What is pari passu in real estate equity joint venture partnerships? How do you model it?

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If you’re working with equity joint venture partnership structures, you may come across the term pari passu in the operating agreement between the partners.

Pari-passu (sometimes you’ll see it hyphenated) is a Latin term used to describe funding and/or the return of capital pro-rata to investment proportions, simultaneously. Note the two dynamics at play here: 1) dollar amount, and 2) timing.

The good news is that it’s harder to remember how to spell pari passu correctly than it is to model it out. If dollars are being invested pari passu, then the individual cash amounts funded in one or more periods of funding are simply the total equity requirement in the period(s) multiplied by the relative share of cash equity investment of each equity entity to the whole equity pie.

For instance, if $100,000 is required in month 1, the operating agreement calls for pari passu investment starting in month 1, and the sponsor is contributing 10% and the investor 90%, then the sponsor would contribute $10,000 and the investor $90,000.

The same would go for the return of capital if it is stipulated that capital is returned pari passu. When cash flow distributions are available (let’s use an example of a $20,000 distribution), the distribution will be paid out $2,000 to the sponsor and $18,000 to the investor.

Our Excel model projection templates assume the following joint venture partnership structures:

• for acquisitions: pari passu equity investment and pari passu preferred return and return of capital (Valuate also uses this same structure)
• for developments: sponsor invests all equity first, then investor, but there is pari passu preferred return and return of capital.