Comparing two preferred equity term sheets when the lower cash pay option wins on paper

That last line answers the spreadsheet on its own. Accrual is a promise settled at exit, cash pay is money already received. The same logic plays out on a retainage argument elsewhere in construction, where the number on paper is fine right up until the entity paying it isn't. So the real question isn't which multiple is higher, it's what B's exit actually depends on. What's the capex budget, and who's holding the contingency?

New here so forgive the basic one. If B accrues 5% and compounds, does that compound on the accrued part only or on the whole $1.5M? Those give pretty different answers over three years.

Rigging, it depends entirely on how the document defines the accrued amount and whether it gets added to the unreturned capital balance, which is where the fight ends up. Bramble, worth pulling B's actual definition of unreturned capital contribution rather than trusting the summary. On the substance, 80 percent last dollar versus 74 percent is six points of value that has to disappear before anyone gets touched, and on a 74 percent position that is a cap rate move that can be survived twice over. What tends to break a small portfolio at scale is insurance, not cap rates. Ask both sponsors for their renewal quote, the actual quote, not the trailing number.

The 12 percent cash on A is 180k a year hitting the account. B pays 135k. For someone who wants income rather than a bigger number in 2029, that is the whole comparison, and the multiples are noise.

The B math should be stressed at the duration that actually hurts, which is 30 months. That works out to roughly 22.5 points of cash and about 13 accrued, so close to 1.355x, and the minimum barely covers the position. That 1.35x is only worth real money if the sponsor takes the investor out inside about 24 months. So B's advantage in this comparison is concentrated in the early exit case, which is also the case where things went well. In the bad case B carries no guarantee, and the negotiation is with a sponsor who is out of money.

What does the personal guarantee on A even reach? A guarantee from someone with two other deals in trouble is a piece of paper.

Plumb's question is the one I'd want answered first. Has either sponsor given you a personal financial statement and a schedule of their other positions, bramble? I'm nowhere near this size but the screening logic feels the same, you're underwriting a person as much as a building.

B has a completion guarantee on capex, which tells me B has a real renovation scope. Ask for the scope by line item and the contractor's contract type. On the reno side, a $6,000 a door budget in a plan written eight months ago is a $7,500 a door budget today, and the sponsor eats that out of the same cash you're expecting to get paid from. Completion guarantees also tend to be capped at the budgeted amount, which does nothing for you when the overrun is the problem.

One thing on A that nobody has said. No accrual and no minimum multiple means that if they refinance you out at month 9 you received 12 percent for nine months and that is the end of it, $135k, and your capital is back on your desk looking for a home in the same market that produced these two term sheets. B's minimum multiple is partly a protection against your own reinvestment problem. That matters more than it sounds like when a maturity wall is pushing deals through the door and you have to redeploy fast.

You're comparing pricing on two positions with different risk and finding one cheap. Usually that means the market saw something in B you haven't. 80% last dollar with no personal guarantee and only 9% cash pay is a structure that only gets funded when the sponsor has run out of better options. I'd go back and ask B who else they showed it to and what the feedback was. The answer to that has told me more than any term sheet has.