Six months of construction slip turned a 14 percent pref into a 9 percent effective yield, and the sponsor thought he was handing investors a win.

Been watching this exact dynamic in the Cleveland small multifamily space, where hold period slippage on new construction is basically the rule rather than the exception, and nobody prices it that way going in. The math you laid out is the version I have never seen in a term sheet conversation, even in the meetups I go to. Everyone is anchored on the headline rate. Nobody is running the scenario where month 24 becomes month 30 and asking what that does to effective yield given realistic reinvestment options. At 12 percent reinvestment assumption the hit is severe, and 12 percent is not aggressive, that is just what comparable paper is yielding right now.

The line that got me was "the sponsor read that as a better outcome for the investor." That is not spin, that is genuine confusion about what an investor is actually measuring, and it makes me wonder what else is not getting modeled on the sponsor side. My question back to you: was there any step-up in the pref rate once the original redemption date passed, or did the 14 percent just keep running flat while the sponsor held your capital for six extra months at no incremental cost to him? Because if there was no rate adjustment triggered at month 24, the extension was essentially free for the sponsor and entirely at your expense in IRR terms. That is the mechanic I would want in any term sheet before I committed capital, a rate that steps up meaningfully after the projected redemption date, not a fixed rate that makes slippage painless for the party causing it.

The IRR math here is clean and the framing is right. Hold period is the dominant variable in any pref underwrite, and it gets less attention than rate because rate is visible in the headline and time is buried in the assumptions.

The piece I'd add to your analysis: the reinvestment rate you chose (12 percent) is doing real work in the effective yield calculation. At 10 percent reinvestment assumption the collapse is shallower; at 14 percent it's steeper. The output is sensitive enough to that number that two counterparties running the same scenario with different reinvestment assumptions can reach genuinely different conclusions about how bad the slip was, which gives sponsors room to characterize a 30-month outcome as "better" without being arithmetically dishonest. The assumption is rarely made explicit in term sheet negotiations.

The risk your post doesn't address is what happens when the extension is not a passive slip but an active sponsor election. Many preferred equity agreements include one or two six-month extension options that the sponsor can exercise, sometimes with a step-up in rate and sometimes without one. If the step-up is 100 to 150 basis points and the investor's reinvestment opportunity is 12 to 14 percent, the step-up doesn't compensate. The investor accepted an extension mechanic that priced the optionality in the sponsor's favor, probably without modeling it that way at signing. Whether those extension economics are even negotiable depends on how much capital the sponsor needed and how many pref investors were in the room, but it's worth flagging as a term that deserves more scrutiny than it typically gets.

On the minimum multiple point: a 1.35x floor calculated on a 24-month hold implies roughly 15.5 percent annualized. Hit at month 30, the same dollar amount implies something closer to 12.2 percent. The multiple doesn't travel with the hold period, and that's the mechanics behind what your investor experienced.

What did the extension provision look like in the operating agreement, and was the rate step-up, if any, negotiated before or after the slip started becoming visible?

The IRR math here is the thing that almost every pref conversation skips, and you have laid it out in a way that is worth pinning.

For anyone reading who is newer to this instrument: IRR, or internal rate of return, is the annualized yield that accounts for when cash actually comes back, not just how much comes back. When capital sits deployed for longer than expected, the IRR falls even if the dollar return rises, because you lose the ability to redeploy those dollars somewhere else. That lost opportunity is called reinvestment cost, and it is invisible on a term sheet.

The mechanism you described is exact. A 14 percent annualized pref accruing on $2,000,000 compounds to a larger dollar figure over 30 months than over 24, but the extra dollars do not compensate for six months of blocked reinvestment capacity. At a 12 percent reinvestment assumption, the math closes against the investor fast.

Two things in the term sheet determine how exposed you are to this. The first is whether the preferred rate steps up if the sponsor misses the redemption date. A step-up provision, sometimes called an escalation mechanic, raises the accruing rate after a defined delay, which partly compensates for lost IRR. The second is whether the term sheet specifies a hard redemption date or allows extensions at the sponsor's discretion with no rate penalty. The latter is where yield compression hides.

I am not certain how common step-up provisions are across deal types right now, and I would want a securities attorney to review any specific term sheet language before relying on it.

What did your term sheet say about sponsor extension rights, and was there any rate adjustment tied to a missed redemption date?