensing side, and the thing that stands out is how much of the return depends on documents nobody has drafted yet.

Last dollar exposure: 16.8 plus 4.5 is 21.3 on a 27.5 appraisal, so 77.5%. That's inside where I'd want to be for garden multifamily with a real turn plan. But run the exit. If you're whole at 1.25x you need about $21.9M of net proceeds, so $22.4M gross after costs. At a 5.75% exit cap that's an NOI of $1.29M, which is well under today. At a 6.5% cap it's $1.46M, still under. So the position survives a lot of cap rate movement, and what actually kills you is an operating miss deep enough to stop payments in year one. Which is exactly what ledger is pointing at. Your risk here is timing, not terminal value.

I'm asking because I want to understand, orchard, not to pick a fight. You describe yourself as long holds and patience. A 36 month pref with consent rights over a value-add turn program is a position that calls you every month. Does that fit how you actually want to spend your attention, or is the appeal just that 11% looks better than land sitting there?

The comparison I'd make is against writing the mezz instead. A mezz loan would give you a pledge too and a foreclosure path with clearer case law, but it's plainly debt, it can trip senior covenants that permit pref, and the default outcomes tend to be more all or nothing. Pref lets you sit as a member with priority and negotiate rather than foreclose. You're paying for that with a fuzzier remedy. At 11% and a 1.25x floor on a 77.5% last dollar I'd want to know who else quoted this and where they came out, because a single quote tells you nothing about price.

Is this the same thing as preferred stock in a company? The priority language sounds identical.

ember, same idea about who gets paid first, completely different documents and a single property behind it instead of a business. orchard, the counter I'd push is the reserve, because every other problem in this thread shows up first as a missed monthly payment.