How Do Joint Venture and Preferred Equity Differ?

Have you ever tried to compare apples to oranges? It’s the analogy most commonly used when saying that two things are different. The two fruits have just as much in common as they do differences. This is just like Joint Venture Real Estate dealings and Preferred Equity deals.

There are similarities but they are two completely different types of real estate business dealings. There is enough to connect them with similarities but what are the differences between the two and why do the differences matter?

1. Real Estate Joint Venture

When you hear joint venture, it seems obvious what type of business arrangement it is right? In this case, it is multiple people owning a real estate venture but there are nuances that make it something very special.

A joint venture is the most common type of real estate transaction. This allows multiple people to work on and invest money into a project. Of course, the more money flowing into a project the better it will be. In this case, real estate investors will be working with real estate developers to make everyone involved a lot of profit.

An example of this would be if John Doe was a real estate developer who worked in New York City. Apple, which is based in California, wanted to buy property in the city that would house unsold iPhones. They would team up and form a joint venture, John would bring his skills to the table and Apple would supply the capital.

2. Preferred Equity

Preferred Equity in real estate is more complicated than a joint venture. The property is usually registered as a limited partnership or a limited liability company.  In a preferred equity situation, an investor would buy equity in a property.  This is done in certain tiers.

The top tier, or the one that gets paid out first, are the loan holders. In every situation, they will get their money first. Next up would be the preferred equity stockholders. While they are paid out second, this is usually a good investment for them. After the preferred equity tier is the common stock.

Being in the preferred equity tier allows the investor to get paid faster. Which is a bonus for that tier. There are some drawbacks, however, like the fact that there is a cap on income. Common equity stock has no limits but is riskier because there are no guaranteed payments, but since preferred equity stock has a guaranteed payout, it is limited.

What is the upside for the company leading the project? They can see their vision fulfilled. And they don’t have to use as much of their capital. It’s a win-win situation for them.

3. Differences Between Joint Venture and Preferred Equity

The apples and oranges analogy of joint venture and preferred equity is apt. Even the appearance is different but there are some similarities. Notably, people coming together and investing capital to get a project done.

The method of how investors get paid is different. In a joint venture, there are usually only a few (less than 5) investors and usually one brings the capital/land and the other has the skill set to develop it out. The arrangement is mutually beneficial for both parties.

A preferred equity setup involves many people investing, with one group in charge of the project and the rest contributing money. The preferred equity class makes money from just investing money in the project.

Fidelman & Co. specializes in management consulting, presentation advisory, and financial modeling. We focus on building businesses alongside entrepreneurs and investors. Contact us today for more information about what we can do for you.

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How Do Joint Venture and Preferred Equity Differ?

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