Goldman and Citi are about to launch a moderate size new CMBS conduit deal. This would follow on the heels of JP Morgan’s more or less successful offering in June. Comparing these two deals is going to be a huge “tell” about CMBS 2.0. If market chatter is right, the Goldman/Citi deal will have many of the bells and whistles at the core of the investment grade buyer’s proposed “Best Practices” wish list regarding CMBS 2.0. Let’s assume for a minute that, indeed, the deal includes a bunch of their “alignment” features, such as some form of “skin in the game”, an independent special servicer not subject to being kicked out and replaced by any B buyer, an operating advisor representing the interest of the investment grade buyer, a bond registrar so that bondholders can more effectively exercise voting rights, enhanced data available to all bond buyers or prospective buyers, a robust web-based disclosure add-on, enhanced representations and warranties, and more data about rent roll on the underlying properties. If so, we’ll have set the table to resolve some of the most contentious issues in CMBS 2.0.

In other words, it will be put up or shut up time for the investment grade buyers. If such a deal is deemed to have traded materially inside JP (adjusted for collateral quality, subordination levels and the like), that will be pretty good evidence that investors are really prepared to pay up for these innovations and that should inform the shape of the new market. If the market senses that these new deal features (many of which have a material price to the deal) do not attract noteworthy better spreads, then the great debate over CMBS 2.0 may be over, and 2.0 will probably continue to look a lot like CMBS we’ve known and loved.

Oh, there will be some enhancements to 2.0 whether or not bond buyers swoon over the new structure. Underwriting will be better (for a while), reimbursement of accrued but unpaid interest will be subordinate to the return of principal, we’ll tweak disclosure, and yes, with FinReg in the books, we’ll now have to deal with some form of skin in the game. Otherwise, 2.0 will equal 1.0. That’s the market for you. Just like in TV land, if the consumer, having said they will only watch Masterpiece Theater, really watches Gilligan’s Island, then we’ll get a steady diet of Gilligan’s Island.