The quick read: An A/B note split restructures one troubled commercial loan into two: a Note A sized to what the property can carry on modified terms, and a Note B holding the rest, which the lender treats as uncollectible and charges off. The interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (June 30, 2023), adopted by the Federal Reserve in SR 23-5, calls it a "multiple note structure." It works only when Note A is "reasonably assured of repayment and performance according to prudently modified terms." For the bank, a performing Note A can escape adverse classification and return to accrual. For the borrower, a charged-off Note B is an accounting entry at the bank, and in the regulators' own example the borrower keeps paying it.
How does an A/B note restructure work?
An A/B note restructure works by splitting the outstanding debt into a new, legally enforceable Note A that the property's value and cash flow can carry on modified terms, and a Note B holding the remainder that is unlikely to be collected, which the lender charges off while the borrower services Note A as a performing loan.
The policy statement, issued by the Federal Reserve, the FDIC, the NCUA and the OCC, sets the rules examiners apply:
Note A (policy statement): "reasonably assured of repayment and performance according to prudently modified terms"
Sizing Note A on a collateral-dependent loan (policy statement): "should be determined using the fair value of the collateral"
Note A classification (policy statement): a properly structured and performing Note A "generally would not be adversely classified by examiners"
Note A accrual (policy statement): may be placed back in accrual status, and sustained payment history before the restructuring may be taken into account
Note B (policy statement): adversely classified "loss" and "must be charged off"
The agencies' own worked example, Scenario 3 of the shopping-mall case in the policy statement, shows the numbers. These are the agencies' illustrative figures, not a market quote.
| Interagency example (Scenario 3) | Original loan | Note A | Note B |
|---|---|---|---|
| Interagency example (Scenario 3) Balance | Original loan $10 million at maturity | Note A $7 million | Note B $3 million |
| Interagency example (Scenario 3) How it is sized | Original loan Property's "as is" value of $7 million, a 143% LTV | Note A The property's market value | Note B The excess of the debt over the value |
| Interagency example (Scenario 3) Rate | Original loan Not stated in the example | Note A A market rate that provides for the incremental risk | Note B 2% |
| Interagency example (Scenario 3) Payment | Original loan Delinquent; one $10 million amortizing note would cover only 0.88x | Note A Amortizes over 20 years; 1.20x on projected net operating income | Note B Interest-only, resetting in five years into an amortizing payment |
| Interagency example (Scenario 3) How the bank reports it | Original loan Collateral-dependent and delinquent | Note A Nonaccrual at restructuring, back to accrual after more than six months of payments; graded pass | Note B Charged off; interest received recorded as recoveries |
The arithmetic on the B note is simple: 2% on $3 million is $60,000 a year of interest before the reset (our arithmetic). The property carries $7 million at 1.20x coverage, and the remaining $3 million waits.
When will a bank offer an A/B note split?
A bank will offer an A/B note split when the property can service a smaller loan at a market rate but not the full balance, the borrower can prove that with current financial statements, and the bank would rather hold a performing Note A than foreclose or carry the whole balance in nonaccrual status.
The policy statement tells examiners not to criticize a workout, "even though such loans may be adversely classified," as long as management has done the work. The list reads like a request for documents:
- A well-conceived workout plan built on updated and comprehensive financial information on the borrower, the real estate project, and all guarantors and sponsors
- Current valuations of the collateral
- An appropriate loan structure, including term, amortization schedule, covenants and any curtailment or re-margining requirements
- Appropriate legal analyses and agreements for the changed terms
- Analysis of the borrower's global debt service coverage and the guarantors' available cash flow
Bring that package before the bank asks for it. A borrower who shows the property supports Note A on realistic projections makes the split easier for the bank to approve.
Most bank commercial real estate loans are still current, so a split is a loan-by-loan decision rather than a market program. The Federal Reserve's charge-off and delinquency release (last updated August 25, 2026) shows:
CRE delinquency rate, all commercial banks, seasonally adjusted (Q2 2026): 1.53%, down from 1.56% in Q1 2026
CRE net charge-off rate, all commercial banks, seasonally adjusted and annualized (Q2 2026): 0.14%
What counts as delinquent (Fed): loans 30 or more days past due and still accruing, plus loans in nonaccrual status
The guaranty cuts both ways. Federal Reserve research on the largest U.S. banks found that recourse gives the lender "additional bargaining power" in modification talks, and that recourse loans were half as likely to receive accommodation during the COVID-19 pandemic. A bank that can collect from a strong guarantor has less reason to write down the debt.
How does an A/B split compare with an extension or a single-note write-down?
Compared with a straight extension, an A/B split fits a loan whose balance the property can no longer support, while an extension fits a temporary gap backed by a strong guarantor; compared with keeping one note and charging part of it off, the split lets the bank grade and accrue Note A as a performing loan sooner.
The policy statement works the same troubled $10 million shopping-mall loan four ways:
| What the bank did | Scenario 1: 12-month extension | Scenario 2: below-market interest-only | Scenario 3: A/B split | Scenario 4: one note, partial charge-off |
|---|---|---|---|---|
| What the bank did Structure | Scenario 1: 12-month extension Renewed 12 months, interest-only at a market rate; $200,000 paydown to $9.8 million | Scenario 2: below-market interest-only One year interest-only at a below-market rate | Scenario 3: A/B split $7 million Note A and $3 million Note B | Scenario 4: one note, partial charge-off New $10 million amortizing note; $1 million charged off |
| What the bank did As-is value and LTV | Scenario 1: 12-month extension $10 million; 98% | Scenario 2: below-market interest-only $9 million; 111% | Scenario 3: A/B split $7 million; 143% | Scenario 4: one note, partial charge-off $9 million; 111% |
| What the bank did Coverage | Scenario 1: 12-month extension Covers interest-only payments | Scenario 2: below-market interest-only 1.02x on the preferential terms | Scenario 3: A/B split 1.20x on Note A | Scenario 4: one note, partial charge-off 0.88x |
| What the bank did Guarantor | Scenario 1: 12-month extension Liquid and willing to cover 12 months | Scenario 2: below-market interest-only Cannot cover any shortfall | Scenario 3: A/B split Minimal other resources | Scenario 4: one note, partial charge-off Minimal other resources |
| What the bank did Examiner's grade | Scenario 1: 12-month extension Special mention | Scenario 2: below-market interest-only $1 million loss; the rest substandard | Scenario 3: A/B split Note A pass | Scenario 4: one note, partial charge-off $9 million substandard |
| What the bank did Accrual | Scenario 1: 12-month extension Stayed on accrual | Scenario 2: below-market interest-only Nonaccrual | Scenario 3: A/B split Nonaccrual, then accrual after more than six months of payments | Scenario 4: one note, partial charge-off Nonaccrual |
Two lessons come out of the table. A guarantor with cash buys an extension; without one, the bank needs a structure the property can carry on its own. And splitting the note, rather than writing down part of a single note, is what let the bank in Scenario 3 recognize interest income again. In the agencies' words, the multiple note structure with the Note B charge-off "enables the lender to recognize interest income."
If the property can still refinance, compare an extension with a new loan before you accept any restructure; our guide on whether to extend or refinance a maturing commercial loan walks through that choice.
What does the B note cost you later?
The B note costs you a second obligation that outlives the workout: the bank has charged it off for its own reporting, but in the regulators' example the borrower still owes the $3 million Note B at 2% interest-only, resetting into amortizing payments after five years, so the property must eventually earn or sell its way past both notes.
The cost shows up in three places.
- Cash flow. Note B interest, $60,000 a year at 2% on $3 million in the example (our arithmetic), sits on top of Note A's full payment, and the reset to amortization raises it.
- The exit. At a sale or refinance, the payoff covers both notes unless the bank agrees to less. If the property only supports the Note A balance, a new lender will not size a loan to retire Note B, so you need fresh equity or a negotiated discount. A Note A that reaches its maturity unpaid is in maturity default all over again.
- The documents. Note B's terms decide whether it is a quiet subordinate claim or a second balloon payment waiting for you.
Settle these before you sign:
- Does Note B accrue interest, pay currently, or neither, and when does it reset?
- Is Note B paid only after Note A, including from sale proceeds?
- Can you retire Note B at a discount at an early sale or refinance, and at what price?
- Does a default on Note B cross-default Note A?
- Does any guaranty cover Note B, and does it end when Note A is repaid?
Tax belongs in the review too. IRS Publication 4681 covers canceled debts and includes a section on discounts and loan modifications. This guide draws no tax or legal conclusion; ask a tax adviser how any later write-down of Note B would be treated, and have counsel review the note documents before you sign.
How do you get a refinance placed instead of, or after, an A/B note split?
You get a refinance placed by giving lenders the full story in one package, with the current loan's terms and maturity, any restructure the bank has proposed, a current valuation, trailing operating statements and the equity you can add, and the first option to weigh is a commercial mortgage brokerage that tests it against many loan programs at once.
Option 1, our pick as the publisher of this guide: a commercial mortgage brokerage. YieldStack is an AI-native commercial mortgage brokerage that arranges financing for commercial real estate investors. We list it first for three reasons. Software matches the deal against a catalog of 20,000+ loan programs, so you learn whether a refinance can beat the bank's restructure before you sign it. Human brokers structure the request and negotiate on the borrower's side, which matters when the story includes a workout. The median first offer arrives in under an hour, from an institutional lender, which helps when the bank has set a deadline. Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing.
Option 2: negotiate the split directly with your bank. If the property supports Note A and no refinance beats it, the restructure may be the best available outcome. If you want an adviser on the modification itself, set the scope in writing first; see how to define broker work on a commercial loan modification.
Option 3: sell or bring in equity. A sale or a new partner can pay down the debt to what the property supports and avoid a B note altogether.
What to send:
- The loan documents, current balance, maturity date and any default or maturity notices
- The bank's restructure proposal, if it has made one, including the Note A and Note B terms
- A current valuation, the rent roll and trailing 12-month operating statements
- The guaranty and the guarantor's current financial statement
- The equity you can add, and your target: a full refinance, a refinance of Note A only, or a bridge to a sale
When the package is ready, send the deal for review.
The bottom line
An A/B note split keeps a troubled loan out of foreclosure by resizing it: Note A to what the property can carry, Note B for the rest. It works only when Note A is reasonably assured of repayment on its new terms. Treat Note B as a debt you will still have to pay, sell past or negotiate away, and price a refinance before you sign.