Citigroup and Deutsche Bank are marketing the second commercial mortgage securitization of the year, according to rating agency reports.

In order to comply with “skin-in-the-game” rules that took effect Dec. 24, it relies on a strategy that has been much discussed, but never used, called the “L” strategy.  An affiliate of Citi will hold on to 1.9% “vertical” strip comprised of portions of each class of securities to be issues; a third party, KKR Real Estate Credit Opportunity Partners, will hold on to the remaining 3.1% “horizontal” strip comprised of the most subordinate class of securities.

Fitch Ratings, Moody’s Investors Service and Kroll Bond Rating Agency have all assigned preliminary ratings to the $1.3 billion deal, dubbed CD 2017-CD3 Mortgage Trust, ranging from triple-A to single-B-minus.

In previous deals structured to comply with risk retention, someone has held on to either a vertical strip or a horizontal strip, not both.

In many other respects, CD 2017-CD3 is structured much like CMBS issued last year. The collateral consists of 52 fixed-rate commercial mortgage loans with an aggregate cut-off date principal balance of approximately $1.3 billion. The loans have principal balances ranging from $3.3 million to $100.0 million for the largest loan in the pool, 229 West 43rd Street Retail Condo (7.5% of the pool).

The pool’s weighted average in-trust KLTV of 100.3% is above the average of the 17 CMBS conduits rated by KBRA over the last six months (96.4%), which ranged from 89.5% to 102.0%. Additionally, the pool’s exposure to loans with KLTVs in excess of 100.0% (35 loans, 67.5%) is higher than the average for the comparable set (56.5%), which ranged from 38.6% to 77.8%.

The pool has two loans (10.2%) with credit characteristics commensurate with investment grade (IG) rated obligations when analyzed on a standalone basis, as follows: 85 Tenth Avenue (3rd largest, 5.6%, ‘AA-’) is a Class-A office building located in the Chelsea neighborhood of Manhattan.

The properties in the collateral pool are located in 25 states, with two states that represent more than 10.0% of the pool balance, New York (31.3%) and California (19.6%). The pool has exposure to all the major property types, including three that represent more than 10.0% of the pool balance: office (52.0%), retail (20.2%), and lodging (15.7%).

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