Updated · Part of the CRE investment glossary
How pari passu works
Every deal document answers the same question: when there is cash, who is paid first? Holders who are pari passu stand in the same place in line. If there is enough for everyone, each receives what they are owed. If there is not, they share the shortfall in proportion to their claims, and no one is paid in full while another goes without.
The phrase shows up in three places in real estate. In the equity, LPs in one class are pari passu with each other, and a sponsor’s co-invest is often pari passu with the LPs. Between classes, an agreement can make two classes pari passu or rank one ahead of the other. In debt, a large mortgage can be split into pari passu notes held by different lenders, each paid pro rata from the same payments.
The formula
Within a pari passu tier, each holder’s share is proportional:
Holder’s share = amount distributed in the tier × (holder’s claim ÷ total claims in the tier)
- Claim: usually capital contributed or unreturned; for a pref tier, the pref owed to each holder.
- Tier: the step of the waterfall in which the holders rank equally. Holders can be pari passu in one tier and not in another.
Worked example: pari passu vs senior
A deal has two classes: Class A with $6,000,000 of capital and Class B with $4,000,000. This year it distributes $500,000.
If the classes are pari passu, Class A receives 60% ($300,000) and Class B 40% ($200,000). If Class A is senior with an 8% preferred return, it is owed 8% × $6,000,000 = $480,000 first, and Class B receives the remaining $20,000. In a weaker year with $300,000 to distribute, pari passu gives $180,000 and $120,000; the senior structure gives Class A all $300,000 and Class B nothing.
| Distribution | Structure | Class A | Class B |
|---|---|---|---|
| $500,000 | Pari passu (60/40) | $300,000 | $200,000 |
| $500,000 | Class A senior, 8% pref | $480,000 | $20,000 |
| $300,000 | Pari passu (60/40) | $180,000 | $120,000 |
| $300,000 | Class A senior, 8% pref | $300,000 | $0 |
Pari passu, pro rata and the capital stack
Pro rata is the arithmetic — shares in proportion to claims. Pari passu is the ranking — no claim ahead of another. Holders who are pari passu are paid pro rata to their claims, which need not be equal: two classes can rank equally while one is owed a higher pref, in which case a shortfall is split by what each is owed.
The opposite of pari passu is priority. In the capital stack, senior debt is paid before mezzanine debt, mezzanine before preferred equity, and preferred equity before common equity. Within the common equity, the waterfall then decides the order of return of capital, pref and profit.
What to check in the documents
"Pari passu" in a summary can mean less than it sounds:
- Which tiers: classes can be pari passu for return of capital but not for the pref, or the reverse.
- Sponsor co-invest: whether the sponsor’s own capital is paid alongside LPs or behind them.
- Different terms: whether pari passu classes have different pref rates, and how a shortfall is split.
- Lenders: with pari passu notes, which holder controls decisions such as modifications and workouts.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.