Pari passu is the Latin phrase for “on equal footing.” In finance, it refers to circumstances in which two or more classes of transactions or people are controlled without preference. Assets, securities, obligations, creditors and investors can be managed under a pari passu structure. For instance, under pari passu, all unsecured creditors are treated equally in a bankruptcy. For a commercial broker, understanding this concept is critical in terms of waterfall structures in CRE partnerships or commercial mortgage backed securities. In this post, we will look at an overview of the difference in pari passu and pro rata.
Distinctions between Pari Passu and Pro Rata
One of the most commonly asked questions regarding pari passu pertains to the distinctions between pari passu and pro rata. These two terms are frequently confused for each other. Pari passu refers to a classification. Bonds or debts are held pari passu. Pro rata refers to how funds or assets are distributed. As noted above, the bankruptcy example means that all unsecured debts are treated equally, pari passu. They belong to the same class and will be paid out with the same priority and with no preference. However, since the debts are pari passu, they will be paid out on a pro rata basis. Distributing the funds in any other way would give priority to some unsecured debts versus others. In a very practical manner little difference exists between pari passu and pro rata. When something is held pari passu, the only method to maintain the “equal footing” is to allocate profits and losses on a pro rata basis.
For a commercial broker who works with investors seeking real property, understanding the difference between these two concepts may seem like a low priority, since they generally apply to bundled and securitized CRE loans. However, your investors may be making choices between buying a CRE property or investing in commercial mortgage backed securities. Having the knowledge to make the distinction may be the one item that tips the potential client towards direct investment in real property.
If you are seeking an experienced commercial broker in Phoenix with broad knowledge of the various investment options you have, contact us at Menlo Commercial Real Estate to be connected with the best brokers in the Phoenix market. Our number is 480.659.1777, or email us at firstname.lastname@example.org.