The A/B note split, or "hope note": what a CMBS servicer can offer

An A/B note split divides a troubled CMBS loan into an A note sized to what the property supports today, which you keep paying, and a B note, the “hope note”, repaid only after the A note is paid in full. As a modification for default, REMIC rules allow it. Special servicers usually ask for new equity first.

The rules here are from the pooling and servicing agreement (PSA) of BANK5 2025-5YR14, the reference deal on this site, and the federal tax rules for REMICs. Your trust’s agreement governs, and this is not legal or tax advice.

How the split works

	A note	B note (hope note)
Size	What today’s income and value can carry	The rest of the balance
Payments	Monthly, like a normal loan	None until the A note is paid in full
Interest	Paid currently	Usually accrues; in BANK5 2025-5YR14, any deferred interest must accrue at the mortgage rate
Repaid from	Payments, then refinance or sale	What is left of a sale or refinance after the A note

The BANK5 2025-5YR14 agreement does not let a servicer split a loan any other way: the modification documents must provide that all payments on the B portion, “including interest, principal and other amounts”, are payable only after the A portion has been repaid in full, while interest on the B portion may accrue in the meantime (PSA 3.18(n)). And no modification may defer interest unless interest keeps accruing at the mortgage rate (PSA 3.18(b)).

A split created in a workout is different from an A/B structure set up when the loan was made. The SEC’s loan-level reporting has separate codes for A and B notes in an A/B participation structure (Schedule AL loan structure codes A1 and B1), and the PSA has its own definition for a loan that became an A/B structure through a modification: an “AB Modified Loan” (PSA 1.01).

Why the tax rules allow it

A CMBS trust is a REMIC, and a “significant modification” of a loan it holds is treated as an exchange for a new loan, a prohibited transaction. Changes “occasioned by default or a reasonably foreseeable default” are excepted (26 CFR 1.860G-2(b)(3)(i)). That is why an A/B split is a tool for loans that are in default or close to it, and why the request has to show the default is real. For a loan that is performing, Rev. Proc. 2009-45 allows a modification when the servicer reasonably believes there is a significant risk of default at or before maturity. More on what a servicer can modify.

Who approves it

A split changes monetary terms, so it is a Major Decision. The special servicer may agree to it only if it is reasonably likely to recover at least as much, on a net present value basis discounted at the mortgage rate, as liquidating the loan (PSA 3.18(b)). The Directing Certificateholder, for the junior bondholders in control, can block it by objecting within 10 business days of the recommendation (PSA 6.08(a)).

The split also changes who controls the trust’s decisions. Once the loan is an AB Modified Loan, the special servicer calculates a Collateral Deficiency Amount: the A and B balance combined, minus the latest appraised value, any new capital you contributed as part of the modification, and other reserves (PSA 1.01). That amount is added to appraisal reductions to write down the junior classes for control purposes (PSA 4.05). A split on a large loan can therefore shift control away from the junior bondholders. See appraisal reductions.

What the special servicer will ask of you

The PSA sets the limits; the deal is negotiated. Servicers commonly look for:

• New equity. Cash for leasing, capital work or a paydown of the A note, often ranking ahead of the B note in the payout order when the property is later sold or refinanced.
• A cash sweep or other cash management while the B note is outstanding.
• A maturity that fits the PSA’s limits, which in this deal bar any maturity later than April 2053 (PSA 3.18(b)). See extensions.
• Reporting and a business plan that shows how the property grows into the B note.

How the A note is sized, and where your new equity sits relative to the B note, decides whether the split is worth doing. Model the property’s value at the new maturity: if a sale then would not cover the A note, the B note and your equity, the new money is at risk ahead of the hope note.

What it costs

On a specially serviced loan, modification fees go to the special servicer (PSA 3.11(c)). Once the modified loan makes three on-time payments, it returns to the master servicer as a Corrected Loan, and the special servicer earns a 1% workout fee on every later collection of principal and interest, with a $25,000 minimum (PSA 1.01, “Workout Fee Rate”). Estimate it with the fee calculator.

Is a split the right answer?

It keeps you in the property with time and upside, but the debt is not reduced, and the B note’s accrued interest keeps growing. Compare it with a discounted payoff funded by a new loan and new equity, which ends the old debt for good, and with an outright sale. Janover Capital LLC can help you price those alternatives on the troubled loan desk, or quote a takeout through get a CMBS quote. It is not your servicer or lender, and contacting it notifies no one.

When to call a lawyer

Before you sign a term sheet. The modification documents, the guaranty, any new equity’s priority and the tax effect of an eventual B note write-off need counsel and a tax adviser.

Sources: BANK5 2025-5YR14 PSA, dated as of April 1, 2025, section 1.01 (“AB Modified Loan”, “Collateral Deficiency Amount”, “Workout Fee Rate”), sections 3.11(c), 3.18(b) and (n), 4.05, 6.08(a); 26 CFR 1.860G-2(b) (eCFR, current text); Rev. Proc. 2009-45; SEC Schedule AL loan structure codes (17 CFR 229.1125).