Pari Passu in Commercial Real Estate: What It Means for Investors

In commercial real estate, investors want to know that profits are distributed fairly and that financial risks are shared appropriately. 

That’s where pari passu comes in. This Latin term, meaning “on equal footing,” is a fundamental principle in real estate partnerships and commercial mortgage-backed securities (CMBS).

Understanding how pari passu works can help investors navigate real estate deals with confidence—whether they’re pooling funds in a partnership or investing in securitized loans. Let’s break it down in simple terms.

What is Pari Passu in Real Estate?

In finance, pari passu means that all investors or creditors in a certain class receive equal treatment. 

When applied to real estate, it ensures that profit distributions, loan repayments, and investment returns are handled fairly, without preference for one investor over another.

For example, in a real estate partnership, all investors might receive profits at the same time and in proportion to their investment—ensuring everyone is treated equally.

 In CMBS loans, pari passu notes allow lenders to spread risk across multiple investors by dividing a loan into equal portions.

Pari Passu vs. Pro Rata: What's the Difference?

Though they often go hand in hand, pari passu and pro rata are not the same thing.

• Pari passu ensures that all investors within a group are treated equally and receive distributions at the same time.
• Pro rata determines how much each investor receives, based on their share of the investment.

For example, if a real estate partnership earns $100,000 in profits and has three investors:

• Investor A (51% ownership) gets $51,000
• Investor B (30% ownership) gets $30,000
• Investor C (19% ownership) gets $19,000

‍

Since all investors are treated equally and paid at the same time, this structure is both pari passu and pro rata.

‍

Pari Passu in Real Estate PartnershipsIn commercial real estate, waterfall structures dictate how cash flow is distributed among investors. Pari passu clauses are often included in these structures—at least up to a certain return threshold.

‍

For example, an operating agreement might state that all investors receive profits pari passu up to a 10% return. Beyond that, the sponsor (or general partner) may earn a “promote” (a larger share of profits) for achieving higher returns.A typical waterfall structure might look like this:

‍

• Up to a 10% return, all investors receive profits pari passu (proportionally).
• Beyond 10%, the sponsor takes 20% of excess profits.
• Beyond 15%, the sponsor takes 25% of excess profits.
• Beyond 20%, the sponsor takes 30% of excess profits.

‍

At the beginning, profits are distributed equally (pari passu), but once return hurdles are met, the sponsor earns a bigger cut as an incentive for outperforming expectations.

‍

Pari Passu in CMBS LoansPari passu also plays a crucial role in commercial mortgage-backed securities (CMBS), which bundle real estate loans into investments that can be bought and sold.CMBS loans are typically divided into senior (A-notes) and subordinate (B-notes):

‍

• A-notes have priority and are often split into pari passu notes, meaning multiple investors hold equal claims and get paid first.
• B-notes are subordinate, meaning they only get paid after A-notes are satisfied.

‍

For example, a $20 million CMBS loan could be split into:

‍

• Three pari passu A-notes of $5 million each (paid back equally).
• One subordinate B-note of $5 million (only paid after A-notes are settled).

‍

By structuring loans this way, risk is spread across multiple investors, making these loans easier to sell and manage.Why Pari Passu Matters for InvestorsThe pari passu structure provides several benefits:

‍

• Ensures fairness – All investors receive equal treatment within their class.
• Increases liquidity – Helps break large investments into smaller, more manageable portions.
• Improves transparency – Investors can trust that distributions will be handled fairly.

‍

Whether you’re investing in a real estate partnership or exploring CMBS investments, understanding pari passu is essential. 

‍

This structure ensures fair treatment among investors, clarifies how profits are shared, and helps manage financial risk.

‍

Before investing, always review the operating agreement and consult with a real estate attorney to understand how profits and risks are allocated. 

‍

Being informed can help you make smarter, more secure investment decisions.

‍

Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.

‍