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Pari Passu in Commercial Real Estate
In commercial real estate, pari passu simply means that two investors, creditors, or assets are on equal footing— that is, without preference to one or the other — particularly in regards to syndication payouts.
What is Pari Passu?
In commercial real estate, pari passu simply means that two investors, creditors, or assets are on equal footing— that is, without preference to one or the other. Pari passu is most commonly used to describe the way that CRE investors receive payouts, especially when waterfall structures are being used. It’s also sometimes used to indicate that two creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default.
Pari Passu vs. Pro Rata Share
Pari passu and pro-rata share are two terms that are often confused with each other:
- A pro rata share simply means that each shareholder gets an equal proportion for every share of an investment that they own.
- In contrast, pari passu means that all obligations are of the same class and priority.
What is pari passu in commercial real estate?
In commercial real estate, pari passu simply means that two investors, creditors, or assets are on equal footing— that is, without preference to one or the other. Pari passu is most commonly used to describe the way that CRE investors receive payouts, especially when waterfall structures are being used. It’s also sometimes used to indicate that two creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default.
Pari passu is not just used in commercial real estate. It is also used in other industries, such as banking, finance, and venture capital. In these industries, pari passu is used to ensure that all creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default. It is also used to ensure that all investors in the same class receive the same amount of money, regardless of the amount of money they invested.
How does pari passu affect commercial real estate financing?
Pari passu affects commercial real estate financing by ensuring that all creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default. It is also used to ensure that all investors in the same class receive the same amount of money, regardless of the amount of money they invested. This helps to protect investors from taking on too much risk and ensures that all investors are treated fairly.
For example, if a borrower defaults on a loan, all creditors or investors with a pari passu claim on the borrower’s assets will receive the same amount of money, regardless of the amount of money they invested. This helps to protect investors from taking on too much risk and ensures that all investors are treated fairly.
What are the benefits of pari passu in commercial real estate?
The main benefit of pari passu in commercial real estate is that it ensures that all investors in the same class receive the same amount of money, regardless of the amount of money they invested. This helps to ensure fairness and equity among investors, and it also helps to protect investors from potential losses due to a borrower default. Additionally, pari passu can help to ensure that all creditors or investors have an equal claim on a borrower’s assets, which can help to protect investors from potential losses.
What are the risks associated with pari passu in commercial real estate?
The main risk associated with pari passu in commercial real estate is that if a borrower defaults, all creditors or investors have an equal claim on the borrower's assets. This means that if one creditor or investor is able to recover more of their investment than the others, the other creditors or investors may not be able to recover their full investment. Additionally, if two investors in the same class receive different amounts of money, this could lead to disputes between the investors.
What are the legal implications of pari passu in commercial real estate?
In commercial real estate, pari passu is used to ensure that all creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default. This means that if a borrower defaults, all creditors or investors will have an equal right to the borrower’s assets. This is important to ensure that all creditors or investors are treated fairly and that no one creditor or investor is given preferential treatment.
In addition, pari passu is also used to ensure that all investors in the same class receive the same amount of money, regardless of the amount of money they invested. This is important to ensure that all investors are treated fairly and that no one investor is given preferential treatment.
The legal implications of pari passu in commercial real estate are that all creditors or investors must be treated equally and fairly. This means that no one creditor or investor should be given preferential treatment, and that all creditors or investors should receive the same amount of money, regardless of the amount of money they invested.
How can pari passu be used to secure commercial real estate financing?
Pari passu can be used to secure commercial real estate financing by ensuring that all creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default. This helps to protect lenders from any potential losses in the event of a borrower default. Additionally, pari passu can be used to ensure that all investors in the same class receive the same amount of money, regardless of the amount of money they invested. This helps to ensure fairness and equity among all investors.
In practice, debts or obligations that are held pari passu will also distribute a pro rata share to each investor or creditor, since they are all on equal footing.
For example, if two investors have a pari passu agreement, they would both receive the same amount of money from a borrower’s assets, regardless of the amount of money they invested.
Pari Passu in Regards to Waterfall/Promote Structures
When a commercial real estate investment involves a waterfall and promote structure, in most cases, all general partners will be treated pari passu — meaning that they will all get an equal amount of return, at the same time, in a pro rata fashion. However, the sponsor/general partner (GP), will generally be only treated pari passu up to a certain return (or hurdle), say, 9%/year. Past that, they will receive a promote (an additional percentage of the profits), in addition to their pro rata share.
For instance, a sponsor might be entitled to a promote of 15% of all profits above and beyond 9%. There may also be multiple hurdles, each of which offers greater incentives to the sponsor. For example, the sponsor might be entitled to a promote of 20% of all profits past 12%, and a promote of 30% of all profits beyond 15%.
Pari Passu and CMBS Loans
Commercial mortgage backed securities (CMBS) also use pari passu notes to break up the risk of any one CMBS loan to multiple different bond securitizations. CMBS loans are typically divided into A and B-piece notes; A-piece notes will be paid first, while B-piece notes are paid second (and may not be paid at all if a borrower defaults on their loan) but enjoy a higher interest rate, due to the higher risk. In general, only A-piece notes are broken into multiple pari passu notes, but, among these A-piece notes, each note will be paid back on equal footing to the others, so no group of investors benefits more or less. For example, a $20 million CMBS loan could be portioned into 3, $5 million pari passu A- notes, each which is placed into a different CMBS. In this example, the other $5 million note would be a B-piece note, which would receive subordinate (non-pari passu) treatment.
Pari Passu in Other Industries
Pari passu is not just used in commercial real estate. It is also used in other industries, such as banking, finance, and venture capital. In these industries, pari passu is used to ensure that all creditors or investors have an equal claim on a borrower’s assets, especially in the case of a borrower default.
It is also used to ensure that all investors in the same class receive the same amount of money, regardless of the amount of money they invested.