An A-note and B-note structure is a single commercial mortgage split into two notes secured by the same lien: a senior A-note with first claim on payments and a subordinate B-note that absorbs losses first. An intercreditor agreement sets payment priority, cure rights, and enforcement between the two holders.
How A-Note and B-Note Structures Work
An A-note and B-note structure works by tranching one whole loan into two notes ranked by payment priority. The senior A-note is paid interest and principal first. The subordinate B-note receives only what remains after the A-note is current, and it absorbs the first dollar of loss.
Both notes are secured by the same mortgage on the same property. The split is contractual, not a second mortgage. Per the law firm Dechert LLP, in its CMBS primer "Slicing and Dicing," a subordinate B-note is secured by the same mortgage as the A-note but is deeply subordinated to it under an intercreditor agreement. That agreement, not the mortgage, controls who gets paid and who controls a workout.
The intercreditor agreement governs three levers: the payment waterfall, cure rights, and enforcement. Debt service first satisfies the current interest and principal owed on the A-note. Only after the A-note is current does cash reach the B-note. On default, common provisions include a standstill period that restricts the B-note holder from acting, a cure right that lets the B-note holder pay a senior default to protect its position, and a purchase option that lets the B-note holder buy out the A-note at par.
Note sizing follows the lender's risk appetite. As a representative range from law firm and capital markets commentary (Dechert LLP, George Smith Partners), the senior A-note commonly runs about 65 to 80 percent of the original principal, with the B-note taking the remaining 20 to 35 percent. The B-note carries a higher yield to compensate for its first-loss position.
Why A-Note and B-Note Structures Matter
An A-note and B-note structure matters because it lets one lender sell risk in layers rather than the whole loan. The lender keeps or sells the safer, lower-yield A-note and places the higher-yield B-note with an investor who accepts first-loss exposure for a larger return.
For an operator, the structure changes who holds control in a workout. The A-note holder usually directs servicing while performing, but a well-drafted intercreditor agreement gives the B-note holder cure and purchase rights that can decide the outcome of a distressed loan. Reading the intercreditor agreement, not just the loan documents, is what tells a borrower who actually holds the pen when a deal goes sideways.
Example
An A-note and B-note example shows how one payment stream and one loss are split by priority. Consider a 50,000,000 dollar first mortgage divided into a 35,000,000 A-note and a 15,000,000 B-note. The table below traces the balances and a loss scenario where the property sells for 40,000,000 in a default.
Item | A-note (senior) | B-note (subordinate) | Total |
|---|---|---|---|
Principal balance | 35,000,000 | 15,000,000 | 50,000,000 |
Share of loan | 70% | 30% | 100% |
Payment priority | Paid first | Paid after A-note current | |
Liquidation proceeds at 40,000,000 | 35,000,000 | 5,000,000 | 40,000,000 |
Loss absorbed | 0 | 10,000,000 | 10,000,000 |
The loan is 50,000,000 and the sale returns 40,000,000, a shortfall of 10,000,000. Because the B-note absorbs loss first, the full 10,000,000 falls on it before the A-note is touched. The B-note writes down 10,000,000 of its 15,000,000 balance, a 67 percent loss, while the A-note recovers its 35,000,000 in full. This is the first-loss mechanic in one number: the junior 30 percent of the loan absorbs 100 percent of the loss until it is exhausted.
Variations and Edge Cases
An A-note and B-note structure varies by how the pieces are sized, sold, and serviced. Some loans split into multiple B-notes or add a junior A-note. Others pair the A-note with a securitization trust while the B-note trades privately. The common variants appear below.
Variation | What changes |
|---|---|
Multiple B-notes | The subordinate piece splits into B-1 and B-2 notes with their own priority and pricing. |
A-1 and A-2 senior split | The senior piece divides so pieces can be sold to different senior buyers or trusts. |
Securitized A-note | The A-note goes into a CMBS trust while the B-note is held or sold to a subordinate investor. |
Pari passu notes | Two notes rank equally rather than senior and subordinate, sharing cash flow and loss pro rata. |
A-Note and B-Note vs Mezzanine Debt
An A-note and B-note structure is often confused with mezzanine debt. Both add subordinate leverage. An A-note and B-note structure splits one mortgage into two notes sharing the same lien on the property. Mezzanine debt is a separate loan secured by a pledge of the ownership interests, not the property.
The difference drives the remedy on default. A B-note holder enforces through the shared mortgage and the intercreditor agreement, foreclosing on the real property alongside or behind the A-note. A mezzanine lender forecloses on the pledged equity interests under the Uniform Commercial Code, taking the entity that owns the property rather than the property itself.
Frequently Asked Questions
What is the difference between an A-note and a B-note?
An A-note is the senior piece of a split mortgage, paid interest and principal first and last to take a loss. A B-note is the subordinate piece of the same mortgage, paid only after the A-note is current and first to absorb losses, in exchange for a higher yield.
Who buys the B-note in an A/B structure?
B-notes are bought by investors who accept first-loss risk for a higher return, such as debt funds, subordinate debt specialists, and B-piece buyers in CMBS deals. The originating lender often keeps or sells the senior A-note and places the higher-yield B-note with these subordinate investors.
Is a B-note the same as a mezzanine loan?
No. A B-note is part of the mortgage and is secured by the same lien on the property. A mezzanine loan is a separate loan secured by a pledge of the ownership interests in the entity that holds the property, giving it a different collateral base and foreclosure path.