What is a preferred return?

A preferred return (sometimes called a 'pref') exists to protect investors by establishing a minimum return threshold that must be paid to investors before the fund sponsor or manager participates in profits.

This structure is designed to align the sponsor's economic interests with those of investors- the sponsor only shares in the upside once investors have received their preferred return in full. Typical preferred returns in private real estate range from 6% to 10% annually, depending on the risk profile of the underlying investment and the position in the capital stack. A Preferred Return is not a guarantee of payment, such as a dividend a corporation may offer. The cash flows generated by a property service debt first, and in some cases, may fall short of what is required from debtors and investors. In such cases, the Preferred Return continues to accrue and unpaid amounts are ultimately recouped by the investor when the property is sold.