Starting today, I'll be sending a note like this every week about what we're seeing in commercial real estate, how we evaluate risk, what we're learning, and the occasional deal story worth telling.
For the first one, here's a deal we just fully realized.
Last month, our Wellings Real Estate Income Fund's preferred equity investment in Madison Terrace Apartments, a 96-unit Chicago workforce multifamily property, was fully realized. It generated a 23.4% IRR and 1.40x MOIC net to the Fund over a ~2.2-year hold on a $3,685,000 commitment.
The easy version of the story: we invested at acquisition, the operator executed the business plan, and we were refinanced out at attractive economics. The more important lesson is this: in preferred equity, structure often matters as much as the property. |
How We Found the Operator and Deal
We found this operator and deal in early 2024 through a capital advisor. The operator has owned/operated single-family and multifamily real estate in Chicago since 2012 and owns/operates ~3,000 multifamily units in Chicago. Before committing, we also learned that one of our current investors had previously invested with this operator in a separate deal that was going well. That didn't replace diligence, but it was helpful context before we dug into the deal.
How the Investment Was Structured
Roughly 22% of the capital stack sat in common equity in first-loss position before our preferred equity position, which gave us meaningful downside protection. In addition, we didn't fund the full commitment on day one. ~60% was funded at closing; the remaining ~40% was held back for capital improvements. Future draws required our approval. That may sound like a small detail. It is not.
This structure meant we weren't wiring all our capital up front and hoping the business plan would work. Capital was released as the operator executed the business plan. If the work wasn't done, we could slow down or stop additional funding.
What Actually Happened
The operator executed. In Q3 2024, renovated units were leasing at rents roughly $600 above acquisition rents and about $200 above pro forma projections. The business plan wasn't just working. It was working better than modeled.
Monthly revenue at the property was approximately $102,000 at acquisition. By September 2025, it had grown to $152,000. Nearly 50% revenue growth in roughly 18 months.
To be fair, the market helped too. Chicago has been one of the strongest multifamily rent-growth markets in the country due to limited supply, especially compared to many oversupplied Sun Belt markets. But market tailwinds alone do not create a good investment.
Then there was a fire at one of the buildings in early 2026, right before the refinance was scheduled to close. This delayed the expected exit. Insurance took a while. Expenses moved around. Real estate rarely follows the original underwriting model.
But this is why structure matters.
Because of the preferred position and underlying property performance, the Fund received current pay at 10%+ annualized throughout the hold period. We were not depending on everything going perfectly. Because of the draw mechanics, we had oversight over additional capital going in. Because the operator performed despite the delays, the property ultimately supported a refinance that redeemed our preferred equity position as originally planned.
And roughly $600,000 of the original $3,685,000 commitment ended up not being needed for capital improvements. The 23.4% IRR was generated on capital actually funded (plus money market interest earned on the holdbacks), not the full amount we had committed.
What We Look for In Every Preferred Equity Deal
Projected returns are only part of the story. These are some questions we ask before sending a term sheet for a preferred equity investment:
How much capital will be funded upfront versus through future draws?
Is the combined DSCR (senior debt service + preferred equity current pay) based on in-place NOI above 1.10x?
Is a current-pay reserve necessary?
How much common equity sits in first-loss position before us in the capital stack, and what is our detachment point?
What has to happen to the deal before our capital is impaired?
What rights do we have if the business plan falls behind or if the operator doesn't perform?
How does the operator make money, and are they aligned with us?
This Chicago deal went well. But the lesson goes beyond this one outcome.
Operator quality, structure, control rights, and day-to-day execution are often what determine whether a deal can survive the inevitable surprises. Even when those surprises include a fire.