Pari passu is a Latin phrase meaning "on equal footing" that describes two or more claims sharing the same repayment priority. Neither claim is senior to the other, so each receives payments and absorbs losses in proportion to its size rather than in any ranked order.
How Pari Passu Works
Pari passu works by granting each claim equal payment priority and a pro-rata share of every dollar collected. When a loan is split into pari passu pieces, no piece gets paid ahead of another. Cash and losses flow to each piece in proportion to its principal balance, so a larger piece takes a larger share of both.
Per the Legal Information Institute at Cornell Law School, pari passu means claims rank equally without preference, so distributions are made proportionally to the amount each party is owed. This is the opposite of a ranked, or tiered, structure where one claim must be paid in full before the next receives anything.
In commercial real estate, the pattern appears most often in split CMBS notes. A large loan is divided into several pari passu notes, and each note is contributed to a different securitization. Per Thomson Reuters Practical Law, pari passu obligations rank equally in right of payment, so every note carries the same priority and shares payments and shortfalls by its pro-rata percentage.
Mechanic | Pari passu treatment |
|---|---|
Payment priority | Equal across all pieces, none paid first |
Cash sharing | Pro rata to each piece's principal balance |
Loss sharing | Pro rata to each piece's principal balance |
Typical use in CRE | Split CMBS notes across multiple securitizations |
Why Pari Passu Matters
Pari passu matters because it decides who takes a loss and in what proportion when a deal underperforms. Equal footing removes the payment race between claims of the same rank. Two lenders that split a loan pari passu cannot jump ahead of each other, so a shortfall hits both in exact proportion to what each holds.
For an operator, the practical effect is predictable exposure. If two mezzanine lenders sit pari passu at 60% and 40% of a tranche, a $1 shortfall is split 60 cents and 40 cents, every time, with no negotiation. The quotable point: pari passu means no one at the same rank gets to the front of the line, so every dollar of recovery and every dollar of loss is shared by the same percentages.
Splitting a large loan into pari passu notes also spreads concentration risk. Per Thomson Reuters Practical Law, dividing a loan into equally ranking notes lets an originator place pieces into multiple securitizations, so no single deal carries the entire balance of one property.
Example
A $100,000,000 loan is split into two pari passu notes. Note A holds $60,000,000, or 60% of the balance. Note B holds $40,000,000, or 40%. The borrower defaults and the workout returns $90,000,000, a $10,000,000 shortfall. Because the notes rank equally, the loss is shared pro rata by principal balance.
Item | Note A | Note B | Total |
|---|---|---|---|
Principal balance | $60,000,000 | $40,000,000 | $100,000,000 |
Pro-rata share | 60% | 40% | 100% |
Recovery collected | $54,000,000 | $36,000,000 | $90,000,000 |
Loss absorbed | $6,000,000 | $4,000,000 | $10,000,000 |
Note A takes 60% of the $10,000,000 loss, or $6,000,000. Note B takes 40%, or $4,000,000. Each recovers 90 cents on the dollar, the same rate, because equal footing forces the outcome to track each note's share exactly.
Variations and Edge Cases
Pari passu is not always clean in practice. The rank holds only if the loan documents say so, and control rights can diverge from payment rights. Two notes can be pari passu on cash flow while one still holds the servicing or voting control, which changes who steers a workout even though losses stay proportional.
Variant | Behavior |
|---|---|
Split pari passu notes | Equal priority, pro-rata cash and loss, different securitizations |
A/B note split | Not pari passu: the B note is subordinate and absorbs loss first |
Pari passu with control note | Equal payment rank, but one note directs the special servicer |
Cross-collateralized pool | Pari passu claims share a common collateral pool pro rata |
The common confusion is treating any co-lending arrangement as pari passu. An A/B structure looks similar but is ranked: the B piece takes the first loss, so it is subordinate, not equal.
Pari Passu vs Subordination
Pari passu is often confused with subordination, and both describe how claims rank, but they are opposites. Pari passu means two claims share the same priority and absorb losses pro rata. Subordination means one claim ranks below another, so the senior claim is paid in full before the subordinate claim receives anything.
The practical difference is loss order. Pari passu claims lose together, in proportion. Subordinated claims lose in sequence, with the junior claim wiped out before the senior claim takes its first dollar of loss. Splitting a loan pari passu spreads a shortfall evenly; subordinating it concentrates the first loss on the junior piece.
Frequently Asked Questions
What does pari passu mean? Pari passu is a Latin phrase meaning "on equal footing." It describes two or more claims that share the same repayment priority, so each receives payments and absorbs losses in proportion to its size rather than in any ranked order.
How does pari passu loss sharing work? Pari passu claims share losses pro rata by their principal balance. If a $100 million loan splits into a $60 million note and a $40 million note, a $10 million shortfall is split $6 million and $4 million, so each note recovers the same rate on every dollar.
Is pari passu the same as subordination? No. Pari passu means claims rank equally and lose in proportion. Subordination means one claim ranks below another, so the junior claim absorbs loss first and the senior claim is paid in full before the junior claim recovers anything.