Preferred Return
As the name suggests, preferred return is a profit distribution preference whereby profits, either from operations, sale, or refinance, are distributed to one class of equity before another until a certain rate of return on the initial investment is reached. The pref is stated as a percentage, such as an 8% cumulative return on initial investment; however, it can also be stated as a certain equity multiple. This preference provides some comfort to investors since it subordinates the sponsor’s profits participation or “promote” (see our recent article: What is a Real Estate Sponsor Promote?) up to a certain return threshold.
