What is the difference between pari passu vs pro rata in real estate?

What is the Difference Between Pari Passu vs Pro Rata in Real Estate?

In real estate and finance, "pari passu" and "pro rata" are terms used to describe how payments or distributions are prioritized and divided among investors or creditors, but they address slightly different aspects of these processes.

  • Pari Passu: This Latin term means "on equal footing" and is used to describe situations where multiple parties or claims have equal rights or priority in the context of financial distributions or obligations. In real estate, if investors are described as being pari passu, it means they have equal claim to distributions or assets, without any priority over each other. For example, in a liquidation scenario, all pari passu creditors or investors would receive payments simultaneously and proportionally to their claims, but only after any senior claims have been satisfied.
  • Pro Rata: This term refers to the proportional allocation or distribution of funds or resources among parties based on their share of the total. In real estate investments, if distributions are made on a pro rata basis, each investor receives a portion of the returns directly proportional to their investment in the project. Pro rata ensures fairness in the distribution process but does not necessarily imply any priority or order in how payments are made, unlike pari passu, which emphasizes the equal standing among parties.

The main difference lies in their context of use: pari passu highlights the equal priority or status among parties, while pro rata focuses on the proportional division of payments or resources based on the size of each party's stake or claim.

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