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Few commercial banks are willing to underwrite large CRE deals anymore: anything north of $100 million, and in some cases $50 million-$75 million, represents too much risk for a bank’s balance sheet. That new attitude toward risk would represent a death knell to large loans – except for one saving grace: more banks are banding together to finance deals, either as club deals or more formal syndications.

To be sure, club loans and syndicated deals are not just now appearing on the scene – several months ago, once it became clear that the conduit markets were not coming back any time soon, banks started to revert back to these older-style financings. However, their numbers are only becoming more noticeable now, though, as deal-making ramps up after a dead Q4.

This new trend is both good and bad for borrowers. It is good in that many deals wouldn’t get done otherwise, says Stephanie Lynch, VP of Jones Lang LaSalle’s Real Estate Investment Banking practice in Washington DC. “Anything that injects liquidity in the real estate market is a good thing, as far as I am concerned,” she tells GlobeSt.com.

Lynch, along with managing director Martin Kamm, and associate Brandon Flickinger, recently helped arrange a $107.6 million loan for the American College of Surgeons in Washington DC to construct a new office at 20 F St – one of the last developable plots in Capitol Hill. It arranged the financing through Northern Trust Co.’s Chicago branch. Northern Trust, in turn, partnered up with three other Chicago banks — Fifth Third Bank, Charter and Chase — to spread out the risk. This was not a true club-style deal, though, in that Northern Trust committed to underwriting the deal if its partner banks were to have pulled out, Lynch says.

Club deals and more importantly, syndications, are becoming a substitute for loans that otherwise would have been securitized 10 months ago, Jeff Friedman, principal at Mesa West Capital, tells GlobeSt.com.

It is bad for borrowers, however, in that it represents yet another form of risk. “Certainty of execution is, well, uncertain,” Friedman says.

“Eighteen months ago a lender would have taken a $300 million loan on its own, closed the deal, and then securitized it. Now, that same lender will make a successful syndication a condition to closing.” Lynch agrees that most syndications now happen far earlier in the deal cycle.

In general, Friedman says, syndications are an inefficient way to distribute a deal, at least compared to the marvelously efficient CMBS markets of the last few years. “Syndications create time pressure, the need for new documentation. Also because the market hasn’t been doing so many of these, people’s skills and contacts are rusty. Banks may have dismantled their internal syndication desks as CMBS became the dominant form of finance.”

The main reason why syndications — at least in this credit cycle — fall so short compared to the CMBS markets is that most of them have been pari passu syndications, Scott McMullin, executive managing director in HFF’s Los Angeles office, tells GlobeSt.com.

CMBS skillfully carved up different tranches of risk and then sold those tranches to investors willing to accept the greater risk — or conversely, investors willing to pay more for the investment grade-rated tranche. By contrast, pari passu notes do not distinguish risk or allow one class of investor to take precedence over another. Basically, all of the securities or obligations are equally entitled to payment.

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