A/B Note Bifurcations, Hope Notes & Subordinate Note Structures
An A/B note structure (also known as a bifurcated note structure) is a sophisticated financing arrangement where a single commercial mortgage loan is divided into two separate promissory notes secured by the exact same underlying mortgage: a senior "A-Note" and a subordinate "B-Note." This structure enables lenders to create customized risk-adjusted debt tranches for syndication and facilitate complex loan workouts.
Indicative Underwriting Matrix
A/B note structures are governed by co-lender agreements. In CMBS pools, B-Notes are typically sold to private opportunity funds while A-Notes are securitized.
How A/B Note Bifurcations Operate Under a Co-Lender Agreement
In an A/B note structure, the borrower executes two promissory notes at closing: Note A and Note B. Both notes are secured by the same recorded mortgage. However, behind the scenes, the holders of Note A and Note B execute a specialized Co-Lender Agreement establishing a payment waterfall.
All property revenues and loan payments flow first to pay interest and scheduled principal on the A-Note. Only after the A-Note is completely satisfied does remaining cash flow distribute to the B-Note. If the loan defaults and the property is liquidated at foreclosure, the A-Note holder is paid in full before the B-Note holder receives a single dollar of recovery.
The Role of A/B Notes in Loan Workouts and "Hope Notes"
A/B structures are frequently deployed in commercial loan workouts and distressed restructuring. When an over-leveraged commercial property cannot service a $20,000,000 mortgage due to market occupancy declines, the lender may bifurcate the debt into a $14,000,000 A-Note and a $6,000,000 B-Note (often called a "Hope Note").
The borrower services monthly debt payments strictly on the $14,000,000 A-Note at market interest rates, bringing the property back into positive cash flow. The $6,000,000 B-Note accrues interest and becomes payable only upon property sale or refinance, giving the lender "hope" of recovering full principal if real estate values recover.
Frequently Answered Financing Questions
Verified answers to common borrower and broker inquiries regarding loan sizing, guidelines, and execution.
What is an A/B note structure in commercial real estate financing?
An A/B note structure splits a single commercial mortgage into two tranches: a senior A-Note with lower rate and payment priority, and a subordinate B-Note that takes higher yield but absorbs first losses.
Both notes share the same recorded first mortgage on the property, governed by an internal co-lender waterfall agreement that dictates cash flow and loss allocation.
Submit Financing Scenario →What is a Hope Note in commercial debt workouts?
A Hope Note is a subordinate B-Note created during a loan restructuring where current interest payments are deferred until property sale, giving the lender the hope of recovering capital if property values appreciate.
Hope notes allow struggling borrowers to lower active monthly mortgage payments while ensuring the lender does not permanently forgive loan principal on Day 1.
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