What is a preferred return?

A preferred return is an annual cash payment made to you as the tax equity investor, calculated as a fixed percentage of your original capital contribution (typically 2.0%–3.0%). It is contractually defined in the partnership or operating agreement and paid before any cash distributions are made to sponsors or other equity holders. In renewable energy tax equity investments (such as solar or wind projects) the preferred return provides priority access to project cash flow and helps reduce downside risk. This structure is a standard component of the cash flow waterfall and works alongside tax credits and depreciation benefits to support the investor’s overall target yield.