Preferred Equity Gap Calculator

Preferred equity sits between mezz and common equity — takes priority return before common. This calculator sizes pref and its impact on common LP returns.

Total project cost

Senior loan

Common equity

Pref return rate

Project IRR

Pref equity needed

$1,700,000

Common effective IRR post-pref

23.67%

Capital stack balance

How the math works

Pref gap = total cost − senior − common equity. Pref takes priority return; common absorbs leveraged upside after pref satisfied.

The leverage effect: every dollar of pref at 12% crowds into a deal earning 18% — LP common gets the 6% spread, magnified over common equity base.

How to Use

Enter total project cost.
Enter senior loan + common equity.
Enter pref return rate.
Enter expected project IRR.
Read pref gap and common equity IRR impact.

Frequently Asked Questions

Pref vs mezz?

Similar economically. Mezz is debt (foreclosable via UCC); pref is equity (no foreclosure right, but priority distribution). Tax treatment differs. Most lenders cap senior + mezz combined; pref doesn't count, making it 'preferred' for leverage stretching.

Typical pref rate?

10-14% current pay in normal markets. 12-18% in distressed. Often structured as current pay + accrual + exit kicker.

Does pref dilute common IRR?

Pref takes priority until cumulative return met; after that, common catches up and shares upside. Well-structured pref allows common to still hit target IRR at exit.