Preferred Return

A preferred return, often used in real estate and private equity investment structures, refers to a priority return that investors are entitled to earn before the general partners or managers of the investment start sharing in the profits.

This is typically expressed as an annual percentage yield, such as 8% per annum, on the initial investment. The preferred return is "preferred" because it is paid out before any other profits are distributed, giving these investors a degree of downside protection.

It's important to note that the preferred return is not a guarantee. If the investment does not generate enough income to cover the preferred return, the unpaid amount may be accrued and then paid out when income becomes available, depending on the specifics of the investment agreement.

In the context of a distribution waterfall, the preferred return is usually the second tier, following the return of capital. Only after the preferred return is paid in full do the remaining profits, if any, get distributed according to the subsequent tiers of the waterfall (such as the "catch-up" and the "profit split" stages).