What is a B-Note
A B-note is the secondary tranche in a commercial mortgage-backed security. Borrower payments on the mortgages contained in the securitized product are used to make payments to the holders of the B-note security. B-notes are a component of A/B financing or A/B/C financing. When mortgage payments are collected, carriers of B-notes are paid after the carries of A-notes. This causes B-notes to carry more risk. B-notes make a larger payment to the investor than the comparable A-note to compensate the investor for this additional risk. A B-note is also assigned a lower credit rating than the corresponding class A note. Carriers of B-notes are paid before investors of C-notes, so they carry less risk than C-notes and have a higher credit rating than class C notes. The financed property serves as collateral for a B-note in the event the borrower does not pay the scheduled loan payments.
A B-note is also known as a "class B note."
BREAKING DOWN B-Note
As long as the borrower is paying the mortgage on time (in other words, as long as the loan is performing), investors in all tranches will receive their respective shares of the borrower's payments concurrently. However, if the borrower defaults, holders of class A notes are paid their interest and principal payments before holders of class B notes.
Similarly, holders of class B-notes are paid before holders of class C notes. The interest rate and rating on class B notes reflect this level of risk. Alternatives to A/B note or A/B/C note financing include preferred equity, mezzanine debt and second mortgages, all of which are forms of secondary financing used in addition to a first mortgage.