Definition
An A-Note is the senior portion of a mortgage loan that has been split into multiple pieces—typically an A-Note and a B-Note.
The A-Note has first priority in repayment and typically carries lower risk than the subordinate portion.
How Loan Splitting Works
- A large senior loan is originated.
- The loan is divided into two tranches.
- The A-Note represents the lower-risk senior portion.
- The B-Note represents the higher-risk subordinate portion.
Capital Stack Position
- A-Note (Senior Mortgage)
- B-Note (Subordinate Mortgage)
- Mezzanine Debt
- Preferred Equity
- Common Equity
Key Characteristics
- Priority claim on collateral.
- Lower interest rate relative to B-Note.
- Strongest control rights in default scenarios.
- Typically held by institutional lenders or securitized.
A-Note vs B-Note
- A-Note: Senior, lower yield, lower risk.
- B-Note: Junior, higher yield, higher risk.
Both notes are secured by the same mortgage but differ in payment priority.
Intercreditor Relationship
The rights and responsibilities between A-Note and B-Note holders are governed by an intercreditor agreement.
Why A-Notes Are Attractive
- Enhanced downside protection.
- Stable income profile.
- Often investment-grade risk exposure.
- Commonly used in securitization structures.
Underwriting Focus
- Loan-to-value (LTV) at A-Note level.
- Debt service coverage ratio (DSCR).
- Property quality and cash flow stability.
- Market cycle positioning.
Common Pitfalls
- Ignoring combined leverage when B-Note exists.
- Overlooking intercreditor limitations.
- Misjudging refinance risk.
- Assuming full insulation from B-Note performance issues.
Investor Checklist
- Review total loan structure.
- Confirm priority rights.
- Analyze property fundamentals.
- Stress test valuation decline scenarios.