Does pulling cash out through a refi actually put you in the same place as selling, or am I missing something in the stack

Your stress test is right. A cash-out refi and a sale at the same valuation look equivalent on paper but they are not, because after the refi you still hold an asset carrying heavier debt service and your remaining distributions are coming off a thinner cash flow cushion. A sale just closes and you are out. The IRR difference you are seeing is real.

On the preferred equity piece specifically: a pref position (meaning you are first in line for returns and return of capital ahead of the operator, but behind the senior mortgage lender) is designed to be short-duration for exactly the reason you named. The redemption event, here the refi, is what returns your principal. If the refi only pulls 70 percent of equity and rates come in 75 basis points above the model, the operator may not be able to hit the debt service coverage ratio the new lender requires. Debt service coverage ratio, or DSCR, is basically net income divided by the mortgage payment, and lenders usually want it above 1.25. A partial refi means a partial or delayed redemption for you, and suddenly a position that was supposed to be 36 months is open-ended.

The question to ask the operator in writing is: what is the contractual fallback if the refi cannot redeem the pref in full? Specifically, does the pref agreement give you any governance rights or forced-sale triggers if redemption is missed? Some agreements do, most do not, and that document is the thing that actually answers your question, not the model.

A tax or securities attorney should review the specific pref agreement before you commit. I want to say that plainly because the answer changes a lot depending on what that document actually says.

What does the pref agreement say about missed or partial redemption? That would tell us a lot about where you actually stand.

The assumption doing the most work in the sponsor's model is that a 70 percent cash-out refi at month 36 is the natural exit for your position. It is not. It is one path, and a rate-sensitive one. You have already identified the DSCR problem correctly. At 75 basis points of rate creep, the maximum LTV the senior lender will underwrite at a clean DSCR threshold drops, and the sponsor cannot pull enough proceeds to redeem you in full. What you get at that point depends entirely on what your preferred equity documents actually say about partial redemption, mandatory redemption timelines, and what triggers a forced sale.

That last part is where most pref investors leave money on the table structurally, not in the return negotiation. If your documents do not include a hard redemption date with teeth, and a sale mandate as the fallback if the refi fails to redeem you in full, then your short-duration instrument becomes an indefinite hold in a deal with rising debt service and a thinner LP distribution waterfall. You described that outcome precisely and then asked why more pref investors do not push on it. The answer is that many do not read the operating agreement carefully enough before closing, and sponsors do not volunteer the clause.

Your IRR comparison between the refi and a clean sale is directionally right. The refi optimizes for the sponsor's hold, a sale optimizes for capital return. Those interests diverge if the refi is partial. The preferred position protects you ahead of common equity in a loss scenario, but it does not automatically accelerate your redemption if the refi underperforms. That protection has to be written in.

The rent roll skepticism you mentioned is the second variable worth stress-testing before you close. What is your current view on the stabilization timeline, and does the pref agreement treat a delayed stabilization as a default trigger or just as a circumstance the sponsor gets to manage?