With common voting shares, each share is equal in the sense that they hold a voting right and are equal in case of a liquidation. With preferred shares, each share is equal in the sense that they each hold an equal preference with dividend distributions and a preference (ahead of common shares) in the case of a liquidation. In the corporate sector, the case of Re Maxwell Communications Corporation plc is often cited. This case involved the insolvency of a multinational media company and required the courts to navigate the interplay between English and U.S. insolvency laws. The court’s decision to uphold the pari passu principle across different jurisdictions demonstrated the clause’s robustness and its critical role in cross-border insolvencies. In commercial real estate, pari-passu generally refers to distribution models that reference the pro-rata distribution of profits based on each investor’s percentage of the initial investment.

Application in Commercial Real Estate Loans

In the context of debt restructuring, the pari passu clause plays a crucial part in safeguarding fair treatment for all creditors by establishing a hierarchical order of claims. This provision certifies that all creditors are treated equally, adhering to fairness principles and upholding ethical standards. By doing so, it prevents preferential treatment of certain creditors, promoting a level playing field for all parties involved. In commercial real estate, the application of Pari Passu is predominantly witnessed in loan agreements and mortgage securitizations. When a substantial property project requires financing, it’s not uncommon for developers to seek funds from multiple sources.

As corporations navigate complex financial landscapes, effective corporate debt structuring is crucial for optimizing capital allocation and minimizing default risk. This involves strategically managing debt portfolios to facilitate efficient use of resources and mitigate the likelihood of default. Debt consolidation, a key aspect of corporate debt structuring, enables companies to simplify their debt obligations by combining multiple loans into a single, more manageable debt instrument. This can lead to reduced interest payments, extended repayment periods, and improved cash flow management.

By incorporating these provisions, lenders can minimize risk and secure a more stable investment. Effective credit agreement provisions are indispensable for maintaining a healthy lender-borrower relationship and facilitating successful financial transactions. In a pari passu hierarchy, all creditors have equal priority, and repayment is distributed proportionally. Subordination agreements, on the other hand, establish a ranked priority, where junior creditors yield to senior creditors. Senior-subordinate relationships involve a tiered structure, where senior creditors are paid in full before junior creditors receive any repayment.

1. SunStream Bancorp provided a $100 million acquisition facility to cannabis business Jushi Holdings.
2. For instance, the Basel Accords, a set of international banking regulations, emphasize the importance of robust risk management practices, including the use of effective financing terms.
3. It is commonly used in law, and is defined in Black’s Law Dictionary as “proportionally; at an equal pace; without preference”.
4. Within the marketplace, all new equity shares (called a secondary offering) have equal rights with existing shares or those that were previously issued.
5. It stops borrowers from harming the bondholders’ security by pledging assets.
6. It implies that all the creditors ranked equally will recover their share from the liquidated assets.

What Is Pari Passu in Commercial Real Estate?

Pari passu is a Latin term which means ranked pari passu charge meaning equally whereas, pro-rata means in proportion. Usually in a real estate agreement, pro-rata refers to the proportional distribution of obligations and profits. To take an example for pro-rata, where one person has invested money for 70% of  a property and another has contributed 30%, then obligations and profits will be distributed proportionally to each of them.

Waterfall and Promote Structures

My business partner and I were looking to purchase a retail shopping center in southern California. Ronny found us several commercial properties which met our desired needs. We came to terms with the Seller, entered into a purchase agreement and opened escrow. Additionally, we needed 80 percent financing on our multimillion-dollar purchase. So, Assets America handled both the sale and the loan for us and successfully closed our escrow within the time frame stated in the purchase agreement.

The U.S. courts ruled that Argentina’s payment to restructured bondholders without making a ratable payment to holdout creditors violated the pari passu clause. This decision underscored the importance of equal treatment and set a precedent for future sovereign debt restructurings. The implications of pari passu clauses extend beyond individual creditors to the broader financial system.

Frequently, the waterfall model includes “preferred returns” for certain investors. These investors receive the first claim on profits until collecting a hurdle IRR. Therefore, if profits fail to achieve the hurdle return, preferred investors take the shortfall from other investors’ returns. Under this structure, non-preferred investors might end up with reduced or conceivably no return. While both promote equality, Pari Passu ensures equal treatment of obligations, while Pro Rata pertains to proportional distribution of returns or liabilities. Large borrowers are financed by multiple banks in the consortium or under joint lending arrangements (JLA).

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At the very least, both sides should agree that the new loan should rank equally with the borrower’s other debts. Pari passu is important to understand, because it can have dire effects on complex transactions that can affect how creditors are paid. When a verdict is reached, all creditors can be regarded equally, and will be repaid at the same time and at the same fractional amount as all other creditors. However, if these investors were lenders and the borrower defaults, a Pari Passu clause would guarantee that no lender has a repayment priority over others.