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Preferred Equity Gets a Boost: Pension Funds Pour $15 B into CRE “Gap Capital”—Here’s How Brokers Can Tap It
George Tsividakis
June 13, 2025
From stalled ground-ups to value-add rehabs, a fresh wall of pension money is flowing into the middle of the capital stack. Learn what it is, why it exploded in 2025, and how to match your clients’ deals with this newly abundant funding source.
1 | The News Behind the Wave
April 2025: CalPERS, CalSTRS, and three other mega-pensions announced $15 billion in new mandates to preferred-equity and structured-capital funds.
Drivers:
Higher “Core” Yields: With senior-loan coupons at 6 %–7 %, pref equity can now earn 10 %–12 % current + upside—juicy for pensions that need 7 % actuarial returns.
Basel III Endgame: Banks are slashing senior proceeds (see prior post). Developers suddenly have bigger “gaps” above 55 %-65 % LTC.
Loan Maturities: $390 B of CRE debt comes due in 2025-26; refinancing often needs mezz or pref to meet new DSCR tests.
Result: Funds like Blackstone, Ares, and MetLife Investment Management are flush—and actively courting brokers with shovel-ready deals.
2 | Preferred Equity, 60-Second Refresher
Capital Layer | Collateral | Typical Cost | Control Rights |
|---|---|---|---|
Senior Loan | 1st lien mortgage | SOFR + 250–350 bp (today ~7 %) | Foreclose on default |
Preferred Equity | Equity pledge; sub-to senior, senior-to common | 10 %–12 % current pay + 1 %–3 % accrual | Cure rights; replace GP after default |
Common Equity | Remaining cash flow & upside | IRR target 15 %–20 % | Full control (until a pref default) |
Key Point: Preferred equity is not a loan, so it doesn’t add to lender LTV limits; but it is senior to the sponsor’s profit. Perfect to fill a 10-25 % “gap.”
3 | How the New Money Changes the Stack
Deal Type | 2023 Structure | 2025+ Structure w/ Pension-Backed Pref |
|---|---|---|
Ground-Up Multifamily (80 % LTC) | 60 % construction loan + 20 % cash equity | 60 % senior + 20 % pref equity + 20 % cash → sponsor equity cut to 20 %–10 % |
Value-Add Hotel | 55 % bank bridge + 15 % mezz + 30 % cash | 55 % bridge + 25 % pref (12 % coupon) + 20 % cash |
Office-to-Resi Conversion | 50 % senior + 10 % mezz + 40 % cash | 50 % senior + 15 % pref + 35 % cash |
Sponsors keep more dry powder; IRRs stay alive even with higher senior coupons.
4 | What Pref Investors Want (Underwriting Cheatsheet)
Metric | Target |
|---|---|
Sponsor Track Record | ≥ 2 similar assets, no bad-boy events |
Skin-in-the-Game | ≥ 8 % “last-loss” common equity |
Projected Debt + Pref Service Coverage | ≥ 1.10 during stabilization |
Exit Strategy | Agency/CMBS refi or sale ≤ 36 mo |
Geography | Primary & strong-secondary MSAs (Tier 1 & 2) |
Deal Size Sweet Spot | $10 M – $150 M total capitalization |
Tip for Brokers: Package a three-layer pro-forma (senior, pref, common) showing waterfall cash flow at exit IRR 14 %–18 %.
5 | How Brokers Can Source & Place Pref Today
Spot the “25 % Gap” – Any deal where senior lands at 55 %–65 % LTC and sponsor balks at 35 % cash.
Pre-Vet Sponsors – Clean background, signed completion guaranty (if construction).
Show Hard Cost Audits – Pref shops love third-party cost-to-complete reports.
Line Up Senior & Pref Together – Many funds co-invest alongside preferred equity; bring a bundled deck.
Leverage White-Label Capital – Through LoanFunders.com, present pref as your solution; we underwrite, you earn an origination override.
6 | LoanFunders.com Preferred-Equity Program Snapshot (via Network Partners)
Feature | Terms |
|---|---|
Check Size | $2 M – $40 M |
Position | Senior to common, junior to senior loan |
Rate / Structure | 9 %–11 % current + 1 %–3 % accrual / exit kicker |
Term | 3–5 yrs, coterminous with senior |
Control | Cure rights; step-in after uncured default |
Closing Speed | 30–45 days (concurrent with senior) |
Brokers retain up to 1 pt on pref placement; additional YSP on senior loan if placed through us.
7 | Case Study — $60 M Multifamily, Phoenix
Metric | Details |
|---|---|
Total Cost | $60 M |
Senior Construction Loan | $36 M (60 % LTC) |
Preferred Equity | $12 M @ 10 % current pay, 2 % accrual |
Sponsor Cash | $12 M |
Exit | Stabilized DSCR 1.35; Fannie refi at 65 % LTV, year 3 |
Sponsor IRR | 18.7 % (vs. 13.2 % without pref) |
Pension-backed pref filled the gap; deal closed 37 days after term sheets.
8 | Key Takeaways
$15 B in pension mandates means pref equity availability is at a 10-year high.
Sponsors can now close deals at 80–85 % of total cost without mezz recourse.
Brokers who understand the waterfall & underwrite coverage ratios will control the pipeline.
LoanFunders.com delivers senior + preferred in one package—white-labeled for your brand.
Ready to Plug Gap Capital Into Your Next Deal?
Upload your project deck and cost schedule—our team will size senior & preferred tranches and issue dual term sheets within 48 hours.
Bridge the gap. Build the asset. Boost the return.