Real estate

Ultimate Guide About Preferred Return 2023

Written By Urban Real Estate Center
Last Updated: Jan 03, 2023 •

Are you serious about advancing your career in the 2021/2022 season? If so, then now is the time to learn more about Preferred Return 2023. This comprehensive guide is designed to give you an inside scoop on this popular investment strategy and how it can impact your career trajectory in the years to come.

It covers everything from what Preferred Return 2023 offers, how it works, and its advantages compared to similar strategies. That said, whether you're a seasoned investor or just getting started in the industry - our ultimate guide will help you leverage this powerful resource for maximum success! Read on for all the information needed to become an expert Preferred Return 2023 trader today.


What Is Preferred Return?

Preferred return is a type of return that investors receive from their real estate investments, primarily in private real estate. This rate of return is exclusive to the investor and trumps any other type of return that the investment may generate. Preferred returns are typically expressed as a percentage and can range between 6% and 9%, depending on the risk associated with the investment.

Preferred returns are common among private real estates investments such as real estate investment trusts (REITs), mortgage-backed securities (MBS), and private equity funds. The primary benefit of preferred returns is that they put passive investors at the front of the line regarding receiving profits from an investment. This means that once an investor receives their preferred return, all other profits go straight to them before any management team or other investors take a cut.

Capital account priority is the main difference between preferred returns and more traditional forms of equity, and equity investors prioritize receiving profits less than those who invest via preferred returns. If a company goes bankrupt, creditors will generally be paid out before equity owners due to legal precedence in most jurisdictions.

Preferred equity holders, however, typically have a higher priority than traditional debt holders in bankruptcy proceedings due to their contractual agreement for preferential returns – thus creating additional security for these investors as opposed to standard equity holdings. 

To summarize, preferred return is an attractive option for many passive real estate investors since it guarantees them a minimum profit before any management team or other investors receive their share from an investment. The legal privileges associated with this form of investing also provide additional protection for such investors should their company declare bankruptcy or experience financial difficulty.


Why Is Preferred Return Important?

Preferred return is important for a number of reasons. First, it is a way to reward sponsors and early equity investors who take on the most risk with their initial capital contribution. It gives them a fixed rate of return that they can count on if the enterprise is successful. It also incentivizes other potential investors to come in and invest, as they know a certain amount of money will come back to them if the venture succeeds.

From an investor standpoint, preferred return offers a degree of comfort when investing in a business venture. By guaranteeing the preferred rate of return, investors can more confidently commit their capital, knowing that they will receive at least this percentage upon distribution or return of capital from the limited partnership. Furthermore, because preferred returns tend to accrue rather than being paid out upfront, investors benefit from seeing compounding returns over time. 

The importance of preferred returns also extends to the sponsor or manager of the investment vehicle itself by providing them with additional capital to work with when deciding how best to utilize funds for future investments and growth opportunities within their portfolio. This allows them to control where their resources are allocated while ensuring that their investors have some level of security regarding financial returns over time. 

Preferred returns are an integral part of any successful investment strategy due to their ability to incentivize both sponsors and potential investors while providing additional funds for reinvestment within existing businesses or new ventures alike. As such, it's important for those looking at investments to understand why these terms exist and how they can serve both parties involved in any given investment situation.


Some Examples Of Preferred Return

A guaranteed return of 8% implies that the first 8% of funds must be rendered to the investor. Any money beyond that point is divided according to the terms in the contract (make certain to study this agreement thoroughly). In this illustration, let's refer to it as a 75/25 split. This indicates that after the 8% preferred return has been paid out, the surplus is separated, with 75% going to the investor and 25% going to the sponsor.

Let me classify these three Examples into three tables, where the investment returns are 6 in the first one, 8 in the second one, and 15 in the third.

Example 1: 

At 6%, the sponsor failed to reach the expected return of 8%. This means that all of the 6% is directed toward the investor with a preferred return. Consequently, there is a gap of 2%, which has to be paid back in the following year. Therefore, during the second year, the investor will receive 8% plus an additional 2% from year one (in total, 10%) before the sponsor can collect any amount whatsoever.

In this case, it results in 0% for the sponsor. It is evident why they must be highly motivated and strive to obtain a much higher rate than their goal percentage. In order to achieve this, sponsors must apply rigorous strategic approaches to improve performance and make sound investment decisions.

This includes investment analysis and forecasting methods to evaluate capital budgeting decisions and risk management techniques to reduce volatility and uncertainty related to investment returns.

Furthermore, sponsors should ensure adequate resources such as financial capital and human resources to maximize returns while minimizing risks associated with investing in properties. By doing so, they will be able to help increase property values and optimize their chances of reaching target returns.

Example 2: 

The investor has been able to reap the full 8% preferred return with no deficits or carryovers into year two. This leaves nothing else for the sponsor who was responsible for managing the property, meaning they receive no distributions from this yield.

The lack of rewards for the sponsor serves as an additional incentive to ensure that their asset can outperform its expected return rate; otherwise, they will be rewarded for their efforts. The sponsor must be properly incentivized in order to ensure a successful investment and maximum yield potential; if not, they may not put forth their best effort, which could lead to sub-optimal returns on the investor's part.

Furthermore, a thorough understanding of market trends and conditions is necessary in order to achieve targeted results and maximize profits. A savvy sponsor understands that going above and beyond expectations will bring greater returns and rewards - both financially and professionally - down the line.

Example 3:

At 15%, the sponsor has achieved and exceeded their preferred return. The first 8% of this goes directly to the investor, leaving a 7% remainder to be split 75/25, with 75% of this remainder going to the investor and the remaining 25% being allocated to the sponsor. This is the only scenario out of the three offered that allows for distributions to be made to the sponsor.

This is due to sufficient gross revenue from rents being generated to minimize expenses and create a large positive net operating income which can then be used to pay off debt and provide distributions for parties involved. Once 8% of returns have been paid out, sponsors will only receive 25% of any other profits.

For sponsors to benefit from investments, they need adequate returns from rent payments and cost-effective management strategies for insufficient money left over after debt payments and preferred return payments are made.



This is your ultimate guide if you're looking for information about the preferred return in 2023. We've compiled all of the important data and analysis so that you can make informed decisions about your investment portfolio. After reading this guide, you should clearly understand the preferred return and how it may impact your investments in the future. Thanks for reading.

Urban Real Estate Center

This comprehensive guide will teach you everything you need to know about preferred return investments in 2023. Learn the basics, strategies, and potential risks from experienced investors who have done this before.