A whole loan is originated and held as a single, unified obligation, with one lender (or a syndicate acting together) holding the entire loan amount on identical terms. An A/B note structure splits that same original loan into two pieces after origination, a senior A note and a subordinate B note, each with different payment priority, rate, and risk, even though the borrower still has one loan and one set of loan documents.
Quick Comparison
Key attributes side by side.
| Attribute | Whole Loan | A/B Note |
|---|---|---|
| Number of Notes | One note, one set of terms | Two notes (A and B) split from one loan |
| Borrower Impact | Deals with a single lender or syndicate | Still one loan; split happens behind the scenes |
| Payment Priority | All holders paid pro rata on the same terms | A note paid first; B note absorbs losses first |
| Risk Distribution | Shared equally among participants, if syndicated | Concentrated in the B note; A note is more protected |
| Common Use | Most conventional bank and bridge loans | Large loans where the originator sells the senior piece |
| Documentation | Single loan agreement | Loan agreement plus an A/B co-lender or participation agreement |
| Investor Access | Whole loan sold or syndicated as one piece | A and B notes can be sold separately to different investors |
In Depth
A whole loan is originated and held as a single, unified obligation on one set of terms: one interest rate, one maturity date, and one payment waterfall. Even when a whole loan is syndicated among multiple participants, meaning several lenders each fund a share of the total loan amount, those participants typically share risk and return pro rata, on identical terms, rather than being split into different risk tiers. From the borrower's perspective, a whole loan means dealing with a single lender or a coordinated group acting together under one set of loan documents.
Whole loans are the most common structure in commercial real estate lending, used by banks, bridge lenders, and most private debt funds for the majority of their originations. Simplicity is the main advantage: the borrower negotiates one set of terms, has one point of contact for servicing and any modification requests, and does not need to navigate the competing interests of a senior and subordinate noteholder within the same loan.
Even a syndicated whole loan, where the lead lender brings in co-lenders to fund a large loan, typically preserves this pari passu structure, meaning all participants are repaid proportionally and share losses proportionally if the loan underperforms. This differs meaningfully from an A/B note split, where the participants intentionally take on different risk positions within the same loan rather than sharing risk equally, even though both structures can involve multiple capital sources behind a single borrower relationship.
In Depth
An A/B note structure takes a single originated loan and splits it, after closing, into two separate notes: a senior A note and a subordinate B note, governed by a co-lender or participation agreement that sets the payment waterfall between them. The A note is paid first and bears the least risk, while the B note is paid only after the A note's required payments are satisfied and absorbs losses first if the loan underperforms, functioning similarly to a mezzanine position but within what remains, structurally, a single mortgage loan.
This structure lets the original lender sell or syndicate the lower-risk A note to a different set of investors, often institutional buyers seeking senior-secured, lower-yielding paper, while retaining or selling the higher-yielding, higher-risk B note separately to investors comfortable with more risk. It is a common technique for large CMBS and balance-sheet loans, allowing the originator to right-size its risk exposure and free up capital to originate additional loans without waiting for the entire loan to mature.
For the borrower, an A/B note split generally does not change the loan terms they signed up for, since the borrower still has one loan agreement and one set of covenants; the split happens behind the scenes between the lender and its co-lenders. Borrowers should still understand who holds the B note and how it may affect servicing decisions, since a workout or modification request can move more slowly when it requires coordination between A and B noteholders with different economic interests.
Key Differences
Structure: A whole loan is one unified obligation; an A/B note splits the same loan into senior and subordinate pieces.
Risk sharing: Whole loan participants typically share risk pro rata; A/B note holders take on different risk tiers.
Borrower experience: Both structures typically leave the borrower with one loan agreement and one set of terms.
Investor access: A/B notes let different investors buy the senior or subordinate piece separately; whole loans are sold or held as one piece.
Servicing: A/B note workouts require coordination between noteholders with different interests, which can add time and complexity.
Common context: A/B note structures are more common in large CMBS and balance-sheet loans than in typical bridge or bank lending.
Decision Guide
Practical scenarios to help you decide.
Going deeper
A lender originates a $50 million loan on a large property, illustrative figures only. Held as a whole loan, the originator keeps the full $50 million on its balance sheet, or syndicates it pro rata to two or three co-lenders who each share proportionally in both the return and any loss, all on identical terms.
Split instead into an A/B note, the same $50 million becomes a $35 million A note, sold to an institutional investor seeking senior, lower-yielding exposure at an illustrative 6% rate, and a $15 million B note retained or sold separately at an illustrative 10% rate, absorbing losses first if the loan underperforms. The borrower's payment obligation is identical in both scenarios; what changes is how the lender side of the transaction allocates the risk and return of that same $50 million.
Now suppose the property underperforms and the loan is eventually resolved for $42 million after a workout. In the whole loan scenario held by a syndicate, every participant absorbs the $8 million shortfall proportionally. In the A/B scenario, the A note is made whole first up to its $35 million balance, leaving the B note to absorb the full $8 million loss against its $15 million balance, a much larger proportional hit than the pro rata syndicate would have taken on the same dollar shortfall.
A whole loan, even when syndicated, is documented with a single loan agreement and note, and a co-lending or participation agreement, if multiple lenders are involved, that keeps every participant's economics proportional and identical.
An A/B note structure adds a co-lender agreement specific to the A and B split, defining payment priority, control rights over servicing and workout decisions, and how principal and interest are allocated between the two notes as payments come in. The borrower typically never sees or signs this agreement, since it governs the relationship between the A and B noteholders rather than the borrower's own obligations, but the borrower's loan agreement will usually disclose the lender's right to sell, syndicate, or split the loan after closing.
For most borrowers, this is not really a choice they make but a structure they should understand before closing, since it can affect how a future modification or workout request is handled.
A/B note structures become more common in large loans during periods when originators want to move senior risk off their balance sheet quickly, typically to free up capacity to originate more loans, which tends to happen more often in an active lending market with strong investor demand for senior paper.
In a tighter credit market with less investor appetite for subordinate B note risk, originators may hold larger loans as whole loans rather than attempt a split that would be difficult to place, since a B note without a ready buyer defeats the purpose of splitting the loan in the first place.
The same dynamic shapes pricing on the two pieces once a split does happen. In a tight market, A note investors demand a wider spread for taking on even senior risk, while B note buyers, if any can be found at all, demand a steep discount to compensate for reduced liquidity, meaning the total cost of an A/B split can exceed what a single whole loan would have cost the same borrower in the same market.
Our Role
H Equities originates and holds its bridge, mezzanine, and preferred equity investments directly, keeping the sponsor relationship with a single point of contact rather than splitting the position into separate notes after closing. For sponsors evaluating a whole loan versus an A/B note structure elsewhere in the market, understanding who ultimately holds and services each piece of the loan is a useful diligence question before closing.
FAQ
No. The borrower's payment obligation stays the same regardless of how the lender allocates that payment between the A and B noteholders internally. The split is a matter of how the lender and its co-lenders share the risk and return of the loan, not a change to the borrower's terms.
Splitting a loan lets the originator sell the lower-risk A note to investors seeking safer, lower-yielding paper while keeping or selling the higher-yielding B note separately. This frees up capital and lets the lender manage its risk exposure without waiting for the full loan to mature.
They are similar in that the B note is subordinate and absorbs losses first, but an A/B note remains structurally one mortgage loan governed by a co-lender agreement, while mezzanine debt is a separate loan secured by a pledge of ownership interests rather than a lien on the property.
Ask the lender directly during term sheet negotiations, since the right to split, sell, or syndicate the loan is typically addressed in the loan documents even if the actual split happens after closing. Large loans from CMBS originators and balance-sheet lenders are more likely to be split than smaller bridge loans.
Related
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