Does "no lien" mean pref equity is basically just riskier than a loan, or is that the wrong way to think about it

The document is where the answer lives, so I'll take the second view with a condition attached.

A lien is a remedy against the property. Pref equity rights are remedies against a person, usually the sponsor's control of the entity. What you actually get from the pref side depends on whether the operating agreement gives you the ability to remove the manager, force a sale, and control the bank accounts, and whether those rights work without the senior lender's consent. That last part is where most of the value goes missing, because senior loan documents commonly restrict changes in control of the borrower, and how that interacts with your removal right varies by the specific documents. A lawyer who does these should read yours.

So I don't think of it as lien versus no lien. I think of it as, on the day the sponsor stops performing, what can I do by myself in the next 30 days. A mezz lender with a pledge often can't do much alone either. A pref holder with clean removal rights and a springing member can sometimes do quite a lot.

I've never held one of these so take the question honestly, but doesn't the no-lien thing also matter for who else can put debt on the property later? A recorded mortgage is public and blocks things. A membership interest with priority rights lives inside a private agreement that a stranger doesn't see.

@pike, the recording point is real but it's not the protection you'd want anyway. Your defense against new debt is the negative covenant in the operating agreement, the one that says no additional indebtedness and no additional capital senior to or pari passu with the pref without your written consent. That works whether or not anything is recorded, and recording practice varies by state so I wouldn't build a structure around it.

On @canton's actual question: I underwrite the pref as if the lien doesn't exist, because functionally it doesn't, and then I price the control rights. What I care about is the current coupon relative to what the property can pay, the minimum multiple, the outside redemption date, and whether combined coverage has a covenant on it. If those are strong, I'll take pref over mezz at the same dollars, partly because the outcomes in default are less all-or-nothing. A mezz lender either takes the pledge or writes the position off. A pref holder can renegotiate from inside the entity, and I've had a position where we reset the coupon and extended the redemption date rather than blowing the deal up, which was a better outcome than any foreclosure would have produced.

What I won't do is take pref with weak documents and tell myself the priority language protects me. Priority in a waterfall only matters if there's cash reaching the waterfall.

So the honest summary for someone at my level is that the lien question is a distraction and the operating agreement is the whole thing? I came into this assuming paper with a lien behind it was always the safer paper. Sounds like the safer paper is the one with a removal right that actually works.