A pari passu intercreditor agreement governs the relationship between two or more lenders that share the same lien priority on the same collateral. In CRE, the pattern shows up most often when a senior mortgage is split into multiple notes held by different lenders (A/A structures, common in CMBS securitization where the loan is bifurcated across multiple trust certificates), or when a syndicated construction loan has multiple equal-priority participants.
The 'pari passu' designation means no participant has structural priority over the others; the agreement defines how they share payments, voting rights, control over enforcement, and proceeds in a default scenario.
Payment allocation under a pari passu structure is governed by the agreement's distribution waterfall, which typically routes scheduled payments pro-rata in proportion to each participant's note balance. The mechanics diverge sharply from pari passu in name only structures where one participant has priority of repayment in default scenarios despite equal contractual priority pre-default, an arrangement now disclosed explicitly and described as 'pari passu with priority' to avoid ambiguity.
The pre-default versus post-default distinction matters most in workouts: a senior lender may agree to pari passu treatment during scheduled performance but reserve a priority position once the loan defaults.
The negotiation points that matter most are voting and control rights. Most intercreditor agreements provide that 'unanimous' decisions (modifications to material terms, releases of collateral, release of guarantors) require all participants to consent, while 'majority' decisions (enforcement strategy, modification of non-material terms) can proceed with a participant holding more than 50% of the outstanding principal.
The control participant designation, common in CMBS A/A structures, gives one note holder the right to direct the special servicer in workout scenarios. Sophisticated participants negotiate buy-sell rights, drag-along rights, and tag-along rights to ensure that disagreements among equal-priority lenders can be resolved through transactions rather than indefinite deadlock.
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