An A/B split carves the loan into a current-pay A-note (sized to what current cash flow can service) and a B-note (sometimes called a hope note) that accrues and is paid only if property value recovers. The structure preserves the lender's full nominal claim while giving the borrower breathing room.
How is the A-note sized?
Typically to a 1.10 to 1.20x debt-service-coverage ratio against trailing or stabilized NOI at a sustainable amortization. The B-note absorbs whatever principal does not fit. Some structures use a stated value-based test instead. A-note up to 60 to 65 percent LTV, B-note above.
When does it work?
When the underlying asset has plausible value-recovery upside (a 2026 office workout where market recovery would re-engage the B-note) and the sponsor is willing to remain operationally engaged. When recovery is implausible, sponsors usually negotiate a discounted payoff or DIL instead.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Financial Stability Report · Board of Governors of the Federal Reserve System · 2025-11