The meaning of pari passu fits in well with the jargon terms and complex regulations the finance and commercial real estate world is flooded with.
To save you from drowning yet again, we are diving headfirst into the waters of “Pari Passu” financing. We will demystify precisely what it means and, more importantly, whether or not it’s still relevant in today’s evolving commercial real estate landscape.
What is the Meaning of Pari Passu?
First things first, let’s break down the term. “Pari Passu” is a Latin phrase that means “on an equal footing” in English.
In the context of commercial real estate financing, it’s often used to describe the equal ranking of various investors or lenders in terms of their claims on a particular asset or cash flow.
That might all sound quite complicated, but to put it simply, it signifies a level playing field where no one party has priority over another. This gives lenders and investors confidence, which ultimately helps close the deal.
What is the Relevance of Pari Passu in Commercial Real Estate?
Now, you might be wondering, “Is this centuries-old concept still relevant in today’s financial world?” The answer is a definitive yes.
Pari passu is a pretty simple concept in commercial real estate where someone’s $5 million SBA 7a exposure limit is maxed out. Then an additional conventional note is taken out, in what is considered the pari-passu position, for up to an extra $5 million.
Both loans will be based on a 10, 25, or blended amortization.
Pari passu arrangements are still very much a cornerstone of modern commercial finance, and here are three reasons why:
1. Protect Investor Rights
In an era of intricate financial instruments and complex deal structures, pari passu provisions are a safeguard for the interests of investors.
These provisions ensure that investors, regardless of their stake in a financial transaction, are treated fairly and equally regarding the repayment or distribution of assets. This transparency is good for everyone as it instills confidence and attracts commercial real estate investment.
2. Maintain Credibility
In commercial real estate, pari passu clauses are often seen as a stamp of credibility. They signal to potential investors and lenders that their interests are protected, fostering trust in the deal. This ultimately means it can lead to more favorable financing terms and lower costs of capital.
3. Adapt to Market Shifts
While the core concept of pari passu remains unchanged, its application has evolved to meet the demands of the modern financial world. It’s a versatile tool that can be tailored to suit the needs of various transactions, from syndicated loans to bond issuances.
How Pari Passu is Used in Today’s Financial Markets?
Pari Passu has several uses and is applied in various ways. Let’s take a look at these three examples to illustrate the enduring relevance and meaning of pari passu.
1. Bond Market Dominance
In the bond market, pari passu clauses are a standard feature. According to data from the IMF, almost 90% of international sovereign bonds issued in recent years include pari passu provisions. This underscores its significance in these markets.
2. Commercial Real Estate Transactions
In the realm of commercial real estate, the presence of pari passu clauses in loan agreements has been steadily increasing. This trend is particularly pronounced in large-scale, high-value deals where investors and lenders seek the security of equal footing (which is the entire meaning of pari passu).
3. Investor Confidence
Surveys of institutional investors consistently highlight the importance of transparent and fair contractual arrangements. Pari passu provisions align with these expectations, encouraging investment and liquidity in financial markets.
Is Pari Passu Right for You
In the ever-evolving landscape of finance and commercial real estate, the meaning and concept of pari passu stand as a testament to the enduring need for fairness and transparency.
While the terminology may be old, its relevance remains firmly rooted in the present. Pari passu isn’t just a Latin phrase; it’s a cornerstone of modern finance that continues to shape the way deals are structured and investments are made.
So, the next time you come across this term, remember that it’s not just a relic of the past – it’s a powerful tool used today so you don’t have to give up equity if you don’t have to.
Find out if pari-passu non-equity debt funding is right for your situation by contacting us today!
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