<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A FINAL PROSPECTUS
SUPPLEMENT AND THE RELATED PROSPECTUS IS DELIVERED. THIS PROSPECTUS SUPPLEMENT
AND THE RELATED PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 16, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 16, 1997)
J.P. MORGAN COMMERCIAL MORTGAGE FINANCE CORP.
DEPOSITOR
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION
SELLER
$174,642,000
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-SPTL-C1
THE SERIES 1997-SPTL-C1 COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES (THE
"CERTIFICATES") WILL INCLUDE THE FOLLOWING SIX CLASSES OF CERTIFICATES,
DESIGNATED AS THE CLASS A1, CLASS A2 (TOGETHER WITH THE CLASS A1, THE "CLASS
A"), CLASS B, CLASS C, CLASS D AND CLASS X CERTIFICATES (THE "OFFERED
CERTIFICATES"). IN ADDITION TO THE OFFERED CERTIFICATES, THE CERTIFICATES WILL
ALSO INCLUDE THE CLASS E, CLASS F, CLASS G, CLASS H, CLASS NR, CLASS R-I, CLASS
R-II AND CLASS R-III CERTIFICATES. ONLY THE OFFERED CERTIFICATES ARE OFFERED
HEREBY.
(CONTINUED ON THE FOLLOWING PAGE.)
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE CAPTION
"RISK FACTORS" AFTER THE SECTION CAPTIONED "SUMMARY OF PROSPECTUS SUPPLEMENT"
HEREIN AND AFTER THE SECTION CAPTIONED "SUMMARY OF PROSPECTUS" IN THE PROSPECTUS
BEFORE PURCHASING ANY OFFERED CERTIFICATES.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE SPECIAL
SERVICER, J.P. MORGAN & CO. INCORPORATED, THE TRUSTEE, THE FISCAL AGENT, THE
UNDERWRITERS OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE SELLER, THE MASTER SERVICER,
THE SPECIAL SERVICER, J.P. MORGAN & CO. INCORPORATED, THE TRUSTEE, THE FISCAL
AGENT, THE UNDERWRITERS OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
INITIAL CLASS
BALANCE (1) PASS-THROUGH RATE
<S> <C> <C>
Class A1 $ 81,230,000 Adjustable Pass-Through Rate (2)
Class A2 $ 60,922,000 Adjustable Pass-Through Rate (2)
Class B $ 10,153,000 Adjustable Pass-Through Rate (2)
Class C $ 12,184,000 Adjustable Pass-Through Rate (2)
Class D $ 10,153,000 Adjustable Pass-Through Rate (2)
Weighted Average Pass-Through Rate
Class X $ 0 (3)(4)
</TABLE>
(1) Subject to a permitted variance of 5%.
(2) The Pass-Through Rate will be determined as more fully described herein as
the lesser of (a) the applicable one-month London interbank offered rate
quotation for U.S. dollar deposits, calculated as described herein ("LIBOR")
plus the corresponding margin and (b) the weighted average of Remittance
Rates on the Mortgage Loans (as more fully described herein).
(3) Based on the Notional Amount as described herein.
(4) The Pass-Through Rate for the Class X Certificates will be generally equal
to the weighted average of the Remittance Rates (as defined herein) on the
Mortgage Loans minus the weighted average of the Pass-Through Rates on all
other classes of Certificates as more fully described herein.
There is currently no secondary market for the Offered Certificates. J.P. Morgan
Securities Inc., Morgan Stanley & Co. Incorporated and Dabney/Resnick/Imperial
(the "Underwriters") currently expect to make a secondary market in the Offered
Certificates, but have no obligation to do so. There can be no assurance that
such a market will develop or, if it does develop, that it will continue. See
"Plan of Distribution" herein.
The Offered Certificates will be purchased by the Underwriters in the manner
described under "Plan of Distribution," from the Depositor and will be offered
by the Underwriters from time to time to the public in negotiated transactions
or otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Offered Certificates will be % of the
initial aggregate principal balance thereof as of June 1, 1997 (the "Cut-off
Date") plus accrued interest from the Cut-off Date. The Seller will pay the
expenses of the Depositor in connection with the purchase of the Mortgage Loans
and the issuance of the Certificates.
The Offered Certificates are offered by the Underwriters when, as and if issued
and accepted by the Underwriters and subject to its right to reject orders in
whole or in part. It is expected that the Offered Certificates will be delivered
in book-entry form through the facilities of The Depository Trust Company, Cedel
Bank, Societe Anonyme and the Euroclear System on or about June 27, 1997,
against payment therefor in immediately available funds.
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
DABNEY/RESNICK/IMPERIAL
June , 1997
<PAGE>
(CONTINUED FROM THE PRECEDING PAGE.)
The Certificates will represent in the aggregate the entire beneficial interest
in a trust fund (the "Trust Fund") to be established by J.P. Morgan Commercial
Mortgage Finance Corp. (the "Depositor"). The Trust Fund will consist primarily
of a pool (the "Mortgage Pool") of adjustable rate mortgage loans with original
terms to maturity of not more than 360 months (the "Mortgage Loans") secured by
first liens on fee simple interests in multifamily, retail, office industrial,
mixed use and other commercial properties. The Mortgage Loans were originated by
Southern Pacific Thrift and Loan Association (the "Seller") and will be sold to
the Depositor on or prior to the date of initial issuance of the Certificates.
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business day,
on the next succeeding business day, beginning in July 1997 (each, a
"Distribution Date"). As more fully described herein, distributions allocable to
interest, if any, on the Offered Certificates on each Distribution Date will be
based on the then applicable pass-through rate (the "Pass-Through Rate") and the
aggregate principal balance (the "Class Balance") of such Class Balance
outstanding immediately prior to such Distribution Date. The Pass-Through Rates
applicable to the Offered Certificates will be adjustable and will be calculated
for each Distribution Date in the manner set forth herein. Distributions in
respect of principal, if any, of the Certificates will be made as described
herein under "Description of the Certificates-- Distributions" and "--Priority
of Distributions" herein.
The Offered Certificates will evidence approximately an initial 86% by initial
principal balance, undivided interest in the Trust Fund.
It is a condition of the issuance of the Offered Certificates that the Class A1,
and Class A2 Certificates be rated "AAA" by Duff & Phelps Credit Rating Co.
("DCR"), Fitch Investors Service, L.P. ("Fitch") and Standard & Poor's Ratings
Services ("Standard & Poor's"). It is a condition of the issuance of the Class X
Certificates that they be rated not lower than "AAA" by DCR and Fitch. It is a
condition of the issuance of the Class B Certificates that they be rated not
lower than "AA" by DCR, Fitch and Standard & Poor's. It is a condition of the
issuance of the Class C Certificates that they be rated not lower than "A" by
DCR, Fitch and Standard & Poor's. It is a condition of the issuance of the Class
D Certificates that they be rated not lower than "BBB" by DCR, and Standard &
Poor's and "BBB-" by Fitch. See "Rating" herein.
Midland Loan Services, L.P. will act as master servicer (in such capacity, the
"Master Servicer") and as special servicer (in such capacity, the "Special
Servicer" and together with the Master Servicer, the "Servicers") of the
Mortgage Loans. The obligations of the Master Servicer and the Special Servicer
with respect to the Certificates will be limited to their contractual servicing
obligations and the obligation under certain circumstances to make P&I Advances
(as defined herein) to the Certificateholders. See "Servicing" herein.
As described herein, three separate "real estate mortgage investment conduit"
("REMIC") elections will be made in connection with the Trust Fund for federal
income tax purposes. The Certificates (other than the Class X, Class NR, Class
R-I, Class R-II and Class R-III Certificates) and each component of the Class X
Certificates will constitute "regular interests" in the related REMIC and the
Class R-I, Class R-II and Class R-III Certificates will constitute the sole
class of "residual interests" in the related REMIC. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
The Offered Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"), as further described herein. The interests of beneficial owners of the
Offered Certificates will be represented by book entries on the records of
participating members of DTC. Definitive certificates will be available for the
Offered Certificates only under the limited circumstances described herein. See
"Description of the Certificates--Book-Entry Registration of the Offered
Certificates" herein.
The yield to maturity on the Offered Certificates will depend on the rate and
timing of principal payments (including prepayments, defaults and liquidations)
on the Mortgage Loans and on adjustments to the Mortgage
(CONTINUED ON THE FOLLOWING PAGE.)
ii
<PAGE>
(CONTINUED FROM THE PRECEDING PAGE.)
Interest Rates (as defined herein). The yield to maturity on each class of
Offered Certificates will be sensitive to losses due to defaults on the Mortgage
Loans (and the timing thereof), to the extent that such losses are not covered
by any Class of Certificates having a lower payment priority, as described
herein and to fluctuations in the level of LIBOR. The yield to investors on the
Class X Certificates will be sensitive to the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans. The rates of prepayments,
defaults and liquidations on the Mortgage Loans may fluctuate significantly over
time. An extremely rapid rate of prepayments, defaults and liquidations on the
Mortgage Loans could result in the failure of investors in the Class X
Certificates to recover their initial investments. The Pass-Through Rates on the
Class X Components (as defined herein) is in part determined by the Weighted
Average Remittance Rates as defined herein. Since Mortgage Loans with higher
Mortgage Interest Rates have higher Remittance Rates, the Pass-Through Rate on
the Class X Components will be adversely affected if Mortgage Loans with
relatively high Mortgage Interest Rates prepay faster than Mortgage Loans with
relatively low Mortgage Interest Rates. See "Summary of Prospectus
Supplement--Special Principal Payment Considerations" and "--Special Yield
Considerations", and "Certain Prepayment, Maturity and Yield Considerations"
herein and "Yield Considerations" in the Prospectus.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS, DATED JUNE 16, 1997 AND ATTACHED HERETO. PURCHASERS ARE URGED TO
READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE
CERTIFICATES OFFERED HEREBY MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS
RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the accompanying Prospectus and if given or made, such
information or representations must not be relied upon as having been authorized
by the Depositor or the Underwriters. This Prospectus Supplement and the
accompanying Prospectus shall not constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation in such jurisdiction. The delivery of this Prospectus Supplement
and the accompanying Prospectus at any time does not imply that the information
herein or therein is correct as of any time subsequent to the date hereof.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement...................................................... S-1
Risk Factors.......................................................................... S-15
Description of the Mortgage Pool...................................................... S-24
Description of the Certificates....................................................... S-47
Certain Prepayment, Maturity and Yield Considerations................................. S-57
Southern Pacific Thrift and Loan Association.......................................... S-62
Master Servicer and Special Servicer.................................................. S-65
Description of the Pooling and Servicing Agreement.................................... S-69
Use of Proceeds....................................................................... S-73
Certain Federal Income Tax Consequences............................................... S-73
State Tax Considerations.............................................................. S-74
ERISA Considerations.................................................................. S-74
Legal Investment...................................................................... S-75
Plan of Distribution.................................................................. S-76
Legal Matters......................................................................... S-76
Rating................................................................................ S-76
Index of Principal Definitions........................................................ S-78
Annex A: Certain Characteristics of the 50 Mortgage Loans with the Highest Principal
Balances as of the Cut-off Date..................................................... A-1
Annex B: Global Clearance, Settlement and Tax Documentation Procedures................ B-1
PROSPECTUS
Prospectus Supplement................................................................. 4
Available Information................................................................. 4
Incorporation of Certain Information by Reference..................................... 5
Summary of Prospectus................................................................. 6
Risk Factors.......................................................................... 13
Description of the Trust Funds........................................................ 21
Use of Proceeds....................................................................... 27
Yield Considerations.................................................................. 27
The Depositor......................................................................... 31
Description of the Certificates....................................................... 31
Description of the Agreements......................................................... 39
Description of Credit Support......................................................... 54
Certain Legal Aspects of Mortgage Loans and the Leases................................ 56
Certain Federal Income Tax Consequences............................................... 72
State Tax Considerations.............................................................. 96
ERISA Considerations.................................................................. 96
Legal Investment...................................................................... 98
Plan of Distribution.................................................................. 99
Legal Matters......................................................................... 100
Financial Information................................................................. 100
Rating................................................................................ 100
Index of Principal Definitions........................................................ 101
</TABLE>
iv
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus. See "Index
of Principal Definitions" herein and in the Prospectus.
<TABLE>
<S> <C>
Title of Certificates........ Commercial Mortgage Pass-Through Certificates, Series
1997-SPTL-C1 (the "Certificates").
Depositor.................... J.P. Morgan Commercial Mortgage Finance Corp., a Delaware
corporation, an indirect wholly-owned limited purpose
finance subsidiary of J.P. Morgan & Co. Incorporated and an
affiliate of one of the Underwriters. See "The Depositor" in
the Prospectus.
Seller....................... Southern Pacific Thrift and Loan Association. The Mortgage
Loans were originated by the Seller and will be sold to the
Depositor on or prior to the Delivery Date. See "Southern
Pacific Thrift and Loan Association" herein.
Master Servicer.............. Midland Loan Services, L.P., a Missouri limited partnership.
See "Master Servicer and Special Servicer" herein.
Sub-Servicer................. Southern Pacific Thrift and Loan Association will
sub-service the Mortgage Loans. See "Southern Pacific Thrift
and Loan Association" herein.
Special Servicer............. Midland Loan Services, L.P. (which also serves as Master
Servicer) will be the Special Servicer with respect to all
the Mortgage Loans. The Special Servicer may be removed
without cause under certain circumstances described herein
under "Master Servicer and Special Servicer--
Responsibilities of Special Servicer."
Trustee...................... LaSalle National Bank ("LaSalle"), a nationally chartered
bank. See "Description of the Pooling and Servicing
Agreement" herein.
Fiscal Agent................. ABN AMRO Bank N.V., a Netherlands banking corporation and
the corporate parent of the Trustee. See "Description of the
Pooling and Servicing Agreement" herein.
Cut-off Date................. June 1, 1997.
Delivery Date................ On or about June 27, 1997.
Distribution Dates........... Distributions on the Certificates will be made by the
Trustee, to the extent of available funds, on the 25th day
of each month or, if any such 25th day is not a business
day, on the next succeeding business day, beginning in July
1997 (each, a "Distribution Date"), to the holders of record
as of the close of business on the last business day of the
month preceding the month of each such distribution (each, a
"Record Date"). Notwithstanding the above, the final
distribution on any Certificate (whether a global
Certificate or Definitive Certificate) will be made after
due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of
such Certificates by the holder of such Certificates (which
could be DTC in the case of a global Certificate) at the
location to be specified in such notice. See "Registration
of the Offered Certificates" below.
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
Rated Final Distribution
Date....................... July 25, 2029, which is the first Distribution Date
following the second anniversary of the date at which all
the Mortgage Loans have zero balances, assuming no
prepayments and that the Mortgage Loans which are Balloon
Mortgage Loans fully amortize according to their
amortization schedule and no Balloon Payment is made.
Registration of the Offered
Certificates............... The Offered Certificates initially will be issued in
book-entry form. Persons acquiring beneficial ownership
interests in the Offered Certificates (the
"Certificateholders") may elect to hold their book-entry
Certificate interests either through The Depository Trust
Company ("DTC"), in the United States, or through Centrale
de Livraison de Valeurs Mobilieres S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may be, will be in
accordance with the usual rules and operating procedures of
the relevant system. The Offered Certificates (the "DTC
Registered Certificates") will be represented by one or more
global certificates registered in the name of Cede & Co., as
nominee of DTC. No person acquiring an interest in the DTC
Registered Certificates (any such person, a "Beneficial
Owner") will be entitled to receive a Certificate of such
class in fully registered, certificated form (a "Definitive
Certificate"), except under the limited circumstances
described in the Prospectus under "Description of the
Certificates--Book-Entry Registration and Definitive
Certificates". Instead, DTC will effect payments and
transfers in respect of the DTC Registered Certificates by
means of its electronic recordkeeping services, acting
through certain participating organizations ("DTC
Participants" and together with the CEDEL and Euroclear
participating organizations, the "Participants"). This may
result in certain delays in receipt of payments by an
investor and may restrict an investor's ability to pledge
its securities. Unless and until Definitive Certificates are
issued, the rights of Beneficial Owners may only be
exercised through DTC and its Participants and will be
subject to procedures established thereby, except as
otherwise specified herein. See "Description of the
Certificates--General" herein, "Annex B" hereto and
"Description of the Certificates--Book-Entry Registration of
the Offered Certificates" in the Prospectus.
Denominations................ The DTC Registered Certificates will be issuable on the
book-entry records of DTC and its Participants in
denominations of $100,000 and integral multiples of $1 in
excess thereof. The Class X Certificates will be issuable in
denominations of $100,000 Notional Amount and integral
multiples of $1 Notional Amount in excess thereof.
The Mortgage Pool............ The Trust Fund will consist of a pool (the "Mortgage Pool")
of 540 adjustable rate mortgage loans (the "Mortgage Loans")
secured by first liens on fee simple interests in
multifamily, retail, office, industrial, mixed use and other
commercial properties (the "Mortgaged Properties") located
in 12 states. See "Description of the Mortgage
Pool--General." The Mortgage Loans will be acquired by the
Depositor from the Seller on or before the Delivery Date.
See "Description of the Mortgage Pool-- Underwriting
Guidelines" herein. The Mortgage Loans will have an
aggregate principal balance as of the Cut-off Date of
approximately $203,075,453 and individual principal balances
as of the Cut-off Date of
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
at least $36,604 but not more than $3,078,561 with an
average principal balance of approximately $376,066. The
Mortgage Loans will have terms to maturity from the Cut-off
Date of not more than 360 months, and a weighted average
remaining term to maturity of approximately 341 months as of
the Cut-off Date. The Mortgage Interest Rates will generally
adjust semi-annually on the date (the "Rate Adjustment
Date") specified in the related Mortgage Note to a rate
equal to the sum (generally rounded to the nearest 0.125% of
the related Index (as defined herein) and the margin set
forth in the related Mortgage Note (the "Note Margin"),
subject to the limitations set forth herein. See
"Description of the Mortgage Pool-- Indices" herein. The
amount of the monthly payment on each Mortgage Loan will be
adjusted semi-annually on the Rate Adjustment Date to the
amount necessary to pay interest at the then applicable
Mortgage Interest Rate and, except with respect to Balloon
Mortgage Loans, to fully amortize the outstanding principal
balance of the Mortgage Loan over its remaining term to
stated maturity. The Mortgage Loans will initially bear
interest at Mortgage Interest Rates of at least 7.25% per
annum but not more than 12.5% per annum, with a weighted
average Mortgage Interest Rate of approximately 8.727% per
annum as of the Cut-off Date. The Mortgage Loans generally
provide for scheduled payments of principal and/or interest
("Monthly Payments") to be due on the first day of each
month (the "Due Date").
Approximately 3.08% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date provide for
monthly payments of principal based on an amortization
schedule longer, and in some cases significantly longer,
than the remaining term of such Mortgage Loan (each, a
"Balloon Mortgage Loan"), thereby leaving a substantial
outstanding principal amount due and payable (the "Balloon
Payment") on its maturity date, unless prepaid prior
thereto.
Approximately 95.95% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date provide that if the
borrower thereunder (the "Mortgagor") prepays the principal
balance thereof in an amount in excess of 20% of the
principal amount thereof per year during a certain period of
time following the origination (the "Prepayment Premium
Period"), such borrower is required to pay a premium (the
"Prepayment Premium"). With respect to approximately 4.05%
of the Mortgage Loans by aggregate principal balance as of
the Cut-off Date, the related Mortgage Note does not provide
for a Prepayment Premium or the related Prepayment Premium
Period has elapsed. See the table entitled "Months of
Prepayment Premium Period Remaining as of the Cut-off Date"
under "Description of the Mortgage Pool--Certain
Characteristics of the Mortgage Loans" herein. Any Net
Prepayment Premium collected on a Mortgage Loan will be
distributed solely to holders of the Class X Certificates.
See "--Special Principal Payment Considerations" below,
"Description of the Certificates--Distributions--Interest
Distributions on the Certificates" and "Certain Prepayment,
Maturity and Yield Considerations" herein.
The Seller will make certain representations to the
Depositor, which will be assigned to the Trustee under the
Pooling and Servicing Agreement (as defined herein), and
will covenant to cure any material breach of such
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
representations and warranties or to repurchase any Mortgage
Loan in which there has been a breach of a representation or
warranty which materially and adversely affects the interest
of the Certificateholders in such Mortgage Loan. The sole
remedy available to the Trustee or the Certificateholders is
the obligation of the Seller to cure any such breach or
repurchase any such Mortgage Loan.
With respect to 80.89% of Mortgage Loans by aggregate
principal balance as of the Cut-off Date, the Index will be
equal to the average of the interbank offered rates for
six-month U.S. dollar denominated deposits in the London
market based on quotation of major banks calculated as
described herein ("Six-Month LIBOR"). With respect to 6.83%
of the Mortgage Loans by aggregate principal balance as of
the Cut-off Date, the Index will be equal to the daily prime
loan rate as reported by Bank of America N.T. & S.A. as of
the date specified in the related Mortgage Note ("Prime").
With respect to 12.29% of the Mortgage Loans by aggregate
principal balance as of the Cut-off Date, the Index will be
the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by
the Federal Reserve Board in Statistical Release H.15(519)
and available as of the date specified herein ("One-Year
U.S. Treasury").
For a further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
The Offered Certificates..... The Certificates will be issued pursuant to a pooling and
servicing agreement, to be dated as of the Cut-off Date,
among the Depositor, the Master Servicer, the Special
Servicer, the Trustee and the Fiscal Agent (the "Pooling and
Servicing Agreement"). Only the Class A1, Class A2, Class B,
Class C, Class D and Class X Certificates (the "Offered
Certificates") are offered hereby. The Offered Certificates
will have the initial Class Balances set forth on the cover
hereof. The Class X Certificates will not have a Class
Balance.
Pass-Through Rate on the
Offered Certificates....... The Pass-Through Rates on the Class A1, Class A2, Class B,
Class C and Class D Certificates for each Distribution Date
will be equal to the lesser of (a) LIBOR plus the
corresponding margin (each a "Net Margin") and (b) the
weighted average, by Stated Principal Balance, of the
Remittance Rates on the Mortgage Loans prior to giving
effect to distributions thereon in the Remittance Period
immediately preceding such Distribution Date (the "Weighted
Average Remittance Rate"). The Net Margins of the Offered
Certificates (other than the Class X Certificate) will be:
Class A1: ; Class A2: ; Class B: ; Class
C: ; and Class D: . The Pass-Through Rate on the
Class X Certificates will be generally equal to the Weighted
Average Remittance Rates in effect from time to time on the
Mortgage Loans minus the weighted average of the
Pass-Through Rates on all other classes of Certificates. The
Pass-Through Rate on the Class X Certificates for the
initial Distribution Date will be % per annum. The
Mortgage Interest Rate for each of the Mortgage Loans which
provide for the computation of interest other than on the
basis of a 360-day year consisting of twelve 30-day months
(a
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
"30/360 basis") will be adjusted by computing an effective
monthly rate based on the actual amount of interest
receivable in each month.
The Class X Certificates will consist of the Class A1X,
Class A2X, Class BX, Class CX, Class DX, Class EX, Class FX,
Class GX, Class HX and Class NRX Components (the "Class X
Components").
The Pass-Through Rates on the Class A1X, Class A2X, Class
BX, Class CX, Class DX, Class EX, Class FX, Class GX, Class
HX and Class NRX Components will be equal to the excess of
the Weighted Average Remittance Rate over the Pass-Through
Rates for the Class A1, Class A2, Class B, Class C and Class
D, Class E, Class F, Class G, Class H and Class NR
Certificates, respectively, for such Distribution Date.
Interest accrued on the Class A1X, Class A2X, Class BX,
Class CX, Class DX, Class EX, Class FX, Class GX, Class HX
and Class NRX Components will be calculated based on the
related Notional Amount. The Notional Amounts of the Class
A1X, Class A2X, Class BX, Class CX, Class DX, Class EX,
Class FX, Class GX, Class HX and Class NRX Components will
be equal to the Class Balances of the Class A1, Class A2,
Class B, Class C, Class D, Class E, Class F, Class G, Class
H and Class NR Certificates, respectively, for the related
Distribution Date. The Class X Certificates will not have a
Class Balance.
The "Remittance Rate" in effect for any Mortgage Loan as of
any date of determination is equal to the excess (adjusted
to reflect the actual number of days in the related
Remittance Period and a 360-day year) of the Mortgage
Interest Rate thereon (without giving effect to any
modification or reduction thereof following the Cut-off
Date) over 0.3775% per annum (which represents the per annum
fee payable to the Master Servicer and the per annum fee
payable to the Trustee).
Interest Distributions on the
Certificates............... Subject to the distribution of the Principal Distribution
Amount to the Holders of classes of Certificates of a higher
priority as described under "Priority of Distributions"
below, Holders of each class of Offered Certificates will be
entitled to receive on each Distribution Date in the order
described herein, to the extent of the Available
Distribution Amount (as defined herein) for such
Distribution Date net of any Net Prepayment Premium (as
defined herein) (the "Adjusted Available Distribution
Amount"), distributions allocable to interest in an amount
(the "Interest Distribution Amount") equal to the interest
accrued during the period from and including the first day
of the month preceding the month of the Distribution Date
(or from the Cut-off Date, in the case of the initial
Distribution Date) to and including the last day of the
month preceding the month of the Distribution Date (based on
a 360-day year consisting of twelve 30-day months but
restated as a rate based on the actual number of days in
such period and a 360-day year in the case of the Class A1,
Class A2, Class B, Class C and Class D Certificates ) on the
related Class Balance (or the related Notional Amounts, in
the case of the Class X Components) immediately prior to
such Distribution Date at the then-applicable Pass-Through
Rate (the "Interest Accrual Amount", which in the case of
the Class X Certificate shall give effect to the reduction
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
described in clause (a) below), plus any shortfall from
prior Distribution Dates remaining undistributed as
described in the penultimate sentence of this paragraph,
less such class' pro rata share, according to the Interest
Accrual Amount for each such class for such Distribution
Date, of any interest shortfall not related to a Mortgagor
delinquency or default, such as Prepayment Interest
Shortfalls to the extent not offset as described herein, and
shortfalls associated with exemptions provided by the Relief
Act (as defined in the Prospectus), and less (a) with
respect to each class of Certificates other than the Class X
Certificates, any Collateral Value Adjustment Capitalization
Amount (as defined herein) allocated to such class as
described under "--Subordination" below and (b) with respect
to the Class X Certificates, the portion of the Interest
Accrual Amount therefor accrued on the portion of the
Notional Amount corresponding to any Collateral Value
Adjustment or Collateral Value Adjustment Capitalization
Amount allocated to the Class Balance of any class of
Certificates (and not reversed) (the "Collateral Value
Adjustment Reduction Amount"). The "Notional Amount" of the
Class X Certificates will equal the aggregate Class Balance
of all the Certificates. The Notional Amount does not
entitle the Class X Certificates to any distributions of
principal. If the Adjusted Available Distribution Amount for
any Distribution Date is less than the Interest Distribution
Amount for such Distribution Date, the shortfall will be
part of the Interest Distribution Amount distributable to
holders of Offered Certificates on subsequent Distribution
Dates. Any Net Prepayment Premium will be distributed on the
Class X Certificates.
The Available Distribution Amount for any Distribution Date
generally includes: (i) scheduled payments on the Mortgage
Loans due on or prior to the related Due Date immediately
preceding, and collected as of, the related Determination
Date (to the extent not distributed on previous Distribution
Dates) and unscheduled payments and other collections on the
Mortgage Loans collected during the related Remittance
Period, net of amounts payable or reimbursable to the
Trustee, the Master Servicer, the Special Servicer or the
Fiscal Agent therefrom and (ii) any P&I Advances made or
deemed to be made by the Trustee, the Master Servicer, the
Special Servicer, or the Fiscal Agent for the related
Distribution Date. The "Determination Date" for any
Distribution Date is the 10th day of the month of such
Distribution Date or, if any such 10th day is not a business
day, on the succeeding business day. The "Remittance Period"
for any Distribution Date is the period beginning after a
Determination Date in the immediately preceding month (or
the Cut-off Date, in the case of the first Remittance
Period) through the related Determination Date. See
"Description of the Certificates--Distributions--Interest
Distributions on the Certificates" herein.
Principal Distributions on
the Certificates........... Holders of a class of Certificates will be entitled to
receive on each Distribution Date in reduction of the
related Class Balance in the order described herein until
the related Class Balance is reduced to zero, to the extent
of the balance of the Adjusted Available Distribution Amount
remaining after the payment of the Interest Distribution
Amount for such Distribution Date for the classes of
Certificates with the highest priority of
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
payment for interest payments (as described under "Priority
of Distributions" below), distributions in respect of
principal in an amount (the "Principal Distribution Amount")
equal to the aggregate of (i) all scheduled payments of
principal (other than Balloon Payments) due on the Mortgage
Loans on the Due Date occurring in the Remittance Period
immediately preceding such Distribution Date whether or not
received and all scheduled Balloon Payments received, (ii)
if the scheduled Balloon Payment is not received, with
respect to any Balloon Loans on and after the Maturity Date
thereof, the principal payment that would need to be
received in the related month in order to fully amortize
such Balloon Loan with level monthly payments by the end of
the term used to derive scheduled payments of principal due
prior to the related Maturity Date, (iii) to the extent not
previously advanced, any unscheduled principal recoveries
received during the related Remittance Period in respect of
the Mortgage Loans, whether in the form of liquidation
proceeds, insurance proceeds, condemnation proceeds or
amounts received as a result of the purchase of any Mortgage
Loan out of the Trust Fund to the extent not required to be
otherwise applied pursuant to the terms of the related
Mortgage Loan and (iv) any other portion of the Adjusted
Available Distribution Amount remaining undistributed after
payment of any interest payable on the Certificates. See
"Description of the Certificates-- Distributions--Principal
Distributions on the Offered Certificates" herein.
Priority of Distributions.... The Adjusted Available Distribution Amount for any
Distribution Date will be applied (a) first, to
distributions of interest on the classes of Certificates
outstanding with highest priority for interest payment (as
described below), (b) second, to distributions of the
Principal Distribution Amount to the classes of Certificates
then entitled to distributions of principal as described
below, and (c) third, to distributions of interest on each
class of Certificates other than the classes described in
clause (a) above, in the order of priority described below;
provided that on any Distribution Date on which the Class
Balance of a class of Certificates is reduced to zero
pursuant to clause (b) above, interest distributions
pursuant to clause (a) above will be made to the class of
Certificates outstanding with the next highest priority for
interest payments prior to making distributions of the
Principal Distribution Amount thereto pursuant to clause (b)
above. The priority for interest payments for purposes of
clauses (a) and (c), above, is: first to distributions of
interest on the Class A1, Class A2 and Class X Certificates,
pro rata, based on their respective Interest Accrual
Amounts; second, to the Class B Certificates; third, to the
Class C Certificates; fourth, to the Class D Certificates,
and then to the Class E, Class F, Class G, Class H and Class
NR Certificates. The Principal Distribution Amount for such
Distribution Date will be applied to the payment of
principal of the Class A1, Class A2, Class B, Class C and
Class D Certificates, in that order, and then to the
remaining classes of Certificates, until their respective
Class Balances have been reduced to zero. Any Net Prepayment
Premium for any Distribution Date will be available to make
distributions solely on the Class X Certificates. After
reduction of the Class Balances of all the Certificates to
zero, any remaining portion of the Available Distribution
Amount will be distributed to the holders of the Class X
Certificates up to an aggregate amount equal
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
to the sum of all prior Collateral Value Adjustment
Reduction Amounts (as defined herein) allocated thereto. See
"Description of the Certificates-- Subordination" herein.
P&I Advances................. The Master Servicer is required to make advances for
delinquent Monthly Payments on the Mortgage Loans, including
any Specially Serviced Mortgage Loans ("P&I Advances") and
for certain other expenses for the protection of the
Mortgaged Properties, subject to the limitations described
herein. None of the Servicers will be required to advance
the full amount of any Balloon Payment not made by the
related Mortgagor. To the extent a Servicer is required to
make a P&I Advance on and after the Due Date for a Balloon
Payment, such P&I Advance shall not exceed an amount equal
to the monthly payment calculated by such Servicer, the
Trustee or the Fiscal Agent necessary to fully amortize the
related Mortgage Loan over the period used for purposes of
calculating the scheduled monthly payments thereon prior to
the related Maturity Date. To the extent that a Servicer
fails to make any P&I Advance required of it, the Trustee
shall make such required P&I Advance and to the extent the
Trustee fails to make any P&I Advance required of it, the
Fiscal Agent shall make such required P&I Advance. As more
fully described herein, if any Servicer, the Trustee or the
Fiscal Agent makes a P&I Advance (or any other advance) it
will be entitled to reimbursement thereof and interest
thereon at the prime rate determined in accordance with the
Pooling and Servicing Agreement to the extent provided
therein. See "Description of the Certificates--Advances"
herein.
Other Certificates........... The Class E, Class F, Class G, Class H, Class NR, Class R-I,
Class R-II and Class R-III Certificates are not offered
hereby (the "Other Certificates"). The Other Certificates
will be acquired initially by an affiliate of the Seller.
The Pass-Through Rate on the Class E, Class F, Class G,
Class H and Class NR Certificates for any Distribution Date
will equal %, %, %, % and % per annum.
The aggregate Class Balance of the Class E, Class F, Class
G, Class H and Class NR Certificates will equal $28,433,453.
The Class R-I, Class R-II and Class R-III Certificates will
not have a Pass-Through Rate or a Class Balance.
Subordination................ Neither the Offered Certificates nor the Mortgage Loans are
insured or guaranteed against losses suffered on the
Mortgage Loans by any government agency or instrumentality
or by the Depositor, the Seller, the Trustee, the Fiscal
Agent, the Underwriters, the Master Servicer, the Special
Servicer or any of their respective affiliates.
Realized Losses and Collateral Value Adjustments (as defined
herein) on the Mortgage Loans will be allocated, first, to
the Class NR, Class H, Class G, Class F and Class E
Certificates in that order, second, to the Class D
Certificates, third, to the Class C Certificates, fourth, to
the Class B and thereafter, to the Class A1 and Class A2
Certificates, on a pro rata basis, based on Class Balance,
in each case until the related Class Balance is reduced to
zero. Any allocation of a Realized Loss or a Collateral
Value Adjustment to a class of Certificates will result in a
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
reduction of the related Class Balance and the Notional
Amount of the Class X Certificates. Interest accrued for any
Distribution Date on any Collateral Value Adjustment or
Collateral Value Adjustment Capitalization Amount allocated
to the Class Balance (or to the Notional Amount, with
respect to the Class X Certificates) of any class of
Certificates will not be distributed to such class on such
Distribution Date as interest and, except for interest
accrued thereon with respect to the Class X Certificates,
will be added to the Class Balance thereof. Under certain
circumstances, a Collateral Value Adjustment may be
reversed. Such reversal will reduce the accrual of the
Collateral Value Adjustment Capitalization Amount and
therefore the amount otherwise available to make
distributions of principal on the more senior classes of
Certificates. In addition, the Adjusted Available
Distribution Amount will be applied in the order set forth
under "Priority of Distributions" above.
In addition to Realized Losses and Collateral Value
Adjustments, shortfalls may also occur as a result of any
Servicer's, the Trustee's or the Fiscal Agent's right to
receive payments of interest with respect to unreimbursed
advances, the related Special Servicer's right to
compensation with respect to Mortgage Loans which are or
have been Specially Serviced Mortgage Loans and as a result
of other Trust Fund expenses. Such shortfalls will be
allocated to the classes of Certificates with the lowest
payment priority for purposes of the application of the
Adjusted Available Distribution Amount in the order
described herein.
Optional Termination......... At its option, any holder of a Class R-I Certificate, the
holders of any aggregate Percentage Interest in excess of
50% of the Most Subordinate Class of Certificates (as
defined herein), the Master Servicer and (to the extent all
of the remaining Mortgage Loans are being serviced by the
Special Servicer) the Special Servicer (in that order) may
purchase all of the Mortgage Loans, at the price set forth
under "Description of the Pooling and Servicing
Agreement--Termination," and thereby effect termination of
the Trust Fund and early retirement of the then outstanding
Certificates, on any Distribution Date on which the
aggregate Stated Principal Balance (as defined herein) of
the Mortgage Loans remaining in the Trust Fund is less than
5% of the aggregate principal balance of the Mortgage Loans
as of the Cut-off Date. See "Description of the Pooling and
Servicing Agreement--Termination" herein and "Description of
the Certificates--Termination" in the Prospectus.
Special Principal Payment
Considerations............. The rate and timing of principal payments, if any, on the
Offered Certificates will depend, among other things, on the
rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of
Mortgage Loans due to a breach of a representation and
warranty) on the Mortgage Loans. As described herein,
certain of the Mortgage Loans are in the related Prepayment
Premium Period and, if certain voluntary prepayments are
made, a Prepayment Premium will be required to be paid
during such period. Any Net Prepayment Premium will be
available to make distributions solely on the Class X
Certificates. See "The Mortgage Pool" above and "Description
of the Mortgage Pool" herein.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
All classes of Offered Certificates entitled to payments of
principal are subject to priorities for payment of principal
as described herein. Distributions of principal on classes
having an earlier priority of payment will be directly
affected by the rates of prepayments of the Mortgage Loans.
The timing of commencement of principal distributions and
the weighted average lives of classes of Certificates with a
later priority of payment will be affected by the rates of
prepayments experienced both before and after the
commencement of principal distributions on such classes.
In addition, a portion of collections on the Mortgage Loan
in excess of scheduled and unscheduled principal
distributions, which generally will be limited to interest
distributions not payable on a class of Certificates as a
result of a Collateral Value Adjustment, will be allocated
to the classes of Certificates then entitled to
distributions of principal. Any such allocation may result
in a faster amortization of such class of Certificates.
Special Yield
Considerations............. The yield to maturity on each class of the Offered
Certificates will depend on, among other things, the rate
and timing of principal payments (including prepayments,
defaults, liquidations and purchases of Mortgage Loans due
to breaches of representations and warranties) on the
Mortgage Loans and the allocation thereof to reduce the
Class Balance. The yield to maturity on each class of the
Offered Certificates will also depend on the Pass-Through
Rate and the purchase price for such Certificates. The yield
to investors on any class of Offered Certificates will be
adversely affected by any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage Loans, which may result
from the distribution of interest only to the date of a
prepayment occurring during any month following the related
Determination Date (rather than a full month's interest).
See "Description of the
Certificates--Distributions--Interest Distributions on the
Certificates" herein.
The Pass-Through Rates and the yields on the Offered
Certificates will depend on changes in LIBOR and the
Weighted Average Remittance Rate on the Mortgage Loans.
Except as described below, the Pass-Through Rate on the
Offered Certificates is based upon the value of an index
(LIBOR) which is different from the value of the indices
applicable to the Mortgage Loans, as described under
"Description of the Mortgage Pool" herein. Each Mortgage
Loan adjusts semi-annually based upon the related Index
whereas the Pass-Through Rates on the Offered Certificates
adjust monthly based upon LIBOR. LIBOR and the indices
applicable to the Mortgage Loans may respond differently to
economic and market factors, and there is not necessarily
any correlation between them. In addition, all of the
Mortgage Loans are subject to limitations on periodic
increases and/or decreases in the related Mortgage Interest
Rate (the "Periodic Rate Caps"), maximum Mortgage Interest
Rates (the "Maximum Mortgage Interest Rates") and minimum
Mortgage Interest Rates (the "Minimum Mortgage Interest
Rates"). Thus, it is possible, for example, that LIBOR may
rise during periods in which the indices on the Mortgage
Loans are stable or are falling or that, even if both LIBOR
and such indices rise during the same period, LIBOR may rise
more rapidly than such indices and therefore the amount of
interest collected on all Mortgage Loans
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
(adjusted to the Remittance Rate) may be insufficient to pay
interest on a class of Offered Certificates at a rate equal
to LIBOR plus the related Net Margin. In such event, the
Pass-Through Rate on such class will be equal to the
Weighted Average Remittance Rate on the Mortgage Loans.
In addition, a number of factors affect the performance of
LIBOR and may cause LIBOR to move in a manner different from
other indices. To the extent that LIBOR may reflect changes
in the general level of interest rates more or less quickly
than other indices, in a period of rising interest rates,
increases in the yield to Holders of the Offered
Certificates due to such rising interest rates may occur
earlier or later than that which would be produced by other
indices, and in a period of declining rates, LIBOR may drop
lower or remain higher than other market interest rates.
In general, if a class of Offered Certificates is purchased
at a premium and principal distributions thereon occur at a
rate faster than anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a class of
Offered Certificates is purchased at a discount and
principal distributions thereon occur at a rate slower than
that assumed at the time of purchase, the investor's actual
yield to maturity will be lower than that assumed at the
time of purchase.
The multiple class structure of the Offered Certificates
causes the yield of certain classes to be particularly
sensitive to changes in the rates of principal payments
(including prepayments, defaults, liquidations and purchases
of Mortgage Loans due to a breach of a representation and
warranty) of the Mortgage Loans and other factors.
The yield to investors on the Class X Certificates will be
sensitive to the rate and timing of prepayments, defaults
and liquidations on the Mortgage Loans. The rate of such
prepayments, defaults and liquidations on the Mortgage Loans
may fluctuate significantly over time. A significantly
faster than expected rate of such prepayments, defaults and
liquidations on the Mortgage Pool will have a negative
effect on the yield to such investors and could result in
the failure of investors in the Class X Certificates to
recover their initial investments. The Pass-Through Rates on
the Class X Components will be adversely affected by
increases in LIBOR or decreases in the Weighted Average
Remittance Rate which are disproportionate to decreases in
the Weighted Average Remittance Rate or increases in LIBOR,
respectively. In addition, because holders of the Class X
Certificates have rights to relatively larger portions of
interest payments on Mortgage Loans with higher Mortgage
Interest Rates than on Mortgage Loans with lower Mortgage
Interest Rates, and because Mortgage Loans with higher
Mortgage Interest Rates are generally likely to prepay at a
faster rate than Mortgage Loans with lower Mortgage Interest
Rates, the yield on the Class X Certificates will be
materially and adversely affected to a greater extent than
the yields on other Offered Certificates if the Mortgage
Loans with higher Mortgage Interest Rates prepay faster than
the Mortgage Loans with lower Mortgage Interest Rates. See
"Certain Yield, Prepayment and Maturity Considerations,"
especially "-- Class X Certificate Yield Considerations"
herein.
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
The yield to investors on any of the Certificates will be
sensitive to losses due to defaults on the Mortgage Loans
(and the timing thereof), because the amount of such losses
will be allocable to such class to the extent such losses
are not allocated to a subordinate class of Certificates, as
described herein. Furthermore, as described herein, the
timing of receipt of principal and interest by any such
class of Certificates may be adversely affected by losses
even if such class does not ultimately bear such loss.
If any Servicer, the Trustee or the Fiscal Agent makes an
advance it will be entitled to interest thereon at the prime
rate determined in accordance with the Pooling and Servicing
Agreement to the extent provided therein. Therefore losses
may be allocated to a class of Offered Certificates with
respect to any delinquent Monthly Payment and certain other
expenses advanced by a Servicer, the Trustee or the Fiscal
Agent.
The Special Servicer will be entitled to receive
compensation in the form of a percentage of the outstanding
principal balance of any Mortgage Loan which is being
serviced by the Special Servicer (a "Specially Serviced
Mortgage Loan") prior to the right of Certificateholders to
receive distributions on the Certificates. Such compensation
will result in shortfalls which will be allocated to the
classes of Certificates with the lowest payment priority for
purposes of application of the Adjusted Available
Distribution Amount in the order described herein. See
"Master Servicer and Special Servicer--Servicing and Other
Compensation and Payment of Expenses" herein.
See "Certain Prepayment, Maturity and Yield Considerations,"
especially "-- Class X Certificates Yield Considerations"
herein, and "Yield Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences............... Three separate real estate mortgage investment conduit
("REMIC") elections will be made with respect to the Trust
Fund for federal income tax purposes. Upon the issuance of
the Offered Certificates, Brown & Wood LLP, counsel to the
Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling
and Servicing Agreement, for federal income tax purposes,
REMIC I, REMIC II and REMIC III (each as defined in the
Pooling and Servicing Agreement) will each qualify as a
REMIC under Sections 860A through 860G of the Internal
Revenue Code of 1986 (the "Code").
For federal income tax purposes, the Class R-I Certificates
will be the sole class of "residual interests" in REMIC I,
the Class R-II Certificates will be the sole class of
"residual interests" in REMIC II, and the Class R-III
Certificates will be the sole class of "residual interests"
in REMIC III. The Offered Certificates (other than the Class
X Certificates), each component of the Class X Certificates
and the Other Certificates will be "regular interests" of
REMIC III and will generally be treated as debt instruments
of REMIC III.
The Class X Certificates will, and the other Offered
Certificates may, be treated as having been issued with
original issue discount for federal income tax purposes.
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
For further information regarding the federal income tax
consequences of investing in the Offered Certificates, see
"Certain Federal Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations......... A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code should review carefully with its legal advisors
whether the purchase or holding of any class of Offered
Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA
or Section 4975 of the Code or whether there exists any
statutory or administrative exemption applicable to an
investment therein. The U.S. Department of Labor has issued
individual exemption, Prohibited Transaction Exemption
90-23, to J.P. Morgan Securities Inc. that generally exempts
from the application of certain of the prohibited
transaction provisions of Section 406 of ERISA, and the
excise taxes imposed on such prohibited transactions by
Section 4975(a) and (b) of the Code and Section 502(i) of
ERISA, transactions relating to the purchase, sale and
holding of pass-through certificates purchased and sold by
J.P. Morgan Securities Inc., (and if also purchased and sold
by J.P. Morgan Securities Inc., such certificates purchased
and sold by Morgan Stanley & Co. Incorporated and
Dabney/Resnick/Imperial) such as the Class A1, Class A2 and
Class X Certificates and the servicing and operation of
asset pools, provided that certain conditions are satisfied.
Purchasers using insurance company general account funds to
effect such purchase should consider the availability of
Prohibited Transaction Class Exemption 95-60 (60 Fed. Reg.
35925, July 12, 1995) issued by the U.S. Department of
Labor. See "ERISA Considerations" herein and in the
Prospectus.
Rating....................... It is a condition of the issuance of the Class A1, and Class
A2 Certificates that they be rated "AAA" by Duff and Phelps
Credit Rating Co. ("DCR"), Fitch Investors Service, L.P.
("Fitch") and Standard & Poor's Ratings Services ("Standard
& Poor's"). It is a condition of the issuance of the Class X
Certificates that they be rated not lower than "AAA" by DCR
and Fitch. It is a condition of the issuance of the Class B
Certificates that they be rated not lower than "AA" by DCR,
Fitch and Standard & Poor's. It is a condition of the
issuance of the Class C Certificates that they be rated not
lower than "A" by DCR, Fitch and Standard & Poor's. It is a
condition of the issuance of the Class D Certificates that
they be rated not lower than "BBB" by DCR, and Standard &
Poor's and "BBB-" by Fitch. A security rating is not a
recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the
assigning rating organization. A rating on mortgage
pass-through certificates addresses the likelihood of the
receipt of all distributions to which Certificateholders are
entitled, including payment of all principal on the
Certificates by the Rated Final Distribution Date. The
ratings on the Certificates do not represent any assessment
of (i) the likelihood or frequency of principal prepayments
on the Mortgage Loans, (ii) the degree to which such
prepayments might differ from those originally anticipated
or (iii) whether and to what extent Prepayment Premiums will
be received. Also, a security rating does not represent any
assessment of the yield to maturity that investors may
experience or the possibility that the holders
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
of the Class X Certificates might not fully recover their
investment in the event of rapid prepayments of the Mortgage
Loans (including both voluntary and involuntary
prepayments). In general, the ratings thus address credit
risk and not prepayment risk. As described herein, the
amounts payable with respect to the Class X Certificates
consist only of interest. If the entire pool were to prepay
in the initial month, with the result that the Class X
Certificateholders receive only a single month's interest
and thus suffer a nearly complete loss of their investment,
all amounts "due" to such Holders will nevertheless have
been paid, and such result is consistent with the "AAA"
rating received on the Class X Certificates. The Class X
Certificate notional amount upon which interest is
calculated is reduced by the allocation of Realized Losses,
Collateral Value Adjustments and prepayments, whether
voluntary or involuntary. The rating does not address the
timing or magnitude of reductions of such notional amount,
but only the obligation to pay interest timely on the
notional amount as so reduced from time to time.
Accordingly, the rating of the Class X Certificates should
be evaluated independently from similar ratings on other
types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the
assigning rating agency. See "Certain Prepayment, Maturity
and Yield Considerations" herein, "Risk Factors," and
"Rating" herein and in the Prospectus and "Yield
Considerations" in the Prospectus.
Legal Investment............. The Class A1, Class A2, Class X and Class B Certificates
will be "mortgage related securities" within the meaning of
the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in one of the two
highest rating categories by at least one nationally
recognized statistical rating organization. The Class C and
Class D Certificates will not be "mortgage related
securities" within the meaning of SMMEA. The appropriate
characterization of the Offered Certificates under various
legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase any
Class of Offered Certificates, may be subject to significant
interpretative uncertainties.
In addition, institutions whose investment activities are
subject to review by certain regulatory authorities may be
or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain forms of
mortgage-backed securities. Furthermore, certain states have
enacted legislation overriding the legal investment
provisions of SMMEA. Accordingly, investors should consult
their own legal advisors to determine whether and to what
extent the Offered Certificates constitute legal investments
for them. See "Legal Investment" herein and in the
Prospectus.
</TABLE>
S-14
<PAGE>
RISK FACTORS
Prospective purchasers of the Offered Certificates should consider, among other
things, the following risk factors (as well as the risk factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment in the
Offered Certificates.
LIMITED LIQUIDITY. There can be no assurance that a secondary market for the
Certificates will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Certificates remain
outstanding. Any such secondary market may provide less liquidity to investors
than any comparable market for securities evidencing interest in single family
mortgage loans. The market value of the Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, sale of Certificates by a holder
in any secondary market that may develop may be at a discount from 100% of their
original principal balance or from their purchase price. Furthermore, secondary
market purchasers may look only hereto and to the reports to Certificateholders
delivered pursuant to the Pooling and Servicing Agreement as described herein
under the heading "Description of the Pooling and Servicing Agreement--Reports
to Certificateholders" herein for information concerning the Certificates.
Except to the extent described herein, Certificateholders will have no
redemption rights and the Certificates are subject to early retirement only
under certain specified circumstances described herein. "Description of the
Pooling and Servicing Agreement--Termination" herein.
LIMITED ASSETS. The Certificates will not represent an interest in or
obligation of the Depositor, the Seller, any Servicer, or any of their
respective affiliates. The only obligations of the Seller with respect to the
Certificates or the Mortgage Loans will be the obligations (if any) of the
Seller pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans. None of the Depositor, any Servicer or any of
their respective affiliates thereof will have any obligation with respect to
representations or warranties made by any other entity. Neither the Certificates
nor the underlying Mortgage Loans will be guaranteed or insured by the Federal
Deposit Insurance Corporation, any other governmental agency or instrumentality,
or by the Depositor, the Seller, the Underwriters, any Servicer, the Trustee,
the Fiscal Agent or any of their respective affiliates. Proceeds of the assets
included in the Trust Fund will be the sole source of payments on the
Certificates, and there will be no recourse to the Depositor or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Certificates.
If the Trust Fund is insufficient to make payments on the Certificate, no other
assets will be available for payment of the deficiency. Additionally, certain
amounts remaining in certain funds or accounts, including the Certificate
Account, the Collection Account and the REO Account (each as defined herein),
may be withdrawn under certain conditions, as described herein. In the event of
such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Certificates. In addition, on any Distribution
Date in respect of which losses or shortfalls in collections on the Mortgage
Loans have been incurred, the amount of such losses or shortfalls will be borne
first by the certain classes of Certificates, in the priority and manner and
subject to the limitations specified herein. As a result, the impact of
significant losses and shortfalls may fall primarily on the classes of
Certificates having a lower priority of payment.
SPECIAL PREPAYMENT CONSIDERATIONS. The rate and timing of principal payments on
the Offered Certificates will depend, among other things, on the rate and timing
of principal payments (including prepayments, defaults, liquidations and
purchases of Mortgage Loans due to a breach of representation and warranty) on
the Mortgage Loans. The rate at which principal payments occur on the Mortgage
Pool will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
related Index and Net Margin, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however, if
prevailing interest rates fall significantly below the Mortgage Interest Rates
on the Mortgage Loans, such Mortgage Loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. The rate of principal payments on the
Offered Certificates will correspond to the rate of principal payments on the
Mortgage Loans and may be affected by the Prepayment Premium provisions
applicable to the Mortgage Loans and by the extent to which a Servicer is able
to enforce such provisions. Mortgage Loans with a Prepayment Premium provision,
to the extent
S-15
<PAGE>
enforceable, generally would be expected to experience a lower rate of principal
prepayments than otherwise identical mortgage loans without such provisions. See
"Description of the Mortgage Pool," "Description of the
Certificates--Distributions--Priority" and "Certain Prepayment, Maturity and
Yield Considerations" herein and "Yield Considerations" in the Prospectus.
SPECIAL YIELD CONSIDERATIONS. The yield to maturity on each class of the
Offered Certificates will depend, among other things, on the rate and timing of
principal payments (including prepayments, defaults, liquidations and purchases
of Mortgage Loans due to a breach of representation and warranty) on the
Mortgage Pool and the allocation thereof to reduce the Class Balance of such
class. Mortgage Loans with higher Mortgage Interest Rates will have higher
Remittance Rates, and therefore, the yield on the Class X Certificates will, and
the yield on the Class A, Class B, Class C and Class D Certificates could be
adversely affected if Mortgage Loans with higher Mortgage Interest Rates pay
faster than the Mortgage Loans with lower Mortgage Interest Rates. The yield to
investors on the Offered Certificates will be adversely affected by any
allocation thereto of interest shortfalls on the Mortgage Loans, such as
Prepayment Interest Shortfalls. Neither the Certificates nor the Mortgage Loans
are guaranteed by any governmental entity or instrumentality or any other
entity.
Prospective investors in the Class X Certificates should consider, among other
things, that the yield to maturity on the Class X Certificates will be extremely
sensitive to the rate and timing of principal payments (including prepayments,
Realized Losses, defaults, and purchases of Mortgage Loans due to a breach of
representation and warranty) on the Mortgage Pool and the allocation thereof to
reduce Notional Amounts of the Class X Components. Prospective investors should
consider the associated risk that they may not fully recover their initial
investments. In addition to aggregate prepayments, investors should also
consider the risk that prepayments could occur disproportionately on Mortgage
Loans with higher Mortgage Interest Rates. Mortgage Loans with higher Mortgage
Interest Rates will have higher Remittance Rates, and, therefore, the yield on
the Class X Certificates could be adversely affected if Mortgage Loans with
higher Mortgage Interest Rates pay faster than Mortgage Loans with lower
Mortgage Interest Rates. Furthermore, the yield to investors on the Class X
Certificates will be particularly adversely affected by any allocation thereto
of interest shortfalls on the Mortgage Loans, such as Prepayment Interest
Shortfalls.
In addition, the yield to maturity on Offered Certificates (other than the Class
X Certificates) may be lower than the yield which would result if the related
Pass-Through Rate were calculated based on LIBOR plus the related Net Margin
without reference to the Weighted Average Remittance Rate on the Mortgage Loans.
The Pass-Through Rate on such Offered Certificates is based upon the value of an
index (LIBOR) which is different from the value of the indices applicable to the
Mortgage Loans, as described under "Description of the Mortgage Pool" herein.
Each Mortgage Loan adjusts semi-annually based upon the related Index whereas
the Pass-Through Rates on the Offered Certificates adjust monthly based upon
LIBOR (or LIBOR and the Remittance Rates, in the case of the Class X
Certificates). LIBOR and the indices applicable to the Mortgage Loans may
respond differently to economic and market factors, and there is not necessarily
any correlation between them. In addition, all of the Mortgage Loans are subject
to Periodic Rate Caps, Maximum Mortgage Interest Rates and Minimum Mortgage
Interest Rates. Thus, it is possible, for example, that LIBOR may rise during
periods in which the indices on the Mortgage Loans are stable or are falling or
that, even if both LIBOR and such indices rise during the same period, LIBOR may
rise more rapidly than such indices and therefore the amount of interest
collected on all Mortgage Loans (adjusted to the Remittance Rate) may be
insufficient to pay interest on a class of Offered Certificates (other than the
Class X Certificates) at a rate equal to LIBOR plus the related Net Margin. In
such event, the Pass-Through Rate on such class will be equal to the Weighted
Average Remittance Rate on the Mortgage Loans.
In addition, a number of factors affect the performance of LIBOR and may cause
LIBOR to move in a manner different from other indices. To the extent that LIBOR
may reflect changes in the general level of interest rates more or less quickly
than other indices, in a period of rising interest rates, increases in the yield
to Holders of the Offered Certificates (other than the Class X Certificates) due
to such rising interest rates may occur earlier or later than that which would
be produced by other indices, and in a period of declining rates, LIBOR may drop
lower or remain higher than other market interest rates.
S-16
<PAGE>
Although the Mortgage Interest Rates on the Mortgage Loans will adjust
semi-annually, such increases and decreases may be limited by the Periodic Rate
Cap, the Maximum Mortgage Interest Rate and the Minimum Mortgage Interest Rate,
if applicable, on each Mortgage Loan, and will be based on the applicable Index
(which may be different from the prevailing margins on other mortgage loans). As
a result, the Mortgage Interest Rates on the Mortgage Loans at any time may not
equal the prevailing rates for other adjustable-rate loans and accordingly, the
rate of prepayment may be lower or higher than would otherwise be anticipated.
In addition, because all of the Mortgage Loans have Maximum Mortgage Interest
Rates, if prevailing mortgage rates were to increase above the Maximum Mortgage
Interest Rates, the rate of prepayment on the Mortgage Loans may be slower than
would otherwise be the case. In general, if prevailing mortgage rates fall
significantly below the Mortgage Interest Rates on the Mortgage Loans, the rate
of prepayments (including refinancings) will be expected to increase.
Conversely, if prevailing mortgage rates rise significantly above the Mortgage
Interest Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans will be expected to decrease.
In general, if a Certificate is purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Certificate is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than assumed at the time of purchase. See "Certain Prepayment, Maturity
and Yield Considerations" herein and "Yield Considerations" in the Prospectus.
RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES. The Mortgage Loans are secured by a fee simple interest in
multifamily, retail, office, industrial, mixed use and other commercial
properties. Commercial and multifamily lending typically involves larger loans
to single borrowers or groups of related borrowers than residential one- to
four-family mortgage loans. Further, the repayment of loans secured by income
producing properties is typically dependent upon the successful operation of the
related property. If the cash flow from the property is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. Commercial and multifamily real estate can be affected
significantly by the supply and demand in the market for the type of property
securing the loan and, therefore, may be subject to adverse economic conditions.
Market values may vary as a result of economic events or governmental
regulations outside the control of the borrower or lender, such as rent control
laws in the case of multifamily mortgage loans, which impact the future cash
flow of the property.
The successful operation of a real estate project is also dependent on the
performance and viability of the property manager of such project. The property
manager is responsible for responding to changes in the local market, planning
and implementing the rental structure, including establishing appropriate rental
rates, and advising the borrowers so that maintenance and capital improvements
can be carried out in a timely fashion. There is no assurance regarding the
performance of any operators and/or managers or persons who may become operators
and/or managers upon the expiration or termination of leases or management
agreements or following any default or foreclosure under a Mortgage Loan.
While most of the Mortgage Loans included in the Trust Fund provide for recourse
against the Mortgagor, there can be no assurance that such recourse will be
available or enforceable, or that such recourse will ensure a recovery in
respect of a defaulted Mortgage Loan greater than liquidation value of the
related Mortgaged Property. Certain of the Mortgage Loans may be nonrecourse
loans. With respect to such Mortgage Loans, in the event of a Mortgagor default,
recourse may be had only against the specific property and such limited other
assets as have been pledged to secure such Mortgage Loan, and against not the
Mortgagor's other assets.
Commercial and multifamily property values and net operating income are subject
to volatility. The net operating income and value of the Mortgaged Properties
may be adversely affected by a number of factors, including but not limited to
the national, regional and local economic conditions (which may be adversely
impacted by plant closings, industry slowdowns and other factors); local real
estate conditions (such as an oversupply of housing, retail, industrial or
office space); changes or continued weakness in specific industry segments;
perceptions by prospective tenants and, in the case of retail properties,
retailers and shoppers, of the safety, convenience,
S-17
<PAGE>
services and attractiveness of the property; the willingness and ability of the
property's owner to provide capable management and adequate maintenance;
construction quality, age and design; demographic factors; retroactive changes
to building or similar codes; and increases in operating expenses (such as
energy costs). Historical operating results of the Mortgaged Properties may not
be comparable to future operating results. In addition, other factors may
adversely affect the Mortgaged Properties' value without affecting the current
net operating income, including changes in governmental regulations, zoning or
tax laws; potential environmental or other legal liabilities; the availability
of refinancing; and changes in interest rate levels.
The Mortgage Loans secured by multifamily, retail, office, industrial, mixed use
and other commercial properties represent approximately 70.47%, 11.00%, 5.77%,
2.08%, 3.71%, and 6.97%, of the Mortgage Pool, respectively, as of the Cut-off
Date by aggregate principal balance.
ONE ACTION CONSIDERATIONS. Several states (including California) have laws that
prohibit more than one "judicial action" to enforce a mortgage obligation, and
some courts have construed the term "judicial action" broadly. The Special
Servicer may be required to foreclose first on properties located in states
where such "one action" rules apply (and when non-judicial foreclosure is
permitted) before foreclosing on properties located in states where judicial
foreclosure is the only permitted method of foreclosure. See "Certain Legal
Aspects of the Mortgage Loans and the Leases--Foreclosure" in the Prospectus.
RISKS OF DIFFERENT TIMING OF MORTGAGE LOAN AMORTIZATION. If and as principal
payments, property releases, or prepayments are made on a Mortgage Loan, the
remaining Mortgage Pool may be subject to more concentrated risk with respect to
the diversity of properties, types of properties and property characteristics
and with respect to the number of borrowers. See the table entitled "Year of
Scheduled Maturity" under "Description of the Mortgage Pool--Certain
Characteristics of the Mortgage Loans" herein for a description of the
respective maturity dates of the Mortgage Loans. Because principal on the
Offered Certificates is payable in sequential order, and no class receives
principal until the Class Balance of the preceding class or classes has been
reduced to zero, classes that have a lower sequential priority are more likely
to be exposed to the risk of concentration discussed under "--Concentration of
Mortgage Loans and Borrowers" above than classes with a higher sequential
priority.
GEOGRAPHIC CONCENTRATION. 531 of the Mortgaged Properties, representing
approximately 49.95%, 14.35%, 12.42%, 9.77%, 8.34% and 2.81%, respectively, of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
are located in California, Washington, Arizona, Colorado, Oregon and Texas,
respectively. Except as indicated in the immediately preceding sentence, no more
than 49.95% of the Mortgage Loans, by aggregate principal balance of the
Mortgage Loans as of the Cut-off Date are secured by Mortgaged Properties in any
one state. Repayments by borrowers and the market value of the Mortgaged
Properties could be affected by economic conditions generally or in regions
where the borrowers and the Mortgaged Properties are located, conditions in the
real estate market where the Mortgaged Properties are located, changes in
governmental rules and fiscal policies, acts of nature, including earthquakes
(which may result in uninsured losses), and other factors which are beyond the
control of the borrowers. Mortgage Loans, representing approximately 38.25% of
the Mortgage Loans by aggregate principal balance as of the Cut-Off Date, are
secured by Mortgage Properties located in Southern California primarily in Los
Angeles, San Diego, Riverside and Orange counties. Improvements on Mortgaged
Properties located in California may be more susceptible to certain types of
special hazards not covered by insurance (such as earthquakes) than properties
located in other parts of the country. In addition, the economy of California
may be adversely affected to a greater degree than those of other areas of the
country by certain developments affecting industries concentrated in such
states. Moreover, in recent periods, several regions of the United States
(including California) have experienced significant downturns in the market
value of real estate.
ENVIRONMENTAL RISKS. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal and remediation of hazardous or
toxic substances on, under, adjacent to or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
any required remediation and the owner's liability therefor as to any property
is generally not limited
S-18
<PAGE>
under such enactments and could exceed the value of the property and/or the
aggregate assets of the owner. In addition, the presence of hazardous or toxic
substances, or the failure to properly remediate such property, may adversely
affect the owner's or operator's ability to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility. Certain laws impose
liability for release of asbestos into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to asbestos.
Under some environmental laws, such as the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), as
well as certain state laws, a secured lender (such as the Trust Fund) may be
liable as an "owner" or "operator", for the costs of responding to a release or
threat of a release of hazardous substances on or from a borrower's property, if
agents or employees of a lender are deemed to have participated in the
management of the borrower's property, regardless of whether a previous owner
caused the environmental damage. The Trust Fund's potential exposure to
liability for cleanup costs pursuant to CERCLA may increase if the Trust Fund
actually takes possession of a borrower's property, or control of its day-to-day
operations, as for example through the appointment of a receiver.
A substantial number of the Mortgagors may not have made any representation with
respect to whether any Mortgaged Property was in compliance with applicable
environmental laws and regulations on the date of the origination of the related
Mortgage Loan. Even where any such representation was made, the principal
security for the obligations under each Mortgage Loan consists of the Mortgaged
Property and, accordingly, if any such representations are breached, there can
be no assurance that any other assets of the Mortgagor would be available in
connection with any exercise of remedies in respect of such breach. Moreover,
most Mortgagors are structured as single asset entities and therefore have no
assets other than the related Mortgaged Property.
The Pooling and Servicing Agreement provides that the Special Servicer, acting
on behalf of the Trust Fund, may not acquire, through foreclosure or deed in
lieu thereof, title to a Mortgaged Property or take over its operation unless
the Special Servicer has previously determined, based on a report prepared by a
qualified person who regularly conducts environmental audits, that (i) the
Mortgaged Property is in compliance with applicable environmental laws or that
taking the actions necessary to comply with such laws is reasonably likely to
produce a greater recovery on a present value basis than not taking such actions
and (ii) there are no circumstances known to the Special Servicer relating to
the use of hazardous substances or petroleum-based materials which require
investigation or remediation, or that if such circumstances exist, taking such
remedial actions is reasonably likely to produce a greater recovery on a present
value basis than not taking such actions.
LITIGATION. There may be legal proceedings pending and, from time to time,
threatened against the Mortgagors and the managers of the Mortgaged Properties
and their respective affiliates arising out of the ordinary business of the
Mortgagor, the managers and such affiliates. There can be no assurance that such
litigation may not have a material adverse effect on distributions to
Certificateholders.
OTHER FINANCINGS. Certain of the Mortgaged Properties may be encumbered by one
or more junior liens. In cases where one or more junior liens are imposed on a
Mortgaged Property or the Mortgagor incurs other indebtedness, the Trust Fund is
subjected to additional risks, including, without limitation, the risks that the
Mortgagor may have greater incentives to repay the junior or unsecured
indebtedness first and that it may be more difficult for the Mortgagor to
refinance the Mortgage Loan or to sell the Mortgaged Property for purposes of
making the Balloon Payment upon the maturity of the Mortgage Loan.
EFFECT OF MORTGAGOR DELINQUENCIES AND DEFAULTS. The aggregate amount of
distributions on the Offered Certificates, the yield to maturity of the Offered
Certificates, the rate of principal payments on the Offered Certificates and the
weighted average lives of the Offered Certificates will be affected by the rate
and the timing of delinquencies and defaults on the Mortgage Loans. If a
purchaser of a class of Offered Certificates calculates its anticipated yield
based on an assumed rate of default and amount of losses on the Mortgage Loans
that is lower than the default rate and amount of losses actually experienced
and such additional losses are allocable to such
S-19
<PAGE>
class of Certificates, such purchaser's actual yield to maturity will be lower
than that so calculated and could, under certain extreme scenarios, be negative.
The timing of any loss on a liquidated Mortgage Loan will also affect the actual
yield to maturity of the class of Offered Certificates to which a portion of
such loss is allocable, even if the rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss borne
by an investor occurs, the greater is the effect on such investor's yield to
maturity.
As and to the extent described herein, each Servicer, the Trustee and the Fiscal
Agent will be entitled to receive interest on unreimbursed P&I Advances and
unreimbursed advances of servicing expenses until such advances (i) are
recovered out of amounts received on the Mortgage Loan as to which such advances
were made pursuant to the Pooling and Servicing Agreement, which amounts are in
the form of late payments, liquidation proceeds, insurance proceeds,
condemnation proceeds or amounts paid in connection with the purchase of such
Mortgage Loan out of the Trust Fund or (ii) are otherwise recovered following a
determination that such advance is a nonrecoverable advance. A Servicer's, the
Trustee's and the Fiscal Agent's right to receive such payments of interest is
prior to the rights of Certificateholders to receive distributions on the
Certificates and, consequently, is likely to result in losses being allocated to
the Offered Certificates that would not otherwise have resulted absent the
accrual of such interest.
The Special Servicer will be entitled to receive, with respect to each Mortgage
Loan which is or was at some time a Specially Serviced Mortgage Loan,
compensation in the form of a percentage of the outstanding principal balance of
any such Specially Serviced Mortgage Loan prior to the right of
Certificateholders to receive distributions on the Certificates. See "Master
Servicer and Special Servicer--Servicing and Other Compensation and Payment of
Expenses" herein.
Regardless of whether losses ultimately result, delinquencies and defaults on
the Mortgage Loans may significantly delay the receipt of payments by the holder
of a class of Offered Certificates, to the extent that P&I Advances or the
subordination of another class of Certificates does not fully offset the effects
of any such delinquency or default. The Special Servicer has the ability to
extend and modify Mortgage Loans that are in default or as to which a payment
default is imminent, including the ability to extend the date on which a Balloon
Payment is due, subject to certain conditions described in the Pooling and
Servicing Agreement. A Servicer's, the Trustee's, and the Fiscal Agent's
obligation to make P&I Advances in respect of a Mortgage Loan that is delinquent
as to its Balloon Payment is limited, however, to the extent described under
"Description of the Certificates--Advances." Until such time as any Mortgage
Loan delinquent in respect of its Balloon Payment is liquidated, the entitlement
of the holders of any class of Offered Certificates on each Distribution Date in
respect of principal of such Mortgage Loan will be limited to any payment made
by the related Mortgagor and any related P&I Advance made by a Servicer, the
Trustee, and the Fiscal Agent. Consequently, any delay in the receipt of a
Balloon Payment that is payable, in whole or in part, to holders of the Offered
Certificates will extend the weighted average life of the Offered Certificates.
As described under "Description of the Certificates--Distributions" herein, if
the portion of the Adjusted Available Distribution Amount distributable in
respect of interest on any class of Offered Certificates on any Distribution
Date is not sufficient to distribute the Interest Distribution Amount then
payable for such class, the shortfall will be distributable to holders of such
class of Certificates on subsequent Distribution Dates, to the extent of
available funds.
SPECIAL SERVICER ACTIONS. In connection with the servicing of Specially
Serviced Mortgage Loans, the Special Servicer may take actions with respect to
such Mortgage Loans that could adversely affect the holders of some or all of
the classes of Offered Certificates. As described under "Master Servicer and
Special Servicer--Responsibilities of Special Servicer" herein, the actions of
the Special Servicer will be subject to review and may be rejected by a
representative of the holders of the Monitoring Certificates (as defined
herein), who may have interests in conflict with those of the holders of the
other classes of Certificates. As a result, it is possible that such
representative may cause the Special Servicer to take actions which conflict
with the interests of certain classes of Certificates. The Seller will serve as
the sub-servicer for the Master Servicer and the Special Servicer. The Pooling
and Servicing Agreement provides that each Servicer shall administer the
Mortgage Loans in accordance
S-20
<PAGE>
with the Servicing Standard set forth therein, without regard to ownership of
any Certificate or interest in the performance therefor by such Servicer or any
affiliate thereof.
BALLOON PAYMENTS. Nine Mortgage Loans, representing 3.08% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, are Balloon
Mortgage Loans. The Balloon Mortgage Loans do not fully amortize over their
terms to maturity and, thus, require substantial principal payments (i.e.,
balloon payments) at their stated maturity. Mortgage Loans with balloon payments
involve a greater degree of risk because the ability of a Mortgagor to make a
balloon payment typically will depend upon its ability either to timely
refinance the loan or to timely sell the related Mortgaged Property. The ability
of a Mortgagor to accomplish either of these goals will be affected by a number
of factors, including the level of available mortgage interest rates at the time
of sale or refinancing, the Mortgagor's equity in the related Mortgaged
Property, the financial condition and operating history of the Mortgagor and the
related Mortgaged Property, tax laws, rent control laws (with respect to certain
multifamily properties), renewability of operating licenses, prevailing general
economic conditions and the availability of credit for commercial or multifamily
real properties, as the case may be, generally.
OBLIGOR DEFAULT. In order to maximize recoveries on defaulted Mortgage Loans,
the Master Servicer or the Special Servicer will be permitted (within prescribed
parameters) to extend and modify Mortgage Loans that are in default or as to
which a payment default is imminent, including in particular with respect to
balloon payments. In addition, the Special Servicer shall be entitled to receive
a disposition fee based on receipts from or proceeds of such Mortgage Loans.
While any such entity generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery on
a present value basis than liquidation, there can be no assurance that such
flexibility with respect to extensions or modifications or payment of a workout
fee will increase the present value of receipts from or proceeds of Mortgage
Loans that are in default or as to which a payment default is imminent.
MORTGAGOR TYPE. Mortgage Loans made to partnerships, corporations or other
entities may entail risks of loss from delinquency and foreclosure that are
greater than those of Mortgage Loans made to individuals. The Mortgagor's
sophistication and form of organization may increase the likelihood of
protracted litigation or bankruptcy in default situations.
ENFORCEABILITY. Mortgages may contain a due-on-sale clause, which permits the
lender to accelerate the maturity of the Mortgage Loan if the Mortgagor sells,
transfers or conveys the related Mortgaged Property or its interest in the
Mortgaged Property. Mortgages may also include a debt-acceleration clause, which
permits the lender to accelerate the debt upon a monetary or non-monetary
default of the Mortgagor. Such clauses are generally enforceable subject to
certain exceptions. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default. The equity courts of
any state however, may refuse the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
Certain of the Mortgage Loans will be secured in part by an assignment of leases
and rents pursuant to which the Mortgagor typically assigns its right, title and
interest as landlord under the leases on the related Mortgaged Property and the
income derived therefrom to the lender as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. In the event the Mortgagor defaults, the license terminates and
the lender is entitled to collect rents. Such assignments are typically not
perfected as security interests prior to actual possession of the cash flows.
Some state laws may require that the lender take possession of the Mortgaged
Property and obtain a judicial appointment of a receiver before becoming
entitled to collect the rents. In addition, if bankruptcy or similar proceedings
are commenced by or in respect of the Mortgagor, the lender's ability to collect
the rents may be adversely affected. See "Certain Legal Aspects of the Mortgage
Loans--Leases and Rents" herein and in the Prospectus.
S-21
<PAGE>
ERISA CONSIDERATIONS. Generally, ERISA applies to investments made by employee
benefit plans and transactions involving the assets of such plans. Due to the
complexity of regulations which govern such plans, prospective investors that
are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of the
Offered Certificates. See "ERISA Considerations" herein.
CONTROL. Under certain circumstances, the consent or approval of the holders of
a specified percentage of the aggregate Certificate Balance of all outstanding
Certificates ("Voting Rights") will be required to direct, and will be
sufficient to bind all Certificateholders to, certain actions, including
directing the Special Servicer or the Master Servicer with respect to actions to
be taken with respect to certain Mortgage Loans and REO Properties and amending
the Pooling and Servicing Agreement in certain circumstances. See "Description
of the Pooling and Servicing Agreement--Events of Default," --"Rights Upon Event
of Default" and "--Amendment" herein.
BOOK-ENTRY REGISTRATION. The Offered Certificates will be initially represented
by one or more certificates registered in the name of Cede & Co., the nominee
for DTC, and will not be registered in the names of the Beneficial Owners or
their nominees. Because of this, unless and until Definitive Certificates are
issued, Beneficial Owners will not be recognized by the Trustee as
"Certificateholders." Therefore, until such time, Beneficial Owners will be able
to exercise the rights of Certificateholders only indirectly through DTC and its
participating organizations. See "Description of the Certificates--Book-Entry
Registration of the Certificates--Definitive Certificates" herein.
EARTHQUAKE INSURANCE. The Mortgaged Properties for 49.95% of the Mortgage Loans
by aggregate principal balance as of the Cut-off Date are located in California.
None of the Mortgagors are required to maintain earthquake insurance. Standard
hazard insurance policies specifically exclude damage caused by earthquakes from
coverage thereunder.
INSOLVENCY CONSIDERATION. The Seller is a California licensed industrial loan
company, the deposits of which are insured by the FDIC. The FDIC and the DOC
jointly issued an Memorandum Of Understanding addressing issues identified by
the FDIC and DOC during their 1996 annual examination, which was acknowledged by
the Seller on September 29, 1996. See "Southern Pacific Thrift and Loan
Association" herein. Under the Federal Deposit Insurance Act (the "FDIA"), the
FDIC may be appointed as receiver or conservator of an insolvent FDIC-insured
financial institution. Although the sale by the Seller of the Mortgage Loans to
the Depositor is intended to be treated as a sale of the Mortgage Loans, if the
Seller were to become insolvent and the FDIC were appointed receiver or
conservator for the Seller, the FDIC could attempt to recharacterize the sale of
the Mortgage Loans as a pledge to secure a borrowing by the Seller (a "Deemed
Financing"). Any such attempt, even if unsuccessful, could result in delays in
payments on the Offered Certificates.
If the sale of the Mortgage Loans were to be recharacterized as a Deemed
Financing, the Depositor, and therefore the Trustee, would be deemed to have a
security interest in the Mortgage Loans. Such security interest should not be
subject to avoidance, and payments to the Trustee with respect to the Mortgage
Loans should not be subject to recovery by the FDIC as conservator or receiver
of the Seller, unless the security interest of the Trustee in the Mortgage Loans
was not validly perfected before the Seller's insolvency.
Nonetheless, if the transfer of the Mortgage Loans were to be recharacterized as
a Deemed Financing, the FDIC, as receiver or conservator for the Seller, could
also seek to repudiate or disaffirm the Seller's obligation under a Deemed
Financing so as to accelerate payment thereon. Upon such an acceleration,
holders of Offered Certificates should be entitled to receive, either from the
proceeds of the liquidation of the Mortgage Loans or upon redemption by the FDIC
as receiver or conservator, the then outstanding principal balance thereof.
Holders of Offered Certificates could thereby lose the right to future payments
of interest, and could suffer reinvestment loss in an environment in which
interest rates were lower than the applicable Pass-Through Rate.
The FDIC has not issued a policy statement regarding the payment of
post-insolvency interest to holders of secured debt obligations issued by an
insolvent FDIC-insured financial institution. Accordingly, there can be no
assurance that the FDIC would not, as conservator or receiver for the Seller,
claim that, as a matter of law, if there were a Deemed Financing, holders of
Offered Certificates would be entitled only to the then outstanding
S-22
<PAGE>
principal balance thereof together with interest at the applicable Pass-Through
Rate to the date of the appointment of the FDIC, as receiver or conservator. Any
such claim, even if unsuccessful, could result in delays in payments on the
Certificates. If such a claim were successful, holders of Offered Certificates
would not be able to recover interest accruing thereon during the period from
the date of the appointment of the FDIC as receiver or conservator to the date
of final payment in respect of the accelerated Deemed Financing.
S-23
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of a pool of adjustable rate Mortgage
Loans with an aggregate principal balance as of the Cut-off Date, after
deducting payments of principal due on such date, of approximately $203,075,453.
Each Mortgage Loan is evidenced by a promissory note (a "Mortgage Note") and
secured by a mortgage, deed of trust or other similar security instrument (a
"Mortgage") creating a first lien on a fee simple interest in a multifamily,
retail, office, industrial, mixed use or other commercial property (a "Mortgaged
Property"). Except as otherwise indicated all percentages of the Mortgage Loans
described herein are approximate percentages by aggregate principal balance as
of the Cut-off Date.
All of the Mortgage Loans to be included in the Trust Fund were originated by
the Seller and sold to the Depositor. All the Mortgage Loans were underwritten
under substantially similar guidelines. See "--Underwriting Guidelines" below.
The Depositor will cause the Mortgage Loans in the Mortgage Pool to be assigned
to the Trustee pursuant to the Pooling and Agreement.
REPRESENTATIONS AND WARRANTIES
Under the Pooling and Servicing Agreement, the Depositor will assign certain
representations and warranties of the Seller to the Trustee. In the event of a
breach of any such representation or warranty that materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan, the
Seller will be obligated to cure such breach or to repurchase any such Mortgage
Loan from the Trustee within 90 days of receiving notice thereof. The sole
remedy available to the Trustee or the Certificateholders is the obligation of
the Seller to cure or repurchase any Mortgage Loan in connection with which
there has been a breach of any such representation or warranty which materially
and adversely affects the interest of the Certificateholders in such Mortgage
Loan.
The Seller has generally represented and warranted as of the Delivery Date with
respect to each Mortgage Loan, among other things, that: (i) such Mortgage Loan
is secured by a Mortgage that is a valid and subsisting first priority lien on
the Mortgage Property free and clear of any other liens, claims or encumbrances,
subject only to certain permitted encumbrances; (ii) there is an assignment of
leases and rents provision creating a first priority security interest in leases
and rents arising in respect of the related Mortgaged Property, subject only to
certain permitted encumbrances; (iii) there are no mechanics' or other similar
liens affecting the Mortgaged Property which are or may be prior or equal to the
lien of the Mortgage, except those insured against pursuant to the applicable
title insurance policy; (iv) the related Mortgagor has good and indefeasible
title to, and no person has any outstanding exercisable rights of record with
respect to the purchase or sale of all or a portion of, the related Mortgaged
Property; (v) the Mortgaged Property is covered by a title insurance policy
insuring that the Mortgage is a valid first lien, subject only to certain
permitted encumbrances; (vi) no claims have been made under the related title
insurance policy and such policy is in full force and effect and will provide
that the insured includes the owner of the Mortgage Loan; (vii) at the time of
the assignment of such Mortgage Loan to the Trustee, the Seller had good title
to and was the sole owner of such Mortgage Loan free and clear of any pledge,
lien or encumbrance and such assignment validly transfers ownership of such
Mortgage Loan to the Trustee free and clear of any pledge, lien or encumbrance;
(viii) the related assignment of mortgage and related assignment of the
assignment of rents and leases is legal, valid and binding and has been recorded
or submitted for recording in the applicable jurisdiction; (ix) the Seller's
endorsement of the related Mortgage Note constitutes the legal and binding
assignment of such Mortgage Note and together with an assignment of mortgage and
the assignment of the assignment of leases and rents, legally and validly convey
all right, title and interest in such Mortgage Loan and related Mortgage Loan
documents; (x) each Mortgage Loan document is a legal, valid and binding
obligation of the parties thereto, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by applicable state law and
by bankruptcy, insolvency, reorganization or other laws relating to creditors'
rights and general equitable principles and except that certain provisions of
such Mortgage Loan documents are or may be unenforceable in whole or in part,
but the inclusion of such provisions does not render the Mortgage Loan documents
invalid as a whole, and such Mortgage Loan documents taken as a whole are
enforceable to the
S-24
<PAGE>
extent necessary and customary for the practical realization of the rights and
benefits afforded thereby; (xi) such Mortgage Loan is not as of the Delivery
Date, and has not been at any time during the twelve preceding months, more than
30 days delinquent in payments of principal or interest; (xii) the terms of such
related Mortgage Loan and related Mortgage Loan documents have not been modified
or waived in any material respect; (xiii) such Mortgage Loan has not been
satisfied, canceled, subordinated, released or rescinded and the related
Mortgagor has not been released from its obligations under any Mortgage Loan
document; (xiv) none of the Mortgage Loan documents is subject to any right of
rescission, set-off, valid counterclaim or defense; (xv) each Mortgage Loan
document complied in all material respects with all material applicable state or
federal laws including usury laws; (xvi) the related Mortgaged Property is, in
all material aspects, in compliance with, and is used and occupied in accordance
with applicable law; (xvii) the related Mortgaged Property is in good repair and
no condemnation proceedings are pending; (xviii) all property taxes and premiums
for all insurance policies required to be maintained pursuant to the related
Mortgage with respect to the Mortgaged Property have been paid to the extent
such amounts have become due; (xix) if so indicated in the mortgage loan
purchase agreement between the Seller and the Depositor with respect to such
Mortgage Loan, either an environmental site assessment was prepared in
connection with the origination of such Mortgage Loan or the Seller reviewed a
compilation of data bases made available by several regulatory agencies
constructed by a private service with respect to an area within a certain radius
surrounding the related Mortgaged Property, and no such assessment or review
revealed any known circumstances or conditions, and the Seller has no knowledge
of any circumstances or conditions with respect to such Mortgaged Property, that
would constitute or result in a material violation of any environmental laws or
require any expenditure material in relation to the principal balance of such
Mortgage Loan to achieve or maintain compliance in all material respects with
any environmental laws; (xx) the Mortgaged Property is covered by insurance
policies providing coverage against certain losses or damage; (xxi) all amounts
required to be deposited by the Mortgagor at origination have been deposited;
(xxii) to the Seller's best knowledge, all significant leases are in full force
and effect, and there has been no material default by the related Mortgagor or
lessee; and (xxiii) to the Seller's best knowledge there are no pending or
threatened actions, suits or proceedings by or before any court or other
governmental authority against or affecting the related Mortgagor under such
Mortgage Loan or the Mortgaged Property which, if determined against such
Mortgagor or Mortgaged Property would materially and adversely affect the value
of such Mortgaged Property or ability of the Mortgagor to pay principal,
interest and other amounts due under such Mortgage Loan.
In addition, Imperial Credit Industries, Inc., a California corporation and the
Seller's parent ("ICII"), will represent as of the Delivery Date to the Trustee
for the benefit of the Certificateholders that there are no circumstances or
conditions with respect to any Mortgaged Property that would constitute or
result in a material violation of any environmental laws or require any
expenditure material in relation to the principal balance of the related
Mortgage Loan to achieve or maintain compliance in all material respects with
any environmental laws. ICII will agree to purchase from the Trustee (within 30
days of receiving notice thereof) any Mortgage Loan as to which there exists a
breach of such representation that materially and adversely affects the
interests of Certificateholders in such Mortgage Loan. There can be no assurance
that ICII will be able to purchase any or all such Mortgage Loans following any
such breach.
S-25
<PAGE>
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The Due Dates for most of the Mortgage Loans occur on the first day of each
month. All of the Mortgage Loans are secured by first liens on fee simple
interests in the related Mortgaged Properties. Approximately 9.0% of the
Mortgaged Properties are owner-occupied. As of the Cut-off Date, the Mortgage
Loans had characteristics set forth below. The totals in the following tables
may not add up to 100% due to rounding.
MORTGAGE INTEREST RATES (1)
<TABLE>
<CAPTION>
AGGREGATE
PERCENT BY PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF NUMBER OF BALANCE AS OF PRINCIPAL BALANCE AS
INTEREST RATES MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
7.0001%- 7.5000% 134 24.81% $ 48,948,572 24.10%
7.5001 - 8.0000 94 17.41 32,266,453 15.89
8.0001 - 8.5000 28 5.19 16,293,895 8.02
8.5001 - 9.0000 63 11.67 26,530,741 13.06
9.0001 - 9.5000 76 14.07 33,490,158 16.49
9.5001 -10.0000 79 14.63 24,899,822 12.26
10.0001 -10.5000 24 4.44 9,074,743 4.47
10.5001 -11.0000 21 3.89 5,206,593 2.56
11.0001 -11.5000 3 0.56 698,015 0.34
11.5001 -12.0000 13 2.41 4,805,596 2.37
12.0001 -12.5000 5 0.93 860,866 0.42
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Mortgage Interest Rate: 8.7271%
</TABLE>
(1) Each Mortgage Loan is an adjustable rate mortgage loan.
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL BALANCE PERCENT BY PRINCIPAL PERCENT BY AGGREGATE
AS OF THE NUMBER OF NUMBER OF BALANCE AS OF THE PRINCIPAL BALANCE AS
CUT-OFF DATE MORTGAGE LOANS MORTGAGE LOANS CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
$0.01-$ 100,000.00 38 7.04% $ 3,207,812 1.58%
100,000.01- 200,000.00 181 33.52 27,427,689 13.51
200,000.01- 300,000.00 108 20.00 26,393,843 13.00
300,000.01- 400,000.00 61 11.30 21,041,128 10.36
400,000.01- 500,000.00 40 7.41 18,195,642 8.96
500,000.01- 600,000.00 19 3.52 10,528,698 5.18
600,000.01- 700,000.00 18 3.33 11,575,600 5.70
700,000.01- 800,000.00 14 2.59 10,745,099 5.29
800,000.01- 900,000.00 14 2.59 11,686,912 5.75
900,000.01- 1,000,000.00 9 1.67 8,555,922 4.21
1,000,000.01- 1,100,000.00 10 1.85 10,516,985 5.18
1,100,000.01- 1,200,000.00 5 0.93 5,818,353 2.87
1,200,000.01- 1,300,000.00 4 0.74 4,988,573 2.46
1,300,000.01- 1,400,000.00 5 0.93 6,734,406 3.32
1,400,000.01- 1,500,000.00 3 0.56 4,359,868 2.15
1,500,000.01- 1,600,000.00 2 0.37 3,141,564 1.55
1,600,000.01- 1,700,000.00 2 0.37 3,339,038 1.64
1,700,000.01- 1,800,000.00 1 0.19 1,791,407 0.88
1,800,000.01- 1,900,000.00 1 0.19 1,863,857 0.92
1,900,000.01- 2,000,000.00 2 0.37 3,985,343 1.96
2,000,000.01- 2,100,000.00 2 0.37 4,099,154 2.02
3,000,000.01- 3,100,000.00 1 0.19 3,078,561 1.52
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Average Principal Balance: $376,066
</TABLE>
S-26
<PAGE>
INDICES
<TABLE>
<CAPTION>
AGGREGATE
PERCENT BY PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF NUMBER OF BALANCE AS OF PRINCIPAL BALANCE AS
INDEX MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ----------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
One-Year U.S. Treasury 47 8.70% $ 24,949,643 12.29%
Six-Month LIBOR 438 81.11 164,263,870 80.89
Prime 55 10.19 13,861,940 6.83
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
</TABLE>
NOTE MARGINS
FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PERCENT BY
PERCENT BY PRINCIPAL AGGREGATE PRINCIPAL
NOTE NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
MARGIN MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------- ------------------- --------------- ------------------ -------------------
<S> <C> <C> <C> <C>
2.5001%- 3.0000% 26 4.81% $ 13,362,649 6.58%
3.0001 - 3.5000 58 10.74 24,263,435 11.95
3.5001 - 4.0000 277 51.30 96,472,719 47.51
4.0001 - 4.5000 109 20.19 41,389,764 20.38
4.5001 - 5.0000 55 10.19 20,336,941 10.01
5.0001 - 5.5000 13 2.41 4,894,160 2.41
5.5001 - 6.0000 2 0.37 2,355,785 1.16
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Note Margin: 3.9869%
</TABLE>
NOTE MARGINS
FOR SIX-MONTH LIBOR MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY PERCENT BY AGGREGATE
NUMBER OF NUMBER OF AGGGREGATE PRINCIPAL BALANCE OF
SIX-MONTH SIX-MONTH PRINCIPAL SIX-MONTH LIBOR
NOTE LIBOR LIBOR BALANCE AS OF MORTGAGE LOANS AS
MARGIN MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
3.0001%- 3.5000% 20 4.57% $ 10,089,055 6.14%
3.5001 - 4.0000 240 54.79 85,297,782 51.93
4.0001 - 4.5000 108 24.66 41,290,147 25.14
4.5001 - 5.0000 55 12.56 20,336,941 12.38
5.0001 - 5.5000 13 2.97 4,894,160 2.98
5.5001 - 6.0000 2 0.46 2,355,785 1.43
--- ------ ------------------ ------
Total: 438 100.00% $ 164,263,870 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Note Margin: 4.1470%
</TABLE>
S-27
<PAGE>
NOTE MARGINS
FOR PRIME MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF PRINCIPAL PRIME MORTGAGE
NOTE PRIME PRIME BALANCE AS OF LOANS AS OF THE
MARGIN MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- -------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
2.5001%- 3.0000% 5 9.09% $ 1,152,908 8.32%
3.0001 - 3.5000 16 29.09 3,519,160 25.39
3.5001 - 4.0000 33 60.00 9,090,255 65.58
4.0001 - 4.5000 1 1.82 99,617 0.72
--
------ ------------------ ------
Total: 55 100.00% $ 13,861,940 100.00%
--
--
------ ------------------ ------
------ ------------------ ------
Weighted Average Note Margin: 3.5153%
</TABLE>
NOTE MARGINS
FOR ONE-YEAR U.S. TREASURY
MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF AGGREGATE ONE-YEAR U.S.
ONE-YEAR ONE-YEAR PRINCIPAL TREASURY MORTGAGE
NOTE U.S. TREASURY U.S. TREASURY BALANCE AS OF LOANS AS OF THE
MARGIN MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- -------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
2.5001%- 3.0000% 21 44.68% $ 12,209,741 48.94%
3.0001 - 3.5000 22 46.81 10,655,220 42.71
3.5001 - 4.0000 4 8.51 2,084,681 8.36
--
------ ------------------ ------
Total: 47 100.00% $ 24,949,643 100.00%
--
--
------ ------------------ ------
------ ------------------ ------
Weighted Average Note Margin: 3.1953%
</TABLE>
MINIMUM MORTGAGE INTEREST
RATES FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
MINIMUM PERCENT BY PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF NUMBER OF BALANCE AS OF PRINCIPAL BALANCE AS
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- -------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
6.5001%- 7.0000% 3 0.56% $ 2,631,409 1.30%
7.0001 - 7.5000 238 44.07 97,021,083 47.78
7.5001 - 8.0000 201 37.22 67,727,440 33.35
8.0001 - 8.5000 39 7.22 16,424,505 8.09
8.5001 - 9.0000 45 8.33 14,637,452 7.21
9.0001 - 9.5000 9 1.67 3,111,033 1.53
9.5001 -10.0000 3 0.56 824,356 0.41
10.0001 -10.5000 1 0.19 99,617 0.05
10.5001 -11.0000 1 0.19 598,557 0.29
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Minimum Mortgage Interest Rate: 7.7796%
</TABLE>
S-28
<PAGE>
MINIMUM MORTGAGE INTEREST RATES
FOR SIX-MONTH LIBOR MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
MINIMUM NUMBER OF NUMBER OF PRINCIPAL SIX-MONTH LIBOR
MORTGAGE SIX-MONTH LIBOR SIX-MONTH LIBOR BALANCE AS OF MORTGAGE LOANS AS
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- --------------------- ----------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
6.5001%- 7.0000% 2 0.46% $ 1,514,329 0.92%
7.0001 - 7.5000 193 44.06 73,348,945 44.65
7.5001 - 8.0000 196 44.75 65,828,847 40.08
8.0001 - 8.5000 27 6.16 13,154,806 8.01
8.5001 - 9.0000 12 2.74 6,780,688 4.13
9.0001 - 9.5000 4 0.91 2,213,342 1.35
9.5001 -10.0000 3 0.68 824,356 0.50
10.5001 -11.0000 1 0.23 598,557 0.36
--- ------ ------------------ ------
Total: 438 100.00% $ 164,263,870 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Minimum Mortgage Interest Rate: 7.7725%
</TABLE>
MINIMUM MORTGAGE INTEREST RATES
FOR PRIME MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
MINIMUM NUMBER OF NUMBER OF PRINCIPAL PRIME MORTGAGE
MORTGAGE PRIME PRIME BALANCE AS OF LOANS AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
7.5001%- 8.0000% 4 7.27% $ 1,738,169 12.54%
8.0001 - 8.5000 12 21.82 3,269,699 23.59
8.5001 - 9.0000 33 60.00 7,856,764 56.68
9.0001 - 9.5000 5 9.09 897,691 6.48
10.0001 -10.5000 1 1.82 99,617 0.72
--
------ ------------------ ------
Total: 55 100.00% $ 13,861,940 100.00%
--
--
------ ------------------ ------
------ ------------------ ------
Weighted Average Minimum Mortgage Interest Rate: 8.6925%
</TABLE>
MINIMUM MORTGAGE INTEREST RATES
FOR ONE-YEAR U.S. TREASURY MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF ONE-YEAR
MINIMUM NUMBER OF ONE-YEAR NUMBER OF ONE-YEAR PRINCIPAL U.S. TREASURY
MORTGAGE U.S. TREASURY U.S. TREASURY BALANCE AS OF MORTGAGE LOANS AS
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- ----------------------- ------------------- ------------------ -----------------------------
<S> <C> <C> <C> <C>
6.5001%- 7.0000% 1 2.13% $ 1,117,081 4.48%
7.0001 - 7.5000 45 95.74 23,672,138 94.88
7.5001 - 8.0000 1 2.13 160,424 0.64
--
------ ------------------ ------
Total: 47 100.00% $ 24,949,643 100.00%
--
--
------ ------------------ ------
------ ------------------ ------
Weighted Average Minimum Mortgage Interest Rate: 7.3193%
</TABLE>
S-29
<PAGE>
MAXIMUM MORTGAGE INTEREST RATES
FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
MAXIMUM PERCENT BY PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF NUMBER OF BALANCE AS OF PRINCIPAL BALANCE AS
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ---------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
12.9500%-13.0000% 3 0.56% $ 2,631,409 1.30%
13.0001 -14.0000 423 78.33 162,878,574 80.21
14.0001 -15.0000 99 18.33 33,746,634 16.62
15.0001 -16.0000 12 2.22 3,345,619 1.65
16.0001 -17.0000 2 0.37 373,598 0.18
17.0001 -18.0000 1 0.19 99,617 0.05
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Maximum Mortgage Interest Rate: 13.7990%
</TABLE>
MAXIMUM MORTGAGE INTEREST RATES
FOR SIX-MONTH LIBOR MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
MAXIMUM NUMBER OF NUMBER OF PRINCIPAL SIX-MONTH
MORTGAGE SIX-MONTH LIBOR SIX-MONTH LIBOR BALANCE AS OF LIBOR MORTGAGE LOANS
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE AS OF THE CUT-OFF DATE
- ---------------------- --------------------- ----------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
12.9500%-13.0000% 2 0.46% $ 1,514,329 0.92%
13.0001 -14.0000 372 84.93 137,151,183 83.49
14.0001 -15.0000 61 13.93 25,127,090 15.30
15.0001 -16.0000 3 0.68 471,268 0.29
--- ------ ------------------ ------
Total: 438 100.00% $ 164,263,870 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Maximum Mortgage Interest Rate: 13.7773%
</TABLE>
MAXIMUM MORTGAGE INTEREST RATES
FOR PRIME MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
AGGREGATE PRINCIPAL BALANCE
MAXIMUM PERCENT BY PRINCIPAL OF PRIME MORTGAGE
MORTGAGE NUMBER OF PRIME NUMBER OF PRIME BALANCE AS OF LOANS AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------- ------------------- ----------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
13.0001%-14.0000% 5 9.09% $ 1,894,829 13.67%
14.0001 -15.0000 38 69.09 8,619,545 62.18
15.0001 -16.0000 9 16.36 2,874,351 20.74
16.0001 -17.0000 2 3.64 373,598 2.70
17.0001 -18.0000 1 1.82 99,617 0.72
--- ------ ------------------ ------
Total: 55 100.00% $ 13,861,940 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Maximum Mortgage Interest Rate: 14.9352%
</TABLE>
S-30
<PAGE>
MAXIMUM MORTGAGE INTEREST RATES
FOR ONE-YEAR U.S. TREASURY MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PRINCIPAL BALANCE
PERCENT BY OF ONE-YEAR
NUMBER OF NUMBER OF AGGREGATE U.S. TREASURY
MAXIMUM ONE-YEAR ONE-YEAR PRINCIPAL MORTGAGE LOANS
MORTGAGE U.S. TREASURY U.S. TREASURY BALANCE AS OF AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
12.9500%-13.0000% 1 2.13% $ 1,117,081 4.48%
13.0001 -14.0000 46 97.87 23,832,562 95.52
--- ------ ------------------ ------
Total: 47 100.00% $ 24,949,643 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Maximum Mortgage Interest Rate: 13.3111%
</TABLE>
PERIODIC CAP FOR
ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
AGGREGATE PRINCIPAL BALANCE
PERCENT BY PRINCIPAL OF MORTGAGE
PERIODIC NUMBER OF NUMBER OF BALANCE AS OF LOANS AS OF
CAP MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
0.5001%-1.0000% 1 0.19% $ 472,316 0.23%
1.0001 -1.5000 291 53.89 110,226,072 54.28
1.5001 -2.0000 248 45.93 92,377,066 45.49
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Periodic Cap: 1.7263%
</TABLE>
PERIODIC CAP FOR
SIX-MONTH LIBOR MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY PERCENT BY AGGREGATE
NUMBER OF NUMBER OF AGGREGATE PRINCIPAL BALANCE OF
SIX-MONTH SIX-MONTH PRINCIPAL SIX-MONTH LIBOR
PERIODIC LIBOR LIBOR BALANCE AS OF MORTGAGE LOANS AS
CAP MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- ------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
0.5001%-1.0000% 1 0.23% $ 472,316 0.29%
1.0001 -1.5000 244 55.71 85,276,429 51.91
1.5001 -2.0000 193 44.06 78,515,125 47.80
--- ------ ------------------ ------
Total: 438 100.00% $ 164,263,870 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Periodic Cap: 1.7376%
</TABLE>
PERIODIC CAP FOR PRIME MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF PRINCIPAL PRIME MORTGAGE
PERIODIC PRIME PRIME BALANCE AS OF LOANS AS OF THE
CAP MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
1.5001%-2.0000% 55 100.00% $ 13,861,940 100.00%
--- ------ ------------------ ------
Total: 55 100.00% $ 13,861,940 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Periodic Cap: 2.0000%
</TABLE>
S-31
<PAGE>
PERIODIC CAP FOR ONE-YEAR U.S. TREASURY
MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF AGGREGATE ONE-YEAR U.S.
ONE-YEAR ONE-YEAR PRINCIPAL TREASURY MORTGAGE
PERIODIC U.S. TREASURY U.S. TREASURY BALANCE AS OF LOANS AS OF THE
CAP MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- --------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
1.5000% 47 100.00% $ 24,949,643 100.00%
--- ------ ------------------ ------
Total: 47 100.00% $ 24,949,643 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
Weighted Average Periodic Cap: 1.5000%
</TABLE>
NEXT RATE ADJUSTMENT DATE
FOR ALL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
PERCENT OF BALANCE AS OF BALANCE AS OF
NEXT RATE NUMBER OF NUMBER OF THE CUT-OFF THE CUT-OFF
ADJUSTMENT DATE MORTGAGE LOANS MORTGAGE LOANS DATE DATE
- --------------------- ------------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
July 1, 1997 77 14.26% $ 25,881,778 12.74%
August 1, 1997 142 26.30 56,512,172 27.83
September 1, 1997 111 20.56 41,464,108 20.42
October 1, 1997 63 11.67 29,942,514 14.74
November 1, 1997 59 10.93 20,283,626 9.99
December 1, 1997 76 14.07 25,412,272 12.51
January 1, 1998 8 1.48 1,888,250 0.93
January 1, 2000 1 0.19 991,643 0.49
February 1, 2000 1 0.19 349,069 0.17
March 1, 2000 1 0.19 164,632 0.08
April 1, 2000 1 0.19 185,390 0.09
--- ------ ------------------ ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
</TABLE>
S-32
<PAGE>
NEXT RATE ADJUSTMENT DATE FOR
SIX-MONTH LIBOR MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
NUMBER OF SIX- NUMBER OF SIX- PRINCIPAL SIX-MONTH LIBOR
NEXT RATE MONTH LIBOR MONTH LIBOR BALANCE AS OF MORTGAGE LOANS AS
ADJUSTMENT DATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE OF THE CUT-OFF DATE
- --------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
July 1, 1997 60 13.70% $ 18,876,671 11.49%
August 1, 1997 117 26.71 44,922,251 27.35
September 1, 1997 87 19.86 32,753,291 19.94
October 1, 1997 55 12.56 25,780,140 15.69
November 1, 1997 43 9.82 16,316,929 9.93
December 1, 1997 64 14.61 22,035,605 13.41
January 1, 1998 8 1.83 1,888,250 1.15
January 1, 2000 1 0.23 991,643 0.60
February 1, 2000 1 0.23 349,069 0.21
March 1, 2000 1 0.23 164,632 0.10
April 1, 2000 1 0.23 185,390 0.11
--- ------ ------------------ ------
Total: 438 100.00% $ 164,263,870 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
</TABLE>
NEXT RATE ADJUSTMENT DATE FOR
PRIME MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF PRINCIPAL PRIME MORTGAGE
NEXT RATE PRIME PRIME BALANCE AS OF LOANS AS OF THE
ADJUSTMENT DATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- --------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
July 1, 1997 11 20.00% $ 3,441,888 24.83%
August 1, 1997 8 14.55 2,122,481 15.31
September 1, 1997 10 18.18 2,217,501 16.00
October 1, 1997 3 5.45 886,083 6.39
November 1, 1997 14 25.45 3,472,166 25.05
December 1, 1997 9 16.36 1,721,822 12.42
--- ------ ------------------ ------
Total: 55 100.00% $ 13,861,940 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
</TABLE>
S-33
<PAGE>
NEXT RATE ADJUSTMENT DATE FOR
ONE-YEAR U.S. TREASURY
MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE
PERCENT BY PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF AGGREGATE ONE-YEAR U.S.
ONE-YEAR ONE-YEAR PRINCIPAL TREASURY MORTGAGE
NEXT RATE U.S. TREASURY U.S. TREASURY BALANCE AS OF LOANS AS OF THE
ADJUSTMENT DATE MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- --------------------- ------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
July 1, 1997 6 12.77% $ 3,563,219 14.28%
August 1, 1997 17 36.17 9,467,440 37.95
September 1, 1997 14 29.79 6,493,316 26.03
October 1, 1997 5 10.64 3,276,291 13.13
November 1, 1997 2 4.26 494,531 1.98
December 1, 1997 3 6.38 1,654,845 6.63
--- ------ ------------------ ------
Total: 47 100.00% $ 24,949,643 100.00%
--- ------ ------------------ ------
--- ------ ------------------ ------
</TABLE>
ORIGINAL TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
ORIGINAL NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
TERM IN MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
MONTHS LOANS LOANS DATE DATE
- -------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
84 2 0.37% $ 969,567 0.48%
96 1 0.19 752,665 0.37
120 4 0.74 3,051,808 1.50
180 6 1.11 3,684,751 1.81
240 7 1.30 2,198,357 1.08
300 4 0.74 1,868,486 0.92
360 516 95.56 190,549,818 93.83
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
Weighted Average Original Term to Maturity in Months: 349
</TABLE>
S-34
<PAGE>
REMAINING TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
REMAINING NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
TERM IN MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
MONTHS LOANS LOANS DATE DATE
- ------------------------ ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
60.001 - 72.000 1 0.19% $ 752,665 0.37%
72.001 - 84.000 2 0.37 969,567 0.48
108.001 -120.000 4 0.74 3,051,808 1.50
168.001 -180.000 6 1.11 3,684,751 1.81
228.001 -240.000 8 1.48 2,373,361 1.17
288.001 -300.000 4 0.74 1,868,486 0.92
324.001 -336.000 14 2.59 6,298,020 3.10
336.001 -348.000 31 5.74 8,705,251 4.29
348.001 -360.000 470 87.04 175,371,544 86.36
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
Weighted Average Remaining Term to Maturity in Months: 340.8
</TABLE>
YEAR OF FIRST DUE DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
YEAR LOANS LOANS DATE DATE
- -------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
1994 5 0.93% $ 1,764,545 0.87%
1995 17 3.15 7,372,745 3.63
1996 271 50.19 103,907,298 51.17
1997 247 45.74 90,030,865 44.33
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
</TABLE>
S-35
<PAGE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
YEAR LOANS LOANS DATE DATE
- -------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
2003 2 0.37% $ 1,572,768 0.77%
2004 1 0.19 149,464 0.07
2006 4 0.74 3,051,808 1.50
2011 4 0.74 3,045,959 1.50
2012 2 0.37 638,792 0.31
2016 6 1.11 1,885,531 0.93
2017 2 0.37 487,829 0.24
2021 2 0.37 1,108,277 0.55
2022 2 0.37 760,209 0.37
2024 6 1.11 3,138,013 1.55
2025 21 3.89 8,448,106 4.16
2026 308 57.04 111,419,985 54.87
2027 180 33.33 67,368,711 33.17
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
</TABLE>
Nine of the Mortgage Loans, representing 3.08% of the Mortgage Loans are Balloon
Mortgage Loans.
BALLOON MORTGAGE LOANS
ORIGINAL TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PERCENT BY PRINCIPAL PRINCIPAL
BALLOON NUMBER OF BALLOON BALANCE AS OF BALANCE OF BALLOON
ORIGINAL TERM MORTGAGE MORTGAGE THE CUT-OFF MORTGAGE LOANS AS OF
IN MONTHS LOANS LOANS DATE THE CUT-OFF DATE
- -------------- ------------- ------------------- --------------- ---------------------
<S> <C> <C> <C> <C>
84 2 22.22% $ 969,567 15.51%
96 1 11.11 752,665 12.04
120 4 44.44 3,051,808 48.82
180 2 22.22 1,477,634 23.64
--- ------ --------------- ------
Total: 9 100.00% $ 6,251,674 100.00%
--- ------ --------------- ------
--- ------ --------------- ------
Weighted Average Original Term to Maturity in Months: 126
</TABLE>
S-36
<PAGE>
BALLOON MORTGAGE LOANS
REMAINING TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PERCENT BY PRINCIPAL PRINCIPAL
REMAINING BALLOON NUMBER OF BALLOON BALANCE AS OF BALANCE OF BALLOON
TERM IN MORTGAGE MORTGAGE THE CUT-OFF MORTGAGE LOANS AS OF
MONTHS LOANS LOANS DATE THE CUT-OFF DATE
- ------------------------ ------------- ------------------- --------------- ---------------------
<S> <C> <C> <C> <C>
60.1- 72.1 1 11.11% $ 752,665 12.04%
72.1- 84.1 2 22.22 969,567 15.51
108.1-120.1 4 44.44 3,051,808 48.82
120.1+ 2 22.22 1,477,634 23.64
--- ------ --------------- ------
Total: 9 100.00% $ 6,251,674 100.00%
--- ------ --------------- ------
--- ------ --------------- ------
Weighted Average Remaining Term to Maturity in Months: 115
</TABLE>
The following table sets forth the range of remaining amortization terms of each
Balloon Mortgage Loan. The remaining amortization term of a Balloon Mortgage
Loan represents the number of months required to fully amortize the Cut-off Date
Balance of each Balloon Mortgage Loan.
BALLOON MORTGAGE LOANS
REMAINING AMORTIZATION TERM
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
REMAINING NUMBER OF NUMBER OF BALANCE AS OF BALANCE OF BALLOON
AMORTIZATION BALLOON MORTGAGE BALLOON MORTGAGE THE CUT-OFF MORTGAGE LOANS AS OF
TERM IN MONTHS LOANS LOANS DATE THE CUT-OFF DATE
- ---------------- ------------------- ----------------- --------------- ---------------------
<S> <C> <C> <C> <C>
241-300 1 11.11% $ 991,669 15.86%
301-360 8 88.89 5,260,005 84.14
--- ------ --------------- ------
Total: 9 100.00% $ 6,251,674 100.00%
--- ------ --------------- ------
--- ------ --------------- ------
Weighted Average Remaining Amortization Term in Months: 341
</TABLE>
S-37
<PAGE>
The following two tables set forth the range of Cut-off Date LTV Ratios and
Maturity Date LTV Ratios of the Mortgage Loans. A "Cut-off Date LTV Ratio" is a
fraction, expressed as a percentage, the numerator of which is the Cut-off Date
Balance of a Mortgage Loan, and the denominator of which is the appraised value
of the related Mortgaged Property as determined by an appraisal thereof obtained
in connection with the origination of such Mortgage Loan. The appraised value
does not incorporate any pledges of additional collateral which under the
Seller's Underwriting Guidelines, are taken into account in approving loans with
a higher LTV than 75%. A "Maturity Date LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the principal balance of a Mortgage Loan
on the related Maturity Date assuming all scheduled payments due prior thereto
are made and there are no principal prepayments, and the denominator of which is
the appraised value of the related Mortgaged Property as determined by an
appraisal thereof obtained in connection with the origination of such Mortgage
Loan. Because the value of Mortgaged Properties at the Maturity Date may be
different than such appraisal value, there can be no assurance that the
loan-to-value ratio for any Mortgage Loan determined at any time following
origination thereof will be lower than the Cut-off Date LTV Ratio or Maturity
Date LTV Ratio, notwithstanding any positive amortization of such Mortgage Loan.
It is possible that the market value of a Mortgaged Property securing a Mortgage
Loan may decline between the origination thereof and the related Maturity Date.
An appraisal of each of the Mortgaged Properties was made between May 1994 and
May 1997. It is possible that the market value of a Mortgaged Property securing
a Mortgage Loan has declined since the most recent appraisal for such Mortgaged
Property. All appraisals were obtained by the Seller in accordance with the
requirements of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, as amended ("FIRREA").
CUT-OFF DATE LTV RATIOS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL BALANCE
NUMBER OF NUMBER OF BALANCE AS OF AS
CUT-OFF DATE MORTGAGE MORTGAGE THE OF THE CUT-OFF
LTV RATIOS LOANS LOANS CUT-OFF DATE DATE
- ------------------ ------------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
# 25.000 % 4 0.74% $ 585,762 0.29%
25.001- 30.000 2 0.37 1,405,864 0.69
30.001- 35.000 4 0.74 1,327,811 0.65
35.001- 40.000 5 0.93 2,057,164 1.01
40.001- 45.000 13 2.41 3,559,664 1.75
45.001- 50.000 31 5.74 10,900,013 5.37
50.001- 55.000 34 6.30 11,336,767 5.58
55.001- 60.000 82 15.19 25,009,823 12.32
60.001- 65.000 100 18.52 41,166,879 20.27
65.001- 70.000 160 29.63 60,500,402 29.79
70.001- 75.000 94 17.41 38,279,793 18.85
75.001- 80.000 5 0.93 3,324,412 1.64
80.001- 85.000 2 0.37 1,845,650 0.91
85.001- 90.000 1 0.19 213,649 0.11
90.001- 95.000 2 0.37 1,143,058 0.56
105.001-110.000 1 0.19 418,741 0.21
--- ------ ---------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ---------------- ------
--- ------ ---------------- ------
Weighted Average Cut-off Date LTV Ratio: 64.0%
</TABLE>
S-38
<PAGE>
BALLOON MORTGAGE LOAN
MATURITY DATE LTV RATIOS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
PERCENT BY AGGREGATE PRINCIPAL BALANCE
NUMBER OF NUMBER OF PRINCIPAL OF THE BALLOON
BALLOON BALLOON BALANCE AS OF MORTGAGE LOANS
MATURITY DATE LTV MORTGAGE MORTGAGE THE AS OF THE CUT-OFF
RATIOS LOANS LOANS CUT-OFF DATE DATE
- ------------------ ----------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
#50.0000 % 3 33.33% $ 2,236,805 35.78%
50.0001-55.0000 1 11.11 752,665 12.04
55.0001-60.0000 3 33.33 2,195,405 35.12
60.0001-65.0000 2 22.22 1,066,798 17.06
-
------ ---------------- ------
Total: 9 100.00% $ 6,251,674 100.00%
-
-
------ ---------------- ------
------ ---------------- ------
Weighted Average Maturity Date LTV Ratio: 49%
</TABLE>
The "Debt Service Coverage Ratio" or "DSCR" for any Mortgage Loan is the ratio
of Net Operating Income produced by the related Mortgaged Property, in most
cases as underwritten by the Seller, to the amounts of principal and interest,
not fully indexed, due under such Mortgage Loan as of the Cut-off Date.
Generally, "Net Operating Income" for a Mortgaged Property equals the operating
revenues for such Mortgaged Property minus its operating expenses and
replacement reserves, but without giving effect to debt service, depreciation,
non-recurring capital expenditures, tenant improvements, leasing commissions and
similar items. The Net Operating Income of a Mortgage Property was determined
based on the Seller's underwriting guildelines, including appraisals, and do not
necessarily reflect the operating statements for the Mortgaged Properties
obtained from the respective Mortgagors. The information contained therein was
unaudited, and the Depositor has made no attempt to verify its accuracy. The
information derived from these sources was not uniform among the Mortgage Loans.
DEBT SERVICE COVERAGE RATIOS
FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
DEBT SERVICE MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
COVERAGE RATIO LOANS LOANS DATE DATE
- ------------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
0.5001x-0.7500x 1 0.19% $ 182,347 0.09%
0.7501-1.0000 4 0.74 1,521,601 0.75
1.0001-1.2500 45 8.33 18,987,099 9.35
1.2501-1.5000 140 25.93 53,203,252 26.20
1.5001-1.7500 156 28.89 61,697,807 30.38
1.7501-2.0000 102 18.89 35,638,384 17.55
2.0001-2.2500 41 7.59 17,754,692 8.74
2.2501-2.5000 22 4.07 6,144,607 3.03
2.5001-2.7500 14 2.59 3,539,331 1.74
2.7501-3.0000 5 0.93 1,641,020 0.81
3.0001+ 10 1.85 2,765,314 1.36
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
Weighted Average Debt Service Coverage Ratio: 1.67x
</TABLE>
S-39
<PAGE>
YEAR OF CALCULATION OF UNDERWRITTEN NOI
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
BALANCE PERCENT BY AGGREGATE
NUMBER OF PERCENT BY AS OF THE PRINCIPAL BALANCE
MORTGAGE NUMBER OF CUT-OFF AS OF THE
YEAR LOANS MORTGAGE LOANS DATE CUT-OFF DATE
- ----------- ------------- --------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Unknown 1 0.19% $ 87,436 0.04%
1994 7 1.30 4,146,566 2.04
1995 29 5.37 10,067,672 4.96
1996 421 77.96 160,386,264 78.98
1997 82 15.19 28,387,514 13.98
--- ------ ---------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ---------------- ------
--- ------ ---------------- ------
</TABLE>
The Mortgage Loans are secured by Mortgaged Properties located in 12 different
states. The table below sets forth the states in which the Mortgaged Properties
are located:
GEOGRAPHIC DISTRIBUTION (1)
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL BALANCE
NUMBER OF NUMBER OF BALANCE AS OF AS
MORTGAGE MORTGAGE THE OF THE CUT-OFF
STATE LOANS LOANS CUT-OFF DATE DATE
- --------------------- ------------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
California (Southern (1) 258 47.78% $ 77,675,214 38.25%
California (Northern (1) 42 7.78 23,759,490 11.70
Washington 46 8.52 29,148,591 14.35
Arizona 59 10.93 25,218,423 12.42
Colorado 61 11.30 19,850,270 9.77
Oregon 48 8.89 16,928,744 8.34
Texas 17 3.15 5,701,689 2.81
Illinois 1 0.19 1,695,238 0.83
Nevada 4 0.74 1,343,959 0.66
New Jersey 1 0.19 834,598 0.41
Idaho 1 0.19 458,742 0.23
Utah 1 0.19 311,111 0.15
New Mexico 1 0.19 149,386 0.07
--- ------ ---------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ------ ---------------- ------
--- ------ ---------------- ------
</TABLE>
- ------------------------
(1) Mortgaged Properties are deemed to be in California (Southern) if located in
California with zip codes less than or equal to 93600. Mortgaged Properties
are deemed to be in California (Northern) if located in California with zip
codes greater than 93600.
S-40
<PAGE>
PROPERTY TYPES (1)
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATGE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
PROPERTY TYPE LOANS LOANS DATE DATE
- ------------------------ ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Industrial 13 2.41% $ 4,225,216 2.08%
Mixed Commercial 7 1.30 6,557,916 3.23
Mixed Use 17 3.15 7,537,903 3.71
Mobile Home Park 8 1.48 5,514,200 2.72
Multifamily 429 79.44 143,112,061 70.47
Office 19 3.52 11,726,330 5.77
Retail 44 8.15 22,343,125 11.00
Warehouse 3 0.56 2,058,703 1.01
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
</TABLE>
- ------------------------
(1) Property types reflect primary use of property.
LOAN PURPOSES(1)
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
AGGREGATE PRINCIPAL
PERCENT BY PRINCIPAL BALANCE OF
NUMBER OF NUMBER OF BALANCE AS OF MORTGAGE LOANS
MORTGAGE MORTGAGE THE CUT-OFF AS OF THE
LOAN PURPOSE LOANS LOANS DATE CUT-OFF DATE
- ----------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Purchase 313 57.96% $ 106,210,669 52.30%
Refinance(1) 227 42.04 96,864,784 47.70
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
</TABLE>
- ------------------------
(1) Includes cash-out refinancing
S-41
<PAGE>
YEAR BUILT
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PERCENT BY PRINCIPAL PRINCIPAL
NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
YEAR BUILT LOANS LOANS DATE DATE
- --------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Not Available 2 0.37% $ 404,740 0.20%
Pre-1940 102 18.89 37,503,544 18.47
1941-1945 8 1.48 2,198,252 1.08
1946-1950 23 4.26 5,918,301 2.91
1951-1955 43 7.96 10,102,242 4.97
1956-1960 67 12.41 18,483,759 9.10
1961-1965 95 17.59 33,839,746 16.66
1966-1970 32 5.93 15,166,989 7.47
1971-1975 40 7.41 27,764,041 13.67
1976-1980 24 4.44 8,529,797 4.20
1981-1985 49 9.07 21,478,694 10.58
1986-1990 43 7.96 16,601,684 8.18
1991-1996 12 2.22 5,083,663 2.50
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
Weighted Average Year Built: 1960
</TABLE>
Approximately 95.95% of the Mortgage Loans provide that if the related Mortgagor
prepays the principal balance thereof in an amount in excess of 20% of the
original principal balance of the related Mortgage Loan during any 12-month
period, such Mortgagor will be required to pay a prepayment premium equal to six
months' interest at the Mortgage Interest Rate then in effect for such Mortgage
Loan on the amount of such prepayment in excess of 20% of the original principal
amount thereof (a "Prepayment Premium"). The following table sets forth the
approximate months remaining in the Prepayment Premium Period of the Mortgage
Loans. Any Prepayment Premium collected for any Distribution Date will not be
available to make distributions on the Offered Certificates except under the
limited circumstances described herein.
MONTHS OF PREPAYMENT PREMIUM PERIOD REMAINING AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
MONTHS OF PERCENT BY PRINCIPAL PRINCIPAL
PREPAYMENT NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
PREMIUM MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
PERIOD REMAINING LOANS LOANS DATE DATE
- ---------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
None 16 2.96% $ 8,222,568 4.05%
1- 6 44 8.15 24,012,671 11.82
7-12 20 3.70 6,213,134 3.06
13-18 10 1.85 3,659,014 1.80
19-24 19 3.52 4,180,706 2.06
25-30 261 48.33 93,967,842 46.27
31-36 169 31.30 62,695,988 30.87
43+ 1 0.19 123,529 0.06
--- ----------- --------------- ------
Total: 540 100.00% $ 203,075,453 100.00%
--- ----------- --------------- ------
--- ----------- --------------- ------
Weighted Average Months of Prepayment Premium Period Remaining: 24
</TABLE>
S-42
<PAGE>
INDICES
GENERAL. The Mortgage Interest Rate on each Mortgage Loan will generally adjust
semi-annually to a rate equal to the sum of the related Index and the margin set
forth on the related Mortgage Note (the "Note Margin"). In the case of four of
the Mortgage Loans the first Rate Adjustment Date occurs three years after the
first Due Date; and thereafter, the rate adjusts semi-annually. The Index on
each Mortgage Loan will be Six-Month LIBOR, Prime or One-Year U.S. Treasury, all
as more fully described below. The Mortgage Interest Rate on each Mortgage Loan
prior to the related initial Rate Adjustment Date is typically an introductory
rate which is generally lower than the rate which would have been in effect
based on the related Index and Note Margin. A description of each Index is set
forth below.
SIX-MONTH LIBOR INDEX. The Index for 80.89% of the Mortgage Loans will be
Six-Month LIBOR. Six-month LIBOR for any Six-Month LIBOR Mortgage Loan will
generally be calculated for each six-month accrual period as the six-month
London Interbank Offered Rate for U.S. Dollar deposits published in THE WALL
STREET JOURNAL on the 25th day (or if such day is not a business day, the
following business day) of the month preceding the month of the Rate Adjustment
Date for such Mortgage Loan. Listed below are levels of Six-Month LIBOR as
published by THE WALL STREET JOURNAL on such dates. Such levels may fluctuate
significantly from month to month as well as over longer periods and may not
increase or decrease in a constant pattern from period to period. The following
does not purport to be representative of future levels of Six-Month LIBOR as
published in THE WALL STREET JOURNAL. No assurance can be given as to the level
of Six-Month Libor for any Rate Adjustment Date or during the life of any
Six-Month LIBOR Mortgage Loan.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
January 4.313% 3.438% 3.375% 6.750% 5.735% 5.719%
February 4.500 3.313 4.000 6.438 5.188 5.594
March 4.625 3.313 4.188 6.438 5.469 5.938
April 4.250 3.313 4.625 6.313 5.563 6.031
May 4.125 3.438 5.000 6.125 5.594 5.969
June 4.125 3.563 5.000 5.813 5.781
July 3.625 3.563 5.250 5.938 5.844
August 3.563 3.438 5.313 6.000 5.688
September 3.438 3.375 5.688 5.844 5.875
October 3.563 3.375 5.938 5.906 5.625
November 3.938 3.500 6.313 5.688 5.531
December 3.625 3.500 6.938 5.594 5.688
</TABLE>
PRIME INDEX. The Index for 6.83% of the Mortgage Loans will be Prime. Prime for
any Prime Mortgage Loan will be the prime lending rate of the Bank of America
N.T. & S.A. as publicly announced by Bank of America N.T. & S.A. as its prime
rate as most recently available on the indicated Rate Adjustment Dates. Listed
below are levels of Prime that were applicable to mortgage loans on such date.
Such levels may fluctuate significantly from month to month as well as over
longer periods and may not increase or decrease in constant pattern from period
to period. The following does not purport to be representative of future levels
of Prime. No assurance can be given as to the level of Prime for any Rate
Adjustment Date or during the life of any Prime Mortgage Loan.
S-43
<PAGE>
PRIME
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January 1 6.50% 6.00% 6.00% 8.50% 8.50% 8.25%
February 1 6.50 6.00 6.00 9.00 8.25 8.25
March 1 6.50 6.00 6.00 9.00 8.25 8.25
April 1 6.50 6.00 6.25 9.00 8.25 8.50
May 1 6.50 6.00 6.75 9.00 8.25 8.50
June 1 6.50 6.00 7.25 9.00 8.25 8.50
July 1 6.50 6.00 7.25 9.00 8.25
August 1 6.00 6.00 7.25 8.75 8.25
September 1 6.00 6.00 7.75 8.75 8.25
October 1 6.00 6.00 7.75 8.75 8.25
November 1 6.00 6.00 7.75 8.75 8.25
December 1 6.00 6.00 8.50 8.75 8.25
</TABLE>
ONE-YEAR U.S. TREASURY INDEX. The Index for 12.29% of the Mortgage Loans will
be the One-Year U.S. Treasury. The One-Year U.S. Treasury is currently
calculated based on information reported in the Federal Reserve Board's
Statistical Release No. H.15(519). Listed below are the weekly average yields on
actively traded U.S. Treasury securities adjusted to a constant maturity of one
year as reported by the Federal Reserve Board in Statistical Release No.
H.15(519) that was most recently available as of the date indicated. Such
average yields may fluctuate significantly from week to week as well as over
longer periods and may not increase or decrease in constant pattern from period
to period. The following does not purport to be representative of future average
yields. No assurance can be given as to the average yields on such U.S. Treasury
securities on any Rate Adjustment Date or during the life of any One-Year
Treasury Mortgage Loan.
ONE-YEAR U.S. TREASURY
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
January 1...................................................... 4.170% 3.643% 3.600% 7.120% 5.300% 5.500%
February 1..................................................... 4.142 3.408 3.510 6.950 5.050 5.610
March 1........................................................ 4.373 3.312 4.010 6.540 5.040 5.470
April 1........................................................ 4.644 3.300 4.360 6.370 5.420 5.940
May 1.......................................................... 4.324 3.184 4.900 6.240 5.520 6.010
June 1......................................................... 4.267 3.550 5.290 5.920 5.590 5.850
July 1......................................................... 4.136 3.526 5.300 5.590 5.790
August 1....................................................... 3.532 3.530 5.510 5.720 5.850
September 1.................................................... 3.518 3.366 5.610 5.810 5.640
October 1...................................................... 3.156 3.392 5.850 5.570 5.720
November....................................................... 3.482 3.462 6.220 5.580 5.560
December 1..................................................... 3.755 3.610 6.630 5.440 5.420
</TABLE>
UNDERWRITING GUIDELINES
The Seller has represented to the Depositor that all of the Mortgage loans were
underwritten pursuant to its Multifamily and Commercial Lending Program. The
Seller began underwriting mortgage loans in accordance with such standards in
February 1994. Typically, the multifamily loans are 30 year term fully
amortizing loans secured by 5 to 164 unit apartment buildings and the commercial
loans are 30 year term fully amortizing loans secured by office buildings,
shopping centers, mobile home parks, industrial properties and other approved
property types. Mortgage loans underwritten pursuant to the Multifamily and
Commercial Lending Program have maximum loan amounts and LTV's and minimum
DSCR's which are determined from time to time by the Loan Committee of the
S-44
<PAGE>
Board of Directors of the Seller. Appraisals and field inspections (performed by
outside and certified inspectors) and title insurance are required for each
multifamily and commercial loan.
Under the Multifamily and Commercial Lending Program standards presently in
effect, the maximum loan amount is generally $3,000,000, the maximum LTV is 75%
of the appraised value of the mortgaged property for multifamily loans and 70%
for commercial loans, and the minimum DSCR is 1.15 to 1.00, based on the
applicable level of the related index and the related Note Margin, for
multifamily loans, 1.25 to 1.00, based on the applicable level of the related
index and the related Note Margin, for commercial loans secured by properties in
California, and 1.20 to 1.00, based on the applicable level of the related index
and the related Note Margin. However, senior management may approve a higher
loan amount, a lower DSCR or a higher LTV if it is determined that borrower has
a strong financial position, good credit and good property management skills
and/or pledges additional collateral. With respect to mortgage loans secured by
seasoned multifamily properties, either 80% of the living units (or the higher
level necessary to cover debt service and pay all other expenses) must be
occupied at rent levels that support the appraised value of the mortgaged
property, or an appropriate holdback of loan proceeds must be established until
the required occupancy level is met. For newly constructed properties, a lower
occupancy level may be approved by the Loan Committee.
The Seller's underwriting standards under the Multifamily and Commercial Lending
Program are primarily intended to assess the economics of the mortgaged property
and the financial capabilities, credit standing and managerial ability of the
borrower. In determining whether a loan should be made, the Seller considers,
among other things, the creditworthiness of the mortgagor, the borrower's
income, liquid assets and liabilities, the borrower's management experience,
DSCRs, the borrower's overall financial position and the adequacy of such
property as collateral for the mortgage loan. While the primary consideration in
underwriting a mortgage loan is the property securing the mortgage loan,
sufficient documentation on the borrower is required to establish the financial
strength and ability of the borrower to successfully operate the property and
meet its obligations under the note and deed of trust. The majority of the
mortgage loans originated by the Seller provide for recourse against the related
borrower.
The Multifamily and Commercial Lending Program requires that the property and
records regarding the property are inspected to determine the number of units
that can be rebuilt under current zoning requirements, the number of buildings
on the property, the type of construction materials used, the proximity of the
property to natural hazards, flood zones and fire stations and whether there are
any environmental factors and whether a tract map has been recorded. The
property must front on publicly dedicated and maintained streets with provisions
for adequate and safe ingress and egress. Properties that share ingress and
egress through an easement or private road must have a recorded non-exclusive
easement. Recreational facilities and amenities, if any, must be located on site
and be under the exclusive control of the owner of the premises. If available,
engineering reports concerning the condition of the major building components of
the property are reviewed as is a ground lease analysis if the property is on
leased ground. Also, the title is reviewed to determine if there are any
covenants, conditions and restrictions, easements or reservations of mineral
interests in the property. The properties are appraised by independent
appraisers approved by the Seller.
In addition to the considerations set forth above, with respect to mortgage
loans secured by commercial properties, the Seller's lending policies typically
require that the commercial usage is permitted under local zoning and use
ordinances and the utilization of the commercial space is compatible with the
property and neighborhood. If the commercial property is an office building, the
office building must have an excellent occupancy history, must be located in a
good office market area and in a conforming neighborhood, must have on-site
parking and must be fire sprinkler equipped according to zoning codes.
Industrial properties must be located in a conforming industrial marketplace and
may not be used for the production, storage or treatment of toxic waste. Retail
properties must be highly visible and located on a heavily traveled thoroughfare
and typically have tenants on term leases. The Seller may not make a loan
secured by a property that has any of the following characteristics: inadequate
maintenance or repairs as determined by the Seller, the property is subject to
covenants, conditions and restrictions unacceptable to the Seller, existence of
or potential for hazardous geological conditions, the
S-45
<PAGE>
property is not to code or the cost of restoring the property to code is
prohibitive or existence of or potential for contamination by hazardous toxic
materials.
The Seller analyzes the financial statements of the borrower to determine the
borrower's equity position, particularly as it relates to real estate mortgage
demands on equity. If the borrower's holdings are heavily encumbered so that the
debt service requirements consume a high percentage of the rental income from
the mortgaged property, or consist substantially of unimproved or underimproved
properties having little or no gross income, the Seller analyzes whether the
borrower will be able to meet all of the mortgaged property's loan obligations
(expenses, debt service and equity return). In addition to DSCRs, the borrower's
income and expense ratios are calculated.
In addition to the income from the mortgaged property, the Seller also evaluates
the borrower's income as a possible secondary source of repayment for the
mortgage loan. In analyzing such income, the Seller considers, among other
factors, employment or business history of the borrower and the stability and
seasonality of the borrower's current employment or business. If the borrower
derives income from rental property, the Seller evaluates the experience of the
manager of the rental property, type of tenancy and the cash flow generated by
the borrower's real estate portfolio. The Seller also reviews the borrower's
credit history to determine the borrower's ability and willingness to repay
debts. ln general, the Seller will not make a mortgage loan to a borrower who
has a history of slow payments or delinquencies, bankruptcies, collection
actions, foreclosures or judgments against the borrower without adequate
explanations and verifications.
S-46
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing Agreement
and will include the following six classes of Offered Certificates designated as
the Class A1, Class A2, Class B, Class C, Class D and Class X Certificates. In
addition to the Offered Certificates, the Certificates will also include the
Class E, Class F, Class G, Class H, Class NR, Class R-I, Class R-II and Class
R-III Certificates. Only the Offered Certificates are offered hereby. The
Certificates represent in the aggregate the entire beneficial ownership interest
in a Trust Fund consisting of: (i) a pool of adjustable rate Mortgage Loans and
all payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the Cut-
off Date); (ii) any Mortgaged Property acquired on behalf of the Trust Fund
through foreclosure or deed in lieu of foreclosure (upon acquisition, an "REO
Property"); (iii) such funds or assets as from time to time are deposited in the
Collection or Certificate Accounts or any account established in connection with
REO Properties (the "REO Account"); and (iv) the rights of the mortgagee under
all insurance policies with respect to the Mortgage Loans.
The Offered Certificates will evidence approximately an initial 86%, by initial
principal balance, undivided interest in the Trust Fund.
The Offered Certificates (the "DTC Registered Certificates") will be issued,
maintained and transferred on the book-entry records of The Depository Trust
Company ("DTC") and its Participants. The DTC Registered Certificates will be
issued in minimum denominations of $100,000 and integral multiples of $1 in
excess thereof. The Class X Certificate will be issued in denominations of
$100,000 Notional Amount and integral multiples of $1 Notional Amount.
The DTC Registered Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC. The Company has been informed by
DTC that DTC's nominee will be Cede & Co. ("Cede"). No person acquiring an
interest in the DTC Registered Certificates (a "Beneficial Owner") will be
entitled to receive a Definitive Certificate (as defined below) representing
such person's interest, except as set forth below under "--Book-Entry
Registration of the Offered Certificates--Definitive Certificates." Unless and
until Definitive Certificates are issued for the DTC Registered Certificates
under the limited circumstances described herein, all references to actions by
Certificateholders with respect to the DTC Registered Certificates shall refer
to actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the DTC Registered Certificates shall refer
to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the DTC Registered Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures. The Beneficial
Owners may elect to hold their Certificates through DTC, in the United States,
or CEDEL or Euroclear, in Europe, through participants of such system, or
indirectly through organizations which are participants in such systems.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be initially issued through the book-entry
facilities of DTC, or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear
System ("Euroclear") (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. As to
any such class of Offered Certificates, the record holder of such Certificates
will be DTC's nominee. CEDEL and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositories (the
"Depositories"), which in turn will hold such positions in customers' securities
accounts in Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State of
New York, which holds securities for its participating organizations ("DTC
Participants," and together with the CEDEL and Euroclear participating
organizations, the "Participants") and facilitates the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants
S-47
<PAGE>
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Other institutions
that are not Participants but clear through or maintain a custodial relationship
with Participants (such institutions, "Indirect Participants") have indirect
access to DTC's clearance system.
Because of time zone differences, the securities account of a CEDEL or Euroclear
Participant (each as defined below) as a result of a transaction with a DTC
Participant (other than a depositary holding on behalf of CEDEL or Euroclear)
will be credited during the securities settlement processing day (which must be
a business day for CEDEL or Euroclear, as the case may be) immediately following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear
Participant or CEDEL Participant on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or Euroclear Participant to a DTC Participant (other than the depository for
CEDEL or Euroclear) will be received with value on the DTC settlement date, but
will be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants or Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
the relevant Depositories; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depository to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. CEDEL Participants or Euroclear Participants
may not deliver instructions directly to the Depositories.
CEDEL, as a professional depository, holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policies for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Board of Governors of the
Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash accounts with
the Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts.
Distributions in respect of the DTC Registered Certificates will be forwarded by
the Trustee to DTC, and DTC will be responsible for forwarding such payments to
Participants, each of which will be responsible for disbursing
S-48
<PAGE>
such payments to the Beneficial Owners it represents or, if applicable, to
Indirect Participants. Accordingly, Beneficial Owners may experience delays in
the receipt of payments in respect of their Certificates. Under DTC's
procedures, DTC will take actions permitted to be taken by holders of any class
of DTC Registered Certificates under the Pooling and Servicing Agreement only at
the direction of one or more Participants to whose account the DTC Registered
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of
Certificateholders of any class to the extent that Participants authorize such
actions. None of the Depositor, the Trustee or any of their respective
affiliates will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the DTC Registered
Certificates or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Beneficial Owners will not be recognized by the Trustee as Certificateholders,
as such term is used in the Pooling and Servicing Agreement; provided, however,
that Beneficial Owners will be permitted to request and receive information
furnished to Certificateholders by the Trustee subject to receipt by the Trustee
of a certification in form and substance acceptable to the Trustee stating that
the person requesting such information is a Beneficial Owner. Otherwise, the
Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Indirect Participants.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of the Offered Certificates among Participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES. Certificates initially issued in book-entry form will
be issued in fully registered, certificated form to Beneficial Owners or their
nominees ("Definitive Certificates"), rather than to DTC or its nominee only if
(i) the Depositor advises the Trustee in writing that DTC is no longer willing
or able to properly discharge its responsibilities as depository with respect to
the Certificates and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of an event described in the Prospectus in the preceding
paragraph, the Trustee is required to notify, through DTC, Participants who have
ownership of DTC Registered Certificates as indicated on the records of DTC of
the availability of Definitive Certificates for their DTC Registered
Certificates. Upon surrender by DTC of the definitive certificates representing
the DTC Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will reissue the DTC Registered Certificates as
Definitive Certificates issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders under the Pooling
and Servicing Agreement.
DISTRIBUTIONS
METHOD, TIMING AND AMOUNT. Distributions on the Certificates will be made on
the 25th day of each month or, if such 25th day is not a business day, then on
the next succeeding business day, commencing in July 1997 (each, a "Distribution
Date"). All distributions (other than the final distribution on any Certificate)
will be made by the Trustee to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Such distributions will be made by wire transfer in immediately
available funds to the account specified by the Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
will have provided the Trustee with wiring instructions as provided in the
Pooling and Servicing Agreement and is the registered holder of Certificates
with an initial aggregate denomination of at least $1,000,000 or, otherwise, by
check. The final distribution on any Certificate will be made in like manner,
but only upon presentment or surrender of such Certificate at the location
specified in the notice to the holder thereof of such final distribution. All
distributions made with respect to a class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates of such class
based on their respective Percentage
S-49
<PAGE>
Interests. The "Percentage Interest" evidenced by any Certificate is equal to
the initial denomination thereof as of the Delivery Date, divided by the initial
Class Balance or Notional Amount, as applicable, for such class. The aggregate
distribution to be made on the Certificates on any Distribution Date shall equal
the Available Distribution Amount.
The "Available Distribution Amount" for any Distribution Date is an amount equal
to (a) the sum of (i) the amount on deposit in the Collection Account (as
defined herein) as of the close of business on the related Determination Date,
which amount will include scheduled payments on the Mortgage Loans due on or
prior to the Due Date occuring in the Remittance Period immediately preceding,
and collected as of, such Determination Date (to the extent not distributed on
previous Distribution Dates) and unscheduled payments and other collections on
the Mortgage Loans collected during the related Remittance Period and (ii) the
aggregate amount of any P&I Advances made by a Servicer, the Trustee or the
Fiscal Agent in respect of such Distribution Date (not otherwise included in
clause (i) above) net of (b) the portion of the amount described in clause
(a)(i) hereof that represents (i) Monthly Payments due on a Due Date subsequent
to the end of the related Remittance Period, (ii) any amounts payable or
reimbursable therefrom to any Servicer, the Trustee or the Fiscal Agent or (iii)
any servicing and trustee compensation.
PASS-THROUGH RATE ON THE CERTIFICATES. The "Pass-Through Rates" on the Offered
Certificates, other than the Class X Certificates, for each Distribution Date
will equal the lesser of (a) LIBOR plus the corresponding margin (each, a "Net
Margin") and (b) the weighted average, by Stated Principal Balance, of the
Remittance Rates on the Mortgage Loans prior to giving effect to distributions
thereon in the Remittance Period immediately preceding such Distribution Date
(the "Weighted Average Remittance Rate"). The Net Margins for the Offered
Certificates (other than the Class X Certificate) will be; Class A1: ;
Class A2: ; Class B: ; Class C: ; and Class D: . The
Pass-Through Rate on the Class X Certificates will be generally equal to the
weighted average of the Remittance Rates in effect from time to time on the
Mortgage Loans minus the weighted average of the Pass-Through Rates on the
Certificates (including the Other Certificates). The Pass-Through Rate on the
Class X Certificates for the initial Distribution Date will be % per annum.
The Mortgage Interest Rate for each of the Mortgage Loans which provide for the
computation of interest other than on the basis of a 360-day year consisting of
twelve 30-day months (a "30/360 basis") will be adjusted by computing an
effective monthly rate based on the actual amount of interest receivable in each
month.
The Class X Certificates will consist of the Class A1X, Class A2X, Class BX,
Class CX, Class DX, the Class EX, Class FX, Class GX, Class HX and Class NRX
Components (the "Class X Components").
The Pass-Through Rates on the Class A1X, Class A2X, Class BX, Class CX, Class
DX, Class EX, Class FX, Class GX, Class HX and Class NRX. Components will equal
the excess of the Weighted Average Remittance Rate over the Pass-Through Rates
for the Class A1, Class A2, Class B, Class C, Class D, Class E, Class F, Class
G, Class H and Class NR Certificates, respectively for such Distribution Date.
Interest accrued on the Class A1X, Class A2X, Class BX, Class CX, Class DX,
Class EX, Class FX, Class GX, Class HX and Class NRX Components will be
calculated based on the related Notional Amount. The Notional Amount of each of
the Class A1X, Class A2X, Class BX, Class CX, Class DX, Class EX, Class FX,
Class GX, Class HX and Class NRX Components will be equal to the Class Balance
of the Class A1, Class A2, Class B, Class C, Class D, Class E, Class F, Class G,
Class H and Class NR Certificates, respectively, for the related Distribution
Date. The Class X Certificates will not have a Class Balance.
DETERMINATION OF LIBOR. The Pass-Through Rates on the Offered Certificates for
any Interest Accrual Period will be based on LIBOR, which will be determined as
described below.
On each Distribution Date, LIBOR shall be established by the Trustee and, as to
any Interest Accrual Period, LIBOR will equal the rate for United States dollar
deposits for one month which appears on the Dow Jones Telerate Screen Page 3750
as of 11:00 A.M., London time, on the second LIBOR Business Day prior to the
first day of such Interest Accrual Period (a "LIBOR Rate Adjustment Date").
"Telerate Screen Page 3750" means the display designated as page 3750 on the
Telerate Service (or such other page as may replace page 3750 on that
S-50
<PAGE>
service for the purpose of displaying London interbank offered rates of major
banks). If such rate does not appear on such page (or such other page as may
replace that page on that service, or if such service is no longer offered, such
other service for displaying LIBOR or comparable rates as may be selected by the
Trustee after consultation with the Master Servicer), the rate will be the
Reference Bank Rate. The "Reference Bank Rate" will be determined on the basis
of the rates at which deposits in the U.S. Dollars are offered by the reference
banks (which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Trustee after consultation with the
Master Servicer) as of 11:00 A.M., London time, on the day that is two LIBOR
Business Days prior to the immediately preceding Distribution Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Class Balance of the Class Balance of the
Certificates then outstanding. The Trustee will request the principal London
office of each of the reference banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate will be the arithmetic mean of
the quotations. If on such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Master Servicer, as of 11:00 A.M., New York City time, on such date for
loans in U.S. Dollars to leading European banks for a period of one month in
amounts approximately equal to the aggregate Class Balance of the Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or Sunday or (ii) a day on which banking institutions in the city
of London, England are required or authorized by law to be closed.
The establishment of LIBOR by the Trustee and the Trustee's subsequent
calculation of the Pass-Through Rates applicable to the Certificates for the
relevant Interest Accrual Period, in the absence of manifest error, will be
final and binding.
INTEREST DISTRIBUTIONS ON THE CERTIFICATES. Subject to the distribution of the
Principal Distribution Amount to the Holders of classes of Certificates of a
higher priority, as described under "Priority of Distributions" below, Holders
of each class of Certificates will be entitled to receive on each Distribution
Date, to the extent of the Available Distribution Amount for such Distribution
Date (net of any Net Prepayment Premium) (the "Adjusted Available Distribution
Amount"), distributions allocable to interest in an amount (the "Interest
Distribution Amount") equal to the sum of interest accrued during the period
from and including the first day of the month preceding the month of the
Distribution Date (or from the Cut-off Date in the case of the initial
Distribution Date) to and including the last day of the month preceding the
month of the Distribution Date (calculated on the basis of a 360-day year
consisting of twelve 30-day months but restated as a rate based on the actual
number of days in such period and a 360-day year in the case of Class A1, Class
A2, Class B, Class C and Class D Certificates) on the Class Balance (or the
related Notional Amounts, in the case of the Class X Components) of such class
of Certificates outstanding immediately prior to such Distribution Date, at the
then-applicable Pass-Through Rate (the "Interest Accrual Amount"), plus any
shortfall from the prior Distribution Dates remaining undistributed as described
in the second to last sentence of this paragraph, less such class' pro rata
share, according to the Interest Accrual Amount, for each such class for such
Distribution Date, of any interest shortfall not related to a Mortgagor
delinquency or default, such as Prepayment Interest Shortfalls (as defined
herein) and shortfalls associated with exemptions provided by the Relief Act (as
defined in the Prospectus), and less (a) with respect to each class of
Certificates other than the Class X Certificates, any Collateral Value
Adjustment Capitalization Amount (as defined herein) allocated to such class as
described under "--Subordination" below and (b) with respect to the Class X
Certificates, the portion of the Interest Accrual Amount therefor accrued on the
portion of the related Notional Amount corresponding to any Collateral Value
Adjustment or Collateral Value Adjustment Capitalization Amount allocated to the
Class Balance of any class of Certificates (and not reversed) (the "Collateral
Value Adjustment Reduction Amount"). The "Notional Amount" of the Class X
Certificates will equal the aggregate of the Class Balances of all the
Certificates. The Notional Amount does not entitle the Class X Certificates to
any distributions of principal. If the Adjusted Available Distribution Amount
for any Distribution Date is less than the Interest Distribution Amount for such
Distribution Date, the shortfall will be part of the Interest Distribution
Amount distributable to holders of Certificates affected by such shortfall on
subsequent Distribution Dates. Any such shortfall will bear interest at the
related Pass-Through Rate. Any Net
S-51
<PAGE>
Prepayment Premium for any Distribution Date will be available to make
distributions on the Class X Certificates.
To the extent during a Remittance Period any Mortgage Loan is prepaid in full or
in part prior to the Due Date occurring in such Remittance Period, an interest
shortfall may result on the Distribution Date following such Remittance Period
because interest on prepayments in full or in part will only accrue to the date
of payment (such shortfall, a "Prepayment Interest Shortfall"). To the extent
during a Remittance Period any Mortgage Loan is prepaid in full or in part after
the Due Date occuring in such Remittance Period, the interest on such prepayment
will be included in the Available Distribution Amount for the immediately
succeeding Distribution Date (the "Prepayment Interest Excess"). If a Mortgage
Loan is prepaid in full or in part during any Remittance Period, any related
Prepayment Interest Shortfall shall be offset to the extent of any Prepayment
Interest Excess and any Prepayment Premium collected during such Remittance
Period. If the Prepayment Interest Shortfall for any Remittance Period exceeds
the sum of any Prepayment Interest Excess and any Prepayment Premium collected
during such period, such shortfall shall only be offset by an amount up to the
portion of the Servicing Fee payable to the Master Servicer on the related
Distribution Date. The Master Servicer shall be entitled to any excess of the
Prepayment Interest Excess over the Prepayment Interest Shortfall for any
Remittance Period as additional compensation.
The "Net Prepayment Premium" with respect to any Distribution Date will equal
the excess of (a) the total amount of Prepayment Premiums received during the
related Remittance Period over (b) the amount by which the Prepayment Interest
Shortfall for such Remittance Period exceeds the Prepayment Interest Excess for
such Remittance Period.
The Pass-Through Rates on the Offered Certificates will not be affected by the
deferral of interest or reduction of the Mortgage Interest Rate on any Mortgage
Loan by the Special Servicer or by the occurrence of either such event in
connection with any bankruptcy proceeding involving the related borrower. The
amount of any resulting interest shortfall will be allocated to the
Certificates, in the order described under "Subordination" below.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES. Holders of the
Certificates will be entitled to receive on each Distribution Date in reduction
of the related Class Balance in the order described herein until the related
Class Balance is reduced to zero, to the extent of the balance of the Adjusted
Available Distribution Amount remaining after the payment of the Interest
Distribution Amount for such Distribution Date for the classes of Certificates
with the highest priority for interest payments (as described under "Priority of
Distributions" below), distributions in respect of principal in an amount (the
"Principal Distribution Amount") equal to the aggregate of (i) all scheduled
payments of principal (other than Balloon Payments) due on the Mortgage Loans on
the related Date whether or not received and all scheduled Balloon Payments
received, (ii) if the scheduled Balloon Payment is not received, with respect to
any Balloon Loans on and after the Maturity Date thereof, the principal payment
that would need to be received in the related month in order to fully amortize
such Balloon Loan with level monthly payments by the end of the term used to
derive scheduled payments of principal due prior to the related Maturity Date,
(iii) to the extent not previously advanced any unscheduled principal recoveries
received during the related Remittance Period in respect of the Mortgage Loans,
whether in the form of liquidation proceeds, insurance proceeds, condemnation
proceeds or amounts received as a result of the purchase of any Mortgage Loan
out of the Trust Fund and (iv) any other portion of the Adjusted Available
Distribution Amount remaining after payment of any interest payable on the
certificates for the related and any prior Distribution Date, which generally
will be limited to interest distribution not payable on a class of Certificates
as a result of a Collateral Value Adjustment. The "Class Balance" for any class
of Certificates on any Distribution Date will equal the initial Class Balance
thereof reduced by distributions in reduction thereof and Realized Losses
allocated thereto, as described under "-- Subordination" below, and increased by
any Collateral Value Adjustment Capitalization Amounts allocated thereto as
described under "-- Subordination" below. The Class X Certificates do not have a
Class Balance and are therefore not entitled to any principal distributions.
S-52
<PAGE>
PRIORITY OF DISTRIBUTIONS
The Adjusted Available Distribution Amount for each Distribution Date will be
applied in the following order of priority:
(a) to distributions of the Interest Distribution Amounts for such
Distribution Date on the Class A1, Class A2, and Class X Certificates, pro
rata, based on their respective Interest Accrual Amounts (in the case of the
Class X Certificates, after giving effect to reduction thereto resulting
from a Collateral Value Adjustment);
(b) to distributions of the Principal Distribution Amount for such
Distribution Date to Class A1 Certificates until the Class Balance thereof
is reduced to zero;
(c) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class A1
Certificates in reduction of the Class Balance thereof to zero) for such
Distribution Date on the Class A2 Certificates, until the Class Balance
thereof is reduced to zero;
(d) to distributions of the Interest Distribution Amount for such
Distribution Date on the Class B Certificates;
(e) to distribution of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class A2
Certificates in reduction of the Class Balance thereof to zero) for such
Distribution Date to the Class B Certificates, until the Class Balance
thereof is reduced to zero;
(f) to distributions of the Interest Distribution Amount for such
Distribution Date on the Class C Certificates;
(g) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class B Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date to the Class C Certificates until the Class Balance thereof is reduced
to zero;
(h) to the distributions of the Interest Distribution Amount for such
Distribution Date on the Class D Certificates;
(i) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class C Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date on the Class D Certificates, until the Class Balance thereof is reduced
to zero;
(j) to distributions of the Interest Distribution Amount for such
Distribution Date on the Class E Certificates;
(k) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class D Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date on the Class E Certificates, until the Class Balance thereof is reduced
to zero;
(l) to distributions of the Interest Distribution Amount for such
Distribution Date on the Class F Certificates;
(m) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class E Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date on the Class F Certificates, until the Class Balance thereof is reduced
to zero;
(n) to distributions of the Interest Distribution Amount for such
Distribution Date on the Class G
Certificates;
(o) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class F Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date on the Class G Certificates, until the Class Balance thereof is redued
to zero; and
S-53
<PAGE>
(p) to distribution of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class G Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date on the Class H Certificates, until the Class Balance thereof is
reducted to zero; and
(q) to distributions of the Principal Distribution Amount (or the portion
thereof remaining after the distribution thereof to the Class H Certificates
in reduction of the Class Balance thereof to zero) for such Distribution
Date on the Class NR Certificates, until the Class Balance thereof is
reduced to zero.
After reduction of the Class Balances of all the Certificates to zero any
remaining portion of the Available Distribution Amount will be distributed to
the holders of the Class X Certificates up to an aggregate amount equal to the
sum of all prior Collateral Value Adjustment Reduction Amounts allocated
thereto. Notwithstanding the foregoing, to the extent only the Class A1 and
Class A2 Certificates are outstanding on any Distribution Date, the Adjusted
Available Distribution Amount remaining after application pursuant to clause (a)
above shall be applied to distribution of the Principal Distribution Amount for
such Distribution Date to the Class A1 and Class A2 Certificates pro rata based
on their respective Class Balances.
OTHER CERTIFICATES
The Class E, Class F, Class G, Class H, Class NR, Class R-I, Class R-II and
Class R-III Certificates are not offered hereby (the "Other Certificates"). The
Pass-Through Rates on the Class E, Class F, Class G, Class H and Class NR
Certificates for any Distribution Date will equal %, %, %, % and % per
annum. The aggregate Class Balance for the Class E, Class F, Class G, Class H
and Class NR Certificates will equal $28,433,453.
The Class R-I, Class R-II and Class R-III Certificates will not have a
Pass-Through Rate or a Class Balance.
SUBORDINATION
Neither the Offered Certificates nor the Mortgage Loans are insured or
guaranteed against losses suffered on the Mortgage Loans by the Federal Deposit
Insurance Corporation, any other government agency or instrumentality or by the
Depositor, the Seller, the Trustee, the Fiscal Agent, the Master Servicer, the
Special Servicer, the Underwriters, or any affiliate thereof.
In addition to the payment priorities described under "--Priority of
Distributions" above, certain Certificates will be subordinated to other
Certificates with respect to the allocation of Realized Losses. Realized Losses
on the Mortgage Loans will be allocated, first, to the Class NR, Class H, Class
G, Class F and Class E Certificates, in that order, second, to the Class D
Certificates, third, to the Class C Certificates, fourth, to the Class B
Certificates, and thereafter, to the Class A1 and Class A2 Certificates, on a
pro rata basis, based on Class Balance, in each case until the related Class
Balance is reduced to zero. The Class Balance of a class of Certificates will be
reduced by the principal portion of any Realized Losses allocated to such class.
In addition to Realized Losses, shortfalls will also occur as a result of a
Servicer's, the Trustee's and the Fiscal Agent's right to receive payments of
interest with respect to unreimbursed advances, the related Special Servicer's
right to compensation with respect to Mortgage Loans which are or have been
Specially Serviced Mortgage Loans and as a result of other Trust Fund expenses.
Such shortfalls will be allocated as described above to the classes of
Certificates with the lowest payment priority for purposes of the application of
Available Distribution Amount in the order described herein.
Within 30 days after the earliest to occur of (i) 90 days after the date on
which an uncured delinquency occurs in respect of a Mortgage Loan, (ii) 60 days
after the date on which a receiver is appointed (if such appointment remains in
effect during such 60-day period) in respect of a Mortgaged Property, (iii) the
date on which a Mortgaged Property becomes an REO Property or (iv) the date on
which a change in the payment rate, Mortgage Interest Rate, principal balance,
amortization terms or Maturity Date of any Specially Serviced Mortgage Loan
becomes effective (the earliest of such dates, a "Required Appraisal Date"), an
appraisal will be obtained by the Special Servicer from an independent MAI
appraiser at the expense of the Trust Fund (except if an appraisal has
S-54
<PAGE>
been conducted within the 12 month period preceding such event). As a result of
such appraisal, a Collateral Value Adjustment may result, which Collateral Value
Adjustment will be allocated, for purposes of determining distributions of
interest to the Certificates, in the manner and priority described above with
respect to Realized Losses. Notwithstanding the foregoing, a Collateral Value
Adjustment will be zero with respect to such a Mortgage Loan if (i) the event
giving rise to such Collateral Value Adjustment is the extension of the maturity
of such Mortgage Loan, (ii) the payments on such Mortgage Loan were not
delinquent during the twelve month period immediately preceding such extension
and (iii) the payments on such Mortgage Loan are then current, provided, that if
at any later date there occurs a delinquency in payment with respect to such
Mortgage Loan, the Collateral Value Adjustment will be recalculated and applied
as described above. In addition, in any case, upon the occurrence of any event
giving rise to a subsequent Collateral Value Adjustment (including the
delinquency referred to in the immediately preceding sentence) more than twelve
months after an appraisal was obtained with respect to a Collateral Value
Adjustment, the Special Servicer will order a new appraisal as described above,
within 30 days of the occurrence of any such event giving rise to a subsequent
Collateral Value Adjustment and will adjust the amount of the Collateral Value
Adjustment in accordance therewith.
The "Collateral Value Adjustment" for any Distribution Date with respect to any
Mortgage Loan will be an amount equal to the excess of (a) the principal balance
of such Mortgage Loan over (b) the excess of (i) 90% of the current appraised
value of the related Mortgaged Property as determined by an independent MAI
appraisal of such Mortgaged Property over (ii) the sum of (A) to the extent not
previously advanced by a Servicer, all unpaid interest on such Mortgage Loan at
a per annum rate equal to the Mortgage Interest Rate, (B) all unreimbursed
Advances and interest thereon, (c) any unpaid Servicing and Trustee fees and (D)
all currently due and delinquent real estate taxes and assessments, insurance
premiums and, if applicable, ground rents in respect of such Mortgaged Property
(net of any amount escrowed or otherwise available for payment of the amount due
on such Mortgage Loan). The excess of the principal balance of any Mortgage Loan
over the related Collateral Value Adjustment is referred to herein as the
"Adjusted Collateral Value." A Collateral Value Adjustment shall result in a
reduction of the Interest Distribution Amount of one or more classes of
Certificates and shall not be a permanent reduction of the Class Balance (or
Notional Amount) of any class of Certificates prior to the occurrence of a
Realized Loss.
A "Realized Loss," in the case of any Mortgage Loan described in clause (a) or
clause (b) of the succeeding sentence, is equal to the sum of (a) the Stated
Principal Balance of any Loss Mortgage Loan, (b) interest thereon not previously
distributed or advanced to Certificateholders through the last day of the month
in which such Mortgage Loan became a Loss Mortgage Loan, (c) any advances made
by a Servicer, the Trustee or the Fiscal Agent which remain unreimbursed and (d)
any interest accrued on such advances (see "--Advances" below) as of such time,
reduced by any amounts recovered thereon as of such time and, in the case of any
Mortgage Loan described in clause (c) of the succeeding sentence, is the amount
determined to have been permanently forgiven as described in such clause (c). A
"Loss Mortgage Loan" is any Mortgage Loan (a) which is finally liquidated, (b)
with respect to which the Master Servicer, the Special Servicer, the Trustee or
the Fiscal Agent, as applicable, has determined that an advance which has been
made or would otherwise be required to be made, is not, or, if made, would not
be, recoverable out of proceeds on such Mortgage Loan or (c) with respect to
which a portion of the principal balance thereof has been permanently forgiven
whether pursuant to a modification or a valuation resulting from a proceeding
initiated under the Bankruptcy Code. The "Stated Principal Balance" of any
Mortgage Loan as of any date of determination is the principal balance as of the
Cut-off Date minus the sum of (i) the principal portion of each Monthly Payment
due on such Mortgage Loan after the Cut-off Date, to the extent received from
the Mortgagor or advanced and distributed to Certificateholders, and (ii) any
unscheduled amounts of principal received with respect to such Mortgage Loans,
to the extent distributed to Certificateholders.
The Special Servicer is required, within 30 days of each anniversary of the
Required Appraisal Date, to order an update of the prior appraisal (the cost of
which will be advanced by the Special Servicer and reimbursed thereto from the
Trust Fund). The Special Servicer will determine and report to the Trustee the
updated appraisal. A lower appraisal value will increase the Collateral Value
Adjustment. Such increase will be allocated as described above. A higher
appraised value will reverse the Collateral Value Adjustment by the amount of
the reported
S-55
<PAGE>
increase. Any such reversal or reduction will reduce the accrual of the
Collateral Value Adjustment Capitalization Amount and therefore reduce the
amount otherwise available to make distributions of principal on the classes of
Certificates senior to the class of Certificates to which such reversal is
allocated. However, in neither case will the Class Balance (or Notional Amount)
of the affected class or classes of Certificates be reduced by such reversal or
reduction. In such event, the total Collateral Value Adjustment Capitalization
Amount previously added to the related Class Balance shall be reduced in
proportion to the Collateral Value Adjustment reversal.
ADVANCES
On the business day immediately preceding each Distribution Date, the Master
Servicer will be obligated to make advances out of its own funds or funds held
in the Collection Account (as defined herein) that are not required to be part
of the Available Distribution Amount for such Distribution Date (each, a "P&I
Advance"), in an amount equal to the excess of all Monthly Payments (net of the
Servicing Fee) due over the amount actually received, subject to the limitations
described herein. To the extent that the Master Servicer fails to make a P&I
Advance required of it, the Trustee shall make such required P&I Advance, and to
the extent the Trustee fails to make a P&I Advance required of it, the Fiscal
Agent shall make such required P&I Advance. In addition, the Master Servicer
will be required to advance certain property related expenses. The Servicers
generally may not advance any amounts, other than P&I Advances, unless such
advance is contemplated in the related Asset Strategy Report (as defined herein)
for the related Mortgage Loan or such advance is for one of several purposes
specified in the Pooling and Servicing Agreement as "Property Protection
Expenses." All such advances will be reimbursable to a Servicer, the Trustee and
the Fiscal Agent from late payments, insurance proceeds, liquidation proceeds,
condemnation proceeds or amounts paid in connection with the purchase of such
Mortgage Loan to the extent such amounts are not required to be otherwise
applied pursuant to the terms of the related Mortgage Loan or, as to any such
advance that is deemed not otherwise recoverable, from any amounts required to
be deposited in the Collection Account. Notwithstanding the foregoing, a
Servicer, the Trustee and the Fiscal Agent will be obligated to make any such
advance only to the extent that it determines in its reasonable good faith
judgment that such advance, if made, would be recoverable out of late payments,
insurance proceeds, liquidations, condemnation proceeds or certain other
collections on the related Mortgage Loan. None of the Servicers, the Trustee and
the Fiscal Agent will be required to advance the full amount of any Balloon
Payment not made by the related Mortgagor. To the extent a Servicer, the Trustee
and the Fiscal Agent is required to make a P&I Advance on and after the Due Date
for such Balloon Payment, such P&I Advance shall not exceed an amount equal to a
monthly payment calculated by the Special Servicer necessary to fully amortize
the related Mortgage Loan over the period used for purposes of calculating the
scheduled monthly payments thereon prior to the related Maturity Date. Any
failure by a Servicer to make a P&I Advance as required under the Pooling and
Servicing Agreement will constitute an event of default thereunder, in which
case the Trustee will be obligated to make any required advance, in accordance
with the terms of the Pooling and Servicing Agreement. The Trustee will be
entitled to a reimbursement for each P&I Advance (together with interest
thereon) made by it in the same manner and to the same extent, but prior to, the
Servicers. The Fiscal Agent will be entitled to reimbursement for each P&I
Advance (together with interest thereon) made by it in the same manner and to
the same extent, but prior to, the Servicers and the Trustee.
Each Servicer, the Trustee and the Fiscal Agent shall be entitled to interest on
the aggregate amount of all advances made by such Servicer, the Trustee or the
Fiscal Agent at a per annum rate equal to the prime rate reported in The Wall
Street Journal. See "Risk Factors--Effect of Mortgagor Delinquencies and
Defaults" herein.
S-56
<PAGE>
CERTAIN PREPAYMENT, MATURITY AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity on the Offered Certificates will be affected by the rate
of principal payments on the Mortgage Loans including, for this purpose,
prepayments, which may include amounts received by virtue of the curtailments,
voluntary repayment in full, repurchases by the Seller, condemnation or casualty
with respect to the Mortgaged Property or foreclosure pursuant to a default on a
Mortgage Loan ("Prepayment"). The rate of principal payments on the Offered
Certificates will correspond to the rate of principal payments (including
prepayments) on the related Mortgage Loans.
Approximately 95.95% of the Mortgage Loans provide that if the related Mortgagor
prepays the principal balance thereof in an amount in excess of 20% of the
original principal amount thereof per year during a certain period following
origination, a Prepayment Premium is required to be paid. See the table entitled
"Months of Prepayment Premium Period Remaining as of the Cut-off Date" under
"Description of the Mortgage Pool--Certain Characteristics of the Mortgage
Loans" herein. Any Net Prepayment Premium collected on a Mortgage Loan will be
distributed solely to the holders of the Class X Certificates. See "Description
of the Certificates--Distributions--Interest Distributions on the Certificates"
herein.
The yield to maturity on each class of the Offered Certificates will depend on,
among other things, the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of Mortgage Loans due to a
breach of a representation and warranty) on the Mortgage Loans and the
allocation thereof to reduce the Class Balance or Notional Amount of such class.
The yield to maturity on each class of the Offered Certificates will also depend
on the Pass-Through Rate and the purchase price for such Certificates.
Therefore, the yield to maturity on the Offered Certificates will depend on
changes in LIBOR and the weighted average of the Remittance Rates on the
Mortgage Loans. The yield to investors on any Class of Offered Certificates will
be adversely affected by any allocation thereto of Prepayment Interest
Shortfalls on the Mortgage Loans, which may result from the distribution of
interest only to the date of a prepayment occurring during any month following
the related Determination Date (rather than a full month's interest) to the
extent any such interest shortfall is not offset by Prepayment Premiums, any
Prepayment Interest Excess or the portion of the Servicing Fee for such
Distribution Date allocable to the Master Servicer.
In general, if a class of Offered Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Offered
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase.
The Pass-Through Rates on the Class A-1, Class A-2, Class B, Class C and Class D
Certificates are based upon the value of an index (LIBOR) which is different
from the value of the indices applicable to the Mortgage Loans, as described
under "Description of the Mortgage Pool" herein. Each Mortgage Loan generally
adjusts semi-annually based upon the related Index whereas the Pass-Through
Rates on the Offered Certificates adjusts monthly based upon LIBOR. LIBOR and
the indices applicable to the Mortgage Loans may respond differently to economic
and market factors, and there is not necessarily any correlation between them.
In addition, all of the Mortgage Loans are subject to Periodic Rate Caps,
Maximum Mortgage Interest Rates and Minimum Mortgage Interest Rates. Thus, it is
possible, for example, that LIBOR may rise during periods in which the indices
on the Mortgage Loans are stable or are falling or that, even if both LIBOR and
such indices rise during the same period, LIBOR may rise more rapidly than such
indices and therefore the amount of interest collected on all Mortgage Loans
(adjusted to the Remittance Rate) may be insufficient to pay interest on a class
of Offered Certificates at a rate equal to LIBOR plus the related Net Margin. In
such event, the Pass-Through Rate on such class will be equal to the Weighted
Average Remittance Rate on the Mortgage Loans.
In addition, a number of factors affect the performance of LIBOR and may cause
LIBOR to move in a manner different from other indices. To the extent that LIBOR
may reflect changes in the general level of interest rates
S-57
<PAGE>
more or less quickly than other indices, in a period of rising interest rates,
increases in the yield to Holders of the Offered Certificates due to such rising
interest rates may occur earlier or later than that which would be produced by
other indices, and in a period of declining rates, LIBOR may drop lower or
remain higher than other market interest rates.
Although the Mortgage Interest Rates on the Mortgage Loans will generally adjust
semi-annually, such increases and decreases may be limited by the Periodic Rate
Cap, the Maximum Mortgage Interest Rate and the Minimum Mortgage Interest Rate,
if applicable, on each Mortgage Loan, and will be based on the applicable Index
(which may be different from the prevailing margins on other mortgage loans). As
a result, the Mortgage Interest Rates on the Mortgage Loans at any time may not
equal the prevailing rates for other adjustable-rate loans and accordingly, the
rate of prepayment may be lower or higher than would otherwise be anticipated.
In addition, because all of the Mortgage Loans have Maximum Mortgage Interest
Rates, if prevailing mortgage rates were to increase above the Maximum Mortgage
Interest Rates, the rate of prepayment on the Mortgage Loans may be slower than
would otherwise be the case. In general, if prevailing mortgage rates fall
significantly below the Mortgage Interest Rates on the Mortgage Loans, the rate
of prepayments (including refinancings) will be expected to increase.
Conversely, if prevailing mortgage rates rise significantly above the Mortgage
Interest Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans will be expected to decrease.
If a Mortgage Loan becomes a Specially Serviced Mortgage Loan, the Special
Servicer may adopt a servicing strategy which affects the yield to maturity of
one or more classes of Offered Certificates.
The assumed final Distribution Date for the Certificates will be July 25, 2029
which is the second anniversary of the date at which all the Mortgage Loans have
zero balances, assuming no prepayments and that the Mortgage Loans which are
Balloon Loans fully amortize according to their amortization schedule and no
Balloon Payment is made.
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Offered Certificates
will be influenced by the rate at which principal payments (including scheduled
payments, principal prepayments and payments made pursuant to any applicable
policies of insurance) on the Mortgage Loans are made. Principal payments on the
Mortgage Loans may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, partial prepayments
and liquidations due to a default or other dispositions of the Mortgage Loans).
Prepayments on loans are commonly measured relative to a prepayment standard or
model, such as the constant prepayment rate prepayment model ("CPR"). CPR
represents a constant assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans for the life of such loans.
Neither CPR nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans.
The table of Percent of Initial Class Balance Outstanding for each class of the
Offered Certificates at each CPR set forth below indicates the weighted average
life of such Certificates and sets forth the percentage of the initial principal
amount of such Certificates that would be outstanding after each of the dates
shown at the indicated CPR. The table has been prepared on the basis of the
characteristics of the mortgage loans in the attached diskette and on the basis
of the following assumptions: (i) the Mortgage Loans prepay at the indicated
CPR; (ii) the maturity date of each of the Balloon Mortgage Loans is not
extended; (iii) distributions on the Offered Certificates are received in cash,
on the 25th day of each month, commencing in July, 1997; (iv) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the Mortgagors of principal and interest on the Mortgage Loans occur;
(v) prepayments represent payment in full of individual Mortgage Loans and are
received on the respective Due Dates and include a month's interest thereon;
(vi) there are no repurchases of Mortgage Loans due to breaches of any
representation and warranty, or pursuant to an optional termination as described
under "Description of the Pooling and Servicing Agreement--Termination" or
otherwise;
S-58
<PAGE>
(vii) the Offered Certificates are purchased on June 27, 1997; (viii) one-month
LIBOR is equal to % per annum and remains constant while the Certificates are
outstanding; and (ix) the Indices are equal to the following per annum rates and
remain constant while the Certificates are outstanding:
<TABLE>
<CAPTION>
----------
<S> <C>
Six-Month LIBOR.................................................................%
Prime...........................................................................%
One-Year U.S. Treasury..........................................................%
</TABLE>
Variations in the actual prepayment experience and the balance of the Mortgage
Loans that prepay may increase or decrease the percentage of initial Class
Balance (and weighted average life) shown in the following table. Such
variations may occur even if the average prepayment experience of all such
Mortgage Loans is the same as any of the specified assumptions.
PERCENT OF INITIAL CLASS BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR(1)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A1
------------------------- CLASS A2
0% -------------------------------
--- V1 V2 V3 V4 V1 V2
DISTRIBUTION DATE -- -- -- -- -- --
- ------------------------------------------ 0%
---
Initial percentage........................
1998..............................
1999..............................
2000..............................
2001..............................
2002..............................
2003..............................
2004..............................
2005..............................
2006..............................
2007..............................
Weighted Average life in years (2)........
<CAPTION>
<S> <C>
CLASS B
CLASS C
------------------------- ---------
V3 V1 V2 V3 V4
DISTRIBUTION DATE -- 0% -- -- -- --
- ------------------------------------------ --- 0%
V4 ---
--
Initial percentage........................
1998..............................
1999..............................
2000..............................
2001..............................
2002..............................
2003..............................
2004..............................
2005..............................
2006..............................
2007..............................
Weighted Average life in years (2)........
<CAPTION>
CLASS D
-------------------------
V1 V2 V3 V4 V1 V2 V3
DISTRIBUTION DATE -- -- -- -- -- -- --
- ------------------------------------------ 0%
---
Initial percentage........................
1998..............................
1999..............................
2000..............................
2001..............................
2002..............................
2003..............................
2004..............................
2005..............................
2006..............................
2007..............................
Weighted Average life in years (2)........
<CAPTION>
V4
DISTRIBUTION DATE --
- ------------------------------------------
Initial percentage........................
1998..............................
1999..............................
2000..............................
2001..............................
2002..............................
2003..............................
2004..............................
2005..............................
2006..............................
2007..............................
Weighted Average life in years (2)........
</TABLE>
- ------------------------
(1) [To come]
(2) The weighted average life of a class of Offered Certificates is determined
by (i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum by the total principal
distributions on such class of Certificates.
CLASS X CERTIFICATES YIELD CONSIDERATIONS
The yield to maturity of the Class X Certificates will be extremely sensitive to
the prepayment, repurchase and default experience on the Mortgage Loans.
Furthermore, the amount of interest on each Mortgage Loan that will be payable
to the Class X Certificateholders will vary due to a wide variety of factors and
will be especially sensitive to the size and timing of increases in the rates of
LIBOR. The yield to maturity on the Class X Certificates will also be very
sensitive to any reduction of the Interest Distribution Amount thereof as a
result of a Collateral Value Adjustment or the allocation of any Collateral
Value Adjustment Capitalization Amount to any other class of Certificates.
Prospective Investors should fully consider the associated risks, including the
risk that such investors may not fully recover their initial investment.
The Pass-Through Rate on the Class X Certificates will equal the excess of the
Weighted Average Remittance Rate on the Mortgage Loans over the Pass-Through
Rates on the other Certificates. The Pass-Through Rates on such other Offered
Certificates will be based on LIBOR subject to a maximum rate equal to the
Weighted Average Remittance Rate. Therefore, the Pass-Through Rate on the Class
X Certificates will be adversely affected by increases in the value of LIBOR in
excess of increases in the value of the Indices or decreases in the value of the
Indices in excess of decreases in the value of LIBOR.
In general, the yield to maturity on the Class X Certificates will be lower if
the Pass-Through Rate on the other Offered Certificates rises more than the
Weighted Average Remittance Rate on the Mortgage Loans. The Pass-Through Rate on
the Offered Certificates is based upon the value of an index (LIBOR) which is
different from the value of the indices applicable to the Mortgage Loans, as
described under "Description of the Mortgage Pool" herein. Each Mortgage Loan
adjusts semi-annually based upon the related Index whereas the Pass-Through
Rates on the Offered Certificates adjust monthly based upon LIBOR. LIBOR and the
indices applicable to the Mortgage
S-59
<PAGE>
Loans may respond differently to economic and market factors, and there is not
necessarily any correlation between them. In addition, all of the Mortgage Loans
are subject to Periodic Rate Caps, Maximum Mortgage Interest Rates and Minimum
Mortgage Interest Rates. Thus, it is possible, for example, that LIBOR may rise
during periods in which the indices on the Mortgage Loans are stable or are
falling or that, even if both LIBOR and such indices rise during the same
period, LIBOR may rise more rapidly than such indices and therefore the amount
of interest collected on all Mortgage Loans (adjusted to the Remittance Rate)
may be insufficient to pay interest on a class of Class X Certificates.
A number of factors affect the performance of LIBOR and may cause LIBOR to move
in a manner different from other indices. To the extent that LIBOR may reflect
changes in the general level of interest rates more or less quickly than other
indices, in a period of rising interest rates, increases in the yield to Holders
of the Offered Certificates, other than the Class X Certificates, due to such
rising interest rates may occur earlier or later than that which would be
produced by other indices, and in a period of declining rates, LIBOR may drop
lower or remain higher than other market interest rates.
Although the Mortgage Interest Rates on the Mortgage Loans will adjust
semi-annually, such increases and decreases may be limited by the Periodic Rate
Cap, the Maximum Mortgage Interest Rate and the Minimum Mortgage Interest Rate,
if applicable, on each Mortgage Loan, and will be based on the applicable Index
(which may be different from the prevailing margins on other mortgage loans). As
a result, the Mortgage Interest Rates on the Mortgage Loans at any time may not
equal the prevailing rates for other adjustable-rate loans and accordingly, the
rate of prepayment may be lower or higher than would otherwise be anticipated.
In addition, because all of the Mortgage Loans have Maximum Mortgage Interest
Rates, if prevailing mortgage rates were to increase above the Maximum Mortgage
Interest Rates, the rate of prepayment on the Mortgage Loans may be slower than
would otherwise be the case. In general, if prevailing mortgage rates fall
significantly below the Mortgage Interest Rates on the Mortgage Loans, the rate
of prepayments (including refinancings) will be expected to increase.
Conversely, if prevailing mortgage rates rise significantly above the Mortgage
Interest Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans will be expected to decrease.
The following table indicates the sensitivity of the pre-tax yield to maturity
on the Class X Certificates to various rates of prepayment on the Mortgage Loans
by projecting the monthly aggregate payments on the Class X Certificates and
computing the corresponding pre-tax yields to maturity on a corporate bond
equivalent basis, based on the assumptions described in clauses (i) through (ix)
in the second paragraph preceding the table entitled "Percent of Initial Class
Balance Outstanding at the Following Percentages of CPR" under the heading
"Certain Yield, Prepayment and Maturity Considerations--Weighted Average Life of
the Offered Certificates" herein. Any differences between such assumptions and
the actual characteristics and performance of the Mortgage Loans and of the
Certificates may result in yields being different from those shown in such
table. Discrepancies between assummed and actual characteristics and performance
underscore the hypothetical nature of the table, which are provided only to give
a general sense of the sensitivity of yields in varying prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE CLASS X CERTIFICATES
<TABLE>
<CAPTION>
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSUMED PURCHASE PRICE PREPAYMENT ASSUMPTION
AS A PERCENTAGE OF THE ----------------------------------------------------------
NOTIONAL AMOUNT 0% V1 V2 V3 V4
- -------------------------------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
% % % % % %
</TABLE>
- ------------------------
(1) Calculated based on the weighted average of the Remittance Rates of the
Mortgage Loans as of the Cut-off Date and assuming a one-month LIBOR is
equal to % per annum. The Pass-Through Rate on such Certificates will be
subject to adjustment on each Distribution Date.
S-60
<PAGE>
Each pre-tax yield to maturity set forth in the preceding table was calculated
by determining the monthly discount rate which, when applied to the assumed
stream of cash flows to be paid on the Class X Certificates would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price listed in the corresponding table. Accrued interest is
included in the assumed purchase price of each class of Class X Certificates and
is used in computing the corporate bond equivalent yields shown. These yields do
not take into account the different interest rates at which investors may be
able to reinvest funds received by them as distributions on the Class X
Certificates, and thus do not reflect the return on any investment in the Class
X Certificates when, as applicable, any reinvestment rates other than the
discount rates set forth in the preceding table are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding table,
it is highly unlikely that the Mortgage Loans will be prepaid according to one
particular pattern. For this reason and because the timing of cash flows is
critical to determining yields, the pre-tax yield to maturity on the Class X
Certificates is likely to differ from those shown in the table, even if all of
the Mortgage Loans prepay at the indicated constant percentages of CPR over any
given time period or over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any particular
rate or that the yield on the Class X Certificates will conform to the yields
described herein. Moreover, the various remaining terms to maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the preceding table at the various constant percentages of CPR
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Investors are urged to make their investment
decisions based on their determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class X Certificates should fully
consider the risk that an extremely rapid rate of prepayments on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments.
S-61
<PAGE>
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION
Southern Pacific Thrift and Loan Association, the Seller, is a California
licensed industrial loan company and wholly-owned subsidiary of ICII. The Seller
is supervised and examined by the California Department of Corporations (the
"CDC"), and the Seller's deposits are insured by the FDIC. Southern Pacific
Thrift and Loan Association was incorporated in California in 1981. Its
principal executive offices are located at 12300 Wilshire Blvd., Los Angeles, CA
90025 and its telephone number is (310) 442-3300. The Seller originates mortgage
loans secured by multifamily residences and commercial properties located
primarily in California, Colorado, Oregon, Washington and other areas in the
United States, through its two branches in California and several loan
origination offices located in various states. The Seller also acquires mortgage
loans through approved mortgage brokers and other financial institutions in
accordance with the underwriting standards applicable to loans originated by the
Seller.
In connection with a joint examination in January 1996 by the FDIC and the DOC
of the Seller, the agencies criticized the Seller in their reports of
examination for, among other things, deficiencies and inadequacies in certain
operational practices, including practices in the areas of credit underwriting,
administration, affiliate transactions and internal controls. As a result of
such examination, the Seller entered into a joint memorandum of understanding
with the FDIC and the DOC. The memorandum of understanding, (the "MOU") requires
certain measures to be taken in the areas of: (i) hiring and retention of
management, (ii) adoption of systems to monitor and control risk (iii)
correction of certain violations of law (iv) credit review and (v) enhancement
of other operational policies. The Seller does not believe that this informal
agreement has had or will have a material adverse effect on the Seller. In the
event that the Seller fails to comply with the MOU, the Seller and its
affiliates, officers and directors could be subject to various enforcement
actions, including cease and desist orders, criminal and civil penalties,
removal from office, termination of deposit insurance or the revocation of the
Seller's charter. Any such enforcement action could have a material adverse
effect on the Seller.
The FDIC and the DOC are currently conducting their annual examination of the
Seller, and have not yet reported their results to the Seller. If such agencies
are not satisfied with the Seller's progress in these areas, the FDIC or the DOC
could consider commencing enforcement action against the Seller or its
affiliates, or their respective officers, directors or employees, although the
Seller believes any such action would not be warranted under the circumstances.
Enforcement could include, among other things, injunctive relief, cease and
desist orders, criminal or civil penalties, removal from office or the
revocation of the Seller's charter.
The Seller will act as Sub-Servicer for the Master Servicer and the Special
Servicer. The tables below summarize, at the respective dates indicated, the
delinquency and charge-off experience with respect to all first lien commercial
and multifamily mortgage loans underwritten by the Seller. The indicated periods
of delinquency are based on the number of days past due on a contractual basis.
The monthly payments under all of such mortgage loans are due on the first day
of each calendar month. Charge-offs are generally established based upon an
appraisal undertaken in connection with the foreclosure or other conversion of a
mortgage loan to real property.
The total amount of mortgage loans on which the data below is based includes
many mortgage loans which were not, as of March 31, 1997, outstanding long
enough to give rise to the possibility of default and charge-off. The
delinquency and charge-off experience with respect to the Mortgage Loans may be
expected to be higher, and may be substantially higher, than indicated below.
(The sum of the amounts and the percentages in the table below may not equal the
totals due to rounding.)
S-62
<PAGE>
The table below sets forth, for the periods indicated, the prepayment experience
with respect to all commercial and multifamily mortgage loans underwritten or
purchased by the Seller. The table below only includes information with respect
to prepayments for loans that existed in the Seller's portfolio on or after
March 31, 1995. The prepayment experience with respect to the Mortgage Loans may
be substantially different from that indicated below. (The sum of the amounts
and the percentages in the table below may not equal the totals due to
rounding.)
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION
HISTORICAL PREPAYMENTS
MULTIFAMILY AND COMMERCIAL PROPERTY PORTFOLIOS
(INCLUDING SECURITIZED LOANS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1996 1996 1996 1996 1997
-------------- -------------- -------------- -------------- -------------- --------------
Quarter to Date
Prepayments........... $1,351,241 $6,365,266 $3,745,067 $8,576,474 $5,338,097 $8,259,567
Quarter to Date
Annualized
Prepayment(1)......... 1.82% 6.34% 3.26% 6.73% 3.67% 4.99%
</TABLE>
- ------------------------
(1) Annualized amount of prepayment in each quarter divided by the simple
average of beginning and ending principal balance.
The Master Servicer and the Special Servicer will delegate their servicing
obligations in respect of the Mortgage Loans to the Seller (in such capacity,
the "Sub-Servicer"), but the Master Servicer and the Special Servicer will each
remain liable for their respective obligations under the Pooling and Servicing
Agreement. The Master Servicer and the Special Servicer will be solely liable
for all fees owed by them to the Sub-Servicer, irrespective of whether their
compensation pursuant to the Pooling and Servicing Agreement is sufficient to
pay such fees. The Sub-Servicer will be entitled to reimbursement for certain
expenditures which it makes, generally to the same extent as would the Master
Servicer and the Special Servicer for making the same expenditures. The Master
Servicer may remove the Seller as Sub-Servicer at any time without cause. See
Master Servicer and Special Servicer "--Servicing and Other Compensation and
Payment of Expenses" below.
In connection with a prior commercial mortgaged-backed securities transaction in
which the Seller acts as subservicer for Midland with respect to commercial
mortgage loans originated by the Seller, Midland has notified the Seller that
the Seller was not in compliance in certain respects with the subservicing
agreement between the Seller and Midland. The Seller believes that it has a plan
in place that, when fully implemented, will rectify the issues raised by Midland
in all material respects. As described above, the Master Servicer may remove the
Seller as Sub-Servicer at any time with or without cause.
S-63
<PAGE>
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION
HISTORICAL DELINQUENCY AND CHARGE-OFFS
MULTIFAMILY AND COMMERCIAL INCOME PROPERTY PORTFOLIOS
(INCLUDING SECURITIZED LOANS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995 AT MARCH 31, 1996 AT JUNE 30, 1996
-------------------------------------- -------------------------------------- ------------------------
NO. NO. NO.
--- --- ---------
PERCENTAGE PERCENTAGE
OF OF
OUTSTANDING OUTSTANDING
OUTSTANDING BALANCE OF OUTSTANDING BALANCE OF OUTSTANDING
BALANCE TOTAL LOANS BALANCE TOTAL LOANS BALANCE
------------- ------------ ------------- ------------ -------------
Multifamily
Total Loans
Outstanding..... 744 $ 236,320,744 934 $ 291,164,580 1029 $ 325,312,554
30-59 Days Past
Due............. 0 -- 0.00% 1 173,115 0.06% 1 89,763
60-89 Days Past
Due............. 2 250,911 0.11% 0 -- 0.00% 2 596,767
90-119 Days Past
Due............. 4 688,574 0.29% 1 369,226 0.13% 0 --
120 or More Days
Past Due........ 15 2,487,031 1.05% 17 4,193,955 1.44% 12 2,104,781
--- ------------- ------------ --- ------------- ------------ --------- -------------
Total
Delinquencies... 21 $ 3,426,516 1.45% 19 $ 4,736,296 1.63% 15 $ 2,791,311
Quarter to Date
Charge-Offs(1).. 92,000 0.05% 836,000 0.32% 137,000
Commercial
Total Loans
Outstanding..... 420 $ 132,941,068 448 $ 142,993,827 477 $ 159,437,786
30-59 Days Past
Due............. 1 4,000 0.00% 3 224,504 0.16% 0 --
60-89 Days Past
Due............. 6 694,767 0.52% 0 -- 0.00% 3 573,339
90-119 Days Past
Due............. 3 223,008 0.17% 1 276,572 0.19% 0 --
120 or More Days
Past Due........ 19 4,096,517 3.08% 18 3,454,488 2.42% 15 2,738,685
--- ------------- ------------ --- ------------- ------------ --------- -------------
29 $ 5,018,292 3.77% 22 $ 3,955,564 2.77% 18 $ 3,312,024
Quarter to Date
Charge-Offs(2).. $ 64,000 0.06% -- 0.00% $ 249,000
<CAPTION>
<S> <C> <C>
AT MARCH
AT SEPTEMBER 30, 1996 AT DECEMBER 31, 1996 31, 1997
-------------------------------------- -------------------------------------- ---------
NO. NO. NO.
--------- --------- ---------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
OUTSTANDING OUTSTANDING OUTSTANDING
BALANCE OF OUTSTANDING BALANCE OF OUTSTANDING BALANCE OF
TOTAL LOANS BALANCE TOTAL LOANS BALANCE TOTAL LOANS
------------ ------------- ------------ ------------- ------------
Multifamily
Total Loans
Outstanding..... 1114 $ 350,856,695 1323 $ 421,518,257 1471
30-59 Days Past
Due............. 0.03% 0 -- 0.00% 0 -- 0.00% 7
60-89 Days Past
Due............. 0.18% 2 1,334,734 0.38% 11 3,306,353 0.78% 10
90-119 Days Past
Due............. 0.00% 4 618,529 0.18% 3 550,490 0.13% 3
120 or More Days
Past Due........ 0.65% 11 2,065,486 0.59% 10 2,125,166 0.50% 9
------------ --------- ------------- ------------ --------- ------------- ------------ ---------
Total
Delinquencies... 0.86% 17 $ 4,018,749 1.15% 24 $ 5,982,009 1.42% 29
Quarter to Date
Charge-Offs(1).. 0.04% 4 49,563 0.01% 1 72,584 0.02% 1
Commercial
Total Loans
Outstanding..... 506 $ 184,527,041 541 $ 206,205,436 565
30-59 Days Past
Due............. 0.00% 0 -- 0.00% 0 -- 0.00% 3
60-89 Days Past
Due............. 0.36% 0 -- 0.00% 3 1,025,716 0.50% 4
90-119 Days Past
Due............. 0.00% 2 404,098 0.22% 0 -- 0.00% 2
120 or More Days
Past Due........ 1.72% 15 3,404,491 1.84% 13 3,052,814 1.48% 14
------------ --------- ------------- ------------ --------- ------------- ------------ ---------
2.08% 17 $ 3,808,589 2.06% 16 $ 4,078,530 1.98% 23
Quarter to Date
Charge-Offs(2).. 0.16% 6 $ 182,873 0.11% 2 $ 32,548 0.02% 1
<CAPTION>
PERCENTAGE
OF
OUTSTANDING
OUTSTANDING BALANCE OF
BALANCE TOTAL LOANS
------------- ------------
Multifamily
Total Loans
Outstanding..... $ 477,553,328
30-59 Days Past
Due............. 1,097,520 0.23%
60-89 Days Past
Due............. 4,470,127 0.94%
90-119 Days Past
Due............. 644,459 0.13%
120 or More Days
Past Due........ 2,112,791 0.44%
------------- ------------
Total
Delinquencies... $ 8,324,897 1.74%
Quarter to Date
Charge-Offs(1).. 160,537 0.03%
Commercial
Total Loans
Outstanding..... $ 218,507,776
30-59 Days Past
Due............. 1,421,040 0.65%
60-89 Days Past
Due............. 1,117,420 0.51%
90-119 Days Past
Due............. 276,437 0.13%
120 or More Days
Past Due........ 3,162,865 1.45%
------------- ------------
$ 5,977,762 2.74%
Quarter to Date
Charge-Offs(2).. $ 35,906 0.02%
</TABLE>
- ------------------------
(1) The percentages for "Quarter To Date Charge-Offs" are calculated based upon
the average outstanding balance of all multifamily loans for the quarter.
(2) The percentages for "Quarter To Date Charge-Offs" are calculated based upon
the average outstanding balance of all commercial loans for the quarter.
S-64
<PAGE>
MASTER SERVICER AND SPECIAL SERVICER
Midland Loan Services, L.P. ("Midland") is the Master Servicer and Special
Servicer. Midland was organized under the laws of the state of Missouri in 1992
as a limited partnership. Midland is a real estate financial services company
which provides loan servicing and asset management for large pools of commercial
and multifamily real estate assets and which originates commercial real estate
loans. Midland's address is 210 West 10th Street, 6th Floor, Kansas City,
Missouri 64105.
As of May 31, 1997, Midland and its affiliates were responsible for the
servicing of approximately 11,994 commercial and multifamily loans with an
aggregate principal balance of approximately $16.4 billion, the collateral for
which is located in 50 states, Puerto Rico and the District of Columbia. With
respect to such loans, approximately 10,394 loans with an aggregate principal
balance of approximately $11.7 billion pertain to commercial and multifamily
mortgage-backed securities. Property type concentrations within the portfolio
include multifamily, office, retail, hotel/motel and other types of income
producing properties. Midland and its affiliates also provide commercial loan
servicing for newly-originated loans and loans acquired in the secondary market
on behalf of issuers of commercial and multifamily mortgage-backed securities,
financial institutions and private investors.
RESPONSIBILITIES OF MASTER SERVICER
Under the Pooling and Servicing Agreement, the Master Servicer is required to
service and administer the Mortgage Loans solely on behalf of and in the best
interests of and for the benefit of the Certificateholders, in accordance with
the terms of the Pooling and Servicing Agreement and the Mortage Loans and to
the extent consistent with such terms, with the higher of (a) the standard of
care, skill, prudence and diligence with which the Master Servicer services and
administers mortgage loans that are held for other portfolios that are similar
to the Mortgage Loans and (b) the standard of care, skill, prudence and
diligence with which the Master Servicer services and administers mortgage loans
for its own portfolio and are similar to the Mortgage Loans, in either case,
giving due consideration to customary and usual standards of practice of prudent
institutional multifamily and commercial mortgage lenders, loan servicers and
asset managers (with respect to the Master Servicer, the "Servicing Standard").
The Master Servicer will also be required to perform other customary functions
of a servicer of comparable loans, including maintaining (or using its best
efforts to cause the Mortgagor under each Mortgage Loan to maintain) hazard,
business interruption and general liability insurance policies (and. if
applicable, rental interruption policies) as described herein and filing and
settling claims thereunder; maintaining escrow or impoundment accounts of
Mortgagors for payment of taxes, insurance and other items required to be paid
by any Mortgagor pursuant to the Mortgage Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; demanding that the Mortgagor cure
delinquencies; inspecting and managing Mortgaged Properties under certain
circumstances; and maintaining records relating to the Mortgage Loans.
RESPONSIBILITIES OF SPECIAL SERVICER
The servicing responsibility on a particular Mortgage Loan will be transferred
to the Special Servicer upon the occurrence of certain servicing transfer events
(each, a "Servicing Transfer Event"), including the following: (i) the Mortgage
Loan is more than 60 days delinquent in whole or in part in respect of any
monthly payment or is delinquent in whole or in part in respect of the related
Balloon Payment (except to the extent that with respect to any delinquency in
the Balloon Payment, the Master Servicer and the Special Servicer agree that
such Mortgage Loan is likely to be paid in full within 30 days after such
default); (ii) the related Mortgagor has entered into or consented to
bankruptcy, appointment of a receiver or conservator or a similar insolvency or
similar proceeding, or the Mortgagor has become the subject of a decree or order
for such a proceeding which shall have remained in force undischarged or
unstayed for a period of 60 days; (iii) the Master Servicer shall have received
notice of the foreclosure or proposed foreclosure of any other lien on the
Mortgaged Property;
S-65
<PAGE>
(iv) in the judgment of the Master Servicer, a payment default has occurred and
is not likely to be cured by the related Mortgagor within 60 days; (v) the
related Mortgagor admits in writing its inability to pay its debts generally as
they become due, files a petition to take advantage of any applicable insolvency
or reorganization statute, makes an assignment for the benefit of its creditors,
or voluntarily suspends payment of its obligations; (vi) any other material
default has in the Master Servicer's judgment occurred which is not reasonably
susceptible to cure within the time periods and on the conditions specified in
the related mortgage; (vii) the related Mortgaged Property becomes an REO
Property; (viii) if for any reason, the Master Servicer cannot enter into an
assumption agreement upon the transfer by the related Mortgagor of the mortgage
or (ix) an event has occurred which has materially and adversely affected the
value of the related Mortgaged Property in the reasonable judgment of the Master
Servicer. A Mortgage Loan serviced by a Special Servicer is referred to herein
as a "Specially Serviced Mortgage Loan". The Special Servicer will collect
certain payments on such Specially Serviced Mortgage Loans and make certain
remittances to, and prepare certain reports for the Master Servicer with respect
to such Mortgage Loans. The Master Servicer shall have no responsibility for the
performance by the Special Servicer of its duties under the Pooling and
Servicing Agreement provided that the Master Servicer continues to perform
certain servicing functions on such Specially Serviced Mortgage Loans and, based
on the information provided to it by the Special Servicer, prepares certain
reports for the Trustee with respect to such Specially Serviced Mortgage Loans.
To the extent that any Specially Serviced Mortgage Loan, in accordance with its
original terms or as modified in accordance with the Pooling and Servicing
Agreement, becomes a performing Mortgage Loan for a least three consecutive
months, the Special Servicer will return servicing of such Mortgage Loan to the
Master Servicer.
Midland will act as a Special Servicer with respect to the Mortgage Loans. Under
the Pooling and Servicing Agreement the Special Servicer is required to service,
administer and dispose of Specially Serviced Mortgage Loans solely in the best
interests of and for the benefit of the Certificateholders, in accordance with
the Pooling and Servicing Agreement and the Mortgage Loans and to the extent
consistent with such terms, with the higher of (a) the standard of care, skill,
prudence and diligence with which the Special Servicer services, administers and
disposes of, distressed mortgage loans and related real property that are held
for other portfolios that are similar to the Mortgage Loans, Mortgaged Property
and REO Property and (b) the standard of care, skill, prudence and diligence
with which the Special Servicer services, administers and disposes of distressed
mortgage loans and related real property for its own portfolio and are similar
to the Mortgage Loans, Mortgage Property and REO Property, giving due
consideration to customary and usual standards of practice of prudent
institutional multifamily and commercial mortgage lenders, loan servicers and
asset managers, so as to maximize the net present value of recoveries on the
Mortgage Loans. (with respect to the Special Servicer, the "Servicing
Standard").
The Special Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire, in the name of the
Trustee, title to a Mortgaged Property securing a Specially Serviced Mortgage
Loan by operation of law or otherwise, if such action is consistent with the
Servicing Standard. The Special Servicer may not acquire title to any related
Mortgaged Property or take any other action that would cause the Trustee, for
the benefit of Certificateholders, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Special Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits (which report will be paid as an expense of the Trust
Fund), that:
(i) the Mortgaged Property is in compliance with applicable environmental laws;
or if not, that taking such actions as are necessary to bring the Mortgaged
Property in compliance therewith is reasonably likely to produce a greater
recovery on a present value basis, after taking into account any risks
associated therewith, than not taking such actions; and
(ii) and there are no circumstances present at the Mortgaged Property relating
to the use, management or disposal of any hazardous substances, hazardous
materials, wastes, or petroleum-based materials for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any federal, state or local law or regulation or that, if any such
materials are present, taking such action with respect to
S-66
<PAGE>
the affected Mortgaged Property is reasonably likely to produce a greater
recovery on a present value basis, after taking into account any risks
associated therewith, than not taking such actions.
The Special Servicer, on behalf of the Trust Fund, will use its best efforts to
sell the Mortgaged Property within two years of acquisition, unless (i) the
Internal Revenue Service grants an extension of time to sell such property or
(ii) the Trustee receives an opinion of independent counsel to the effect that
the holding of the property by the Trust Fund subsequent to two years after its
acquisition will not result in the imposition of a tax on the Trust Fund or
cause the Trust Fund to fail to qualify as a REMIC under the Code at any time
that any Certificate is outstanding. Subject to the foregoing, the Special
Servicer will be required to (i) solicit offers for any Mortgaged Property so
acquired in such a manner as will be reasonably likely to realize a fair price
for such property and (ii) accept an offer received from any person that
constitutes a fair price and which is in the best interest of the
Certificateholder as determined by the Special Servicer in accordance with
Servicing Standard.
If the Trust Fund acquires title to any Mortgaged Property, the Special
Servicer, on behalf of the Trust Fund, may retain an independent contractor to
manage and operate such property. The retention of an independent contractor,
however, will not relieve the Special Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Any such
property acquired by the Trust Fund will be managed in a manner consistent with
the Servicing Standard.
The Special Servicer will be obligated to follow or cause to be followed such
normal practices and procedures as it deems necessary or advisable to realize
upon Specially Serviced Mortgage Loan. If the proceeds of any liquidation of the
property securing the Specially Serviced Mortgage Loan are less than the
outstanding principal balance of the Specially Serviced Mortgage Loan plus
interest accrued thereon at the Mortgage Interest Rate plus the aggregate amount
of expenses incurred by the Special Servicer in connection with such proceedings
and which are reimbursable under the Agreement, the Trust Fund will realize a
loss in the amount of such difference. The Special Servicer will be entitled to
be paid from the amounts on deposit in the Collection Account, prior to the
distribution to Certificateholders, amounts representing its normal servicing
compensation on the Specially Serviced Mortgage Loan.
The Special Servicer shall have full power and authority to do any and all
things in connection with servicing and administering a Mortgage Loan that it
may deem in its best judgment necessary or advisable, including, without
limitation, to execute and deliver on behalf of the Trust Fund any and all
instruments of satisfaction or cancellation or of partial release or full
release or discharge and all other comparable instruments, to reduce the related
Mortgage Interest Rate, and to defer or forgive payment of interest and/or
principal with respect to any Specially Serviced Mortgage Loan or any Mortgaged
Property. The Special Servicer may not permit a modification of any Mortgage
Loan to a date later than three years prior to the Assumed Final Distribution
Date. Notwithstanding the forgoing, the Special Servicer may not permit any such
modification with respect to a Balloon Mortgage Loan if it results in the
extension of such maturity date beyond the amortization term of such Balloon
Mortgage Loan absent the related Balloon Payment. The related Special Servicer
will prepare a report (an "Asset Strategy Report") for each Mortgage Loan which
becomes a Specially Serviced Mortgage Loan not later than sixty (60) days after
the servicing of such Mortgage Loan is transferred to the Special Servicer. The
holders of the fewest number of classes of Certificates representing the most
subordinate interests in the Trust Fund that equals at least a 2% interest (by
Class Balance) in the Trust Fund (the "Monitoring Certificateholders") will
designate one Monitoring Certificateholder pursuant to the Pooling and Servicing
Agreement (the "Directing Certificateholder"). Each Asset Strategy Report will
be delivered to the Directing Certificateholder. The Directing Certificateholder
may object to any Asset Strategy Report within 10 business days of receipt;
provided, however, that the Special Servicer shall implement the recommended
action as outlined in such Asset Strategy Report if it makes an affirmative
determination that such objection is not in the best interest of all the
Certificateholders. In connection with making such affirmative determination,
the Special Servicer, by notice to the Trustee, may request a vote by all the
Certificateholders. If the Directing Certificateholder does not disapprove an
Asset Strategy Report within 10 business days, the Special Servicer shall
implement the recommended action as outlined in such Asset Strategy Report. If
the Directing Certificateholder disapproves such Asset Strategy Report and the
Special Servicer has not made the affirmative determination described above, the
Special Servicer will revise such Asset
S-67
<PAGE>
Strategy Report as soon as practicable. The Special Servicer will revise such
Asset Strategy Report until the Directing Certificateholder fails to disapprove
such revised Asset Strategy Report as described above, provided that the Special
Servicer shall not be under any obligation to perform any actions which are not
consistent with applicable laws and the related Mortgage Loan documents. Any
Certificateholder may request and obtain a copy of any Asset Strategy Report
except to the extent prohibited by applicable law or the related Mortgage Loan
documents.
The Special Servicer may be removed without cause at any time by the holders of
a majority interest in the Certificates representing the most subordinate
interests in the Trust Fund that equal at least 5% interest in the Trust Fund.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of their
servicing activities will be the Servicing Fee. The Servicing Fee will be
payable monthly and will accrue at the applicable Servicing Fee Rate and will be
computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on such Mortgage Loan is computed.
The "Servicing Fee Rate" with respect to each Mortgage Loan equals 0.36% per
annum.
The Master Servicer will also be entitled to retain as additional servicing
compensation (i) all investment income earned on amounts on deposit in the
Mortgagor escrow accounts (to the extent consistent with applicable law and the
related Mortgage Loan documents) and the Collection Account, (ii) all amounts
collected with respect to the Mortgage Loans (that are not Specially Serviced
Mortgage Loans) in the nature of late payment charges, late fees, NSF check
charges (including with respect to Specially Serviced Mortgage Loans), extension
fees, modification fees, assumption fees, and similar fees and charges, and
(iii) any Prepayment Interest Excess (to the extent not offset against any
Prepayment Interest Shortfall in accordance with the provisions of the Pooling
and Servicing Agreement).
The principal compensation to be paid to the Special Servicer in respect of its
special servicing activities will be the Special Servicing Fee. The Special
Servicing Fee will be payable monthly only from amounts received in respect of
each Specially Serviced Mortgage Loan. The Special Servicing Fee will equal
0.45% of all amounts collected with respect to any Specially Serviced Mortgage
Loans.
The Special Servicer will also be entitled to receive with respect to any
Specially Serviced Mortgage Loan or REO Property that is sold or transferred or
otherwise liquidated, in addition to the Special Servicing Fee, a disposition
fee (the "Disposition Fee") equal to 1.00% of the net proceeds of the sale or
liquidation of any Specially Serviced Mortgage Loan or REO Property.
The Special Servicer will also be entitled to retain as additional servicing
compensation (i) all investment income earned on amounts on deposit in any REO
Account, and (ii) all amounts collected with respect to the Specially Serviced
Mortgage Loans in the nature of late payment charges, late fees, assumption
fees, modification fees, extension fees or similar items.
CONFLICTS OF INTEREST
The Master Servicer, Special Servicer or their respective affiliates own and are
in the business of acquiring assets similar to the Mortgage Loans held by the
Trust Fund. To the extent that any mortgage loans owned and/or serviced by the
Special Servicer or their respective affiliates are similar to the Mortgage
Loans held by the Trust Fund, the mortgaged properties related to such mortgage
loans may, depending upon certain circumstances such as the location of the
mortgaged property, compete with the Mortgaged Properties related to the
Mortgage Loans held by the Trust Fund for tenants, purchasers, financing and
similar resources.
S-68
<PAGE>
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing Agreement to
be dated as of June 1, 1997 (the "Pooling and Servicing Agreement"), by and
among the Depositor, the Master Servicer, the Special Servicer, the Trustee and
the Fiscal Agent. Following are summaries of certain provisions of the Pooling
and Servicing Agreement. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the provisions
of the Pooling and Servicing Agreement. The Trustee will provide to a
prospective or actual Certificateholder without charge, upon written request, a
copy (without exhibits) of the Pooling and Servicing Agreement. Requests should
be addressed to LaSalle National Bank, 135 South LaSalle Street, Chicago,
Illinois 60674, Attention: Asset-Backed Trust-Southern Pacific 1997-SPTL-C1.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the Delivery Date, the Seller will assign or cause to be assigned
the Mortgage Loans, without recourse, to the Trustee for the benefit of the
Certificateholders. Prior to the Delivery Date, the Seller will, as to each
Mortgage Loan, deliver to or retain on behalf of the Trustee among other things,
the following documents (collectively, as to such Mortgage Loan, the "Mortgage
Loan File"): (i) the original Mortgage, and any intervening assignments thereof,
in each case with evidence of recording thereon or in case such documents have
not been returned by the applicable recording office, certified copies thereof;
(ii) the original or, if accompanied by a "lost note" affidavit, a copy of the
Mortgage Note, endorsed by the Seller, without recourse, in blank or to the
order of Trustee; (iii) an assignment of the Mortgage, executed by the Seller,
in blank or to the order of the Trustee, in recordable form; (iv) originals or
certified copies of any related assignment of leases, rents and profits and any
related security agreement (if, in either case, such item is a document separate
from the Mortgage) and any intervening assignments of each such document or
instrument; (v) assignments of any related assignment of leases, rents and
profits and any related security agreement (if, in either case, such item is a
document separate from the Mortgage), executed by the Seller, in blank or to the
order of the Trustee; (vi) originals or certified copies of all assumption,
modification and substitution agreements in those instances where the terms or
provisions of the Mortgage or Mortgage Note have been modified or the Mortgage
or Mortgage Note has been assumed; and (vii) the originals or certificates of a
lender's title insurance policy issued on the date of the origination of such
Mortgage Loan or, with respect to each Mortgage Loan not covered by a lender's
title insurance policy, an attorney's opinion of title given by an attorney
licensed to practice law in the jurisdiction where the Mortgaged Property is
located; (viii) originals or copies of any guaranties related to such Mortgage
Loan; (ix) original or certified copies of any prior assignments of mortgage if
the Seller is not the seller of record; and (x) the Seller has agreed with the
Depositor to cause each assignment of the Mortgage described in clause (iv)
above to be submitted for recording in the real property records of the
jurisdiction in which the related Mortgage Property is located. Any such
assignment delivered in blank will be completed to the order of the Trustee
prior to recording.
TRUSTEE
LaSalle National Bank, a nationally chartered bank, shall serve as Trustee under
the Pooling and Servicing Agreement pursuant to which the Certificates are being
issued. Except in circumstances such as those involving defaults (when it might
request assistance from other departments in the bank), its responsibilities as
trustee are carried out by its Asset-Backed Securities Trust Services Division.
Its principal corporate trust office is located at 135 South LaSalle Street,
Suite 1740, Chicago, Illinois 60674, Attention: Asset-Backed Trust-Southern
Pacific 1997-SPTL-C1.
THE FISCAL AGENT
ABN AMRO Bank N.V., a Netherlands banking corporation and the corporate parent
of the Trustee, will act as Fiscal Agent for the Trust Fund and will be
obligated to make any P&I Advance required to be but not made by
S-69
<PAGE>
the Trustee under the Pooling and Servicing Agreement. The Fiscal Agent will be
entitled to various rights, protections and indemnities similar to those
afforded the Trustee.
The Trustee will be responsible for payment of the compensation of the Fiscal
Agent. As of December 31, 1996, the Fiscal Agent reported assets of
approximately $341,000,000,000.
COLLECTION ACCOUNTS
GENERAL. The Master Servicer will establish and maintain or cause to be
established and maintained one or more separate accounts for the collection of
payments on the related Mortgage Loans (collectively, the "Collection Account")
which shall be an account satisfying the requirements set forth in the Pooling
and Servicing Agreement as are necessary to maintain the ratings on the
Certificates from each Rating Agency. The amount on deposit in the Collection
Account may be invested by the Master Servicer in certain United States
government securities and other obligations specified in the Pooling and
Servicing Agreement ("Permitted Investments"). The Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested in certain Permitted Investments. Interest or
other income earned on funds in the Collection Account will be paid to the
Master Servicer as additional servicing compensation.
DEPOSITS. The Master Servicer will deposit or cause to be deposited in a
Collection Account within one (1) business day after receipt, the following
payments and collections received, with respect to the Mortgage Loans by the
Master Servicer:
(i) all payments on account of principal, including principal prepayments, on
the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including any
default interest collected, in each case net of any portion thereof retained
by the Master Servicer as its servicing compensation;
(iii) all proceeds of the hazard, business interruption and general liability
insurance policies to be maintained in respect of each Mortgaged Property
securing a Mortgage Loan (to the extent such proceeds are not applied to the
restoration of the property or released to the Mortgagor in accordance with
the normal servicing procedures of a Servicer, subject to the terms and
conditions of the related Mortgage Loan) and all proceeds of rental
interruption policies, if any, insuring against losses arising from the
failure of lessees under a Lease to make timely rental payments because of
certain casualty events (collectively, "Insurance Proceeds") and all other
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans in the Trust Fund, by foreclosure, condemnation or
otherwise ("Liquidation Proceeds"), together with the net proceeds on a
monthly basis with respect to any Mortgaged Properties acquired for the
benefit of Certificateholders by foreclosure or by deed in lieu of
foreclosure or otherwise;
(iv) any advances made as described under "Description of the
Certificates--Advances";
(v) any amounts representing Prepayment Premiums;
(vi) any amounts received from the Special Servicer;
but excluding any REO Proceeds and penalties or modification fees which may be
retained by the Master Servicer. REO Proceeds shall be maintained in the REO
Account by the Special Servicer prior to their Remittance (net of withdrawals
permitted to be made by the Special Servicer pursuant to the Pooling and
Servicing Agreement to the Master Servicer for deposit into the Collection
Account).
The Master Servicer is required to deposit on the business day preceding each
Distribution Date, all amounts with respect to the Mortgage Loan into the
Certificate Account (as described below) net of the withdrawals permitted to be
made by the Master Servicer.
WITHDRAWALS. The Master Servicer may, from time to time, make withdrawals from
the Collection Account for any of the following purposes:
S-70
<PAGE>
(i) to reimburse itself, the Special Servicer, the Trustee or the Fiscal Agent
for unreimbursed amounts advanced as described under "Description of the
Certificates--Advances," such reimbursement to be made out of amounts
received which were identified and applied by such Servicer as late
collections of interest on and principal of the particular Mortgage Loans
with respect to which the advances were made;
(ii) to reimburse itself or the Special Servicer for unpaid servicing fees
earned and certain unreimbursed servicing expenses incurred with respect to
Mortgage Loans and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent late collections,
Liquidation Proceeds and Insurance Proceeds collected on the particular
Mortgage Loans and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such expenses
were incurred;
(iii) to reimburse itself, the Special Servicer, the Trustee or the Fiscal Agent
for any advances described in clause (i) above and any servicing expenses
described in clause (ii) above which, in the Master Servicer's, the Special
Servicer's, the Trustee's or the Fiscal Agent's good faith judgment, will
not be recoverable from the amounts described in clauses (i) and (ii),
respectively, such reimbursement to be made from amounts collected on other
Mortgage Loans remain outstanding;
(iv) to pay itself, the Trustee or the Fiscal Agent interest accrued on the
advances described in clause (i) above and the servicing expenses described
in clause (ii) above while such remain outstanding and unreimbursed;
(v) to pay itself as additional servicing compensation, interest and investment
income earned in respect of amounts held in the Collection Amount;
(vi) to pay the Special Servicer the Special Servicing Fees and Disposition
Fees; and
(vii) to make any other withdrawals permitted by the Pooling and Servicing
Agreement.
CERTIFICATE ACCOUNT. The Trustee will establish and maintain, or cause to be
established and maintained, an Account for the collection of payments from the
Master Servicer immediately preceding each Distribution Date (the "Certificate
Account"). The Trustee will also deposit or cause to be deposited in a
Certificate Account the following amounts:
(i) Liquidation Proceeds, if any;
(ii) any other amounts required to be deposited in the Certificate Account as
provided in the Pooling and Servicing Agreement.
The time within which the Special Servicer makes the initial determination of
appropriate action evaluates the success of corrective action, develops
additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders, may vary considerably depending on the
particular Mortgage Loan the Mortgaged Property, the Mortgagor, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the jurisdiction
in which the Mortgaged Property is located. Under federal bankruptcy law, the
Special Servicer in certain cases may not be permitted to accelerate a Mortgage
Loan or to foreclose on a Mortgaged Property for a considerable period of time.
See "Certain Legal Aspect of the Mortgage Loans and the Leases" in the
Prospectus.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, based upon information provided by the Servicers, the
Trustee shall furnish to each Certificateholder, the Seller, to the Depositor
and each Rating Agency a statement setting forth certain information with
respect to the Mortgage Loans and the Certificates required pursuant to the
Pooling and Servicing Agreement and in the form of Annex B hereto. In addition,
within a reasonable period of time after each calendar year, the Trustee shall
furnish to each person who at any time during such calendar year was the holder
of a Certificate a statement containing certain information with respect to the
Certificates required pursuant to the Pooling and Servicing Agreement,
aggregated for such calendar year or portion thereof during which such person
was a Certificateholder. Unless and until Definitive Certificates are issued,
such statements or reports will be furnished
S-71
<PAGE>
only to Cede & Co., as nominee for DTC; provided, however, that the Trustee
shall furnish a copy of any such statement or report to any Beneficial Owner
which requests such copy and certifies to the Trustee that it is the Beneficial
Owner of a Certificate. The Trustee shall furnish a copy of any such statement
or report to any person who requests it for a nominal charge. Any person may
call the Trustee at (800) 246-5761 in order to inquire as to how to obtain such
statement or report. Such statement or report may be available to Beneficial
Owners upon request to DTC or their respective Participant or Indirect
Participants. Any Asset Strategy Report shall be delivered by the Trustee upon
request to any Beneficial Owner of an Offered Certificate subject to receipt by
the Trustee and the Special Servicer of evidence satisfactory to them that the
request is made by a Beneficial Owner and the receipt by the Trustee of a
certificate acknowledging certain limitations with respect to the use of such
statement or report. See "Description of the Certificates--Reports to
Certificateholders" in the Prospectus. The Directing Certificateholder shall
receive all reports prepared or received by the Master Servicer or the Special
Servicer. In addition, each other Certificateholder (or a Beneficial Owner,
subject to the third preceding sentence) may obtain all such reports at its
expense as described in the Pooling and Servicing Agreement.
VOTING RIGHTS
At all times during the term of this Agreement, 98.0% of all Voting Rights shall
be allocated among the classes of Certificates (other than the Class X
Certificates) in proportion to the respective Class Balances, 1.00% of all
Voting Rights shall be allocated to the Class X Certificates and 0.33- 1/3% of
all Voting Rights shall be allocated to each of the Class R-I, Class R-II and
Class R-III Certificates. Voting Rights allocated to a class of Certificates
shall be allocated among the holders of such class in proportion to the
Percentage Interests evidenced by their respective Certificates.
As described under "Description of the Certificates -Book-Entry Registration and
Definitive Certificates" in the Prospectus, unless and until Definitive
Certificates are issued, except as otherwise expressly provided herein,
Certificate Owners may only exercise their rights as owners of Certificates
indirectly through DTC or their respective Participant or Indirect Participant.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will terminate
following the earliest of (i) the final payment or other liquidation of the last
Mortgage Loan or REO Property subject thereto, and (ii) the purchase of all of
the assets of the Trust Fund by any holder of a Class R-I Certificate, the
holders of an aggregate Percentage Interest in excess of 50% of the Most
Subordinate Class of Certificates, the Master Servicer and (to the extent all of
the remaining Mortgage Loans are being serviced by the Special Servicer) the
Special Servicer (in that order). The "Most Subordinate Class of Certificates"
at the time of determination shall be the class of Certificates to which
Realized Losses would be allocated at such time as described under "Description
of the Certificates--Subordination" herein. Written notice of termination of the
Pooling and Servicing Agreement will be given to each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar specified in such notice
of termination.
Any such purchase of all the Mortgage Loans and other assets in the Trust Fund
is required to be made at a price equal to the greater of (1) the aggregate fair
market value of all the Mortgage Loans and REO Properties then included in the
Trust Fund, determined pursuant to the Pooling and Servicing Agreement, and (2)
the aggregate Class Balance of all the Certificates plus accrued and unpaid
interest thereon. Such purchase will effect early retirement of the then
outstanding Certificates, but the right to effect such termination is subject to
the requirement that the aggregate Stated Principal Balance of the Mortgage
Loans then in the Trust Fund is less than 5% of the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
S-72
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Offered Certificates will be used by the
Depositor to pay a portion of the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood LLP, counsel to the Depositor and the
Underwriters. This summary is based on laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Offered Certificates applicable to all categories of investors, some of which
(for example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Offered Certificates.
Three separate real estate mortgage investment conduit ("REMIC") elections will
be made with respect to the Trust Fund for federal income tax purposes. Upon the
issuance of the Certificates, Brown & Wood LLP, counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the Pooling and Servicing Agreement, for federal income tax
purposes, REMIC I, REMIC II and REMIC III (each as defined in the Pooling and
Servicing Agreement) will each qualify as a REMIC under the Code.
For federal income tax purposes, the Class R-I Certificates will be the sole
class of "residual interests" in REMIC I, the Class R-II Certificates will be
the sole class of "residual interests" in REMIC II, and the Class R-III
Certificates will be the sole class of "residual interests" in REMIC III. The
Offered Certificates (other than the Class X Certificates), each component of
the Class X Certificates and the Other Certificates will be "regular interests"
of REMIC III and will be treated as debt instruments of the REMIC III.
SEE "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--REMICS" IN THE PROSPECTUS.
The Class X Certificates will, and the other classes of Offered Certificates
may, be treated as having been issued with original issue discount for federal
income tax reporting purposes. For purposes of computing the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes it will be assumed that there are no prepayments on the Mortgage
Loans. No representation is made that the Mortgage Loans will not prepay at
another rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates" and "--Original Issue Discount" in the
Prospectus.
Net Prepayment Premiums allocated to the Certificates will be taxable to the
holders of such Certificates on the date the amount of such premiums becomes
fixed.
The Offered Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of such a class of
Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the Prospectus.
The Offered Certificates will be treated as "real estate assets" within the
meaning of Section 856(c)(6)(B) of the Code generally in the same proportion
that the assets of the REMIC underlying such Certificates would be so treated.
In addition, interest (including original issue discount) on the Offered
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that such Offered Certificates are treated as "real
S-73
<PAGE>
estate assets" under Section 856(c)(6)(B) of the Code. Moreover, the Offered
Certificates will be "obligation[s] . . . which . . . [are] principally secured
by an interest in real property" within the meaning of Section 860G(a)(3)(C) of
the Code. The Offered Certificates will not be considered to represent an
interest in "loans . . . secured by an interest in real property which is . . .
residential real property" within the meaning of Section 7701 (a)(19)(C)(v) of
the Code except in the proportion that the assets of the Trust Fund are
represented by Mortgage Loans secured by multifamily apartment buildings. See
"Certain Federal Income Tax Consequences--REMICs-- Characterization of
Investments in REMIC Certificates" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences" in
the Prospectus.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain Federal
Income Tax Consequences", potential investors should consider the state income
tax consequences of the acquisition, ownership, and disposition of the Offered
Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its legal advisors whether the purchase or
holding of any Class of Offered Certificates could give rise to a transaction
that is prohibited or is not otherwise permitted either under ERISA or Section
4975 of the Code.
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 90-23 (the "Exemption"), on May 17, 1990 to J.P. Morgan
Securities Inc., which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations",
the term "Underwriter" shall include (a) J.P. Morgan Securities Inc., (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with J.P. Morgan Securities Inc. and (c)
any member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to the Class A1,
Class A2 and Class X Certificates.
The Exemption sets forth six general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of such Classes of Offered
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of such Classes of Offered Certificates by certain employee benefit
plans subject to Section 4975 of the Code (each, a "Plan"), must be on terms
(including the price) that are at least as favorable to the Plan as they would
be in an arm's-length transaction with an unrelated party. Second, the rights
and interests evidenced by such Classes of Offered Certificates must not be
subordinate to the rights and interests evidenced by the other certificates of
the same trust. Third, such Classes of Offered Certificates at the time of
acquisition by the Plan must be rated in one of the three highest generic rating
categories by Standard & Poor's Corporation, Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc. Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group," which
consists of the Underwriters, the Depositor, the Seller, the Master Servicer,
the Special Servicer, the Sub-Servicer and any Mortgagor with respect to
Mortgage Loans constituting more than 5% of the aggregate unamortized principal
balance of the Mortgage Loans
S-74
<PAGE>
as of the date of initial issuance of such Classes of Offered Certificates.
Fifth, the sum of all payments made to and retained by the Underwriters must
represent not more than reasonable compensation for underwriting such Classes of
Offered Certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the Mortgage Loans to the Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and the Special
Servicer must represent not more than reasonable compensation for such person's
services under the Agreements and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the investing Plan must be an
accredited investor as defined in Rule 501 (a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
Because the Class A1, Class A2 and Class X Certificates are not subordinate to
any other class of Certificates, the second general condition set forth above is
satisfied with respect to such Certificates. It is a condition of the issuance
of the Class A1 and A2 Certificates that they be rated "AAA" by Fitch, DCR and
Standard & Poor's. It is a condition of the issuance of the Class X Certificates
that they be rated "AAA" by Fitch and DCR. A fiduciary of a Plan contemplating
purchasing any such Class of Certificates in the secondary market must make its
own determination that at the time of such acquisition, any such Class of
Certificates continues to satisfy the third general condition set forth above.
The Depositor expects that the fourth general condition set forth above will be
satisfied with respect to each of such Classes of Certificates. A fiduciary of a
Plan contemplating purchasing any such Class of Certificate must make its own
determination that the first, third, and fifth general conditions set forth
above will be satisfied with respect to any such Class of Certificate. Each
purchaser purchasing Class A1, Class A2 or Class X Certificates with the assets
of a Plan shall be deemed to represent and warrant that it is an "accredited
investor" as described in the sixth general condition set forth above.
The Class B, Class C and Class D Certificates do not satisfy the second
condition described above because they are subordinated to the Class A1, Class
A2 and Class X Certificates, and accordingly, may not be purchased with the
assets of a Plan. By purchasing a Class B, Class C or Class D Certificate, each
purchaser shall be deemed to represent and warrant that it is an "accredited
investor" as described in the sixth general condition set forth above.
Before purchasing any such Class of Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions.
Purchasers using insurance company general account funds to effect such purchase
should consider the availability of Prohibited Transaction Class Exemption 95-60
(60 Fed. Reg. 35925, July 12, 1995) issued by the U.S. Department of Labor.
Any Plan fiduciary considering whether to purchase any such Class of Certificate
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Class A1, Class A2, Class X and Class B Certificates will be "mortgage
related securities" within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization. The Class C, Class D and Class E Certificates will not be
"mortgage related securities" within the meaning of SMMEA.
In addition, institutions whose investment activities are subject to review by
certain regulatory authorities may be or may become subject to restrictions,
which may be retroactively imposed by such regulatory authorities, on the
S-75
<PAGE>
investment by such institutions in certain forms of mortgage-backed securities.
Furthermore, certain states have enacted legislation overriding the legal
investment provisions of SMMEA.
The Depositor makes no representations as to the proper characterization of the
Offered Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Offered Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Offered Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Offered Certificates constitute a legal investment or is subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and the Underwriters, the Depositor has agreed to sell to
the Underwriters and the Underwriters have agreed to purchase from the
Depositor, upon issuance, the Offered Certificates.
The obligations of the Underwriters under the Underwriting Agreement are subject
to certain conditions precedent and the Underwriters will be obligated to
purchase all of the Offered Certificates if any are purchased.
Distribution of the Offered Certificates will be made by the Underwriters from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the Offered
Certificates will be % of the initial aggregate principal balance thereof as
of the Cut-off Date, plus accrued interest from the Cut-off Date before
deducting expenses payable by the Depositor. In connection with the purchase and
sale of the Offered Certificates, the Underwriters may be deemed to have
received compensation from the Depositor in the form of underwriting discounts,
commissions or concessions.
The Depositor also has been advised by the Underwriters that it currently
expects to make a market in the Offered Certificates; however, it has no
obligation to do so, any market making may be discontinued at any time, and
there can be no assurance that an active public market for the Offered
Certificates will develop, or if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933.
The Seller has agreed to pay the expenses of the Depositor in connection with
the purchase of the Mortgage Loans and the issuance of the Certificates. One of
the Underwriters is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and the Underwriters
by Brown & Wood LLP, New York, New York and for the Seller by Cadwalader,
Wickersham & Taft, New York, New York.
RATING
It is a condition of the issuance of the Class A1, and Class A2 Certificates
that they be rated "AAA" by Fitch Investors Service, L.P. ("Fitch"), Duff &
Phelps Credit Rating Co. ("DCR") and Standard & Poor's Ratings Services
("Standard & Poor's"). It is a condition of the issuance of the Class X
Certificates that they be rated not lower than "AAA" by Fitch and DCR. It is a
condition of the issuance of the Class B Certificates that they be rated not
lower than "AA" by Fitch, DCR and Standard & Poor's. It is a condition of the
issuance of the Class C Certificates that they be rated not lower than "A" by
Fitch, DCR and Standard & Poor's. It is a condition of the issuance of the Class
D Certificates that they be rated not lower than "BBB" by DCR and Standard &
Poor's and "BBB-" by Fitch.
S-76
<PAGE>
A rating on mortgage pass-through certificates addresses the likelihood of the
receipt of all distributions to which Certificateholders are entitled, including
payment of all principal on the Certificates by the Rated Final Distribution
Date. The ratings on the Certificates do not represent any assessment of (i) the
likelihood or frequency of principal prepayments on the Mortgage Loans, (ii) the
degree to which such prepayments might differ from those originally anticipated
or (iii) whether and to what extent Prepayment Premiums will be received. Also,
a security rating does not represent any assessment of the yield to maturity
that investors may experience or the possibility that the holders of the Class X
Certificates might not fully recover their investment in the event of rapid
prepayments of the Mortgage Loans (including both voluntary and involuntary
prepayments). In general, the ratings thus address credit risk and not
prepayment risk. As described herein, the amounts payable with respect to the
Class X Certificates consist only of interest. If the entire pool were to prepay
in the initial month, with the result that the Class X Certificateholders
receive only a single month's interest and thus suffer a nearly complete loss of
their investment, all amounts "due" to such Holders will nevertheless have been
paid, and such result is consistent with the "AAA" rating received on the Class
X Certificates. The Class X Certificate notional amount upon which interest is
calculated is reduced by the allocation of Realized Losses, Collateral Value
Adjustments and prepayments, whether voluntary or involuntary. The rating does
not address the timing or magnitude of reductions of such notional amount, but
only the obligation to pay interest timely on the notional amount as so reduced
from time to time. Accordingly, the rating of the Class X Certificates should be
evaluated independently from similar ratings on other types of securities. See
"Risk Factors" herein.
There can be no assurance as to whether any rating agency not requested to rate
the Offered Certificates will nonetheless issue a rating and, if so, what such
rating would be. A rating assigned to the Offered Certificates by a rating
agency that has not been requested by the Depositor to do so may be lower than
the rating assigned by Fitch, DCR or Standard & Poor's pursuant to the
Depositor's request.
The rating of the Offered Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency. Each security rating
should be evaluated independently of any other security rating. A security
rating does not address the frequency or likelihood of prepayments (whether
voluntary or involuntary) of Mortgage Loans, or the corresponding effect on the
yield to investors.
The ratings do not address the fact that the Pass-Through Rates on the Offered
Certificates, to the extent determined based on the Remittance Rates, may be
affected by changes therein.
S-77
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
30/360 basis.................................................................. S-5
Adjusted Available Distribution Amount........................................ S-5
Adjusted Collateral Value..................................................... S-5
Asset Strategy Report......................................................... S-67
Available Distribution Amount................................................. S-50
Balloon Mortgage Loan......................................................... S-3
Balloon Payment............................................................... S-3
Beneficial Owner.............................................................. S-2, S-47
Cede.......................................................................... S-43
CEDEL......................................................................... S-2, S-47
CEDEL Participants............................................................ S-8
CERCLA........................................................................ S-19
Certificateholders............................................................ S-2
Certificates.................................................................. 1, S-1
Class Balance................................................................. ii
Clearance Cooperative......................................................... S-48
Code.......................................................................... S-12
Collateral Value Adjustment................................................... S-53
Collateral Value Adjustment Reduction Amount.................................. S-6, S-51
Collateral Value Adjustment Capitalization Amount............................. S-51
Cut-off Date.................................................................. 1
Cut-off Date LTV Ratio........................................................ S-38
Definitive Certificate........................................................ S-2
Depositor..................................................................... ii
Depositories.................................................................. S-47
Determination Date............................................................ S-6
Directing Certificateholder................................................... S-67
Distribution Date............................................................. ii, S-1
ii, S-2,
DTC........................................................................... S-47
DTC Participants.............................................................. S-3
DTC Participants,............................................................. S-47
DTC Registered Certificates................................................... S-2, S-47
Due Date...................................................................... S-3
ERISA......................................................................... S-13
Euroclear..................................................................... S-2, S-47
Euroclear Operator............................................................ S-48
Euroclear Participants........................................................ S-48
Exemption.....................................................................
FIRREA........................................................................ S-38
Fitch......................................................................... ii, S-13
Index.........................................................................
Indirect Participants......................................................... S-48
Interest Accrual Amount....................................................... S-5
Interest Distribution Amount.................................................. S-5
LIBOR......................................................................... 1
Loss Mortgage Loan............................................................ S-55
Master Servicer............................................................... ii
Maturity Date LTV Ratio....................................................... S-38
Maximum Mortgage Interest Rate................................................ S-10
Midland....................................................................... S-60
</TABLE>
S-78
<PAGE>
<TABLE>
<S> <C>
Minimum Mortgage Interest Rates............................................... S-10
Monitoring Certificateholders................................................. S-67
Monthly Payments.............................................................. S-3
Mortgage Interest Rate........................................................ 3
Mortgage Pool................................................................. ii
Mortgaged Properties.......................................................... S-8
Mortgaged Property............................................................ S-4
Most Subordinate Class of Certificates........................................ S-72
Net Prepayment Premium........................................................ S-52
Offered Certificates.......................................................... 1
Other Certificates............................................................ S-54
P&I Advance................................................................... S-56
Participants.................................................................. S-47
Pass-Through Rate............................................................. ii
Percentage Interest........................................................... S-50
Periodic Rate Caps............................................................ S-10
Pooling and Servicing Agreement............................................... S-4, S-69
Prepayment Interest Excess.................................................... S-52
Prepayment Interest Shortfall................................................. S-52
Prepayment Premium............................................................ S-3
Prepayment Premium Period..................................................... S-3
Primary Collection Account.................................................... S-74
Principal Distribution Amount................................................. S-7, S-52
Priority of Distributions..................................................... S-8, S-54
Property Protection Expenses.................................................. S-56
Rated Final Distribution Date................................................. S-13
Realized Loss,................................................................ S-55
Record Date................................................................... S-1
REMIC......................................................................... ii, S-12
REMIC Regulations............................................................. S-73
Remittance Period............................................................. S-6
Remittance Rate............................................................... S-5
REO Account................................................................... S-47
REO Property.................................................................. S-47
Required Appraisal Date....................................................... S-54
Restricted Group,............................................................. S-74
Seller........................................................................ ii
Servicing Transfer Event...................................................... S-65
SMMEA......................................................................... S-14
Special Servicer.............................................................. ii
Specially Serviced Mortgage Loan.............................................. S-12
Standard & Poor's............................................................. ii, S-13
Stated Principal Balance...................................................... S-55
Terms and Conditions.......................................................... S-48
Trust Fund.................................................................... ii
Underwriter................................................................... 1
Weighted Average Remittance Rate.............................................. S-4, 5
</TABLE>
S-79
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE TOP 50 MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
LOAN ZIP PROPERTY YEAR
NUMBER ADDRESS CITY STATE CODE TYPE BUILT UNITS/SF(1)
- --------- -------------------------------- --------------- ----- --------- --------------- ----- -----------
<C> <S> <C> <C> <C> <C> <C> <C>
257012341 9331-9523 Silverdale Way NW Silverdale Mixed
WA 98383 Commercial 1971 72,510
217012510 12062 Valley View Street Garden Grove CA 92645 Office 1970 56,330
256312345 334 Lakeside Avenue South Seattle WA 98122 Multifamily 1965 28
266312956 3535 West Camelback Road Phoenix AZ 85019 Multifamily 1975 164
257012560 8601-8799 South Tacoma Way Tacoma WA 98499 Retail 1973 51,719
237012458 340-350 W. Grant Line Road Tracy CA 95376 Retail 1963 30,487
237012593 601-609 Mission Street San Francisco CA 94105 Office 1907 43,085
277012762 2934-54 N. Milwaukuee Avenue Chicago IL 60618 Mixed Use 1918 57,150
216312718 1621-1735 East Harvard Place Ontario CA 91764 Multifamily 1973 88
226312399 2456-2512 West Whittier La Habra CA 90631 Multifamily 1957 60
226312513 1075 E. Chandler Boulevard Chandler AZ 85225 Multifamily 1985 46
216312523 251 W. Blacklidge Dr. Tuscon AZ 85705 Multifamily 1982 104
256312380 3730 South 148th Street Tukwila WA 98168 Multifamily 1968 68
237012893 343 East Main Street Stockton CA 95202 Office 1915 84,672
226320079 1369 North Willow Avenue Rialto CA 92376 Multifamily 1984 98
256312650 732 4th Avenue N.E. Pacific WA 98047 Multifamily 1986 56
256312766 1741 Belmont Avenue Seattle WA 98122 Multifamily 1926 52
217012422 1340 E. 7th Street Long Beach CA 90813 Retail 1964 23,240
216312394 40389 Mayberry Avenue Hemet CA 92544 Multifamily 1991 88
237012461 9998 Old Placerville Road Rancho Cordova CA 95827 Industrial 1981 111,846
217012704 7500-7528 Rosecrans Ave. Paramount CA 90723 Retail 1989 45,239
256312519 415 W. Roy St Seattle WA 98119 Multifamily 1930 26
246312895 9710 Military Parkway Dallas TX 75227 Multifamily 1974 160
217012768 747 East Green Street Pasadena CA 91101 Office 1966 22,216
237012705 840 East Main Street Grass Valley CA 95945 Retail 1975 28,260
216312413 3840 North 43rd Avenue Phoenix AZ 85031 Multifamily 1975 80
226312319 7051 Cerritos Avenue Stanton CA 90680 Multifamily 1965 40
216310910 11313 Oxnard Street North Hollywood CA 91606 Multifamily 1984 80
266312750 1538 SE 122nd Avenue Portland OR 97233 Multifamily 1964 54
237012605 5478 Arboga Road Olivehurst Mobile Home
CA 95901 Park 1960 --
256312708 1819 Bellevue Avenue Seattle WA 98122 Multifamily 1929 30
236312671 725 Ellis Street San Francisco CA 94109 Multifamily 1906 53
216312391 3244 West Avenue J6 Lancaster CA 93536 Multifamily 1986 67
247012357 8231 East Prentice Avenue Greenwood Office
Village CO 80111 1975 20,394
247012511 938 Quail Street Lakewood Mixed
CO 80215 Commercial 1978 40,229
257012416 14300 124th Avenue NE Kirkland WA 98034 Retail 1982 17,220
216311340 21217 Gault St. Canoga Park CA 91306 Multifamily 1971 48
227020081 27742 Forbes Road Laguna Niguel CA 92677 Warehouse 1972 24,000
267012495 50 SW Second Avenue Portland OR 97204 Office 1872 44,721
226312669 3605 W. Osborn Road Phoenix AZ 85019 Multifamily 1984 112
237012892 925 N. El Dorado St. and 17 E. Stockton Mixed Use
Popl CA 95202 1927 55,823
256311726 5205 & 5231 39th Avenue South Seattle WA 98118 Multifamily 1960 52
217012754 10956-10962 Los Alamitos Blvd. Los Alamitos CA 90720 Retail 1970 10,464
266312415 17440 E Burnside Street & 17441 Gresham Multifamily
SE OR 97030 1992 24
236312346 1821 Lakeville Hwy Petaluma Mobile Home
CA 94952 Park 1966 --
226312493 4540 E. Belleview Street Phoenix AZ 85008 Multifamily 1981 42
246312492 3318 N. 18th Ave & 1820 W. Phoenix Multifamily
Mulberry AZ 85016 1964 52
216312715 407 N. Avenue 50 Los Angeles CA 90042 Multifamily 1969 60
266312426 669-673,685,705,709 Young St. Woodburn OR 97071 Multifamily 1963 40
246312596 3076 W. 71st Way Westminster CO 80030 Multifamily 1962 36
<CAPTION>
MATURITY
LOAN APPRAISAL APPRAISAL DATE ORIGINAL CUT-OFF
NUMBER VALUE DATE LTV LTV(2) BALANCE BALANCE RATE
- --------- --------- ---------- --------- ----------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C> <C>
257012341
$4,800,000 5/10/1996 64.14% -- % $3,100,000 $3,078,561 9.5000%
217012510 3,070,000 8/14/1996 66.96 -- 2,065,000 2,055,538 10.4500
256312345 3,200,000 5/17/1996 63.86 -- 2,060,000 2,043,616 8.5000
266312956 3,010,000 1/3/1997 66.30 -- 2,000,000 1,995,519 7.5000
257012560 3,300,000 6/3/1996 60.30 -- 2,000,000 1,989,823 9.4500
237012458 2,400,000 7/12/1996 77.66 -- 1,875,000 1,863,857 9.2500
237012593 2,800,000 9/3/1996 63.98 -- 1,800,000 1,791,407 9.7500
277012762 2,520,000 12/4/1996 67.27 -- 1,700,000 1,695,238 8.9500
216312718 2,225,000 12/2/1996 73.88 -- 1,650,000 1,643,800 7.5000
226312399 1,890,000 1/16/1996 83.31 -- 1,584,000 1,574,586 9.2500
226312513 2,100,000 8/24/1996 74.62 -- 1,575,000 1,566,977 9.0000
216312523 2,001,000 9/9/1996 74.58 -- 1,500,000 1,492,360 9.0000
256312380 2,100,000 3/29/1996 68.55 -- 1,450,000 1,439,590 8.7500
237012893 3,050,000 11/26/1996 46.82 -- 1,432,000 1,427,918 7.7500
226320079 2,250,000 11/8/1994 61.04 -- 1,400,000 1,373,468 9.6250
256312650 2,020,000 10/22/1996 67.83 -- 1,375,000 1,370,166 8.7500
256312766 2,500,000 11/20/1996 53.80 -- 1,350,000 1,344,928 7.5000
217012422 2,050,000 7/24/1996 64.63 -- 1,332,500 1,324,952 8.4506
216312394 2,020,000 7/16/1996 65.39 -- 1,330,000 1,320,893 7.5006
237012461 2,730,000 7/18/1996 46.39 -- 1,300,000 1,266,421 9.7500
217012704 1,950,000 11/4/1996 64.80 -- 1,267,500 1,263,566 8.4500
256312519 1,800,000 9/4/1996 69.07 -- 1,250,000 1,243,310 8.7500
246312895 1,625,000 12/10/1996 74.79 -- 1,218,750 1,215,276 7.7500
217012768 1,810,000 12/10/1996 66.12 -- 1,200,000 1,196,714 7.9500
237012705 3,270,000 11/18/1996 36.57 -- 1,200,000 1,195,710 7.7500
216312413 1,900,000 6/8/1996 62.46 -- 1,195,000 1,186,817 7.5006
226312319 1,600,000 5/23/1996 70.13 -- 1,129,700 1,122,031 9.7500
216310910 2,000,000 5/26/1994 55.85 -- 1,149,200 1,117,081 9.2500
266312750 1,660,000 10/21/1996 66.02 -- 1,100,100 1,095,966 7.5000
237012605
2,095,000 10/17/1996 52.30 48.05 1,100,000 1,095,673 10.5000
256312708 1,550,000 11/27/1996 70.10 -- 1,090,000 1,086,565 8.3750
236312671 1,630,000 10/16/1996 64.75 -- 1,060,000 1,055,438 7.7500
216312391 1,475,000 7/12/1996 71.17 -- 1,057,500 1,049,818 7.7506
247012357
1,540,000 2/20/1996 67.66 -- 1,050,000 1,041,908 7.4506
247012511
1,700,000 8/14/1996 60.76 -- 1,050,000 1,032,898 9.7500
257012416 1,590,000 7/15/1996 64.60 -- 1,033,500 1,027,187 9.3750
216311340 1,594,000 6/10/1995 64.18 -- 1,036,100 1,022,980 10.0000
227020081 1,560,000 11/3/1994 64.65 -- 1,022,000 1,008,553 11.7500
267012495 3,700,000 8/21/1996 26.80 18.38 1,000,000 991,669 9.7500
226312669 2,000,000 11/15/1996 49.58 -- 995,000 991,643 8.9500
237012892
1,835,000 11/13/1996 53.25 -- 980,000 977,206 7.7500
256311726 1,350,000 10/9/1995 72.07 -- 985,000 972,943 8.8750
217012754 1,400,000 12/9/1996 67.97 -- 955,000 951,599 7.7500
266312415
1,300,000 7/12/1996 72.59 -- 950,000 943,628 8.3750
236312346
1,500,000 6/6/1996 60.98 56.12 920,000 914,639 10.5000
226312493 1,220,000 9/16/1996 74.51 -- 915,000 909,016 9.2500
246312492
1,375,000 7/25/1996 65.71 -- 910,000 903,580 8.9500
216312715 1,200,000 11/12/1996 74.72 -- 900,000 896,618 7.5000
266312426 1,400,000 7/27/1995 62.44 -- 880,000 874,097 8.3750
246312596 1,250,000 10/17/1996 68.49 -- 860,000 856,072 7.4500
</TABLE>
- ------------------------
(1) Units/square feet represents the number of multifamily, mobile home park,
and self storage properties and square feet for all other properties.
(2) The Maturity Date LTV Ratio is a fraction, calculated as a percentage, the
numerator of which is the Balloon Payment and the denominator of which is
the appraised value of the related Mortgaged Property as determined by an
appraisal thereof generally obtained in connection with the origination of
such Mortgage Loan.
A-1
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE TOP 50 MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
LOAN REMAINING REMAINING FIRST YEAR OF NOI
NUMBER P&I TERM AMORT TERM PAYMENT DATE MATURITY DATE NOI DETERMINATION DSCR
- --------- --------- --------------- --------------- ------------- ------------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
257012341 $26,032.64 349 349 8/1/1996 7/1/2026 $ 559,596 1996 1.79x
217012510 18,788.25 352 352 11/1/1996 10/1/2026 320,702 1996 1.42
256312345 15,822.88 349 349 8/1/1996 7/1/2026 222,164 1996 1.17
266312956 13,984.30 357 357 4/1/1997 3/1/2027 281,514 1997 1.68
257012560 16,718.53 353 353 12/1/1996 11/1/2026 337,700 1996 1.68
237012458 15,407.63 351 351 10/1/1996 9/1/2026 200,911 1996 1.09
237012593 15,442.62 353 353 12/1/1996 11/1/2026 393,200 1996 2.12
277012762 13,617.47 355 355 2/1/1997 1/1/2027 273,653 1996 1.67
216312718 11,537.04 355 355 2/1/1997 1/1/2027 221,308 1996 1.60
226312399 13,016.36 351 351 10/1/1996 9/1/2026 184,290 1996 1.18
226312513 12,657.75 353 353 12/1/1996 11/1/2026 236,982 1996 1.56
216312523 12,055.00 353 353 12/1/1996 11/1/2026 185,538 1996 1.28
256312380 11,392.99 350 350 9/1/1996 8/1/2026 205,005 1996 1.50
237012893 10,259.03 356 356 3/1/1997 2/1/2027 248,421 1996 2.02
226320079 11,866.27 330 330 1/1/1995 12/1/2024 299,151 1994 2.10
256312650 10,817.14 354 354 1/1/1997 12/1/2026 188,364 1996 1.45
256312766 9,439.40 355 355 2/1/1997 1/1/2027 199,973 1996 1.77
217012422 10,198.60 351 351 10/1/1996 9/1/2026 188,961 1996 1.54
216312394 9,299.56 351 351 10/1/1996 9/1/2026 199,709 1996 1.79
237012461 13,731.17 171 171 10/1/1996 9/1/2011 264,567 1996 1.61
217012704 9,701.10 355 355 2/1/1997 1/1/2027 205,488 1996 1.77
256312519 9,821.54 353 353 12/1/1996 11/1/2026 138,290 1996 1.17
246312895 8,731.28 356 356 3/1/1997 2/1/2027 138,935 1997 1.33
217012768 8,763.39 356 356 3/1/1997 2/1/2027 157,862 1996 1.50
237012705 8,596.95 355 355 2/1/1997 1/1/2027 225,635 1996 2.19
216312413 8,355.62 351 351 10/1/1996 9/1/2026 163,192 1996 1.63
226312319 9,691.78 349 349 8/1/1996 7/1/2026 159,422 1996 1.37
216310910 9,378.16 326 326 9/1/1994 8/1/2024 198,604 1994 1.76
266312750 7,692.06 355 355 2/1/1997 1/1/2027 152,342 1996 1.65
237012605 10,051.25 113 353 12/1/1996 11/1/2006 222,463 1996 1.84
256312708 8,284.79 355 355 2/1/1997 1/1/2027 129,414 1996 1.30
236312671 7,593.97 354 354 1/1/1997 12/1/2026 148,767 1996 1.63
216312391 7,576.06 350 350 9/1/1996 8/1/2026 178,751 1996 1.97
247012357 7,305.84 350 350 9/1/1996 8/1/2026 152,056 1996 1.73
247012511 8,908.39 352 352 11/1/1996 10/1/2026 173,667 1996 1.62
257012416 8,583.77 351 351 10/1/1996 9/1/2026 169,943 1996 1.65
216311340 9,073.85 338 338 9/1/1995 8/1/2025 169,628 1995 1.56
227020081 10,284.14 331 331 2/1/1995 1/1/2025 151,581 1994 1.23
267012495 8,894.70 172 292 11/1/1996 10/1/2011 370,039 1996 3.47
226312669 7,970.23 354 354 1/1/1997 12/1/2026 208,308 1996 2.18
237012892 7,020.85 356 356 3/1/1997 2/1/2027 183,352 1997 2.18
256311726 7,825.29 342 342 1/1/1996 12/1/2025 136,459 1995 1.45
217012754 6,841.74 355 355 2/1/1997 1/1/2027 160,244 1996 1.95
266312415 7,213.74 351 351 10/1/1996 9/1/2026 104,436 1996 1.21
236312346 8,404.94 109 349 8/1/1996 7/1/2006 129,104 1996 1.28
226312493 7,512.41 352 352 11/1/1996 10/1/2026 135,058 1996 1.50
246312492 7,270.87 352 352 11/1/1996 10/1/2026 118,908 1996 1.36
216312715 6,292.94 355 355 2/1/1997 1/1/2027 133,272 1996 1.76
266312426 6,682.20 351 351 10/1/1996 9/1/2026 136,652 1996 1.70
246312596 5,983.83 354 354 1/1/1997 12/1/2026 125,196 1996 1.74
<CAPTION>
MAXIMUM
MORTGAGE RATE AND
LOAN PERIODIC INTEREST MINIMUM MORTGAGE PAYMENT NEXT RATE LOAN
NUMBER INDEX MARGIN CAP RATE INTEREST RATE RESET FREQ CHANGE DATE PURPOSE(1)
- --------- ---------- ----------- ----------- ----------- ------------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
257012341 6mo LIBOR 3.7500% 2.0000% 13.7500% 7.7500% 6 8/1/1997 Refinance
217012510 6mo LIBOR 5.0000 2.0000 14.4500 8.4500 6 11/1/1997 Purchase
256312345 1yr CMT 2.9500 1.5000 13.2500 7.2500 6 8/1/1997 Refinance
266312956 6mo LIBOR 3.7500 1.5000 13.5000 7.5000 6 10/1/1997 Purchase
257012560 6mo LIBOR 3.5000 2.0000 13.4500 7.4500 6 12/1/1997 Refinance
237012458 6mo LIBOR 4.0000 1.5000 13.7500 7.7500 6 10/1/1997 Refinance
237012593 6mo LIBOR 4.0000 2.0000 13.7500 7.7500 6 12/1/1997 Refinance
277012762 6mo LIBOR 6.0000 2.0000 14.9500 8.9500 6 8/1/1997 Refinance
216312718 6mo LIBOR 4.0000 1.5000 13.5000 7.5000 6 8/1/1997 Purchase
226312399 6mo LIBOR 3.7500 1.5000 13.5000 7.7500 6 10/1/1997 Refinance
226312513 6mo LIBOR 3.7500 1.5000 13.5000 7.5000 6 12/1/1997 Purchase
216312523 6mo LIBOR 3.9500 2.0000 13.5000 7.5000 6 12/1/1997 Refinance
256312380 1yr CMT 3.5000 1.5000 13.2500 7.2500 6 9/1/1997 Purchase
237012893 6mo LIBOR 4.5000 2.0000 13.7500 7.7500 6 9/1/1997 Refinance
226320079 6mo LIBOR 4.2500 2.0000 12.9500 6.9500 6 7/1/1997 Refinance
256312650 1yr CMT 3.2500 1.5000 13.5000 7.5000 6 7/1/1997 Refinance
256312766 6mo LIBOR 3.5000 1.5000 13.5000 7.5000 6 8/1/1997 Refinance
217012422 6mo LIBOR 5.0000 2.0000 14.4500 8.4500 6 10/1/1997 Refinance
216312394 6mo LIBOR 4.1000 1.5000 13.5000 7.5000 6 10/1/1997 Purchase
237012461 6mo LIBOR 4.7500 2.0000 13.7500 7.7500 6 10/1/1997 Refinance
217012704 6mo LIBOR 5.5000 2.0000 14.5000 8.4500 6 8/1/1997 Purchase
256312519 1yr CMT 2.9500 1.5000 13.2500 7.2500 6 12/1/1997 Purchase
246312895 6mo LIBOR 4.0000 1.5000 13.7500 7.7500 6 9/1/1997 Purchase
217012768 6mo LIBOR 4.7500 2.0000 13.9500 7.9500 6 9/1/1997 Purchase
237012705 6mo LIBOR 4.0000 2.0000 13.7500 7.7500 6 8/1/1997 Refinance
216312413 6mo LIBOR 3.9500 1.5000 13.5000 7.5000 6 10/1/1997 Purchase
226312319 6mo LIBOR 4.5000 2.0000 14.2500 7.7500 6 8/1/1997 Purchase
216310910 1yr CMT 3.7500 1.5000 12.9500 6.9500 6 8/1/1997 Purchase
266312750 6mo LIBOR 3.7500 1.5000 13.5000 7.5000 6 8/1/1997 Purchase
237012605 6mo LIBOR 4.5000 2.0000 14.7500 8.7500 6 12/1/1997 Refinance
256312708 1yr CMT 3.0000 1.5000 13.2500 7.2500 6 8/1/1997 Refinance
236312671 6mo LIBOR 4.2500 1.5000 13.7500 7.7500 6 7/1/1997 Purchase
216312391 6mo LIBOR 4.5000 1.5000 13.7500 7.7500 6 9/1/1997 Purchase
247012357 6mo LIBOR 3.5000 2.0000 13.4500 7.4500 6 9/1/1997 Refinance
247012511 6mo LIBOR 4.5000 2.0000 13.7500 7.7500 6 11/1/1997 Refinance
257012416 6mo LIBOR 3.7500 2.0000 13.5000 7.5000 6 10/1/1997 Refinance
216311340 6mo LIBOR 4.2500 1.5000 14.0000 7.5000 6 9/1/1997 Refinance
227020081 BofA Prime 3.5500 2.0000 13.9500 7.9500 6 8/1/1997 Purchase
267012495 6mo LIBOR 4.5000 2.0000 13.7500 7.7500 6 11/1/1997 Refinance
226312669 6mo LIBOR 4.0000 2.0000 13.7500 8.9500 6 1/1/2000 Refinance
237012892 6mo LIBOR 4.5000 2.0000 13.7500 7.7500 6 9/1/1997 Refinance
256311726 1yr CMT 3.5000 1.5000 13.2500 7.2500 6 7/1/1997 Purchase
217012754 6mo LIBOR 3.9500 2.0000 13.7500 7.7500 6 8/1/1997 Purchase
266312415 1yr CMT 2.9500 1.5000 13.2500 7.2500 6 10/1/1997 Purchase
236312346 6mo LIBOR 4.7500 2.0000 14.5000 8.5000 6 8/1/1997 Refinance
226312493 6mo LIBOR 3.7500 2.0000 13.2500 7.2500 6 11/1/1997 Purchase
246312492 6mo LIBOR 3.7500 1.5000 13.4500 7.4500 6 11/1/1997 Refinance
216312715 6mo LIBOR 3.7500 1.5000 13.5000 7.5000 6 8/1/1997 Purchase
266312426 1yr CMT 2.9500 1.5000 13.2500 7.2500 6 10/1/1997 Refinance
246312596 6mo LIBOR 3.7500 1.5000 13.4500 7.4500 6 7/1/1997 Purchase
</TABLE>
- ------------------------
(1) Includes cash-out refinancing.
A-2
<PAGE>
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered J.P. Morgan
Commercial Mortgage Finance Corp. Commercial Mortgage Pass-Through Certificates,
Series 1997-SPTL-C1 (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same day
funds. Capitalized terms used but not defined in this Annex I have the meanings
assigned to them in the Prospectus Supplement and the Prospectus.
Secondary market trading between investors holding Global Securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC Participants
holding Certificates will be effected on a delivery-against-payment basis
through the respective Depositaries of CEDEL and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject to
U.S. withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow the
settlement practices applicable to similar issues of pass-through certificates.
Investors' securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payments in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to similar issues
of pass-through certificates in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
B-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the ease may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by the respective
Depositary to the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to the
respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to them,
CEDEL Participants or Euroclear Participants can elect not to pre-position funds
and allow that credit line to be drawn upon the finance settlement. Under this
procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases, CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the bonds to the
DTC Participant's account against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment date to and
excluding the settlement date. The payment will then be reflected in the account
of the CEDEL Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(i e., the trade fails), receipt of the cash proceeds in the CEDEL Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date. Finally, day traders that use CEDEL or Euroclear and that
purchase Global Securities from DTC Participants for delivery to CEDEL
Participants or Euroclear Participants should note that these trades would
B-2
<PAGE>
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase side of
the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so that
the value date for the purchase from the DTC Participant is at least one day
prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such Beneficial Owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial Owners of Certificates
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status). If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM 4224). A
non-U.S. Person, including a non-U.S. corporation or bank with a U.S. branch,
for which the interest income is effectively connected with its conduct of a
trade or business in the United States can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Beneficial Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Beneficial Owner or
his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Beneficial Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
B-3
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
J.P. MORGAN COMMERCIAL MORTGAGE FINANCE CORP.
DEPOSITOR
The Certificates offered hereby and by Supplements to this Prospectus (the
"Offered Certificates") will be offered from time to time in one or more series
(each, a "Series"). Each Series of Certificates will represent in the aggregate
the entire beneficial ownership interest in a trust fund (with respect to any
Series, the "Trust Fund") consisting of one or more segregated pools of various
types of multifamily or commercial mortgage loans (the "Mortgage Loans"),
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities evidencing interests in or secured by multifamily or
commercial mortgage loans (collectively, the "CMBS") or a combination of
Mortgage Loans and/or CMBS (with respect to any Series, collectively, the
"Mortgage Assets"). If so specified in the related Prospectus Supplement, some
or all of the Mortgage Loans will include assignments of the leases of the
related Mortgaged Properties (as defined herein) and/or assignments of the
rental payments due from the lessees under such leases (each type of assignment,
a "Lease Assignment"). A significant or the sole source of payments on certain
Commercial Loans (as defined herein) and, therefore, of distributions on certain
Series of Certificates, will be such rent payments. If so specified in the
related Prospectus Supplement, the Trust Fund for a Series of Certificates may
include letters of credit, insurance policies, guarantees, reserve funds or
other types of credit support, or any combination thereof (with respect to any
Series, collectively, "Credit Support"), and currency or interest rate exchange
agreements and other financial assets, or any combination thereof (with respect
to any Series, collectively, "Cash Flow Agreements"). See "Description of the
Trust Funds," "Description of the Certificates" and "Description of Credit
Support."
Each Series of Certificates will consist of one or more classes of Certificates
that may (i) provide for the accrual of interest thereon based on fixed,
variable or floating rates; (ii) be senior or subordinate to one or more other
classes of Certificates in respect of certain distributions on the Certificates;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such Series; (vi)
provide for distributions of principal sequentially, based on specified payment
schedules or other methodologies; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available funds,
in each case as described in the related Prospectus Supplement. Any such classes
may include classes of Offered Certificates. See "Description of the
Certificates."
(CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospective investors should review the information appearing under the caption
"Risk Factors" herein and such information as may be set forth under the caption
"Risk Factors" in the related Prospectus Supplement before purchasing any
Offered Certificate.
Prior to issuance there will have been no market for the Certificates of any
Series and there can be no assurance that a secondary market for any Offered
Certificates will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Certificates of
any Series unless accompanied by the Prospectus Supplement for such Series.
Offers of the Offered Certificates may be made through one or more different
methods, including offerings through underwriters as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement.
June 16, 1997
<PAGE>
(CONTINUED FROM THE PRECEDING PAGE)
Principal and interest with respect to Certificates will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Certificates of any Series will be made only from the assets of the related
Trust Fund.
The Certificates of each Series will not represent an obligation of or interest
in the Depositor, any Master Servicer, any Primary Servicer, any Special
Servicer or any of their respective affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates nor any assets in the related Trust Fund will be guaranteed or
insured by any governmental agency or instrumentality or by any other person,
unless otherwise provided in the related Prospectus Supplement. The Assets in
each Trust Fund will be held in trust for the benefit of the holders of the
related Series of Certificates pursuant to a Pooling and Servicing Agreement and
one or more Servicing Agreements, or a Trust Agreement, as more fully described
herein.
The yield on each class of Certificates of a Series will be affected by, among
other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Mortgage Assets in the related Trust Fund and
the timing of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more elections may
be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" for federal income tax purposes. See
also "Certain Federal Income Tax Consequences" herein.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Supplement................. 4
Available Information................. 4
Incorporation of Certain Information
by Reference........................ 5
Summary of Prospectus................. 6
Risk Factors.......................... 13
Description of the Trust Funds........ 21
Use of Proceeds....................... 27
Yield Considerations.................. 27
The Depositor......................... 31
Description of the Certificates....... 31
Description of the Agreements......... 39
<CAPTION>
PAGE
<S> <C>
Description of Credit Support......... 54
Certain Legal Aspects of the Mortgage
Loans and the Leases................ 57
Certain Federal Income Tax
Consequences........................ 72
State Tax Considerations.............. 96
ERISA Considerations.................. 96
Legal Investment...................... 98
Plan of Distribution.................. 99
Legal Matters......................... 100
Financial Information................. 100
Rating................................ 100
Index of Principal Definitions........ 101
</TABLE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other shall the Offered
Certificates or an offer of the Offered Certificates to any person in any state
or other jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is correct as
of any time subsequent to its date; however, if any material change occurs while
this Prospectus is required by law to be delivered, this Prospectus will be
amended or supplemented accordingly.
3
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating to the
Offered Certificates of each Series will, among other things, set forth with
respect to such Certificates, as appropriate: (i) a description of the class or
classes of Certificates, the payment provisions with respect to each such class
and the Pass-Through Rate or method of determining the Pass-Through Rate with
respect to each such class; (ii) the aggregate principal amount and distribution
dates relating to such Series and, if applicable, the initial and final
scheduled distribution dates for each class; (iii) information as to the assets
comprising the Trust Fund, including the general characteristics of the assets
included therein, including the Mortgage Assets and any Credit Support and Cash
Flow Agreements (with respect to the Certificates of any Series, the "Trust
Assets"); (iv) the circumstances, if any, under which the Trust Fund may be
subject to early termination; (v) additional information with respect to the
method of distribution of such Certificates; (vi) whether one or more REMIC
elections will be made and designation of the regular interests and residual
interests; (vii) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Certificates; (viii) information as
to any Master Servicer, any Primary Servicer, any Special Servicer (or provision
for the appointment thereof) and the Trustee, as applicable; (ix) information as
to the nature and extent of subordination with respect to any class of
Certificates that is subordinate in right of payment to any other class; and (x)
whether such Certificates will be initially issued in definitive or book-entry
form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
Series of Certificates contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W, Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661; and New York Regional Office, Seven World Trade Center, New
York, New York 10048. The Commission maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including J.P. Morgan Commercial Mortgage Finance Corp.,
that file electronically with the Commission.
To the extent described in the related Prospectus Supplement, some or all of the
Mortgage Loans may be secured by an assignment of the lessors' (i.e., the
related Mortgagors') rights in one or more leases (each, a "Lease") on the
related Mortgaged Property. Unless otherwise specified in the related Prospectus
Supplement, no Series of Certificates will represent interests in or obligations
of any lessee (each, a "Lessee") under a Lease. If indicated, however, in the
Prospectus Supplement for a given Series, a significant or the sole source of
payments on the Mortgage Loans in such Series, and, therefore, of distributions
on such Certificates, will be rental payments due from the Lessees under the
Leases. Under such circumstances, prospective investors in the related Series of
Certificates may wish to consider publicly available information, if any,
concerning the Lessees. Reference should be made to the related Prospectus
Supplement for information concerning the Lessees and whether any such Lessees
are subject to the periodic reporting requirements of the Securities Exchange
Act of 1934, as amended.
A Master Servicer or the Trustee will be required to mail to holders of
Definitive Certificates (as defined herein) of each Series periodic unaudited
reports concerning the related Trust Fund. Unless and until Definitive
Certificates are issued, or unless otherwise provided in the related Prospectus
Supplement, such reports will be sent on behalf of the related Trust Fund to
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Offered Certificates, pursuant to the applicable
Agreement. Such reports may be available to Beneficial Owners (as defined
herein) in the Certificates upon request to their respective DTC
4
<PAGE>
Participants or Indirect Participants (as defined herein). See "Description of
the Certificates--Reports to Certificateholders" and "Description of the
Agreements--Evidence as to Compliance."
The Depositor will file or cause to be filed with the Commission such periodic
reports with respect to each Trust Fund as are required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder. The Depositor intends to make a
written request to the staff of the Commission that the staff either (i) issue
an order pursuant to Section 12(h) of the Exchange Act exempting the Depositor
from certain reporting requirements under the Exchange Act with respect to each
Trust Fund or (ii) state that the staff will not recommend that the Commission
take enforcement action if the Depositor fulfills its reporting obligations as
described in its written request. If such request is granted, the Depositor will
file or cause to be filed with the Commission as to each Trust Fund the periodic
unaudited reports to holders of the Offered Certificates referenced in the
preceding paragraph; however, because of the nature of the Trust Funds, it is
unlikely that any significant additional information will be filed. In addition,
because of the limited number of Certificateholders expected for each series,
the Depositor anticipates that a significant portion of such reporting
requirements will be permanently suspended following the first fiscal year for
the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed or
caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Certificates evidencing interests therein. The
Depositor will provide or cause to be provided without charge to each person to
whom this Prospectus is delivered in connection with the offering of one or more
classes of Offered Certificates, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Certificates,
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to J.P. Morgan Commercial Mortgage Finance Corp., c/o
J.P. Morgan Securities Inc., 60 Wall Street, New York, New York 10260-0060,
Attention: Secretary. The Depositor has determined that its financial statements
are not material to the offering of any Offered Certificates.
5
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each Series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such "Series." An Index of
Principal Definitions is included at the end of this Prospectus.
<TABLE>
<S> <C>
Title of Certificates........ Mortgage Pass-Through Certificates, issuable in Series (the
"Certificates").
Depositor.................... J.P. Morgan Commercial Mortgage Finance Corp., an indirect
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated.
See "The Depositor."
Master Servicer.............. The master servicer (the "Master Servicer"), if any, for
each Series of Certificates, which may be an affiliate of
the Depositor, will be named in the related Prospectus
Supplement. See "Description of the Agreements-- Collection
and Other Servicing Procedures."
Special Servicer............. The special servicer (the "Special Servicer"), if any, for
each Series of Certificates, which may be an affiliate of
the Depositor, will be named, or the circumstances in
accordance with which a Special Servicer will be appointed
will be described, in the related Prospectus Supplement. See
"Description of the Agreements--Special Servicers."
Primary Servicer............. The primary servicer (the "Primary Servicer"), if any, for
each Series of Certificates, which may be an affiliate of
the Depositor, will be named in the related Prospectus
Supplement. See "Description of the Agreements-- Collection
and Other Servicing Procedures."
Trustee...................... The trustee (the "Trustee") for each Series of Certificates
will be named in the related Prospectus Supplement. See
"Description of the Agreements--The Trustee."
The Trust Assets............. Each Series of Certificates will represent in the aggregate
the entire beneficial ownership interest in a Trust Fund
consisting primarily of:
(a) Mortgage Assets...... The Mortgage Assets with respect to each Series of
Certificates will consist of a pool of multifamily and/or
commercial mortgage loans (collectively, the "Mortgage
Loans") and mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities evidencing
interests in or secured by Mortgage Loans (collectively, the
"CMBS") or a combination of Mortgage Loans and CMBS. The
Mortgage Loans will not be guaranteed or insured by the
Depositor or any of its affiliates or, unless otherwise
provided in the Prospectus Supplement, by any governmental
agency or instrumentality or other person. The CMBS may be
guaranteed or insured by an affiliate of the Depositor, the
Federal Home Loan Mortgage Corporation, the Federal National
Mortgage Association, the Government National Mortgage
Association, or any other person specified in the related
Prospectus Supplement. As more specifically described
herein, the Mortgage Loans will be secured by first or
junior liens on, or security interests in, properties
consisting of (i) residential properties consisting of five
or more rental or cooperatively owned dwelling units (the
"Multifamily Properties") or (ii) office buildings, retail
centers, hotels or motels, nursing homes, congregate care
facilities, industrial properties, mini-warehouse facilities
or self-storage facilities, mobile home parks, mixed use or
other types of commercial properties (the "Commercial
Properties"). The term
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
"Mortgaged Properties" shall refer to Multifamily Properties
or Commercial Properties, or both.
To the extent described in the related Prospectus
Supplement, some or all of the Mortgage Loans may also be
secured by an assignment of one or more leases (each, a
"Lease") of one or more lessees (each, a "Lessee") of all or
a portion of the related Mortgaged Properties. Unless
otherwise specified in the related Prospectus Supplement, a
significant or the sole source of payments on certain
Commercial Loans (as defined herein) will be the rental
payments due under the related Leases. In certain
circumstances, with respect to Commercial Properties, the
material terms and conditions of the related Leases may be
set forth in the related Prospectus Supplement. See
"Description of the Trust Funds--Mortgage Loans--Leases" and
"Risk Factors--Limited Assets" herein.
The Mortgaged Properties may be located in or outside the
United States. All Mortgage Loans will have original terms
to maturity of not more than 40 years. All Mortgage Loans
will have been originated by persons other than the
Depositor, and all Mortgage Assets will have been purchased,
either directly or indirectly, by the Depositor on or before
the date of initial issuance of the related Series of
Certificates. The related Prospectus Supplement will
indicate if any such persons are affiliates of the
Depositor.
Each Mortgage Loan may provide for no accrual of interest or
for accrual of interest thereon at an interest rate (a
"Mortgage Interest Rate") that is fixed over its term or
that adjusts from time to time, or is partially fixed and
partially floating or that may be converted from a floating
to a fixed Mortgage Interest Rate, or from a fixed to a
floating Mortgage Interest Rate, from time to time at the
Mortgagor's election, in each case as described in the
related Prospectus Supplement. The floating Mortgage
Interest Rates on the Mortgage Loans in a Trust Fund may be
based on one or more indices. Each Mortgage Loan may provide
for scheduled payments to maturity, payments that adjust
from time to time to accommodate changes in the Mortgage
Interest Rate or to reflect the occurrence of certain
events, and may provide for negative amortization or
accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be
fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may
contain prohibitions on prepayment or require payment of a
premium or a yield maintenance penalty in connection with a
prepayment, in each case as described in the related
Prospectus Supplement. The Mortgage Loans may provide for
payments of principal, interest or both, on due dates that
occur monthly, quarterly, semi-annually or at such other
interval as is specified in the related Prospectus
Supplement. See "Description of the Trust Funds--Assets."
(b) Collection
Accounts............... Each Trust Fund will include one or more accounts
established and maintained on behalf of the
Certificateholders into which the person or persons
designated in the related Prospectus Supplement will, to the
extent described herein and in such Prospectus Supplement,
deposit all payments and collections received or advanced
with respect to the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Mortgage Assets and other assets in the Trust Fund. Such an
account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be
held as cash or invested in certain short-term, investment
grade obligations, in each case as described in the related
Prospectus Supplement. See "Description of the Agreements--
Distribution Account and Other Collection Accounts."
(c) Credit Support....... If so provided in the related Prospectus Supplement, partial
or full protection against certain defaults and losses on
the Mortgage Assets in the related Trust Fund may be
provided to one or more classes of Certificates of the
related Series in the form of subordination of one or more
other classes of Certificates of such Series, which other
classes may include one or more classes of Offered
Certificates, or by one or more other types of credit
support, such as a letter of credit, insurance policy,
guarantee, reserve fund or another type of credit support,
or a combination thereof (any such coverage with respect to
the Certificates of any Series, "Credit Support"). The
amount and types of coverage, the identification of the
entity providing the coverage (if applicable) and related
information with respect to each type of Credit Support, if
any, will be described in the Prospectus Supplement for a
Series of Certificates. The Prospectus Supplement for any
Series of Certificates evidencing an interest in a Trust
Fund that includes CMBS will describe any similar forms of
credit support that are provided by or with respect to, or
are included as part of the trust fund evidenced by or
providing security for, such CMBS. See "Risk Factors--Credit
Support Limitations" and "Description of Credit Support."
(d) Cash Flow............ Agreements If so provided in the related Prospectus
Supplement, the Trust Fund may include guaranteed investment
contracts pursuant to which moneys held in the funds and
accounts established for the related Series will be invested
at a specified rate. The Trust Fund may also include certain
other agreements, such as interest rate exchange agreements,
interest rate cap or floor agreements, currency exchange
agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate
fluctuations on the Mortgage Assets of one or more classes
of Certificates. The principal terms of any such guaranteed
investment contract or other agreement (any such agreement,
a "Cash Flow Agreement"), including, without limitation,
provisions relating to the timing, manner and amount of
payments thereunder and provisions relating to the
termination thereof, will be described in the Prospectus
Supplement for the related Series. In addition, the related
Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement.
The Prospectus Supplement for any Series of Certificates
evidencing an interest in a Trust Fund that includes CMBS
will describe any cash flow agreements that are included as
part of the trust fund evidenced by or providing security
for such CMBS. See "Description of the Trust Funds--Cash
Flow Agreements."
Description of
Certificates............... Each Series of Certificates evidencing an interest in a
Trust Fund that includes Mortgage Loans as part of its
assets will be issued pursuant to a pooling and servicing
agreement, and each Series of Certificates evidencing an
interest in a Trust Fund that does not include Mortgage
Loans will be issued pursuant to a trust agreement. The
Mortgage Loans
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
shall be serviced pursuant to a pooling and servicing
agreement and a servicing agreement. Pooling and servicing
agreements, servicing agreements and trust agreements are
referred to herein as the "Agreements." Each Series of
Certificates will include one or more classes. Each Series
of Certificates (including any class or classes of
Certificates of such Series not offered hereby) will
represent in the aggregate the entire beneficial ownership
interest in the Trust Fund. Each class of Certificates
(other than certain Stripped Interest Certificates, as
defined below) will have a stated principal amount (a
"Certificate Balance") and (other than certain Stripped
Principal Certificates, as defined below), will accrue
interest thereon based on a fixed, variable or floating
interest rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the Certificate Balance,
if any, and the Pass-Through Rate, if any, for each class of
Certificates or, in the case of a variable or floating
Pass-Through Rate, the method for determining the
Pass-Through Rate.
Distributions on
Certificates............... Each Series of Certificates will consist of one or more
classes of Certificates that may (i) provide for the accrual
of interest thereon based on fixed, variable or floating
rates; (ii) be senior (collectively, "Senior Certificates")
or subordinate (collectively, "Subordinate Certificates") to
one or more other classes of Certificates in respect of
certain distributions on the Certificates; (iii) be entitled
to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively,
"Stripped Principal Certificates"); (iv) be entitled to
interest distributions, with disproportionately low, nominal
or no principal distributions (collectively, "Stripped
Interest Certificates"); (v) provide for distributions of
accrued interest thereon commencing only following the
occurrence of certain events, such as the retirement of one
or more other classes of Certificates of such Series
(collectively, "Accrual Certificates"); (vi) provide for
distributions of principal sequentially, based on specified
payment schedules or other methodologies; and/or (vii)
provide for distributions based on a combination of two or
more components thereof with one or more of the
characteristics described in this paragraph, including a
Stripped Principal Certificate component and a Stripped
Interest Certificate component, to the extent of available
funds, in each case as described in the related Prospectus
Supplement. Any such classes may include classes of Offered
Certificates. With respect to Certificates with two or more
components, references herein to Certificate Balance,
notional amount and Pass-Through Rate refer to the principal
balance, if any, notional amount, if any, and the
Pass-Through Rate, if any, for any such component.
The Certificates will not be guaranteed or insured by the
Depositor or any of its affiliates, by any governmental
agency or instrumentality or by any other person, unless
otherwise provided in the related Prospectus Supplement. See
"Risk Factors--Limited Assets" and "Description of the
Certificates."
(a) Interest............. Interest on each class of Offered Certificates (other than
Stripped Principal Certificates and certain classes of
Stripped Interest Certificates) of each Series will accrue
at the applicable Pass-Through Rate on the outstanding
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Certificate Balance thereof and will be distributed to
Certificateholders as provided in the related Prospectus
Supplement (each of the specified dates on which
distributions are to be made, a "Distribution Date").
Distributions with respect to interest on Stripped Interest
Certificates may be made on each Distribution Date on the
basis of a notional amount as described in the related
Prospectus Supplement. Distributions of interest with
respect to one or more classes of Certificates may be
reduced to the extent of certain delinquencies, losses,
prepayment interest shortfalls, and other contingencies
described herein and in the related Prospectus Supplement.
Stripped Principal Certificates with no stated Pass-Through
Rate will not accrue interest. See "Risk Factors--Average
Life of Certificates; Prepayments; Yields," "Yield
Considerations" and "Description of the
Certificates--Distributions of Interest on the
Certificates."
(b) Principal............ The Certificates of each Series initially will have an
aggregate Certificate Balance no greater than the
outstanding principal balance of the Mortgage Assets as of,
unless the related Prospectus Supplement provides otherwise,
the close of business on the first day of the month of
formation of the related Trust Fund (the "Cut-off Date"),
after application of scheduled payments due on or before
such date, whether or not received. The Certificate Balance
of a Certificate outstanding from time to time represents
the maximum amount that the holder thereof is then entitled
to receive in respect of principal from future cash flow on
the assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, distributions
of principal will be made on each Distribution Date to the
class or classes of Certificates entitled thereto until the
Certificate Balances of such Certificates have been reduced
to zero. Unless otherwise specified in the related
Prospectus Supplement, distributions of principal of any
class of Certificates will be made on a pro rata basis among
all of the Certificates of such class or by random
selection, as described in the related Prospectus Supplement
or otherwise established by the related Trustee. Stripped
Interest Certificates with no Certificate Balance will not
receive distributions in respect of principal. See
"Description of the Certificates--Distributions of Principal
of the Certificates."
Advances..................... Unless otherwise provided in the related Prospectus
Supplement, the Primary Servicer, the Special Servicer or
the Master Servicer (each, a "Servicer") will be obligated
as part of its servicing responsibilities to make certain
advances with respect to delinquent scheduled payments on
the Whole Loans in such Trust Fund which it deems
recoverable. Any such advances will be made under and
subject to any determinations or conditions set forth in the
related Prospectus Supplement. Neither the Depositor nor any
of its affiliates will have any responsibility to make such
advances. Advances made by a Master Servicer are
reimbursable generally from subsequent recoveries in respect
of such Whole Loans and otherwise to the extent described
herein and in the related Prospectus Supplement. If and to
the extent provided in the Prospectus Supplement for any
"Series," each Servicer will be entitled to receive interest
on its outstanding advances, payable from amounts in the
related Trust Fund. The Prospectus Supplement for any Series
of Certificates evidencing an
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
interest in a Trust Fund that includes CMBS will describe
any corresponding advancing obligation of any person in
connection with such CMBS. See "Description of the
Certificates--Advances in Respect of Delinquencies."
Termination.................. If so specified in the related Prospectus Supplement, a
Series of Certificates may be subject to optional early
termination through the repurchase of the Mortgage Assets in
the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the
reduction of the Certificate Balance of a specified class or
classes of Certificates by a specified percentage or amount
or on and after a date specified in such Prospectus
Supplement, the party specified therein will solicit bids
for the purchase of all of the Mortgage Assets of the Trust
Fund, or of a sufficient portion of such Mortgage Assets to
retire such class or classes, or purchase such Mortgage
Assets at a price set forth in the related Prospectus
Supplement. In addition, if so provided in the related
Prospectus Supplement, certain classes of Certificates may
be purchased subject to similar conditions. See "Description
of the Certificates--Termination."
Registration of
Certificates............... If so provided in the related Prospectus Supplement, one or
more classes of the Offered Certificates will initially be
represented by one or more Certificates registered in the
name of Cede & Co., as the nominee of DTC. No person
acquiring an interest in Offered Certificates so registered
will be entitled to receive a definitive certificate
representing such person's interest except in the event that
definitive certificates are issued under the limited
circumstances described herein. See "Risk
Factors--Book-Entry Registration" and "Description of the
Certificates--Book-Entry Registration and Definitive
Certificates."
Tax Status of the
Certificates............... The Certificates of each Series will constitute either (i)
"regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in a
Trust Fund treated as a real estate mortgage investment
conduit ("REMIC") under Sections 860A through 860G of the
Code, or (ii) interests ("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust under applicable
provisions of the Code.
(a) REMIC................ REMIC Regular Certificates generally will be treated as debt
obligations of the applicable REMIC for federal income tax
purposes. Certain REMIC Regular Certificates may be issued
with original issue discount for federal income tax
purposes. See "Certain Federal Income Tax Consequences" in
the Prospectus Supplement.
The Offered Certificates will be treated as (i) "loans"
within the meaning of the assets described in section
7701(a)(19)(C) of the Internal Revenue Code of 1986, as
amended (the "Code") and (ii) "real estate assets" within
the meaning of section 856(c)(5)(A) of the Code, in each
case to the extent described herein and in the related
Prospectus Supplement. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
(b) Grantor Trust........ If no election is made to treat the Trust Fund relating to a
Series of Certificates as a REMIC, the Trust Fund will be
classified as a grantor trust and not as an association
taxable as a corporation for federal income
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
tax purposes, and therefore holders of Certificates will be
treated as the owners of undivided pro rata interest in the
Mortgage Pool or pool of securities and any other assets
held by the Trust Fund.
Investors are advised to consult their tax advisors and to
review "Certain Federal Income Tax Consequences" herein and
in the related Prospectus Supplement.
ERISA Considerations......... A fiduciary of an employee benefit plan and certain other
retirement plans and arrangements, including individual
retirement accounts, annuities, Keogh plans, and collective
investment funds and separate accounts in which such plans,
accounts, annuities or arrangements are invested, that is
subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code
should carefully review with its legal advisors whether the
purchase or holding of Offered Certificates could give rise
to a transaction that is prohibited or is not otherwise
permissible either under ERISA or Section 4975 of the Code.
See "ERISA Considerations" herein and in the related
Prospectus Supplement. Certain classes of Certificates may
not be transferred unless the Trustee and the Depositor are
furnished with a letter of representations or an opinion of
counsel to the effect that such transfer will not result in
a violation of the prohibited transaction provisions of
ERISA and the Code and will not subject the Trustee, the
Depositor or the Master Servicer to additional obligations.
See "Description of the Certificates--General" and "ERISA
Considerations."
Legal Investment............. The related Prospectus Supplement will specify whether the
Offered Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984. Investors whose investment
authority is subject to legal restrictions should consult
their own legal advisors to determine whether and to what
extent the Offered Certificates constitute legal investments
for them. See "Legal Investment" herein and in the related
Prospectus Supplement.
Rating....................... At the date of issuance, as to each Series, each class of
Offered Certificates will be rated not lower than investment
grade by one or more nationally recognized statistical
rating agencies (each, a "Rating Agency"). See "Rating"
herein and in the related Prospectus Supplement.
A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal
at any time by the assigning rating organization.
</TABLE>
12
<PAGE>
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of any
Series will develop or, if it does develop, that it will provide holders with
liquidity of investment or will continue while Certificates of such Series
remain outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities evidencing interests in
single family mortgage loans. The market value of Certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sale of Certificates
by a holder in any secondary market that may develop may be at a discount from
100% of their original principal balance or from their purchase price.
Furthermore, secondary market purchasers may look only hereto, to the related
Prospectus Supplement and to the reports to Certificateholders delivered
pursuant to the related Agreement as described herein under the heading
"Description of the Certificates--Reports to Certificateholders," "--Book-Entry
Registration and Definitive Certificates" and "Description of the
Agreements--Evidence as to Compliance" for information concerning the
Certificates. Except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights and the
Certificates are subject to early retirement only under certain specified
circumstances described herein and in the related Prospectus Supplement. See
"Description of the Certificates--Termination."
LIMITED ASSETS
The Certificates will not represent an interest in or obligation of the
Depositor, any Servicer, or any of their affiliates. The only obligations with
respect to the Certificates or the Mortgage Assets will be the obligations (if
any) of the Depositor (or, if otherwise provided in the related Prospectus
Supplement, the person identified therein as the person making certain
representations and warranties with respect to the Mortgage Loans, as
applicable, the "Warrantying Party") pursuant to certain limited representations
and warranties made with respect to the Mortgage Loans. Since certain
representations and warranties with respect to the Mortgage Assets may have been
made and/or assigned in connection with transfers of such Mortgage Assets prior
to the Closing Date, the rights of the Trustee and the Certificateholders with
respect to such representations or warranties will be limited to their rights as
an assignee thereof. Unless otherwise specified in the related Prospectus
Supplement, none of the Depositor, any Servicer or any affiliate thereof will
have any obligation with respect to representations or warranties made by any
other entity. Unless otherwise specified in the related Prospectus Supplement,
neither the Certificates nor the underlying Mortgage Assets will be guaranteed
or insured by any governmental agency or instrumentality, or by the Depositor,
any Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Fund for each Series of Certificates (including the Mortgage
Assets and any form of credit enhancement) will be the sole source of payments
on the Certificates, and there will be no recourse to the Depositor or any other
entity in the event that such proceeds are insufficient or otherwise unavailable
to make all payments provided for under the Certificates.
Unless otherwise specified in the related Prospectus Supplement, a Series of
Certificates will not have any claim against or security interest in the Trust
Funds for any other Series. If the related Trust Fund is insufficient to make
payments on such Certificates, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Distribution Account, the Trust Master Collection
Account, Trust Primary Collection Account and Trust REO Account and any accounts
maintained as Credit Support, may be withdrawn under certain conditions, as
described in the related Prospectus Supplement. In the event of such withdrawal,
such amounts will not be available for future payment of principal of or
interest on the Certificates. If so provided in the Prospectus Supplement for a
Series of Certificates consisting of one or more classes of Subordinate
Certificates, on any Distribution Date in respect of which losses or shortfalls
in collections on the Trust Assets have been incurred, the amount of such losses
or shortfalls will be borne first by
13
<PAGE>
one or more classes of the Subordinate Certificates, and, thereafter, by the
remaining classes of Certificates in the priority and manner and subject to the
limitations specified in such Prospectus Supplement.
PREPAYMENTS AND EFFECT ON AVERAGE LIFE OF CERTIFICATES AND YIELDS
Prepayments (including those caused by defaults) on the Mortgage Assets in any
Trust Fund generally will result in a faster rate of principal payments on one
or more classes of the related Certificates than if payments on such Mortgage
Assets were made as scheduled. Thus, the prepayment experience on the Mortgage
Assets may affect the average life of each class of related Certificates. The
rate of principal payments on pools of mortgage loans varies between pools and
from time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors. There can be no assurance as
to the rate of prepayment on the Mortgage Assets in any Trust Fund or that the
rate of payments will conform to any model described herein or in any Prospectus
Supplement. If prevailing interest rates fall significantly below the applicable
mortgage interest rates, principal prepayments are likely to be higher than if
prevailing rates remain at or above the rates borne by the Mortgage Loans
underlying or comprising the Mortgage Assets in any Trust Fund. As a result, the
actual maturity of any class of Certificates could occur significantly earlier
than expected. A Series of Certificates may include one or more classes of
Certificates with priorities of payment and, as a result, yields on other
classes of Certificates, including classes of Offered Certificates, of such
Series may be more sensitive to prepayments on Mortgage Assets. A Series of
Certificates may include one or more classes offered at a significant premium or
discount. Yields on such classes of Certificates will be sensitive, and in some
cases extremely sensitive, to prepayments on Mortgage Assets and, where the
amount of interest payable with respect to a class is disproportionately high,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A Series of Certificates may include one or more
classes of Certificates, including classes of Offered Certificates, that provide
for distribution of principal thereof from amounts attributable to interest
accrued but not currently distributable on one or more classes of Accrual
Certificates and, as a result, yields on such Certificates will be sensitive to
(a) the provisions of such Accrual Certificates relating to the timing of
distributions of interest thereon and (b) if such Accrual Certificates accrue
interest at a variable or floating Pass-Through Rate, changes in such rate. See
"Yield Considerations" herein and, if applicable, in the related Prospectus
Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Certificates will reflect
such Rating Agency's assessment solely of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
Series of Certificates. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Certificate at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Certificates of
the related Series are entitled that is not covered by the applicable rating.
The amount, type and nature of credit support, if any, established with respect
to a Series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of such "Series." Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit support required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Mortgage Assets. No assurance can be given that values of any Mortgaged
Properties have remained or will
14
<PAGE>
remain at their levels on the respective dates of origination of the related
Mortgage Loans. Moreover, there is no assurance that appreciation of real estate
values generally will limit loss experiences on the Mortgaged Properties. If the
commercial or multifamily residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Mortgage Loans underlying or comprising the Mortgage Assets in a
particular Trust Fund and any secondary financing on the related Mortgaged
Properties become equal to or greater than the value of the Mortgaged
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced by institutional lenders. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by Mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that such
losses are not covered by the Credit Support, if any, described in the related
Prospectus Supplement, such losses will be borne, at least in part, by the
holders of one or more classes of the Certificates of the related Series. See
"Description of Credit Support" and "Rating."
RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED PROPERTIES
Mortgage loans made with respect to multifamily or commercial property may
entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with single family
property. See "Description of the Trust Funds--Assets." The ability of a
Mortgagor to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
any independent income or assets of the Mortgagor; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. In contrast, the ability of a Mortgagor to repay a
single family loan typically is dependent primarily upon the Mortgagor's
household income, rather than the capacity of the property to produce income;
thus, other than in geographical areas where employment is dependent upon a
particular employer or an industry, the Mortgagor's income tends not to reflect
directly the value of such property. A decline in the net operating income of an
income-producing property will likely affect both the performance of the related
loan as well as the liquidation value of such property, whereas a decline in the
income of a Mortgagor on a single family property will likely affect the
performance of the related loan but may not affect the liquidation value of such
property. Moreover, a decline in the value of a Mortgaged Property will increase
the risk of loss particularly with respect to any related junior Mortgage Loan.
See "--Junior Mortgage Loans."
The performance of a mortgage loan secured by an income-producing property
leased by the Mortgagor to tenants as well as the liquidation value of such
property may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both; the
risks associated with such loans may be offset by the number of tenants or, if
applicable, a diversity of types of business operated by such tenants.
It is anticipated that a substantial portion of the Mortgage Loans included in
any Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable, as to which, in the event of Mortgagor default,
recourse may be had only against the specific property and such other assets, if
any, as have been pledged to secure the related Mortgage Loan. With respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that such recourse will ensure a
recovery in respect of a defaulted Mortgage Loan greater than the liquidation
value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in individual
Mortgagors or Mortgage Loans in a particular Trust Fund or the related Mortgaged
Properties will generally be greater than for pools of single family loans both
because the Mortgage Assets in a Trust Fund will generally consist of a smaller
number of loans than would a single family pool of comparable aggregate unpaid
principal balance and because of the higher principal balance of individual
Mortgage Loans. Mortgage Assets in a Trust Fund may consist of only a single or
limited number of Mortgage Loans and/or relate to Leases to only a single Lessee
or a limited number of Lessees.
If applicable, certain legal aspects of the Mortgage Loans for a Series of
Certificates may be described in the related Prospectus Supplement. See also
"Certain Legal Aspects of the Mortgage Loans and the Leases" herein.
15
<PAGE>
RISKS ASSOCIATED WITH COMMERCIAL LOANS AND LEASES
If so described in the related Prospectus Supplement, each Mortgagor under a
Commercial Loan may be an entity created by the owner or purchaser of the
related Commercial Property solely to own or purchase such property, in part to
isolate the property from the debts and liabilities of such owner or purchaser.
Unless otherwise specified, each such Commercial Loan will represent a
nonrecourse obligation of the related Mortgagor secured by the lien of the
related Mortgage and the related Lease Assignments. Whether or not such loans
are recourse or nonrecourse obligations, it is not expected that the Mortgagors
will have any significant assets other than the Commercial Properties and the
related Leases, which will be pledged to the Trustee under the related
Agreement. Therefore, the payment of amounts due on any such Commercial Loans,
and, consequently, the payment of principal of and interest on the related
Certificates, will depend primarily or solely on rental payments by the Lessees.
Such rental payments will, in turn, depend on continued occupancy by, and/or the
creditworthiness of, such Lessees, which in either case may be adversely
affected by a general economic downturn or an adverse change in their financial
condition. Moreover, to the extent a Commercial Property was designed for the
needs of a specific type of tenant (e.g., a nursing home, hotel or motel), the
value of such property in the event of a default by the Lessee or the early
termination of such Lease may be adversely affected because of difficulty in
re-leasing the property to a suitable substitute lessee or, if re-leasing to
such a substitute is not possible, because of the cost of altering the property
for another more marketable use. As a result, without the benefit of the
Lessee's continued support of the Commercial Property, and absent significant
amortization of the Commercial Loan, if such loan is foreclosed on and the
Commercial Property liquidated following a lease default, the net proceeds might
be insufficient to cover the outstanding principal and interest owing on such
loan, thereby increasing the risk that holders of the Certificates will suffer
some loss.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the Cut-off
Date may not be fully amortizing over their terms to maturity and, thus, will
require substantial principal payments (i.e., balloon payments) at their stated
maturity. Mortgage Loans with balloon payments involve a greater degree of risk
because the ability of a Mortgagor to make a balloon payment typically will
depend upon its ability either to timely refinance the loan or to timely sell
the related Mortgaged Property. The ability of a Mortgagor to accomplish either
of these goals will be affected by a number of factors, including the level of
available mortgage interest rates at the time of sale or refinancing, the
Mortgagor's equity in the related Mortgaged Property, the financial condition
and operating history of the Mortgagor and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain Multifamily Properties and
mobile home parks), reimbursement rates (with respect to certain nursing homes),
renewability of operating licenses, prevailing general economic conditions and
the availability of credit for commercial or multifamily real properties, as the
case may be, generally.
JUNIOR MORTGAGE LOANS
To the extent specified in the related Prospectus Supplement, certain of the
Mortgage Loans may be secured primarily by junior mortgages. In the case of
liquidation, Mortgage Loans secured by junior mortgages are entitled to
satisfaction from proceeds that remain from the sale of the related Mortgaged
Property after the mortgage loans senior to such Mortgage Loans have been
satisfied. If there are not sufficient funds to satisfy such junior Mortgage
Loans and senior mortgage loans, such Mortgage Loan would suffer a loss and,
accordingly, one or more classes of Certificates would bear such loss.
Therefore, any risks of deficiencies associated with first Mortgage Loans will
be greater with respect to junior Mortgage Loans. See "--Risks Associated with
Mortgage Loans and Mortgaged Properties."
OBLIGOR DEFAULT
If so specified in the related Prospectus Supplement, in order to maximize
recoveries on defaulted Whole Loans, a Master Servicer or a Special Servicer
will be permitted (within prescribed parameters) to extend and modify Whole
Loans that are in default or as to which a payment default is imminent,
including in particular with
16
<PAGE>
respect to balloon payments. In addition, a Master Servicer or a Special
Servicer may receive a workout fee based on receipts from or proceeds of such
Whole Loans. While any such entity generally will be required to determine that
any such extension or modification is reasonably likely to produce a greater
recovery on a present value basis than liquidation, there can be no assurance
that such flexibility with respect to extensions or modifications or payment of
a workout fee will increase the present value of receipts from or proceeds of
Whole Loans that are in default or as to which a payment default is imminent.
Additionally, if so specified in the related Prospectus Supplement, certain of
the Mortgage Loans included in the Mortgage Pool for a Series may have been
subject to workouts or similar arrangements following periods of delinquency and
default.
MORTGAGOR TYPE
Mortgage Loans made to partnerships, corporations or other entities may entail
risks of loss from delinquency and foreclosure that are greater than those of
Mortgage Loans made to individuals. The Mortgagor's sophistication and form of
organization may increase the likelihood of protracted litigation or bankruptcy
in default situations.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a Series of Certificates will describe any Credit
Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan originator or other parties.
A Series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a Series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such Series has been repaid. As a result, the impact of
significant losses and shortfalls on the Trust Assets may fall primarily upon
those classes of Certificates having a lower priority of payment. Moreover, if a
form of Credit Support covers more than one Series of Certificates (each, a
"Covered Trust"), holders of Certificates evidencing an interest in a Covered
Trust will be subject to the risk that such Credit Support will be exhausted by
the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes of
Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Mortgage Assets will not
exceed such assumed levels. See "--Limited Nature of Ratings," "Description of
the Certificates" and "Description of Credit Support."
Regardless of the form of credit enhancement provided, the amount of coverage
will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any Series of Certificates, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any Series of Certificates by any applicable Rating
Agency may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related Mortgage Assets substantially in excess of the
levels contemplated by such Rating Agency at the time of its initial rating
analysis. None of the Depositor, the Master Servicer or any of their affiliates
will have any obligation to replace or supplement any credit enhancement, or to
take any other action to maintain any rating of any Series of Certificates.
17
<PAGE>
ENFORCEABILITY
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the Mortgagor sells, transfers
or conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages may also include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or non-monetary default of the
Mortgagor. Such clauses are generally enforceable subject to certain exceptions.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse the foreclosure of a mortgage or deed of trust when an acceleration
of the indebtedness would be inequitable or unjust or the circumstances would
render the acceleration unconscionable.
If so specified in the related Prospectus Supplement, the Mortgage Loans will be
secured by an assignment of leases and rents pursuant to which the Mortgagor
typically assigns its right, title and interest as landlord under the leases on
the related Mortgaged Property and the income derived therefrom to the lender as
further security for the related Mortgage Loan, while retaining a license to
collect rents for so long as there is no default. In the event the Mortgagor
defaults, the license terminates and the lender is entitled to collect rents.
Such assignments are typically not perfected as security interests prior to
actual possession of the cash flows. Some state laws may require that the lender
take possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
Mortgagor, the lender's ability to collect the rents may be adversely affected.
See "Certain Legal Aspects of the Mortgage Loans and the Leases--Leases and
Rents."
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA") a lender may be liable, as an "owner" or
"operator," for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the Mortgagor,
regardless of whether or not the environmental damage or threat was caused by a
prior owner. A lender also risks such liability on foreclosure of the mortgage.
Each Pooling and Servicing Agreement will provide that no Servicer, acting on
behalf of the Trust Fund, may acquire title to a Mortgaged Property securing a
Mortgage Loan or take over its operation unless such Servicer has previously
determined, based upon a report prepared by a person who regularly conducts
environmental audits, that: (i) the Mortgaged Property is in compliance with
applicable environmental laws or, if not, that taking such actions as are
necessary to bring the Mortgaged Property in compliance therewith is likely to
produce a greater recovery on a percent value basis, after taking into account
any risks associated therewith, than not taking such actions and (ii) there are
no circumstances present at the Mortgaged Property relating to the use,
management or disposal of any Hazardous Materials (as defined herein) for which
investigation, testing, monitoring, containment, cleanup or remediation could be
required under any federal, state or local law or regulation, or that, if any
Hazardous Materials are present for which such action would be required, taking
such actions with respect to the affected Mortgaged Property is reasonably
likely to produce a greater recovery on a percent value basis, after taking into
account any risks associated therewith, than not taking such actions. Any
additional restrictions on acquiring title to a Mortgaged Property may be set
forth in the related Prospectus Supplement. See "Certain Legal Aspects of the
Mortgage Loans and the Leases--Environmental Legislation."
DELINQUENT AND NON-PERFORMING MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past due
or are non-performing. Unless otherwise described in the related Prospectus
Supplement, the servicing of such Mortgage Loans as to which a specified number
of payments are
18
<PAGE>
delinquent will be performed by the Special Servicer; however, the same entity
may act as both Master Servicer and Special Servicer. Credit Support provided
with respect to a particular series of Certificates may not cover all losses
related to such delinquent or nonperforming Mortgage Loans, and investors should
consider the risk that the inclusion of such Mortgage Loans in the Trust Fund
may adversely affect the rate of defaults and prepayments on the Mortgage Assets
in such Trust Fund and the yield on the Certificates of such series.
RISKS ASSOCIATED WITH MORTGAGED PROPERTIES NOT LOCATED IN THE UNITED STATES
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular Series of Certificates may include Mortgage Loans secured by
Mortgaged Properties not located in the United States. The related Prospectus
Supplement will set forth certain material risks associated with such Mortgage
Loans which are different and additional to those associated with similar
properties in the United States including restrictions on enforcement of the
rights of the holder of the related Mortgage Notes, currency exchange rate
fluctuations, currency exchange controls and general trends or conditions in the
related real estate market.
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
Series.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in "Certain Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Certificates that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. Individual holders of
REMIC Residual Certificates may be limited in their ability to deduct servicing
fees and other expenses of the REMIC. In addition, REMIC Residual Certificates
are subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently finalized regulations provide that REMIC residual interests
cannot be marked to market. See "Certain Federal Income Tax Consequences--
REMICs."
CONTROL
Under certain circumstances, the consent or approval of the holders of a
specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a Series or a similar means of allocating decision-making under
the related Agreement ("Voting Rights") will be required to direct, and will be
sufficient to bind all Certificateholders of such Series to, certain actions,
including directing the Special Servicer or the Master Servicer with respect to
actions to be taken with respect to certain Mortgage Loans and REO Properties
and amending the related Agreement in certain circumstances. See "Description of
the Agreements--Events of Default," "--Rights Upon Event of Default,"
"--Amendment" and "--List of Certificateholders."
19
<PAGE>
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Certificates will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the Beneficial Owners or their nominees. Because of this, unless
and until Definitive Certificates are issued, Beneficial Owners will not be
recognized by the Trustee as "Certificateholders" (as that term is to be used in
the related Agreement). Hence, until such time, Beneficial Owners will be able
to exercise the rights of Certificateholders only indirectly through DTC and its
participating organizations. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
20
<PAGE>
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund will include (i) one or more multifamily
and/or commercial mortgage loans (the "Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by one or more Mortgage Loans or other
similar participations, certificates or securities (collectively, the "CMBS"),
or (iii) a combination of Mortgage Loans and CMBS. As used herein, "Mortgage
Loans" refers to both whole Mortgage Loans and Mortgage Loans underlying CMBS.
Mortgage Loans that secure, or interests in which are evidenced by, CMBS are
herein sometimes referred to as "Underlying Mortgage Loans." Mortgage Loans that
are not Underlying Mortgage Loans are sometimes referred to as "Whole Loans."
Any mortgage participations, pass-through certificates or other asset-backed
certificates in which an CMBS evidences an interest or which secure an CMBS are
sometimes referred to herein also as CMBS or as "Underlying CMBS." Mortgage
Loans and CMBS are sometimes referred to herein as "Mortgage Assets." No CMBS
originally issued in a private placement will be included as an asset of a Trust
Fund until the holding period provided for under Rule 144(k) promulgated under
the Securities Act of 1933, as amended, has expired or such CMBS has been
registered under the Securities Act of 1933, as amended. The Mortgage Assets
will not be guaranteed or insured by J.P. Morgan Commercial Mortgage Finance
Corp. (the "Depositor") or any of its affiliates or, unless otherwise provided
in the Prospectus Supplement, by any governmental agency or instrumentality or
by any other person. Each Mortgage Asset will be selected by the Depositor for
inclusion in a Trust Fund from among those purchased, either directly or
indirectly, from a prior holder thereof (an "Asset Seller"), which may be an
affiliate of the Depositor and, with respect to Mortgage Assets, which prior
holder may or may not be the originator of such Mortgage Loan or the issuer of
such CMBS.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Depositor. If specified in the related
Prospectus Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in another trust fund that contains
the Mortgage Assets.
MORTGAGE LOANS
GENERAL
The Mortgage Loans will be secured by liens on, or security interests in,
Mortgaged Properties consisting of (i) residential properties consisting of five
or more rental or cooperatively owned dwelling units in high-rise, mid-rise or
garden apartment buildings ("Multifamily Properties" and the related loans,
"Multifamily Loans") or (ii) office buildings, retail centers, hotels or motels,
nursing homes, congregate care facilities, industrial properties, mini-warehouse
facilities or self-storage facilities, mobile home parks, mixed use or other
types of commercial properties ("Commercial Properties" and the related loans,
"Commercial Loans") located, unless otherwise specified in the related
Prospectus Supplement, in any one of the fifty states, the District of Columbia
or the Commonwealth of Puerto Rico. To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by first mortgages or
deeds of trust or other similar security instruments creating a first lien on
Mortgaged Property. Multifamily Property may include mixed commercial and
residential structures and may include apartment buildings owned by private
cooperative housing corporations ("Cooperatives"). The Mortgaged Properties may
include leasehold interests in properties, the title to which is held by third
party lessors. The Prospectus Supplement will specify whether the term of any
such leasehold exceeds the term of the mortgage note by at least ten years. Each
Mortgage Loan will have been originated by a person (the "Originator") other
than the Depositor. The related Prospectus Supplement will indicate if any
Originator is an affiliate of the Depositor. The Mortgage Loans will be
evidenced by promissory notes (the "Mortgage Notes") secured by mortgages or
deeds of trust (the "Mortgages") creating a lien on the Mortgaged Properties.
Mortgage Loans will generally also be secured by an assignment of leases and
rents and/or operating or other cash flow guarantees relating to the Mortgage
Loan.
21
<PAGE>
LEASES
To the extent specified in the related Prospectus Supplement, the Commercial
Properties may be leased to Lessees that respectively occupy all or a portion of
such properties. Pursuant to a Lease Assignment, the related Mortgagor may
assign its rights, title and interest as lessor under each Lease and the income
derived therefrom to the related mortgagee, while retaining a license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the mortgagee or its agent is entitled to collect the
rents from the related Lessee or Lessees for application to the monetary
obligations of the Mortgagor. State law may limit or restrict the enforcement of
the Lease Assignments by a mortgagee until it takes possession of the related
Mortgaged Property and/or a receiver is appointed. See "Certain Legal Aspects of
the Mortgage Loans and the Leases--Leases and Rents." Alternatively, to the
extent specified in the related Prospectus Supplement, the Mortgagor and the
mortgagee may agree that payments under Leases are to be made directly to a
Servicer.
To the extent described in the related Prospectus Supplement, the Leases may
require the Lessees to pay rent that is sufficient in the aggregate to cover all
scheduled payments of principal and interest on the related Mortgage Loans and,
in certain cases, their pro rata share of the operating expenses, insurance
premiums and real estate taxes associated with the Mortgaged Properties. Certain
of the Leases may require the Mortgagor to bear costs associated with structural
repairs and/or the maintenance of the exterior or other portions of the
Mortgaged Property or provide for certain limits on the aggregate amount of
operating expenses, insurance premiums, taxes and other expenses that the
Lessees are required to pay. If so specified in the related Prospectus
Supplement, under certain circumstances the Lessees may be permitted to set off
their rental obligations against the obligations of the Mortgagors under the
Leases. In those cases where payments under the Leases (net of any operating
expenses payable by the Mortgagors) are insufficient to pay all of the scheduled
principal and interest on the related Mortgage Loans, the Mortgagors must rely
on other income or sources (including security deposits) generated by the
related Mortgaged Property to make payments on the related Mortgage Loan. To the
extent specified in the related Prospectus Supplement, some Commercial
Properties may be leased entirely to one Lessee. In such cases, absent the
availability of other funds, the Mortgagor must rely entirely on rent paid by
such Lessee in order for the Mortgagor to pay all of the scheduled principal and
interest on the related Commercial Loan. To the extent specified in the related
Prospectus Supplement, certain of the Leases may expire prior to the stated
maturity of the related Mortgage Loan. In such cases, upon expiration of the
Leases the Mortgagors will have to look to alternative sources of income,
including rent payment by any new Lessees or proceeds from the sale or
refinancing of the Mortgaged Property, to cover the payments of principal and
interest due on such Mortgage Loans unless the Lease is renewed. As specified in
the related Prospectus Supplement, certain of the Leases may provide that upon
the occurrence of a casualty affecting a Mortgaged Property, the Lessee will
have the right to terminate its Lease, unless the Mortgagor, as lessor, is able
to cause the Mortgaged Property to be restored within a specified period of
time. Certain Leases may provide that it is the lessor's responsibility, while
other Leases provide that it is the Lessee's responsibility, to restore the
Mortgaged Property after a casualty to its original condition. Certain Leases
may provide a right of termination to the related Lessee if a taking of a
material or specified percentage of the leased space in the Mortgaged Property
occurs, or if the ingress or egress to the leased space has been materially
impaired.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
Mortgage loans secured by commercial and multifamily properties are markedly
different from owner-occupied single family mortgage loans. The repayment of
loans secured by commercial or multifamily properties is typically dependent
upon the successful operation of such property rather than upon the liquidation
value of the real estate. Unless otherwise specified in the Prospectus
Supplement, the Mortgage Loans will be non-recourse loans, which means that,
absent special facts, the mortgagee may look only to the Net Operating Income
from the property for repayment of the mortgage debt, and not to any other of
the Mortgagor's assets, in the event of the Mortgagor's default. Lenders
typically look to the Debt Service Coverage Ratio of a loan secured by income-
producing property as an important measure of the risk of default on such a
loan. The "Debt Service Coverage Ratio" of a Mortgage Loan at any given time is
the ratio of the Net Operating Income for a twelve-month period
22
<PAGE>
to the annualized scheduled payments on the Mortgage Loan. "Net Operating
Income" means, for any given period, unless otherwise specified in the related
Prospectus Supplement, the total operating revenues derived from a Mortgaged
Property during such period, minus the total operating expenses incurred in
respect of such Mortgaged Property during such period other than (i) non-cash
items such as depreciation and amortization, (ii) capital expenditures and (iii)
debt service on loans secured by the Mortgaged Property. The Net Operating
Income of a Mortgaged Property will fluctuate over time and may be sufficient or
insufficient to cover debt service on the related Mortgage Loan at any given
time.
As the primary component of Net Operating Income, rental income (as well as
maintenance payments from tenant-stockholders of a Cooperative) is subject to
the vagaries of the applicable real estate market and/or business climate.
Properties typically leased, occupied or used on a short-term basis, such as
health care-related facilities, hotels and motels, and mini-warehouse and
self-storage facilities, tend to be affected more rapidly by changes in market
or business conditions than do properties leased, occupied or used for longer
periods, such as (typically) retail centers, office buildings and industrial
properties. Commercial Loans may be secured by owner-occupied Mortgaged
Properties or Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the Mortgagor or single tenant, as
applicable, may have a disproportionately greater effect on the Net Operating
Income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants.
Changes in the expense components of Net Operating Income due to the general
economic climate or economic conditions in a locality or industry segment, such
as increases in interest rates, real estate and personal property tax rates and
other operating expenses, including energy costs; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; and acts
of God may also affect the risk of default on the related Mortgage Loan. As may
be further described in the related Prospectus Supplement, in some cases leases
of Mortgaged Properties may provide that the Lessee rather than the Mortgagor,
is responsible for payment of some or all of these expenses; however, because
leases are subject to default risks as well when a tenant's income is
insufficient to cover its rent and operating expenses, the existence of such
"net of expense" provisions will only temper, not eliminate, the impact of
expense increases on the performance of the related Mortgage Loan. See
"--Leases" above.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities, the income
from which and the operating expenses of which are subject to state and/or
federal regulations, such as Medicare and Medicaid, and multifamily properties
and mobile home parks, which may be subject to state or local rent control
regulation and, in certain cases, restrictions on changes in use of the
property. Low- and moderate-income housing in particular may be subject to legal
limitations and regulations but, because of such regulations, may also be less
sensitive to fluctuations in market rents generally.
The Debt Service Coverage Ratio should not be relied upon as the sole measure of
the risk of default of any loan, however, since other factors may outweigh a
high Debt Service Coverage Ratio. With respect to a Balloon Mortgage Loan, for
example, the risk of default as a result of the unavailability of a source of
funds to finance the related balloon payment at maturity on terms comparable to
or better than those of such Balloon Mortgage Loans could be significant even
though the related Debt Service Coverage Ratio is high.
The liquidation value of any Mortgaged Property may be adversely affected by
risks generally incident to interests in real property, including declines in
rental or occupancy rates. Lenders generally use the Loan-to-Value Ratio of a
mortgage loan as a measure of risk of loss if a property must be liquidated upon
a default by the Mortgagor.
Appraised values of income-producing properties may be based on the market
comparison method (recent resale value of comparable properties at the date of
the appraisal), the cost replacement method (the cost of replacing the property
at such date), the income capitalization method (a projection of value based
upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each
23
<PAGE>
of these appraisal methods presents analytical challenges. It is often difficult
to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections of
income and expense and the selection of an appropriate capitalization rate.
Where more than one of these appraisal methods are used and create significantly
different results, or where a high Loan-to-Value Ratio accompanies a high Debt
Service Coverage Ratio (or vice versa), the analysis of default and loss risks
is even more difficult.
While the Depositor believes that the foregoing considerations are important
factors that generally distinguish the Multifamily and Commercial Loans from
single family mortgage loans and provide insight to the risks associated with
income-producing real estate, there is no assurance that such factors will in
fact have been considered by the Originators of the Multifamily and Commercial
Loans, or that, for any of such Mortgage Loans, they are complete or relevant.
See "Risk Factors--Risks Associated with Mortgage Loans and Mortgaged
Properties," "--Balloon Payments," "--Junior Mortgage Loans," "--Obligor
Default" and "--Mortgagor Type."
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The Value of a Mortgaged Property as of the date of initial issuance of
the related Series of Certificates may be less than the value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then applicable and specifically known
to the Depositor, with respect to the Mortgage Loans, including (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., Multifamily
Property or Commercial Property and the type of property in each such category),
(iii) the weighted average (by principal balance) of the original and remaining
terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the weighted
average (by principal balance) of the Loan-to-Value Ratios at origination of the
Mortgage Loans, (vi) the Mortgage Interest Rates or range of Mortgage Interest
Rates and the weighted average Mortgage Interest Rate borne by the Mortgage
Loans, (vii) the state or states in which most of the Mortgaged Properties are
located, (viii) information with respect to the prepayment provisions, if any,
of the Mortgage Loans, (ix) the weighted average Retained Interest, if any, (x)
with respect to Mortgage Loans with floating Mortgage Interest Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the highest, lowest
and weighted average note margin and pass-through margin, and the maximum
Mortgage Interest Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan and the frequency of such
monthly payment adjustments, (xi) the Debt Service Coverage Ratio either at
origination or as of a more recent date (or both) and (xii) information
regarding the payment characteristics of the Mortgage Loans, including without
limitation balloon payment and other amortization provisions. The related
Prospectus Supplement will also contain certain information available to the
Depositor with respect to the provisions of leases and the nature of tenants of
the Mortgaged Properties and other information referred to in a general manner
under "--Mortgage Loans--Default and Loss Considerations with Respect to the
Mortgage Loans" above. If specific information respecting the Mortgage Loans is
not known to the Depositor at the time Certificates are initially offered, more
general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a
24
<PAGE>
report which will be available to purchasers of the related Certificates at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Securities and Exchange Commission within fifteen
days after such initial issuance.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have original terms to maturity of not more than 40
years and (ii) provide for payments of principal, interest or both, on due dates
that occur monthly, quarterly or semi-annually or at such other interval as is
specified in the related Prospectus Supplement. Each Mortgage Loan may provide
for no accrual of interest or for accrual of interest thereon at an interest
rate (a "Mortgage Interest Rate") that is fixed over its term or that adjusts
from time to time, or that is partially fixed and partially floating, or that
may be converted from a floating to a fixed Mortgage Interest Rate, or from a
fixed to a floating Mortgage Interest Rate, from time to time pursuant to an
election or as otherwise specified on the related Mortgage Note, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may provide
for scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Mortgage Interest Rate or to reflect the occurrence
of certain events, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due on
its stated maturity date, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may contain prohibitions on prepayment (a
"Lock-out Period" and the date of expiration thereof, a "Lock-out Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Premium") in connection with a prepayment, in each case as described in the
related Prospectus Supplement. In the event that holders of any class or classes
of Offered Certificates will be entitled to all or a portion of any Prepayment
Premiums collected in respect of Mortgage Loans, the related Prospectus
Supplement will specify the method or methods by which any such amounts will be
allocated. A Mortgage Loan may also contain provisions entitling the mortgagee
to a share of profits realized from the operation or disposition of the
Mortgaged Property ("Equity Participations"), as described in the related
Prospectus Supplement. In the event that holders of any class or classes of
Offered Certificates will be entitled to all or a portion of an Equity
Participation, the related Prospectus Supplement will specify the terms and
provisions of the Equity Participation and the method or methods by which
distributions in respect thereof will be allocated among such Certificates.
CMBS
Any CMBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, a trust agreement, an indenture or
similar agreement (an "CMBS Agreement"). A seller (the "CMBS Issuer") and/or
servicer (the "CMBS Servicer") of the underlying Mortgage Loans (or Underlying
CMBS) will have entered into the CMBS Agreement with a trustee or a custodian
under the CMBS Agreement (the "CMBS Trustee"), if any, or with the original
purchaser of the interest in the underlying Mortgage Loans or CMBS evidenced by
the CMBS.
Distributions of any principal or interest, as applicable, will be made on CMBS
on the dates specified in the related Prospectus Supplement. The CMBS may be
issued in one or more classes with characteristics similar to the classes of
Certificates described in this Prospectus. Any principal or interest
distributions will be made on the CMBS by the CMBS Trustee or the CMBS Servicer.
The CMBS Issuer or the CMBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the CMBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms of credit
support similar to that described for the Certificates under "Description of
Credit Support" may be provided with respect to the CMBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Mortgage Loans or Underlying CMBS evidenced by or
securing such CMBS and other factors and generally
25
<PAGE>
will have been established for the CMBS on the basis of requirements of either
any Rating Agency that may have assigned a rating to the CMBS or the initial
purchasers of the CMBS.
The Prospectus Supplement for a Series of Certificates evidencing interests in
Mortgage Assets that include CMBS will specify, to the extent available, (i) the
aggregate approximate initial and outstanding principal amount or notional
amount, as applicable, and type of the CMBS to be included in the Trust Fund,
(ii) the original and remaining term to stated maturity of the CMBS, if
applicable, (iii) whether such CMBS is entitled only to interest payments, only
to principal payments or to both, (iv) the pass-through or bond rate of the CMBS
or formula for determining such rates, if any, (v) the applicable payment
provisions for the CMBS, including, but not limited to, any priorities, payment
schedules and subordination features, (vi) the CMBS Issuer, CMBS Servicer and
CMBS Trustee, as applicable, (vii) certain characteristics of the credit
support, if any, such as subordination, reserve funds, insurance policies,
letters of credit or guarantees relating to the related Underlying Mortgage
Loans, the Underlying CMBS or directly to such CMBS, (viii) the terms on which
the related Underlying Mortgage Loans or Underlying CMBS for such CMBS or the
CMBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying CMBS may be substituted for those
originally underlying the CMBS, (x) the servicing fees payable under the CMBS
Agreement, (xi) to the extent available to the Depositor, the type of
information in respect of the Underlying Mortgage Loans described under
"--Mortgage Loans--Mortgage Loan Information in Prospectus Supplements" above,
and the type of information in respect of the Underlying CMBS described in this
paragraph, (xii) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the CMBS and (xiii)
whether the CMBS is in certificated form, book-entry form or held through a
depository such as The Depository Trust Company or the Participants Trust
Company.
ACCOUNTS
Each Trust Fund will include one or more accounts established and maintained on
behalf of the Certificateholders into which the person or persons designated in
the related Prospectus Supplement will, to the extent described herein and in
such Prospectus Supplement deposit all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust Fund.
Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the
Agreement--Distribution Account and Other Collection Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full protection
against certain defaults and losses on the Trust Assets in the related Trust
Fund may be provided to one or more classes of Certificates in the related
Series in the form of subordination of one or more other classes of Certificates
in such Series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Certificates of any Series, "Credit Support"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a Series of Certificates. See "Risk
Factors--Credit Support Limitations" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related Series will be invested at a specified
rate. The Trust Fund may also include certain other agreements, such as interest
rate exchange agreements, interest rate cap or floor agreements, currency
exchange agreements or similar agreements provided to reduce the effects of
interest rate or currency exchange rate fluctuations on the Mortgage Assets or
on one or more classes of Certificates. The principal terms of any such
guaranteed investment contract or other agreement
26
<PAGE>
(any such agreement, a "Cash Flow Agreement"), including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder and
provisions relating to the termination thereof, will be described in the
Prospectus Supplement for the related Series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor to the purchase of Trust Assets and to pay for certain
expenses incurred in connection with such purchase of Trust Assets and sale of
Certificates. The Depositor expects to sell the Certificates from time to time,
but the timing and amount of offerings of Certificates will depend on a number
of factors, including the volume of Mortgage Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate, the receipt and
timing of receipt of distributions on the Certificate and the weighted average
life of the Mortgage Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE
Certificates of any class within a Series may have fixed, variable or floating
Pass-Through Rates, which may or may not be based upon the interest rates borne
by the Mortgage Assets in the related Trust Fund. The Prospectus Supplement with
respect to any Series of Certificates will specify the Pass-Through Rate for
each class of such Certificates or, in the case of a variable or floating
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Asset on the Pass-Through Rate of one
or more classes of Certificates; and whether the distributions of interest on
the Certificates of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
The effective yield to maturity to each holder of Certificates entitled to
payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate because, while interest
may accrue on each Mortgage Asset during a certain period, the distribution of
such interest will be made on a day which may be several days, weeks or months
following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Certificates (or addition to the Certificate
Balance of a class of Accrual Certificates) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "--The Pass-Through Rate," if the Interest Accrual
Period ends on a date other than a Distribution Date for the related Series, the
yield realized by the holders of such Certificates may be lower than the yield
that would result if the Interest Accrual Period ended on such Distribution
Date. In addition, if so specified in the related Prospectus Supplement,
interest accrued for an Interest Accrual Period for one or more classes of
Certificates may be calculated on the assumption that distributions of principal
(and additions to the Certificate Balance of Accrual Certificates) and
allocations of losses on the Mortgage Assets may be made on the first day of the
Interest Accrual Period for a Distribution Date and not on such Distribution
Date. Such method would produce a lower effective yield than if interest were
calculated on the basis of the actual principal amount outstanding during an
Interest Accrual Period. The Interest Accrual Period for any class of Offered
Certificates will be described in the related Prospectus Supplement.
27
<PAGE>
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate of
principal payments on the Mortgage Assets (including principal prepayments on
Mortgage Loans resulting from voluntary prepayments by the Mortgagors, insurance
proceeds, condemnations and involuntary liquidations). Such payments may be
directly dependent upon the payments on Leases underlying such Mortgage Loans.
The rate at which principal prepayments occur on the Mortgage Loans will be
affected by a variety of factors, including, without limitation, the terms of
the Mortgage Loans, the level of prevailing interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors. In general, however, if prevailing interest rates fall significantly
below the Mortgage Interest Rates on the Mortgage Loans comprising or underlying
the Mortgage Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Mortgage Assets may consist of Mortgage Loans with
different Mortgage Interest Rates and the stated pass-through or pay-through
interest rate of certain CMBS may be a number of percentage points higher or
lower than certain of the underlying Mortgage Loans. The rate of principal
payments on some or all of the classes of Certificates of a Series will
correspond to the rate of principal payments on the Mortgage Assets in the
related Trust Fund and is likely to be affected by the existence of Lock-out
Periods and Prepayment Premium provisions of the Mortgage Loans underlying or
comprising such Mortgage Assets, and by the extent to which the servicer of any
such Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a Prepayment Premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Certificate offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. In either
case, if so provided in the Prospectus Supplement for a Series of Certificates,
the effect on yield on one or more classes of the Certificates of such Series of
prepayments of the Mortgage Assets in the related Trust Fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to such classes.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid for the number
of days in the month actually elapsed up to the date of the prepayment. Unless
otherwise specified in the related Prospectus Supplement, the effect of
prepayments in full will be to reduce the amount of interest paid in the
following month to holders of Certificates entitled to payments of interest
because interest on the principal amount of any Mortgage Loan so prepaid will be
paid only to the date of prepayment rather than for a full month. Unless
otherwise specified in the related Prospectus Supplement, a partial prepayment
of principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan as of the Due Date in the month in which such partial
prepayment is received. As a result, unless otherwise specified in the related
Prospectus Supplement, the effect of a partial prepayment on a Mortgage Loan
will be to reduce the amount of interest passed through to holders of
Certificates in the month following the receipt of such partial prepayment by an
amount equal to one month's interest at the applicable Pass-Through Rate on the
prepaid amount.
The timing of changes in the rate of principal payments on the Mortgage Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Certificate, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
28
<PAGE>
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related Series of
Certificates may affect the ultimate maturity and the weighted average life of
each class of such "Series." Prepayments on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Certificates of the related "Series."
If so provided in the Prospectus Supplement for a Series of Certificates, one or
more classes of Certificates may have a final scheduled Distribution Date, which
is the date on or prior to which the Certificate Balance thereof is scheduled to
be reduced to zero, calculated on the basis of the assumptions applicable to
such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of a class of
Certificates of a Series will be influenced by the rate at which principal on
the Mortgage Loans comprising or underlying the Mortgage Assets is paid to such
class, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
In addition, the weighted average life of the Certificates may be affected by
the varying maturities of the Mortgage Loans comprising or underlying the CMBS.
If any Mortgage Loans comprising or underlying the Mortgage Assets in a
particular Trust Fund have actual terms to maturity of less than those assumed
in calculating final scheduled Distribution Dates for the classes of
Certificates of the related Series, one or more classes of such Certificates may
be fully paid prior to their respective final scheduled Distribution Dates, even
in the absence of prepayments. Accordingly, the prepayment experience of the
Mortgage Assets will, to some extent, be a function of the mix of Mortgage
Interest Rates and maturities of the Mortgage Loans comprising or underlying
such Mortgage Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model. CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
such loans.
Neither CPR nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Mortgage Assets. Moreover, CPR was developed
based upon historical prepayment experience for single family loans. Thus, it is
likely that prepayment of any Mortgage Loans comprising or underlying the
Mortgage Assets for any Series will not conform to any particular level of CPR.
The Depositor is not aware of any meaningful publicly available prepayment
statistics for multifamily or commercial mortgage loans.
The Prospectus Supplement with respect to each Series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Certificates of such Series and the percentage of the
initial Certificate Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Mortgage Assets are made at rates
corresponding to various percentages of CPR or at such other rates specified in
such Prospectus Supplement. Such tables and assumptions are intended to
illustrate the sensitivity of weighted average life of the Certificates to
various prepayment rates and will not be intended to predict or to provide
information that will enable investors to predict the actual weighted average
life of the Certificates. It is unlikely that prepayment of any Mortgage Loans
comprising or underlying the Mortgage Assets for any Series will conform to any
particular level of CPR or any other rate specified in the related Prospectus
Supplement.
29
<PAGE>
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE ASSET
A number of Mortgage Loans may have balloon payments due at maturity, and
because the ability of a Mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Mortgage Loans having
balloon payments may default at maturity, or that the servicer may extend the
maturity of such a Mortgage Loan in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the Mortgagor or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the servicer
may, to the extent and under the circumstances set forth in the related
Prospectus Supplement be permitted to modify Mortgage Loans that are in default
or as to which a payment default is imminent. Any defaulted balloon payment or
modification that extends the maturity of a Mortgage Loan will tend to extend
the weighted average life of the Certificates, thereby lengthening the period of
time elapsed from the date of issuance of a Certificate until it is retired.
FORECLOSURES AND PAYMENT PLANS
The number of foreclosures and the principal amount of the Mortgage Loans
comprising or underlying the Mortgage Assets that are foreclosed in relation to
the number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average life of the Mortgage Loans
comprising or underlying the Mortgage Assets and that of the related Series of
Certificates. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular Mortgage Loans and thus the
weighted average life of the Certificates.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of or the
creation of encumbrances upon underlying Mortgaged Property is another factor
affecting prepayment rates that may not be reflected in the prepayment standards
or models used in the relevant Prospectus Supplement. A number of the Mortgage
Loans comprising or underlying the Mortgage Assets may include "due-on-sale"
clauses or "due-on-encumbrance" clauses that allow the holder of the Mortgage
Loans to demand payment in full of the remaining principal balance of the
Mortgage Loans upon sale or certain other transfers of or the creation of
encumbrances upon the related Mortgaged Property. With respect to any Whole
Loans, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer, on behalf of the Trust Fund, will be required to exercise (or
waive its right to exercise) any such right that the Trustee may have as
mortgagee to accelerate payment of the Whole Loan in a manner consistent with
the Servicing Standard. See "Certain Legal Aspects of the Mortgage Loans and the
Leases--Due-on-Sale and Due-on-Encumbrance" and "Description of the
Agreements--Due-on-Sale and Due-on-Encumbrance Provisions."
SINGLE MORTGAGE LOAN OR SINGLE MORTGAGOR
The Mortgage Assets in a particular Trust Fund may consist of a single Mortgage
Loan or obligations of a single Mortgagor or related Mortgagors as specified in
the related Prospectus Supplement. Assumptions used with respect to the
prepayment standards or models based upon analysis of the behavior of mortgage
loans in a larger group will not necessarily be relevant in determining
prepayment experience on a single Mortgage Loan or with respect to a single
Mortgagor.
30
<PAGE>
THE DEPOSITOR
J.P Morgan Commercial Mortgage Finance Corp., the Depositor, is an indirect
wholly-owned subsidiary of J.P Morgan & Co. Incorporated and was incorporated in
the State of Delaware on September 19, 1994. The principal executive offices of
the Depositor are located at 60 Wall Street, New York, New York 10260-0060. Its
telephone number is (212) 648-3636.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each Series (including any class of Certificates not offered
hereby) will represent the entire beneficial ownership interest in the Trust
Fund created pursuant to the related Agreement. Each Series of Certificates will
consist of one or more classes of Certificates that may (i) provide for the
accrual of interest thereon based on fixed, variable or floating rates; (ii) be
senior (collectively, "Senior Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more other classes of Certificates in
respect of certain distributions on the Certificates; (iii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions (collectively, "Stripped Principal Certificates"); (iv) be
entitled to interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Stripped Interest Certificates"); (v)
provide for distributions of accrued interest thereon commencing only following
the occurrence of certain events, such as the retirement of one or more other
classes of Certificates of such Series (collectively, "Accrual Certificates");
(vi) provide for payments of principal sequentially, based on specified payment
schedules, from only a portion of the Trust Assets in such Trust Fund or based
on specified calculations, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Certificate component and a Stripped Interest Certificate component.
Any such classes may include classes of Offered Certificates.
Each class of Offered Certificates of a Series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Certificates may be
registered and such Certificates may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Certificates of a Series may be issued in definitive form
("Definitive Certificates") or in book-entry form ("Book-Entry Certificates"),
as provided in the related Prospectus Supplement. See "Risk Factors--Book-Entry
Registration" and "Description of the Certificates--Book-Entry Registration and
Definitive Certificates." Definitive Certificates will be exchangeable for other
Certificates of the same class and Series of a like aggregate Certificate
Balance, notional amount or percentage interest but of different authorized
denominations. See "Risk Factors Limited Liquidity" and "Limited Assets."
DISTRIBUTIONS
Distributions on the Certificates of each Series will be made by or on behalf of
the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such Series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Certificates are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the
31
<PAGE>
outstanding Certificates in such class or by random selection, as described in
the related Prospectus Supplement or otherwise established by the related
Trustee. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has so notified the
Trustee or other person required to make such payments no later than the date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, holds Certificates in the requisite amount
specified therein), or by check mailed to the address of the person entitled
thereto as it appears on the Certificate Register; provided, however, that the
final distribution in retirement of the Certificates (whether Definitive
Certificates or Book-Entry Certificates) will be made only upon presentation and
surrender of the Certificates at the location specified in the notice to
Certificateholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Certificates of each Series on each Distribution Date
will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Distribution Account
as of the corresponding Determination Date, including Servicer advances, net
of any scheduled payments due and payable after such Distribution Date;
(ii) interest or investment income on amounts on deposit in the Distribution
Account, including any net amounts paid under any Cash Flow Agreements; and
(iii) to the extent not on deposit in the related Distribution Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be distributed
among the related Certificates (including any Certificates not offered hereby)
on each Distribution Date, and accordingly will be released from the Trust Fund
and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which will be a fixed, variable or floating rate at which interest will
accrue on such class or a component thereof (the "Pass-Through Rate"). The
related Prospectus Supplement will specify the Pass-Through Rate for each class
or component or, in the case of a variable or floating Pass-Through Rate, the
method for determining the Pass-Through Rate. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class will be
made on each Distribution Date (other than any class of Accrual Certificates,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Certificates that are
not entitled to any distributions of interest) based on the Accrued Certificate
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof on
each Distribution Date. With respect to each class of Certificates and each
Distribution Date (other than certain classes of Stripped Interest
Certificates), "Accrued Certificate Interest" will be equal to interest accrued
for a specified period on the outstanding Certificate Balance thereof
immediately prior to the Distribution Date, at the applicable Pass-Through Rate,
reduced as
32
<PAGE>
described below. Unless otherwise provided in the Prospectus Supplement, Accrued
Certificate Interest on Stripped Interest Certificates will be equal to interest
accrued for a specified period on the outstanding notional amount thereof
immediately prior to each Distribution Date, at the applicable Pass-Through
Rate, reduced as described below. The method of determining the notional amount
for any class of Stripped Interest Certificates will be described in the related
Prospectus Supplement. Reference to notional amount is solely for convenience in
certain calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Certificate Interest on a Series of Certificates will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full accrual period resulting from prepayments
prior to the due date in such accrual period on the Mortgage Loans comprising or
underlying the Mortgage Assets in the Trust Fund for such Series. The particular
manner in which such shortfalls are to be allocated among some or all of the
classes of Certificates of that Series will be specified in the related
Prospectus Supplement.
The related Prospectus Supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on (or,
in the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) a class of Offered Certificates may be reduced as a
result of any other contingencies, including delinquencies, losses and deferred
interest on or in respect of the Mortgage Loans comprising or underlying the
Mortgage Assets in the related Trust Fund. Unless otherwise provided in the
related Prospectus Supplement, any reduction in the amount of Accrued
Certificate Interest otherwise distributable on a class of Certificates by
reason of the allocation to such class of a portion of any deferred interest on
the Mortgage Loans comprising or underlying the Mortgage Assets in the related
Trust Fund will result in a corresponding increase in the Certificate Balance of
such class. See "Risk Factors--Average Life of Certificates; Prepayments;
Yields" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each Series, other than certain classes of Stripped Interest
Certificates, will have a "Certificate Balance" which, at any time, will equal
the then maximum amount that the holder will be entitled to receive in respect
of principal out of the future cash flow on the Mortgage Assets and other assets
included in the related Trust Fund. The outstanding Certificate Balance of a
Certificate will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Mortgage Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Certificates prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Certificate Interest. Unless otherwise provided
in the related Prospectus Supplement, the initial aggregate Certificate Balance
of all classes of Certificates of a Series will not be greater than the
outstanding aggregate principal balance of the related Mortgage Assets as of the
applicable Cut-off Date. The initial aggregate Certificate Balance of a Series
and each class thereof will be specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or classes of
Certificates entitled thereto in accordance with the provisions described in
such Prospectus Supplement until the Certificate Balance of such class has been
reduced to zero. Stripped Interest Certificates with no Certificate Balance are
not entitled to any distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution on a
class of Certificates may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interests on the Certificates"
and "--Distributions of Principal of the Certificates" above also relate to
components of such a class of Certificates. In such case, reference in such
sections to Certificate Balance and Pass-Through Rate refer to the principal
balance, if any, of any such component and the Pass-Through Rate, if any, on any
such component, respectively.
33
<PAGE>
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations that are collected on the Mortgage
Assets in the related Trust Fund will be distributed on each Distribution Date
to the class or classes of Certificates entitled thereto in accordance with the
provisions described in such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a Series of Certificates
consisting of one or more classes of Subordinate Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on the
Mortgage Assets have been incurred, the amount of such losses or shortfalls will
be borne first by a class of Subordinate Certificates in the priority and manner
and subject to the limitations specified in such Prospectus Supplement See
"Description of Credit Support" for a description of the types of protection
that may be included in shortfalls on Mortgage Assets comprising such Trust
Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Certificates evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, a Servicer
or another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Distribution Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund and were delinquent on the related
Determination Date, subject to such Servicer's (or another entity's) good faith
determination that such advances will be reimbursable from Related Proceeds (as
defined below). In the case of a Series of Certificates that includes one or
more classes of Subordinate Certificates and if so provided in the related
Prospectus Supplement, each Servicer's (or another entity's) advance obligation
may be limited only to the portion of such delinquencies necessary to make the
required distributions on one or more classes of Senior Certificates and/or may
be subject to such Servicer's (or another entity's) good faith determination
that such advances will be reimbursable not only from Related Proceeds but also
from collections on other Trust Assets otherwise distributable on one or more
classes of such Subordinate Certificates. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of a Servicer's (or
another entity's) funds will be reimbursable only out of related recoveries on
the Mortgage Loans (including amounts received under any form of Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and, if so provided in the Prospectus Supplement, out of any amounts
otherwise distributable on one or more classes of Subordinate Certificates of
such Series; provided, however, that any such advance will be reimbursable from
any amounts in the Distribution Account prior to any distributions being made on
the Certificates to the extent that a Servicer (or such other entity) shall
determine in good faith that such advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds or, if applicable, from collections
on other Trust Assets otherwise distributable on such Subordinate Certificates.
If advances have been made by a Servicer from excess funds in the Distribution
Account, such Servicer is required to replace such funds in the Distribution
Account on any future Distribution Date to the extent that funds in the
Distribution Account on such Distribution Date are less than payments required
to be made to Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligations of a Servicer (or another entity) to make
advances may be secured by a cash advance reserve fund, a surety bond, a letter
of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any such
surety bond, will be set forth in the related Prospectus Supplement.
34
<PAGE>
If and to the extent so provided in the related Prospectus Supplement, a
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay itself
such interest periodically from general collections on the Trust Assets prior to
any payment to Certificateholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any Series of Certificates evidencing an interest
in a Trust Fund that includes CMBS will describe any corresponding advancing
obligation of any person in connection with such CMBS.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each distribution
to holders of any class of Certificates of a Series, the Master Servicer or the
Trustee, as provided in the related Prospectus Supplement, will forward or cause
to be forwarded to each such holder, to the Depositor and to such other parties
as may be specified in the related Agreement, a statement setting forth, in each
case to the extent applicable and available:
(i) the amount of such distribution to holders of Certificates of such class
applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of such class
allocable to Accrued Certificate Interest;
(iii) the amount of such distribution allocable to (a) Prepayment Premiums and
(b) payments on account of Equity Participations;
(iv) the amount of related servicing compensation received by each Servicer
and such other customary information as any such Master Servicer or the
Trustee deems necessary or desirable, or that a Certificateholder
reasonably requests, to enable Certificateholders to prepare their tax
returns;
(v) the aggregate amount of advances included in such distribution, and the
aggregate amount of any unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Mortgage Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in respect of
which (a) one scheduled payment is delinquent, (b) two scheduled payments
are delinquent, (c) three or more scheduled payments are delinquent and (d)
foreclosure proceedings have been commenced;
(viii) with respect to each Whole Loan that is delinquent two or more months,
(a) the loan number thereof, (b) the unpaid balance thereof, (c) whether
the delinquency is in respect of any balloon payment, (d) the aggregate
amount of unreimbursed servicing expenses and unreimbursed advances in
respect thereof, (e) if applicable, the aggregate amount of any interest
accrued and payable on related servicing expenses and related advances
assuming such Mortgage Loan is subsequently liquidated through foreclosure,
(f) whether a notice of acceleration has been sent to the Mortgagor and, if
so, the date of such notice, (g) whether foreclosure proceedings have been
commenced and, if so, the date so commenced and (h) if such Mortgage Loan
is more than three months delinquent and foreclosure has not been
commenced, the reason therefor;
(ix) with respect to any Whole Loan liquidated during the related Due Period
(other than by payment in full), (a) the loan number thereof, (b) the
manner in which it was liquidated and (c) the aggregate amount of
liquidation proceeds received;
(x) with respect to any Whole Loan liquidated during the related Due Period,
(a) the portion of such liquidation proceeds payable or reimbursable to
each Servicer (or any other entity) in respect of such Mortgage Loan and
(b) the amount of any loss to Certificateholders;
35
<PAGE>
(xi) with respect to each REO Property relating to a Whole Loan and included
in the Trust Fund as of the end of the related Due Period, (a) the loan
number of the related Mortgage Loan and (b) the date of acquisition;
(xii) with respect to each REO Property relating to a Whole Loan and included
in the Trust Fund as of the end of the related Due Period, (a) the book
value, (b) the principal balance of the related Mortgage Loan immediately
following such Distribution Date (calculated as if such Mortgage Loan were
still outstanding taking into account certain limited modifications to the
terms thereof specified in the Agreement), (c) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect
thereof and (d) if applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
(xiii) with respect to any such REO Property sold during the related Due Period
(a) the loan number of the related Mortgage Loan, (b) the aggregate amount
of sale proceeds, (c) the portion of such sales proceeds payable or
reimbursable to each Servicer in respect of such REO Property or the
related Mortgage Loan and (d) the amount of any loss to Certificateholders
in respect of the related Mortgage Loan;
(xiv) the aggregate Certificate Balance or notional amount, as the case may be,
of each class of Certificates (including any class of Certificates not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance due to the
allocation of any loss and increase in the Certificate Balance of a class
of Accrual Certificates in the event that Accrued Certificate Interest has
been added to such balance;
(xv) the aggregate amount of principal prepayments made during the related Due
Period;
(xvi) the aggregate Accrued Certificate Interest and unpaid Accrued Certificate
Interest, if any, on each class of Certificates at the close of business on
such Distribution Date;
(xvii) in the case of Certificates with a variable Pass-Through Rate, the
Pass-Through Rate applicable to such Distribution Date, and, if available,
the immediately succeeding Distribution Date, as calculated in accordance
with the method specified in the related Prospectus Supplement;
(xviii) in the case of Certificates with a floating Pass-Through Rate, for
statements to be distributed in any month in which an adjustment date
occurs, the floating Pass-Through Rate applicable to such Distribution Date
and the immediately succeeding Distribution Date as calculated in
accordance with the method specified in the related Prospectus Supplement;
(xix) as to any Series which includes Credit Support, the amount of coverage of
each instrument of Credit Support included therein as of the close of
business on such Distribution Date; and
(xx) the aggregate amount of payments by the Mortgagors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above, the
amounts shall be expressed as a dollar amount per minimum denomination of
Certificates or for such other specified portion thereof In addition, in the
case of information furnished pursuant to subclauses (i), (ii), (xiv), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Certificates. The Master Servicer or the
Trustee, as specified in the related Prospectus Supplement, will forward or
cause to be forwarded to each holder, to the Depositor and to such other parties
as may be specified in the Agreement, a copy of any statements or reports
received by the Master Servicer or the Trustee, as applicable, with respect to
any CMBS. The Prospectus Supplement for each Series of Offered Certificates will
describe any additional information to be included in reports to the holders of
such Certificates.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Certificate a statement containing the information set
forth in subclauses (i)-(iv) above,
36
<PAGE>
aggregated for such calendar year or the applicable portion thereof during which
such person was a Certificateholder. Such obligation of the Master Servicer or
the Trustee shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Master Servicer or
the Trustee pursuant to any requirements of the Code as are from time to time in
force.
Unless and until Definitive Certificates are issued, or unless otherwise
provided in the related Prospectus Supplement, such statements or reports will
be forwarded by the Master Servicer or the Trustee to Cede. Such statements or
reports may be available to Beneficial Owners upon request to DTC or their
respective Participant or Indirect Participant. In addition, the Trustee shall
furnish a copy of any such statement or report to any Beneficial Owner which
requests such copy and certifies to the Trustee or the Master Servicer, as
applicable, that it is the Beneficial Owner of a Certificate. See "Description
of the Certificates--Book-Entry Registration and Definitive Certificates."
TERMINATION
The obligations created by the Agreements for each Series of Certificates will
terminate upon the payment to Certificateholders of that Series of all amounts
held in the Distribution Account or by any Servicer, if any, or the Trustee and
required to be paid to them pursuant to such Agreements following the earlier of
(i) the final payment or other liquidation of the last Mortgage Asset subject
thereto or the disposition of all property acquired upon foreclosure of any
Whole Loan subject thereto and (ii) the purchase of all of the assets of the
Trust Fund by the party entitled to effect such termination, under the
circumstances and in the manner set forth in the related Prospectus Supplement.
In no event, however, will the trust created by the Agreements continue beyond
the date specified in the related Prospectus Supplement. Written notice of
termination of the Agreements will be given to each Certificateholder, and the
final distribution will be made only upon presentation and surrender of the
Certificates at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a Series of Certificates
may be subject to optional early termination through the repurchase of the
assets in the related Trust Fund by the party specified therein, under the
circumstances and in the manner set forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of the Certificate Balance of a
specified class or classes of Certificates by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more classes of the
Offered Certificates of any Series will be issued as Book-Entry Certificates,
and each such class will be represented by one or more single Certificates
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code ("UCC") and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for physical
movement of certificates. Participants include J.P. Morgan Securities Inc.,
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, investors that
are not Participants or Indirect Participants but desire to purchase, sell or
otherwise transfer ownership of, or other interests in Book-Entry
37
<PAGE>
Certificates may do so only through Participants and Indirect Participants. In
addition, such investors ("Beneficial Owners") will receive all distributions on
the Book-Entry Certificates through DTC and its Participants. Under a book-entry
format, Beneficial Owners will receive payments after the related Distribution
Date because, while payments are required to be forwarded to Cede & Co., as
nominee for DTC ("Cede"), on each such date DTC will forward such payments to
its Participants which thereafter will be required to forward them to Indirect
Participants or Beneficial Owners. Unless otherwise provided in the related
Prospectus Supplement, the only "Certificateholder" (as such term is used in the
Agreement) will be Cede, as nominee of DTC, and the Beneficial Owners will not
be recognized by the Trustee as Certificateholders under the Agreements.
Beneficial Owners will be permitted to exercise the rights of Certificateholders
under the related Agreements only indirectly through the Participants who in
turn will exercise their rights through DTC. Under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of and interest on the Book-Entry Certificates.
Participants and Indirect Participants with which Beneficial Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Beneficial Owners.
Because DTC can act only on behalf of Participants, who in turn act on behalf of
Indirect Participants and certain banks, the ability of a Beneficial Owner to
pledge its interest in the Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
its interest in the Book-Entry Certificates, may be limited due to the lack of a
physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC interests in the Book-Entry Certificates
are credited. Under DTC's procedures, DTC will take actions permitted to be
taken by Holders of any class of Book-Entry Certificates under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
account the Book-Entry Certificates are credited and whose aggregate holdings
represent no less than any minimum amount of Voting Rights required therefor.
Therefore, Beneficial Owners will only be able to exercise their Voting Rights
to the extent permitted, and subject to the procedures established, by their
Participant and/or Indirect Participant, as applicable. DTC may take conflicting
actions with respect to any action of Certificateholders of any Class to the
extent that Participants authorize such actions. None of the Servicers, the
Depositor, the Trustee or any of their respective affiliates will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Book-Entry Certificates, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Unless otherwise specified in the related Prospectus Supplement, Certificates
initially issued in book-entry form will be issued in fully registered,
certificated form to Beneficial Owners or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Certificates
and the Depositor is unable to locate a qualified successor or (ii) the
Depositor, at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates for the Beneficial Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Certificates, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Beneficial Owners identified
in such instructions the Definitive Certificates to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
38
<PAGE>
DESCRIPTION OF THE AGREEMENTS
The Certificates of each Series evidencing interests in a Trust Fund including
Whole Loans will be issued pursuant to a Pooling and Servicing Agreement among
the Depositor, a Master Servicer, if specified in the related Prospectus
Supplement, a Special Servicer and the Trustee. The Certificates of each Series
evidencing interests in a Trust Fund not including Whole Loans will be issued
pursuant to a Trust Agreement between the Depositor and a Trustee. The Master
Servicer, any Special Servicer and the Trustee with respect to any Series of
Certificates will be named in the related Prospectus Supplement. In lieu of
appointing a Master Servicer, a servicer may be appointed pursuant to the
Pooling and Servicing Agreement for any Trust Fund. The Mortgage Loans shall be
serviced pursuant to the terms of the Pooling and Servicing Agreement and,
unless otherwise specified in the Prospectus Supplement, a Servicing Agreement
among the Depositor (or an affiliate thereof), a Master Servicer, a Special
Servicer and a Primary Servicer. A manager or administrator may be appointed
pursuant to the Trust Agreement for any Trust Fund to administer such Trust
Fund. The provisions of each Agreement will vary depending upon the nature of
the Certificates to be issued thereunder and the nature of the related Trust
Fund. A form of a Pooling and Servicing Agreement and a form of Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Any Trust Agreement will generally conform to the
form of Pooling and Servicing Agreement filed herewith, but will not contain
provisions with respect to the servicing and maintenance of Whole Loans. The
following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a Series of Certificates will describe
any provision of the Agreements relating to such Series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreements for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any Series, the term "Certificate" refers to all of the
Certificates of that Series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreements (without exhibits) relating to any Series of
Certificates without charge upon written request of a holder of a Certificate of
such Series addressed to the Trustee specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the Mortgage
Loans included in each Trust Fund were being serviced prior to the issuance of
the related Series of Certificates pursuant to the terms of a Servicing
Agreement by the Master Servicer, the Special Servicer and/or a Primary
Servicer. Unless otherwise specified in the related Prospectus Supplement,
following the issuance of the related Series of Certificates, such Mortgage
Loans will continue to be serviced pursuant to such Servicing Agreement,
together with the related Pooling and Servicing Agreement. Pursuant to the terms
of each Servicing Agreement, a Primary Servicer or a Special Servicer will
service the Mortgage Loans directly and a Master Servicer may monitor the
activities of each Primary Servicer and Special Servicer. The Depositor shall
assign its rights under each Servicing Agreement to the Trustee for the benefit
of the Certificateholders.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any Series of Certificates, the Depositor will assign
(or cause to be assigned) to the designated Trustee the Trust Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Trust Assets after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date and other
than any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Certificates to the Depositor in exchange for the Trust Assets and
the other assets comprising the Trust Fund for such Series. Each Mortgage Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement, such
schedule will include detailed information (i) in respect of each Whole Loan
included in the related Trust Fund, including without limitation, the address of
the related Mortgaged Property and type of such property, the Mortgage Interest
Rate and, if applicable, the applicable index, margin, adjustment date and any
rate cap information, the original and remaining term to maturity, the original
and outstanding principal balance and balloon payment, if any, the Value,
Loan-to-Value Ratio and the Debt Service Coverage Ratio as of the date
39
<PAGE>
indicated and payment and prepayment provisions, if applicable, and (ii) in
respect of each CMBS included in the related Trust Fund, including without
limitation, the CMBS Issuer, CMBS Servicer and CMBS Trustee, the pass-through or
bond rate or formula for determining such rate, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each Whole Loan, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Company delivers to the Trustee or the custodian
a copy or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. With respect to
such Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. Unless otherwise provided in the
related Prospectus Supplement, the related Agreements will require that the
Depositor or another party specified therein promptly cause each such assignment
of Mortgage to be recorded in the appropriate public office for real property
records, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Depositor. If the
Depositor cannot cure the omission or defect within a specified number of days
after receipt of such notice, then unless otherwise specified in the related
Prospectus Supplement, the Depositor will be obligated, within a specified
number of days of receipt of such notice, to repurchase the related Whole Loan
from the Trustee at the Purchase Price or substitute for such Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, this repurchase
or substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Mortgage Asset or
repurchasing or substituting for such Mortgage Asset, the Depositor may agree to
cover any losses suffered by the Trust Fund as a result of such breach or
defect.
If so provided in the related Prospectus Supplement, the Depositor will, as to
some or all of the Mortgage Loans, assign or cause to be assigned to the Trustee
the related Lease Assignments. In certain cases, the Trustee, or Primary
Servicer, as applicable, may collect all moneys under the related Leases and
distribute amounts, if any, required under the Lease for the payment of
maintenance, insurance and taxes, to the extent specified in the related Lease
agreement. The Trustee, or if so specified in the Prospectus Supplement, the
Master Servicer, as agent for the Trustee, may hold the Lease in trust for the
benefit of the Certificateholders.
With respect to each CMBS in certificated form, the Depositor will deliver or
cause to be delivered to the Trustee (or the custodian) the original certificate
or other definitive evidence of such CMBS together with bond power or other
instruments, certifications or documents required to transfer fully such CMBS to
the Trustee for the benefit of the Certificateholders. With respect to each CMBS
in uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC the Depositor and the Trustee will cause such CMBS
to be registered directly or on the books of such clearing corporation or of a
financial intermediary in the name of the Trustee for the benefit of the
Certificateholders. Unless otherwise provided in the related Prospectus
Supplement, the related Agreement will require that either the Depositor or the
Trustee promptly cause any CMBS in certificated form not registered in the name
of the Trustee to be re-registered, with the applicable persons, in the name of
the Trustee.
40
<PAGE>
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the Depositor
will, with respect to each Whole Loan, make or assign representations and
warranties, as of a specified date (the person making such representations and
warranties, the "Warranting Party") covering, by way of example, the following
types of matters: (i) the accuracy of the information set forth for such Whole
Loan on the schedule of Mortgage Assets appearing as an exhibit to the related
Agreement; (ii) the existence of title insurance insuring the lien priority of
the Whole Loan; (iii) the authority of the Warranting Party to sell the Whole
Loan; (iv) the payment status of the Whole Loan and the status of payments of
taxes, assessments and other charges affecting the related Mortgaged Property;
(v) the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard and extended
perils insurance coverage on the Mortgaged Property.
Any Warranting Party, if other than the Depositor, shall be an Asset Seller or
an affiliate thereof or such other person acceptable to the Depositor and shall
be identified in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Certificates evidencing an interest in such Whole Loan.
Unless otherwise specified in the related Prospectus Supplement, in the event of
a breach of any such representation or warranty, the Warranting Party will be
obligated to reimburse the Trust Fund for losses caused by any such breach or
either cure such breach or repurchase or replace the affected Whole Loan as
described below. Since the representations and warranties may not address events
that may occur following the date as of which they were made, the Warranting
Party will have a reimbursement, cure, repurchase or substitution obligation in
connection with a breach of such a representation and warranty only if the
relevant event that causes such breach occurs prior to such date. Such party
would have no such obligations if the relevant event that causes such breach
occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, the Agreements
will provide that the Master Servicer and/or Trustee will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of a Whole Loan that materially and adversely
affects the value of such Whole Loan or the interests therein of the
Certificateholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Whole
Loan from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor.
As to any Whole Loan, unless otherwise specified in the related Prospectus
Supplement, the "Purchase Price" is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Interest
Rate from the date as to which interest was last paid to the due date in the Due
Period in which the relevant purchase is to occur, plus certain servicing
expenses that are reimbursable to each Servicer. If so provided in the
Prospectus Supplement for a Series, a Warranting Party, rather than repurchase a
Whole Loan as to which a breach has occurred, will have the option, within a
specified period after initial issuance of such Series of Certificates, to cause
the removal of such Whole Loan from the Trust Fund and substitute in its place
one or more other Whole Loans, in accordance with the standards described in the
related Prospectus Supplement. If so provided in the Prospectus Supplement for a
Series, a Warranting Party, rather than repurchase or substitute a Whole Loan as
to which a breach has occurred, will have the option to reimburse the Trust Fund
or the Certificateholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Warranting
Party.
Neither the Depositor (except to the extent that it is the Warranting Party) nor
any Servicer will be obligated to purchase or substitute for a Whole Loan if a
Warranting Party defaults on its obligation to do so, and no assurance can be
given that Warranting Parties will carry out such obligations with respect to
Whole Loans.
41
<PAGE>
Unless otherwise provided in the related Prospectus Supplement the Warranting
Party will, with respect to a Trust Fund that includes CMBS, make or assign
certain representations or warranties, as of a specified date, with respect to
such CMBS, covering (i) the accuracy of the information set forth therefor on
the schedule of Mortgage Assets appearing as an exhibit to the related Agreement
and (ii) the authority of the Warranting Party to sell such Mortgage Assets. The
related Prospectus Supplement will describe the remedies for a breach thereof.
Each Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any such representation in a Pooling and
Servicing Agreement of a Master Servicer or Special Servicer which materially
and adversely affects the interests of the Certificateholders and which
continues unremedied for thirty days after the giving of written notice of such
breach to such Servicer by the Trustee or the Depositor, or to such Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. A breach of any such representation in a Servicing
Agreement of a Servicer which continues unremedied for thirty days after giving
notice of such breach to such Servicer will constitute an Event of Default under
such Servicing Agreement. See "Events of Default" and "Rights Upon Event of
Default."
ACCOUNTS
GENERAL
Each Servicer and/or the Trustee will, as to each Trust Fund, establish and
maintain or cause to be established and maintained one or more separate accounts
for the collection of payments on the related Mortgage Assets (collectively, the
"Accounts"), which must be either (i) an account or accounts the deposits in
which are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC") (to the
limits established by the FDIC) and the uninsured deposits in which are
otherwise secured such that the Certificateholders have a claim with respect to
the funds an Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the institution with which such Account is
maintained or (ii) otherwise maintained with a bank or trust company, and in a
manner, satisfactory to the Rating Agency or Agencies rating any class of
Certificates of such Series. The collateral eligible to secure amounts in an
Account is limited to United States government securities and other investment
grade obligations specified in the Agreement ("Permitted Investments"). An
Account may be maintained as an interest bearing or a non-interest bearing
account and the funds held therein may be invested pending each succeeding
Distribution Date in certain short-term Permitted Investments. Unless otherwise
provided in the related Prospectus Supplement, any interest or other income
earned on funds in an Account will be paid to a Servicer or its designee as
additional servicing compensation. An Account may be maintained with an
institution that is an affiliate of a Servicer provided that such institution
meets the standards imposed by the Rating Agency or Agencies. If permitted by
the Rating Agency or Agencies and so specified in the related Prospectus
Supplement, an Account may contain funds relating to more than one Series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to a Servicer or serviced or master
serviced by it on behalf of others.
DEPOSITS
Unless otherwise provided in the related Prospectus Supplement, the Primary
Servicer will deposit or cause to be deposited in an Account on a daily basis,
unless otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Primary Servicer:
(i) all payments on account of principal, including principal prepayments, on
the Mortgage Assets;
(ii) all payments on account of interest on the Mortgage Assets, including any
default interest collected, in each case net of any portion thereof retained
by a Servicer as its servicing compensation;
42
<PAGE>
(iii) all proceeds of the hazard, business interruption and general liability
insurance policies to be maintained in respect of each Mortgaged Property
securing a Whole Loan in the Trust Fund (to the extent such proceeds are not
applied to the restoration of the property or released to the Mortgagor in
accordance with the normal servicing procedures of a Servicer, subject to
the terms and conditions of the related Mortgage and Mortgage Note) and all
proceeds of rental interruption policies, if any, insuring against losses
arising from the failure of Lessees under a Lease to make timely rental
payments because of certain casualty events (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection with
the liquidation of defaulted Mortgage Loans in the Trust Fund, by
foreclosure, condemnation or otherwise ("Liquidation Proceeds"), together
with the net proceeds on a monthly basis with respect to any Mortgaged
Properties acquired for the benefit of Certificateholders by foreclosure or
by deed in lieu of foreclosure or otherwise;
(iv) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(v) any amounts representing Prepayment Premiums;
(vi) any amounts received from a Special Servicer;
but excluding any REO Proceeds and penalties or modification fees which may be
retained by the Primary Servicer. REO Proceeds shall be maintained in an Account
by the Special Servicer.
Once a month the Primary Servicer and the Special Servicer remit funds on
deposit in the Account each maintains together with any P&I Advances to the
Master Servicer for deposit in an Account maintained by the Master Servicer.
WITHDRAWALS
A Servicer may, from time to time, unless otherwise provided in the related
Agreement and described in the related Prospectus Supplement, make withdrawals
from an Account for each Trust Fund for any of the following purposes:
(i) to reimburse a Servicer for unreimbursed amounts advanced as described
under "Description of the Certificates--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by such Servicer as late collections of interest
on and principal of the particular Whole Loans with respect to which the
advances were made;
(ii) to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing expenses incurred with respect to Whole Loans and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent Liquidation Proceeds and Insurance Proceeds collected
on the particular Whole Loans and properties, and net income collected on
the particular properties, with respect to which such fees were earned or
such expenses were incurred;
(iii) to reimburse a Servicer for any advances described in clause (i) above and
any servicing expenses described in clause (ii) above which, in the Master
Servicer's good faith judgment, will not be recoverable from the amounts
described in clauses (i) and (ii), respectively, such reimbursement to be
made from amounts collected on other Trust Assets or, if and to the extent
so provided by the related Agreement and described in the related Prospectus
Supplement, just from that portion of amounts collected on other Trust
Assets that is otherwise distributable on one or more classes of Subordinate
Certificates, if any, remain outstanding, and otherwise any outstanding
class of Certificates, of the related Series;
(iv) if and to the extent described in the related Prospectus Supplement, to pay
a Servicer interest accrued on the advances described in clause (i) above
and the servicing expenses described in clause (ii) above while such remain
outstanding and unreimbursed;
(v) unless otherwise provided in the related Prospectus Supplement, to pay a
Servicer, as additional servicing compensation, interest and investment
income earned in respect of amounts held in the Account; and
43
<PAGE>
(vi) to make any other withdrawals permitted by the related Agreement and
described in the related Prospectus Supplement.
If and to the extent specified in the Prospectus Supplement amounts may be
withdrawn from any Account to cover additional costs, expenses or liabilities
associated with: the preparation of environmental site assessments with respect
to, and for containment, clean-up or remediation of hazardous wastes and
materials, the proper operation, management and maintenance of any Mortgaged
Property acquired for the benefit of Certificateholders by foreclosure or by
deed in lieu of foreclosure or otherwise, such payments to be made out of income
received on such property; if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and to
the extent described under "Certain Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes"; retaining an
independent appraiser or other expert in real estate matters to determine a fair
sale price for a defaulted Whole Loan or a property acquired in respect thereof
in connection with the liquidation of such Whole Loan or property; and obtaining
various opinions of counsel pursuant to the related Agreement for the benefit of
Certificateholders.
DISTRIBUTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will, as to each Trust Fund, establish and maintain, or cause to be established
and maintained, one or more separate Accounts for the collection of payments
from the Master Servicer immediately preceding each Distribution Date (the
"Distribution Account"). The Trustee will also deposit or cause to be deposited
in a Distribution Account the following amounts:
(i) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Certificates as
described under "Description of Credit Support";
(ii) any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds-- Cash Flow Agreements";
(iii) all proceeds of any Trust Asset or, with respect to a Whole Loan, property
acquired in respect thereof purchased by the Depositor, any Asset Seller or
any other specified person, and all proceeds of any Mortgage Asset purchased
as described under "Description of the Certificates--Termination" (also,
"Liquidation Proceeds");
(iv) any other amounts required to be deposited in the Distribution Account as
provided in the related Agreement and described in the related Prospectus
Supplement.
The Trustee may, from time to time, unless otherwise provided in the related
Agreements and described in the related Prospectus Supplement, make a withdrawal
from a Distribution Account to make distributions to the Certificateholders on
each Distribution Date.
OTHER COLLECTION ACCOUNTS
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any Series of Certificates may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Primary Servicer or Special Servicer will deposit
on a daily basis the amounts described under "--Deposits" above for one or more
Series of Certificates. Any amounts on deposit in any such collection account
will be withdrawn therefrom and deposited into the appropriate Distribution
Account by a time specified in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, any amounts which could be
withdrawn from the Distribution Account as described under "--Withdrawals"
above, may also be withdrawn from any such collection account. The Prospectus
Supplement will set forth any restrictions with respect to any such collection
account, including investment restrictions and any restrictions with respect to
financial institutions with which any such collection account may be maintained.
44
<PAGE>
COLLECTION AND OTHER SERVICING PROCEDURES
PRIMARY SERVICER
The Primary Servicer is required under each Servicing Agreement to make
reasonable efforts to collect all scheduled payments under the Mortgage Loans
and will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Mortgage Loans
and held for its own account, provided such procedures are consistent with (i)
the terms of the related Servicing Agreement, (ii) applicable law and (iii) the
general servicing standard specified in the related Prospectus Supplement or, if
no such standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard").
Each Primary Servicer will also be required to perform other customary functions
of a servicer of comparable loans, including maintaining (or causing the
Mortgagor or Lessee on each Mortgage or Lease to maintain) hazard, business
interruption and general liability insurance policies (and, if applicable,
rental interruption policies) as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance and other
items required to be paid by any Mortgagor pursuant to the Mortgage Loan;
processing assumptions or substitutions in those cases where the Primary
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Mortgage Loans.
MASTER SERVICER
The Master Servicer shall monitor the actions of the Primary Servicer and the
Special Servicer to confirm compliance with the Agreements.
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer, as servicer of the Mortgage Loans, on behalf of itself, the Trustee
and the Certificateholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. See "Description of Credit Support."
If a Master Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Mortgage Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Distribution
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Mortgage Loan, unreimbursed servicing expenses incurred with respect to the
Mortgage Loan and any unreimbursed advances of delinquent payments made with
respect to the Mortgage Loan. See "Hazard Insurance Policies" and "Description
of Credit Support."
SPECIAL SERVICER
A Mortgagor's failure to make required payments may reflect inadequate income or
the diversion of that income from the service of payments due under the Mortgage
Loan, and may call into question such Mortgagor's ability to make timely payment
of taxes and to pay for necessary maintenance of the related Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, upon the
occurrence of any of the following events (each a "Servicing Transfer Event")
with respect to a Mortgage Loan, servicing for such Mortgage Loan (thereafter, a
"Specially Serviced Mortgage Loan") will be transferred from the Primary
Servicer to the Special Servicer:
(a) such Mortgage Loan becomes a defaulted Mortgage Loan,
(b) the occurrence of certain events indicating the possible insolvency of the
Mortgagor,
(c) the receipt by the Primary Servicer of a notice of foreclosure of any other
lien on the related Mortgaged Property,
(d) the Master Servicer or the Primary Servicer determines that a payment
default is imminent,
45
<PAGE>
(e) with respect to a Balloon Mortgage Loan, no assurances have been given as to
the ability of the Mortgagor to make the final payment thereon, or
(f) the occurrence of certain other events constituting defaults under the
terms of such Mortgage Loan.
The Special Servicer is required to monitor any Mortgage Loan which is in
default, contact the Mortgagor concerning the default, evaluate whether the
causes of the default can be cured over a reasonable period without significant
impairment of the value of the Mortgaged Property, initiate corrective action in
cooperation with the Mortgagor if cure is likely, inspect the Mortgaged Property
and take such other actions as are consistent with the Servicing Standard. A
significant period of time may elapse before the Special Servicer is able to
assess the success of such corrective action or the need for additional
initiatives.
The time within which the Special Servicer makes the initial determination of
appropriate action evaluates the success of corrective action, develops
additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders, may vary considerably depending on the
particular Mortgage Loan, the Mortgaged Property, the Mortgagor, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the jurisdiction
in which the Mortgaged Property is located. Under federal bankruptcy law, the
Special Servicer in certain cases may not be permitted to accelerate a Mortgage
Loan or to foreclose on a Mortgaged Property for a considerable period of time.
See "Certain Legal Aspects of the Mortgage Loans and the Leases."
Any Agreement relating to a Trust Fund that includes Mortgage Loans may grant to
the Master Servicer and/or the holder or holders of certain classes of
Certificates a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Mortgage Loan as to which a specified
number of scheduled payments thereunder are delinquent. Any such right granted
to the holder of an Offered Certificate will be described in the related
Prospectus Supplement. The related Prospectus Supplement will also describe any
such right granted to any person if the predetermined purchase price is less
than the Purchase Price described under "Representations and Warranties;
Repurchases."
The Special Servicer may agree to modify, waive or amend any term of any
Specially Serviced Mortgage Loan in a manner consistent with the Servicing
Standard so long as the modification, waiver or amendment will not (i) affect
the amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in its judgment, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of amounts due thereon.
The Special Servicer also may agree to any modification, waiver or amendment
that would so affect or impair the payments on, or the security for, a Mortgage
Loan if, unless otherwise provided in the related Prospectus Supplement, (i) in
its judgment, a material default on the Mortgage Loan has occurred or a payment
default is imminent and (ii) in its judgment, such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to the
Mortgage Loan on a present value basis than would liquidation. The Special
Servicer is required to notify the Trustee in the event of any modification,
waiver or amendment of any Mortgage Loan.
The Special Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise, if such
action is consistent with the Servicing Standard and a default on such Mortgage
Loan has occurred or, in the Special Servicer's judgment, is imminent. Unless
otherwise specified in the related Prospectus Supplement, the Special Servicer
may not acquire title to any related Mortgaged Property or take any other action
that would cause the Trustee, for the benefit of Certificateholders, or any
other specified person to be considered to hold title to, to be a "mortgagee-
in-possession" of, or to be an "owner" or an "operator" of such Mortgaged
Property within the meaning of certain federal environmental laws, unless the
Special Servicer has previously determined, based on a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the Trust Fund), that:
(i) the Mortgaged Property is in compliance with applicable environmental laws;
or if not, that taking such actions as are necessary to bring the Mortgaged
Property in compliance therewith is reasonably likely to
46
<PAGE>
produce a greater recovery on a present value basis, after taking into
account any risks associated therewith, than not taking such actions; and
(ii) and there are no circumstances present at the Mortgaged Property relating
to the use, management or disposal of any hazardous substances, hazardous
materials, wastes, or petroleum-based materials for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any federal, state or local law or regulation or that, if any such
materials are present, taking such action with respect to the affected
Mortgaged Property is reasonably likely to produce a greater recovery on a
present value basis, after taking into account any risks associated
therewith, than not taking such actions.
Unless otherwise provided in the related Prospectus Supplement, if title to any
Mortgaged Property is acquired by a Trust Fund as to which a REMIC election has
been made, the Special Servicer, on behalf of the Trust Fund, will be required
to sell the Mortgaged Property within two years of acquisition, unless (i) the
Internal Revenue Service grants an extension of time to sell such property or
(ii) the Trustee receives an opinion of independent counsel to the effect that
the holding of the property by the Trust Fund subsequent to two years after its
acquisition will not result in the imposition of a tax on the Trust Fund or
cause the Trust Fund to fail to qualify as a REMIC under the Code at any time
that any Certificate is outstanding. Subject to the foregoing, the Special
Servicer will be required to (i) solicit bids for any Mortgaged Property so
acquired in such a manner as will be reasonably likely to realize a fair price
for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
If the Trust Fund acquires title to any Mortgaged Property, the Special
Servicer, on behalf of the Trust Fund, may retain an independent contractor to
manage and operate such property. The retention of an independent contractor,
however, will not relieve the Special Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, any such property
acquired by the Trust Fund will be managed in a manner consistent with the
management and operation of similar property by a prudent lending institution.
The limitations imposed by the related Agreement and the REMIC provisions of the
Code (if a REMIC election has been made with respect to the related Trust Fund)
on the operations and ownership of any Mortgaged Property acquired on behalf of
the Trust Fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of the Mortgage Loans
and the Leases--Foreclosure."
If recovery on a defaulted Mortgage Loan under any related instrument of Credit
Support is not available, the Special Servicer nevertheless will be obligated to
follow or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Mortgage Loan. If the
proceeds of any liquidation of the property securing the defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon at the Mortgage Interest Rate plus the aggregate
amount of expenses incurred by the Special Servicer in connection with such
proceedings and which are reimbursable under the Agreement, the Trust Fund will
realize a loss in the amount of such difference. The Special Servicer will be
entitled to withdraw or cause to be withdrawn from a related Account out of the
Liquidation Proceeds recovered on any defaulted Mortgage Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts
representing its normal servicing compensation on the Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan.
If any property securing a defaulted Mortgage Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under the related
instrument of Credit Support, if any, the Special Servicer is not required to
expend its own funds to restore the damaged property unless it determines (i)
that such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
47
<PAGE>
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each Agreement
for a Trust Fund that includes Whole Loans will require the Primary Servicer to
cause the Mortgagor on each Whole Loan to maintain a hazard insurance policy
providing for such coverage as is required under the related Mortgage. Unless
otherwise specified in the related Prospectus Supplement, such coverage will be
in general in an amount equal to the amount necessary to fully compensate for
any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis, but not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Primary Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by Mortgagors. All amounts collected by the Primary Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Primary Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in a
related Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing the
Whole Loans will typically contain a co-insurance clause that in effect requires
the insured at all times to carry insurance of a specified percentage (generally
80% to 90%) of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the lesser of
(i) the replacement cost of the improvements less physical depreciation and (ii)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
The Agreements for a Trust Fund that includes Whole Loans will require the
Primary Servicer to cause the Mortgagor on each Whole Loan, or, in certain
cases, the related Lessee, to maintain all such other insurance coverage with
respect to the related Mortgaged Property as is consistent with the terms of the
related Mortgage, which insurance may typically include flood insurance (if the
related Mortgaged Property was located at the time of origination in a federally
designated flood area).
In addition, to the extent required by the related Mortgage, the Primary
Servicer may require the Mortgagor or related Lessee to maintain other forms of
insurance including, but not limited to, loss of rent endorsements, business
interruption insurance and comprehensive public liability insurance. Any cost
incurred by the Master Servicer in maintaining any such insurance policy will be
added to the amount owing under the Mortgage Loan where the terms of the
Mortgage Loan so permit; provided, however, that the addition of such cost will
not be taken into account for purposes of calculating the distribution to be
made to Certificateholders. Such costs may be recovered by a Servicer from a
related Account, with interest thereon, as provided by the Agreements.
RENTAL INTERRUPTION INSURANCE POLICY
If so specified in the related Prospectus Supplement, the Primary Servicer or
the Mortgagors will maintain rental interruption insurance policies in full
force and effect with respect to some or all of the Leases. Although the terms
of such policies vary to some degree, a rental interruption insurance policy
typically provides that, to the extent that a Lessee fails to make timely rental
payments under the related Lease due to a casualty event, such
48
<PAGE>
losses will be reimbursed to the insured. If so specified in the related
Prospectus Supplement, the Primary Servicer will be required to pay from its
servicing compensation the premiums on the rental interruption policy on a
timely basis. If so specified in the Prospectus Supplement, if such rental
interruption policy is canceled or terminated for any reason (other than the
exhaustion of total policy coverage), the Primary Servicer will exercise its
best reasonable efforts to obtain from another insurer a replacement policy
comparable to the rental interruption policy with a total coverage that is equal
to the then existing coverage of the terminated rental interruption policy;
provided that if the cost of any such replacement policy is greater than the
cost of the terminated rental interruption policy, the amount of coverage under
the replacement policy will, unless otherwise specified in the related
Prospectus Supplement, be reduced to a level such that the applicable premium
does not exceed, by a percentage that may be set forth in the related Prospectus
Supplement, the cost of the rental interruption policy that was replaced. Any
amounts collected by the Primary Servicer under the rental interruption policy
in the nature of insurance proceeds will be deposited in a related Account.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the Agreements
will require that the Servicers obtain and maintain in effect a fidelity bond or
similar form of insurance coverage (which may provide blanket coverage) or any
combination thereof insuring against loss occasioned by fraud, theft or other
intentional misconduct of the officers, employees and agents of such Servicer.
The related Agreements will allow a Servicer to self-insure against loss
occasioned by the errors and omissions of the officers, employees and agents of
the Master Servicer or the Special Servicer so long as certain criteria set
forth in the Agreements are met.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the Whole
Loan upon any sale or other transfer of the related Mortgaged Property. Certain
of the Whole Loans may contain clauses requiring the consent of the mortgagee to
the creation of any other lien or encumbrance on the Mortgaged Property or
due-on-encumbrance clauses entitling the mortgagee to accelerate payment of the
Whole Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Primary Servicer, on behalf of the Trust Fund, will exercise any right the
Trustee may have as mortgagee to accelerate payment of any such Whole Loan or to
withhold its consent to any transfer or further encumbrance. Unless otherwise
specified in the related Prospectus Supplement, any fee collected by or on
behalf of the Primary Servicer for entering into an assumption agreement will be
retained by or on behalf of the Primary Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Mortgage Loans and the
Leases--Due-on-Sale and Due-on-Encumbrance."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a Series of Certificates will specify whether
there will be any Retained Interest in the Mortgage Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in a Mortgage Asset represents a specified portion of the
interest payable thereon. The Retained Interest will be deducted from Mortgagor
payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, each Servicer's
primary servicing compensation with respect to a Series of Certificates will
come from the periodic payment to it of a portion of the interest payment on
each Mortgage Asset. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Mortgage Asset,
such amounts will decrease in accordance with the amortization of the Mortgage
Assets. The Prospectus Supplement with respect to a Series of Certificates
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, a Servicer may retain all or a portion of assumption
fees, modification fees, late payment charges or Prepayment Premiums collected
from Mortgagors and any interest or other income which may be earned on funds
held in a related Account.
49
<PAGE>
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Mortgage Assets, including,
without limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Certificateholders, and payment of any other
expenses described in the related Prospectus Supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Whole
Loans and, to the extent so provided in the related Prospectus Supplement,
interest thereon at the rate specified therein, and the fees of any Special
Servicer, may be borne by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement will provide that on or before a specified date in each
year, beginning on a date specified therein, a firm of independent public
accountants will furnish a statement to the Trustee to the effect that, on the
basis of the examination by such firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers, the
servicing by or on behalf of each Servicer was conducted in compliance with the
terms of such agreements except for any exceptions the Uniform Single
Attestation Program for Mortgage Bankers requires it to report.
Each Servicing Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Servicer to the effect that such Servicer has fulfilled its
obligations under the Agreement throughout the preceding calendar year or other
specified twelvemonth period.
Unless otherwise provided in the related Prospectus Supplement, copies of such
annual accountants' statement and such statements of officers will be obtainable
by Certificateholders and Beneficial Owners without charge upon written request
to the Master Servicer at the address set forth in the related Prospectus
Supplement; provided that such Beneficial Owner shall have certified to the
Master Servicer that it is the Beneficial Owner of a Certificate.
CERTAIN MATTERS REGARDING EACH SERVICER AND THE DEPOSITOR
The Master Servicer, the Primary Servicer and the Special Servicer, or a
servicer for substantially all the Whole Loans under each Agreement will be
named in the related Prospectus Supplement. Each entity serving as Servicer (or
as such servicer) may be an affiliate of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to a Servicer shall be deemed to be to the servicer of
substantially all of the Whole Loans, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the related
Agreement will provide that any Servicer may resign from its obligations and
duties thereunder only with the consent of the Trustee, which may not be
unreasonably withheld or upon a determination that its duties under the
Agreement are no longer permissible under applicable law. No such resignation
will become effective until a successor servicer has assumed such Servicer's
obligations and duties under the related Servicing Agreement. If a Primary
Servicer resigns, the Master Servicer shall assume the obligations thereof.
Unless otherwise specified in the related Prospectus Supplement, each Servicing
Agreement will further provide that none of the Servicers, or any officer,
employee, or agent thereof will be under any liability to the related Trust Fund
or Certificateholders for any action taken, or for refraining from the taking of
any action in accordance with the Servicing standards set forth in the Servicing
Agreement, in good faith pursuant to the related Servicing Agreement; provided,
however, that no Servicer nor any such person will be protected against any
breach of a representation or warranty made in such Agreement, or against any
liability specifically imposed thereby, or against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Unless otherwise specified in the related
Prospectus Supplement, the Depositor shall be liable only to the extent of its
obligations specifically imposed upon and undertaken by the Depositor. Unless
otherwise specified in the related Prospectus Supplement, each Servicing
Agreement will further provide that each Servicer will be entitled
50
<PAGE>
to indemnification by the related Trust Fund against any loss, liability or
expense incurred in connection with any legal action relating to the related
Servicing Agreement or the Mortgage Loans; provided, however, that such
indemnification will not extend to any loss, liability or expense incurred by
reason of misfeasance, bad faith or negligence in the performance of obligations
or duties thereunder, or by reason of reckless disregard of such obligations or
duties. In addition, each Servicing Agreement will provide that no Servicer will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its responsibilities under the Servicing Agreement and
which in its opinion may involve it in any expense or liability. Any Servicer
may, however, with the consent of the Trustee undertake any such action which it
may deem necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Certificateholders, and the Servicer will be entitled to be reimbursed therefor.
Any person into which a Servicer or the Depositor may be merged or consolidated,
or any person resulting from any merger or consolidation to which a Servicer or
the Depositor is a party, or any person succeeding to the business of a Servicer
or the Depositor will be the successor of such Servicer or the Depositor, as
applicable, under the related Agreements.
EVENTS OF DEFAULT
Unless otherwise provided in the related Prospectus Supplement for a Trust Fund
that includes Whole Loans, Events of Default with respect to a Servicer under
the related Agreements will include (i) any failure by such Servicer to
distribute or cause to be distributed to the Trustee, another Servicer or the
Certificateholders, any required payment within one Business Day of the date
due; (ii) any failure by such Servicer to timely deliver a report that continues
unremedied for two days after receipt of notice of such failure has been given
to such Servicer by the Trustee or another Servicer; (iii) any failure by such
Servicer duly to observe or perform in any material respect any of its other
covenants or obligations under the Agreement which continues unremedied for
thirty days after written notice of such failure has been given to such
Servicer; (iv) any breach of a representation or warranty made by such Servicer
under the Agreement which materially and adversely affects the interests of
Certificateholders and which continues unremedied for thirty days after written
notice of such breach has been given to such Servicer; (v) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by or on behalf of such Servicer
indicating its insolvency or inability to pay its obligations; and (vi) any
failure by such Servicer to maintain a required license to do business or
service the Mortgage Loans pursuant to the related Agreements. Material
variations to the foregoing Events of Default (other than to shorten cure
periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 Days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Certificateholders of the applicable Series notice of
such occurrence, unless such default shall have been cured or waived.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Certificates
evidencing not less than 25% of the Voting Rights, the Trustee shall, terminate
all of the rights and obligations of the related Servicer under the Agreement
and in and to the Mortgage Loans (other than as a Certificateholder or as the
owner of any Retained Interest), whereupon the Master Servicer (or if such
Servicer is the Master Servicer, the Trustee) will succeed to all of the
responsibilities, duties and liabilities of such Servicer under the Agreements
(except that if the Trustee is prohibited by law from obligating itself to make
advances regarding delinquent mortgage loans, or if the related Prospectus
Supplement so specifies, then the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, in the event that the
Trustee is
51
<PAGE>
unwilling or unable so to act, it may or, at the written request of the holders
of Certificates entitled to at least 25% of the Voting Rights, it shall appoint,
or petition a court of competent jurisdiction for the appointment of, a loan
servicing institution acceptable to the Rating Agency with a net worth at the
time of such appointment of at least $15,000,000 to act as successor to the
Master Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and any such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the holders of
Certificates representing at least 66 2/3% of the Voting Rights allocated to the
respective classes of Certificates affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to
Certificateholders described in clause (i) under "Events of Default" may be
waived only by all of the Certificateholders. Upon any such waiver of an Event
of Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
No Certificateholder will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Certificates
evidencing not less than 25% of the Voting Rights have made written request upon
the Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity, and the Trustee for sixty
days has neglected or refused to institute any such proceeding. The Trustee,
however, is under no obligation to exercise any of the trusts or powers vested
in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates covered by such Agreement, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
As described under "Description of the Certificates--Book-Entry Registration and
Definitive Certificates," unless and until Definitive Certificates are issued,
Beneficial Owners may only exercise their rights as owners of Certificates
indirectly through DTC, or their respective Participants and Indirect
Participants.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent of any
of the holders of Certificates covered by the Agreement, (i) to cure any
ambiguity, (ii) to correct, modify or supplement any provision therein which may
be inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, or (iv) to comply with
any requirements imposed by the Code; provided that such amendment (other than
an amendment for the purpose specified in clause (iv) above) will not (as
evidenced by an opinion of counsel to such effect) adversely affect in any
material respect the interests of any holder of Certificates covered by the
Agreement. Unless otherwise specified in the related Prospectus Supplement, each
Agreement may also be amended by the Depositor, the Master Servicer, if any, and
the Trustee, with the consent of the holders of Certificates affected thereby
evidencing not less than 51% of the Voting Rights, for any purpose; provided,
however, that unless otherwise specified in the related Prospectus Supplement,
no such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received or advanced on Mortgage Loans which are required to be
distributed on any Certificate without the consent of the holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
holders of any class of Certificates in a manner other than as described in (i),
without the consent of the holders of all Certificates of such class or (iii)
modify the provisions of such Agreement described in this paragraph without the
consent of the holders of all Certificates covered by such Agreement then
outstanding. However, with respect to any Series of Certificates as to which a
REMIC election is to be made, the Trustee will not consent to any amendment of
the Agreement unless it shall first have received an opinion of counsel to the
effect that such amendment will not result in the imposition of a tax on the
related Trust Fund or cause the related Trust Fund to fail to qualify as a REMIC
at any time that the related Certificates are outstanding.
52
<PAGE>
THE TRUSTEE
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates and with any Master Servicer and its
affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency of
any Agreement, the Certificates or any Trust Asset or related document and is
not accountable for the use or application by or on behalf of any Servicer of
any funds paid to such Servicer or its designee in respect of the Certificates
or the Trust Assets, or deposited into or withdrawn from any Account or any
other account by or on behalf of any Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the related Agreements. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee is required to examine such documents and to determine whether
they conform to the requirements of the Agreements.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the Trustee and
any director, officer, employee or agent of the Trustee shall be entitled to
indemnification out of the Distribution Account for any loss, liability or
expense (including costs and expenses of litigation, and of investigation,
counsel fees, damages, judgments and amounts paid in settlement) incurred in
connection with the Trustee's (i) enforcing its rights and remedies and
protecting the interests, and enforcing the rights and remedies, of the
Certificateholders during the continuance of an Event of Default, (ii) defending
or prosecuting any legal action in respect of the related Agreement or Series of
Certificates, (iii) being the mortgagee of record with respect to the Mortgage
Loans in a Trust Fund and the owner of record with respect to any Mortgaged
Property acquired in respect thereof for the benefit of Certificateholders, or
(iv) acting or refraining from acting in good faith at the direction of the
holders of the related Series of Certificates entitled to not less than 25% (or
such higher percentage as is specified in the related Agreement with respect to
any particular matter) of the Voting Rights for such Series; provided, however,
that such indemnification will not extend to any loss, liability or expense that
constitutes a specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the Trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a breach
of any representation, warranty or covenant of the Trustee made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Certificateholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such under
the related Agreements, or if at any time the Trustee shall become incapable of
acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee
or of its property shall be appointed, or any public officer shall take charge
or control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then the Depositor may remove the
Trustee and appoint a successor trustee acceptable to the Master Servicer, if
any. Holders of the Certificates of any Series entitled to at least 51% of the
Voting Rights for such Series may at any time remove the Trustee without cause
and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor trustee
shall not become effective until acceptance of appointment by the successor
trustee.
53
<PAGE>
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any Series of Certificates, Credit Support may be provided with respect to
one or more classes thereof or the related Mortgage Assets. Credit Support may
be in the form of the subordination of one or more classes of Certificates,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or another method of Credit Support described in the related
Prospectus Supplement, or any combination of the foregoing. If so provided in
the related Prospectus Supplement, any form of Credit Support may be structured
so as to be drawn upon by more than one Series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a Series of
Certificates, the Credit Support will not provide protection against all risks
of loss and will not guarantee repayment of the entire Certificate Balance of
the Certificates and interest thereon. If losses or shortfalls occur that exceed
the amount covered by Credit Support or that are not covered by Credit Support,
Certificateholders will bear their allocable share of deficiencies. Moreover, if
a form of Credit Support covers more than one Series of Certificates (each, a
"Covered Trust"), holders of Certificates evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a Series, or the related Mortgage Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and (d) the material provisions relating
to such Credit Support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the obligor under any instrument of
Credit Support, including (i) a brief description of its principal business
activities, (ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the Prospectus Supplement. See "Risk Factors--Credit Support Limitations."
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes of
Certificates of a Series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions of principal and interest from
the Distribution Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Certificates in a Series, the
circumstances in which such subordination will be applicable and the manner, if
any, in which the amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets for a Series are divided into separate groups, each
supporting a separate class or classes of Certificates of a Series, credit
support may be provided by cross-support provisions requiring that distributions
be made on Senior Certificates evidencing interests in one group of Mortgage
Assets prior to distributions on Subordinate Certificates evidencing interests
in a different group of Mortgage Assets within the Trust Fund. The Prospectus
Supplement for a Series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
54
<PAGE>
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a Series of Certificates, the
Whole Loans in the related Trust Fund will be covered for various default risks
by insurance policies or guarantees. A copy of any such material instrument for
a Series will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the Certificates of the
related Series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a Series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the "L/C
Bank"). Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Assets on the
related Cut-off Date or of the initial aggregate Certificate Balance of one or
more classes of Certificates. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws in the event of only certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
Series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit for a Series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related Series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a Series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
Series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or determined
in the manner specified in the related Prospectus Supplement. A copy of any such
instrument for a Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related Series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a Series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more reserve funds in which cash, a
letter of credit, Permitted Investments, a demand note or a combination thereof
will be deposited, in the amounts so specified in such Prospectus Supplement.
The reserve funds for a Series may also be funded over time by depositing
therein a specified amount of the distributions received on the related Trust
Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Certificates.
55
<PAGE>
Moneys deposited in any Reserve Funds will be invested in Permitted Investments,
except as otherwise specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
Reserve Fund for such Series, and any loss resulting from such investments will
be charged to such Reserve Fund. However, such income may be payable to any
related Master Servicer or another service provider as additional compensation.
The Reserve Fund, if any, for a Series will not be a part of the Trust Fund
unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO CMBS
If so provided in the Prospectus Supplement for a Series of Certificates, the
CMBS in the related Trust Fund and/ or the Mortgage Loans underlying such CMBS
may be covered by one or more of the types of Credit Support described herein.
The related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE LEASES
The following discussion contains general summaries of certain legal aspects of
loans secured by commercial and multifamily residential properties that are
general in nature. Because such legal aspects are governed by applicable state
law (which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans is situated. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the Mortgage Loans. See "Description of the Trust
Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of real
property between two parties--a Mortgagor (the borrower and usually the owner of
the subject property) and a mortgagee (the lender). In contrast, a deed of trust
is a three-party instrument, among a trustor (the equivalent of a Mortgagor), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this Prospectus,
unless the context otherwise requires, "Mortgagor" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the Mortgagor grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale as security for the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. By executing a deed
56
<PAGE>
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the Mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the benefit
of the Mortgagor. At origination of a mortgage loan involving a land trust, the
Mortgagor executes a separate undertaking to make payments on the mortgage note.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the mortgage, the law of the state in which the real
property is located, certain federal laws (including, without limitation, the
Soldiers' and Sailors' Civil Relief Act of 1940) and, in some cases, in deed of
trust transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or deed to
secure debt is most often the fee estate in land and improvements. However, such
an instrument may encumber other interests in real property such as a tenant's
interest in a lease of land or improvements, or both, and the leasehold estate
created by such lease. An instrument covering an interest in real property other
than the fee estate requires special provisions in the instrument creating such
interest or in the mortgage, deed of trust, security deed or deed to secure
debt, to protect the mortgagee against termination of such interest before the
mortgage, deed of trust, security deed or deed to secure debt is paid. The
Seller will make certain representations and warranties in the Agreement with
respect to the Mortgage Loans which are secured by an interest in a leasehold
estate. Such representation and warranties will be set forth in the Prospectus
Supplement if applicable.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an assignment of
rents and leases, pursuant to which the Mortgagor assigns its right, title and
interest as landlord under each lease and the income derived therefrom to the
lender, while the Mortgagor retains a revocable license to collect the rents for
so long as there is no default. Under such assignments, the Mortgagor typically
assigns its right, title and interest as lessor under each lease and the income
derived therefrom to the mortgagee, while retaining a license to collect the
rents for so long as there is no default under the mortgage loan documentation.
The manner of perfecting the mortgagee's interest in rents may depend on whether
the Mortgagor's assignment was absolute or one granted as security for the loan.
Failure to properly perfect the mortgagee's interest in rents may result in the
loss of substantial pool of funds, which could otherwise serve as a source of
repayment for such loan. If the Mortgagor defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed receiver
before becoming entitled to collect the rents. In most states, hotel and motel
room rates are considered accounts receivable under the UCC; generally these
rates are either assigned by the Mortgagor, which remains entitled to collect
such rates absent a default, or pledged by the Mortgagor, as security for the
loan. In general, the lender must file financing statements in order to perfect
its security interest in the rates and must file continuation statements,
generally every five years, to maintain perfection of such security interest.
Even if the lender's security interest in room rates is perfected under the UCC,
the lender will generally be required to commence a foreclosure or otherwise
take possession of the property in order to collect the room rates after a
default.
Even after a foreclosure, the potential rent payments from the property may be
less than the periodic payments that had been due under the mortgage. For
instance, the net income that would otherwise be generated from the property may
be less than the amount that would have been needed to service the mortgage debt
if the leases on the property are at below-market rents, or as the result of
excessive maintenance, repair or other obligations which a lender succeeds to as
landlord.
Lenders that actually take possession of the property, however, may incur
potentially substantial risks attendant to being a mortgagee in possession. Such
risks include liability for environmental clean-up costs and other risks
inherent in property ownership. See "Environmental Legislation" below.
57
<PAGE>
PERSONALTY
Certain types of Mortgaged Properties, such as hotels, motels and industrial
plants, are likely to derive a significant part of their value from personal
property which does not constitute "fixtures" under applicable state real
property law and, hence, would not be subject to the lien of a mortgage. Such
property is generally pledged or assigned as security to the lender under the
UCC. In order to perfect its security interest therein, the lender generally
must file UCC financing statements and, to maintain perfection of such security
interest, file continuation statements generally every five years.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a Series of Offered
Certificate, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property Mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperative's interest in the property and termination of all proprietary leases
and occupancy agreement. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by whomever financed the
purchase by an individual tenant stockholder of cooperative shares or, in the
case of the Mortgage Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of stock
or shares in the corporation, receive proprietary lease or occupancy agreements
which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
58
<PAGE>
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperative
Loans" below.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the Mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having jurisdiction
over the mortgaged property. Generally, the action is initiated by the service
of legal pleadings upon all parties having a subordinate interest of record in
the real property and all parties in possession of the property, under leases or
otherwise, whose interests are subordinate to the mortgage. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
defendants. When the lender's right to foreclose is contested, the legal
proceedings can be time-consuming. Upon successful completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales are
made in accordance with procedures that vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable principles to
limit the remedies available to a mortgagee in connection with foreclosure.
These equitable principles are generally designed to relieve the Mortgagor from
the legal effect of mortgage defaults, to the extent that such effect is
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative and expensive actions to determine the cause of the
Mortgagor's default and the likelihood that the Mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate Mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
Mortgagor failed to maintain the mortgaged property adequately or the Mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a Mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the Mortgagor.
59
<PAGE>
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
require several years to complete. Moreover, as discussed below, a
non-collusive, regularly conducted foreclosure sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the Mortgagor was insolvent (or the Mortgagor was rendered insolvent as a result
of such sale) and within one year (or within the state statute of limitations if
the trustee in bankruptcy elects to proceed under state fraudulent conveyance
law) of the filing of bankruptcy.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
Mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the Mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The Mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the Mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a public sale
because of the difficulty in determining the value of such property at the time
of sale, due to, among other things, redemption rights which may exist and the
possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the Mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will have the
obligation to pay debt service on any senior mortgages, to pay taxes, obtain
casualty insurance and to make such repairs at its own expense as are necessary
to render the property suitable for sale. Frequently, the lender employs a third
party management company to manage and operate the property. The costs of
operating and maintaining a commercial or multifamily residential property may
be significant and may be greater than the income derived from that property.
The costs of management and operation of those mortgaged properties which are
hotels, motels, restaurants, nursing or convalescent homes or hospitals may be
particularly significant because of the expertise, knowledge and, with respect
to nursing or convalescent homes or hospitals, regulatory compliance, required
to run such operations and the effect which foreclosure and a change in
ownership may have on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender will commonly obtain
the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions,
60
<PAGE>
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, a lender commonly incurs substantial legal
fees and court costs in acquiring a mortgaged property through contested
foreclosure and/or bankruptcy proceedings. Furthermore, a few states require
that any environmental contamination at certain types of properties be cleaned
up before a property may be resold. In addition, a lender may be responsible
under federal or state law for the cost of cleaning up a mortgaged property that
is environmentally contaminated. See "Environmental Legislation." Generally
state law controls the amount of foreclosure expenses and costs, including
attorneys' fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans which are junior mortgage loans, if the lender purchases
the property the lender's title will be subject to all senior mortgages, prior
liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the Mortgagor is in default. Any additional
proceeds are generally payable to the Mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
In connection with a Series of Certificates for which an election is made to
qualify the Trust Fund, or a portion thereof, as a REMIC, the REMIC Provisions
and the Agreement may require the Master Servicer to hire an independent
contractor to operate any foreclosed property relating to Whole Loans.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize upon
its security and to bar the Mortgagor, and all persons who have an interest in
the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the Mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the Mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former Mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
61
<PAGE>
Under the REMIC Provisions currently in effect, property acquired by foreclosure
generally must not be held for more than two years. Unless otherwise provided in
the related Prospectus Supplement, with respect to a Series of Certificates for
which an election is made to qualify the Trust Fund or a part thereof as a
REMIC, the Agreement will permit foreclosed property to be held for more than
two years if the Internal Revenue Service grants an extension of time within
which to sell such property or independent counsel renders an opinion to the
effect that holding such property for such additional period is permissible
under the REMIC Provisions.
ANTI-DEFICIENCY LEGISLATION
Some or all of the Mortgage Loans may be nonrecourse loans, as to which recourse
may be had only against the specific property securing the related Mortgage Loan
and a personal money judgment may not be obtained against the Mortgagor. Even if
a mortgage loan by its terms provides for recourse to the Mortgagor, some states
impose prohibitions or limitations on such recourse. For example, statutes in
some states limit the right of the lender to obtain a deficiency judgment
against the Mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former Mortgagor
equal to the difference between the net amount realized upon the public sale of
the real property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the Mortgagor. In certain other states, the lender has the option
of bringing a personal action against the Mortgagor on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the Mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former Mortgagor following a judicial sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a lender from obtaining a large deficiency judgment against the former
Mortgagor as a result of low or no bids at the judicial sale.
LEASEHOLD RISKS
Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain risks not associated with mortgage loans
secured by the fee estate of the Mortgagor. The most significant of these risks
is that the ground lease creating the leasehold estate could terminate, leaving
the leasehold mortgagee without its security. The ground lease may terminate if,
among other reasons, the ground lessee breaches or defaults in its obligations
under the ground lease or there is a bankruptcy of the ground lessee or the
ground lessor. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
Mortgage Loans may not contain some of these protective provisions, and
mortgages may not contain the other protections discussed in the next paragraph.
Protective ground lease provisions include the right of the leasehold mortgagee
to receive notices from the ground lessor of any defaults by the Mortgagor; the
right to cure such defaults, with adequate cure periods; if a default is not
susceptible of cure by the leasehold mortgagee, the right to acquire the
leasehold estate through foreclosure or otherwise; the ability of the ground
lease to be assigned to and by the leasehold mortgagee or purchaser at a
foreclosure sale and for the concomitant release of the ground lessee's
liabilities thereunder; and the right of the leasehold mortgagee to enter into a
new ground lease with the ground lessor on the same terms and conditions as the
old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may require that
the ground lease or leasehold mortgage prohibit the ground lessee from treating
the ground lease as terminated in the event of the ground lessor's bankruptcy
and rejection of the ground lease by the trustee for the debtor-ground lessor.
As further protection, a leasehold mortgage may provide for the assignment of
the debtor-ground lessee's right to reject a lease pursuant to Section 365 of
the Bankruptcy Reform Act of 1978, as amended (Title 11 of the United States
62
<PAGE>
Code) (the "Bankruptcy Code"), although the enforceability of such clause has
not been established. Without the protections described above, a leasehold
mortgagee may lose the collateral securing its leasehold mortgage. In addition,
terms and conditions of a leasehold mortgage are subject to the terms and
conditions of the ground lease. Although certain rights given to a ground lessee
can be limited by the terms of a leasehold mortgage, the rights of a ground
lessee or a leasehold mortgagee with respect to, among other things, insurance,
casualty and condemnation will be governed by the provisions of the ground
lease.
COOPERATIVE LOANS
The cooperative shares owned by the tenant-stockholder and pledged to the lender
are, in almost all cases, subject to restrictions on transfer as set forth in
the Cooperative's Certificate of Incorporation and By-laws, as well as the
proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the an obligor
fails to make payments or defaults in the performance of covenants required
thereunder. Typically, the lender and the Cooperative enter into a recognition
agreement which establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement is terminated, the Cooperative will recognize the lender's lien
against proceeds from the sale of the Cooperative apartment, subject, however,
to the Cooperative's right to sums due under such proprietary lease or occupancy
agreement. The total amount owed to the Cooperative by the tenant-stockholder,
which the lender generally cannot restrict and does not monitor, could reduce
the value of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a sale
in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building was so converted.
63
<PAGE>
BANKRUPTCY LAWS
The Bankruptcy Code and related state laws may interfere with or affect the
ability of a lender to realize upon collateral and/or to enforce a deficiency
judgment. For example, under the Bankruptcy Code, virtually all actions
(including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of the bankruptcy petition, and, usually,
no interest or principal payments are made during the course of the bankruptcy
case. The delay and the consequences thereof caused by such automatic stay can
be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor may stay the senior lender from
taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage secured by
property of the debtor may be modified under certain circumstances. In many
jurisdictions, the outstanding amount of the loan secured by the real property
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Other modifications may include the reduction in the amount
of each scheduled payment, which reduction may result from a reduction in the
rate of interest and/or the alteration of the repayment schedule (with or
without affecting the unpaid principal balance of the loan), and/or an extension
(or reduction) of the final maturity date. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years. Also, under federal bankruptcy law, a
bankruptcy court may permit a debtor through its rehabilitative plan to
de-accelerate a secured loan and to reinstate the loan even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the property had yet occurred) prior to the
filing of the debtor's petition. This may be done even if the full amount due
under the original loan is never repaid.
Federal bankruptcy law provides generally that rights and obligation under an
unexpired lease of the debtor/ lessee may not be terminated or modified at any
time after the commencement of a case under the Bankruptcy Code solely on the
basis of a provision in the lease to such effect or because of certain other
similar events. This prohibition on so-called "ipso facto clauses" could limit
the ability of the Trustee for a Series of Certificates to exercise certain
contractual remedies with respect to the Leases. In addition, Section 362 of the
Bankruptcy Code operates as an automatic stay of, among other things, any act to
obtain possession of property from a debtor's estate, which may delay a
Trustee's exercise of such remedies for a related Series of Certificates in the
event that a related Lessee or a related Mortgagor becomes the subject of a
proceeding under the Bankruptcy Code. For example, a mortgagee would be stayed
from enforcing a Lease Assignment by a Mortgagor related to a Mortgaged Property
if the related Mortgagor was in a bankruptcy proceeding. The legal proceedings
necessary to resolve the issues could be time-consuming and might result in
significant delays in the receipt of the assigned rents. Similarly, the filing
of a petition in bankruptcy by or on behalf of a Lessee of a Mortgaged Property
would result in a stay against the commencement or continuation of any state
court proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the Lease that occurred
prior to the filing of the Lessee's petition. Rents and other proceeds of a
Mortgage Loan may also escape an assignment thereof if the assignment is not
fully perfected under state law prior to commencement of the bankruptcy
proceeding. See "--Leases and Rents" above.
In addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee in bankruptcy on behalf of the lessee, or the
lessee as debtor-in-possession, or the assignee, if applicable, must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. Such remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was assigned, and any assurances provided to the lessor may, in fact, be
inadequate. If the lease is rejected, such rejection generally constitutes a
breach of the executory contract or unexpired lease immediately before the date
of filing the petition. As a consequence, the other party or parties to such
lease, such as the
64
<PAGE>
Mortgagor, as lessor under a Lease, would have only an unsecured claim against
the debtor for damages resulting from such breach, which could adversely affect
the security for the related Mortgage Loan. In addition, pursuant to Section
502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection in
respect of future rent installments are limited to the rent reserved by the
lease, without acceleration, for the greater of one year or 15%, not to exceed
three years, of the remaining term of the lease.
If a trustee in bankruptcy on behalf of a lessor, or a lessor as
debtor-in-possession, rejects an unexpired lease of real property, the lessee
may treat such lease as terminated by such rejection or, in the alternative, the
lessee may remain in possession of the leasehold for the balance of such term
and for any renewal or extension of such term that is enforceable by the lessee
under applicable nonbankruptcy law. The Bankruptcy Code provides that if a
lessee elects to remain in possession after such a rejection of a lease, the
lessee may offset against rents reserved under the lease for the balance of the
term after the date of rejection of the lease, and any such renewal or extension
thereof, any damages occurring after such date caused by the nonperformance of
any obligation of the lessor under the lease after such date. To the extent
provided in the related Prospectus Supplement, the Lessee will agree under
certain Leases to pay all amounts owing thereunder the Master Servicer without
offset. To the extent that such a contractual obligation remains enforceable
against the Lessee, the Lessee would not be able to avail itself of the rights
of offset generally afforded to lessees of real property under the Bankruptcy
Code.
In a bankruptcy or similar proceeding of a Mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the Mortgagor, or made directly by the related Lessee, under
the related Mortgage Loan to the Trust Fund. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs and
expenses in preserving or selling the mortgaged property ahead of payment to the
lender. In certain circumstances, a debtor in bankruptcy may have the power to
grant liens senior to the lien of a mortgage, and analogous state statutes and
general principles of equity may also provide a Mortgagor with means to halt a
foreclosure proceeding or sale and to force a restructuring of a mortgage loan
on terms a lender would not otherwise accept. Moreover, the laws of certain
states also give priority to certain tax liens over the lien of a mortgage or
deed of trust. Under the Bankruptcy Code, if the court finds that actions of the
mortgagee have been unreasonable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
To the extent described in the related Prospectus Supplement, certain of the
Mortgagors may be partnerships. The laws governing limited partnerships in
certain states provide that the commencement of a case under the Bankruptcy Code
with respect to a general partner will cause a person to cease to be a general
partner of the limited partnership, unless otherwise provided in writing in the
limited partnership agreement. This provision may be construed as an "ipso
facto" clause and, in the event of the general partner's bankruptcy, may not be
enforceable. To the extent described in the related Prospectus Supplement,
certain limited partnership agreements of the Mortgagors may provide that the
commencement of a case under the Bankruptcy Code with respect to the related
general partner constitutes an event of withdrawal (assuming the enforceability
of the clause is not challenged in bankruptcy proceedings or, if challenged, is
upheld) that might trigger the dissolution of the limited partnership, the
winding up of its affairs and the distribution of its assets, unless (i) at the
time there was at least one other general partner and the written provisions of
the limited partnership permit the business of the limited partnership to be
carried on by the remaining general partner and that general partner does so or
(ii) the written provisions of the limited partnership agreement permit the
limited partner to agree within a specified time frame (often 60 days) after
such withdrawal to continue the business of the limited partnership and to the
appointment of one or more general partners and the limited partners do so. In
addition, the laws governing general partnerships in certain states provide that
the commencement of a case under the Bankruptcy Code or state bankruptcy laws
with respect to a general partner of such partnerships triggers the dissolution
of such partnership, the winding up of its affairs and the distribution of its
assets. Such state laws, however, may not be enforceable or effective in a
bankruptcy case. The dissolution of a Mortgagor, the winding up of its affairs
and the distribution of
65
<PAGE>
its assets could result in an acceleration of its payment obligation under a
related Mortgage Loan, which may reduce the yield on the related Series of
Certificates in the same manner as a principal prepayment.
In addition, the bankruptcy of the general partner of a Mortgagor that is a
partnership may provide the opportunity for a trustee in bankruptcy for such
general partner, such general partner as a debtor-in-possession, or a creditor
of such general partner to obtain an order from a court consolidating the assets
and liabilities of the general partner with those of the Mortgagor pursuant to
the doctrines of substantive consolidation or piercing the corporate veil. In
such a case, the respective Mortgaged Property, for example, would become
property of the estate of such bankrupt general partner. Not only would the
Mortgaged Property be available to satisfy the claims of creditors of such
general partner, but an automatic stay would apply to any attempt by the Trustee
to exercise remedies with respect to such Mortgaged Property. However, such an
occurrence should not affect the Trustee's status as a secured creditor with
respect to the Mortgagor or its security interest in the Mortgaged Property.
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to unforeseen
environmental liabilities. Of particular concern may be those Mortgaged
Properties which are, or have been, the site of manufacturing, industrial or
disposal activity. Such environmental liabilities may give rise to (i) a
diminution in value of property securing any Mortgage Loan, (ii) limitation on
the ability to foreclose against such property or (iii) in certain circumstances
as more fully described below, liability for clean up costs or other remedial
actions, which liability could exceed the value of the principal balance of the
related Mortgage Loan or of such Mortgaged Property.
Under the laws of many states, contamination on a property may give rise to a
lien on the property for cleanup costs. In several states, such a lien has
priority over all existing liens (a "superlien") including those of existing
mortgages; in these states, the lien of a mortgage contemplated by this
transaction may lose its priority to such a superlien.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), a lender may be liable either to
the government or to private parties for cleanup costs on a property securing a
loan, even if the lender does not cause or contribute to the contamination.
CERCLA imposes strict, as well as joint and several, liability on several
classes of potentially responsible parties, including current owners and
operators of the property, regardless of whether they caused or contributed to
the contamination. Many states have laws similar to CERCLA.
Lenders may be held liable under CERCLA as owners or operators. Excluded from
CERCLA's definition of "owner or operator," however, is a person "who without
participating in the management of the facility, holds indicia of ownership
primarily to protect his security interest." This exemption for holders of a
security interest such as a secured lender applies only in circumstances where
the lender acts to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities encroach on the actual management of
such facility or property, the lender faces potential liability as an "owner or
operator" under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property (whether it holds the facility or property as
an investment or leases it to a third party), the lender may incur potential
CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the Eleventh
Circuit in United States v. Fleet Factors Corp. very narrowly construed CERCLA's
secured-creditor exemption. The court held that a lender need not have involved
itself in the day-to-day operations of the facility or participated in decisions
relating to hazardous waste to be liable under CERCLA; rather, liability could
attach to a lender if its involvement with the management of the facility is
broad enough to support the inference that the lender had the capacity to
influence the borrower's treatment of hazardous waste. The court added that a
lender's capacity to influence such decision could be inferred from the extent
of its involvement in the facility's financial management.
On April 29, 1992, in response to the decision in Fleet Factors Corp., the
United States Environmental Protection Agency (the "EPA") adopted a rule
interpreting and delineating CERCLA's secured-creditor exemption in EPA
enforcement proceedings. The rule attempted to define and specify the range of
permissible actions that may be
66
<PAGE>
undertaken by a foreclosing lender/holder of a contaminated facility without
exceeding the bounds of the secured-creditor exemption. The rule also attempted
to specify the circumstances under which governmental or government-appointed
entities that acquire possession or control of contaminated facilities as
conservators or receivers will be considered "involuntary" owners for purposes
of CERCLA's "innocent landowner" defense to liability. Issuance of this rule by
the EPA under CERCLA does not necessarily affect the potential for liability in
actions by either a state or a private party under CERCLA or in actions under
other federal or state laws which may impose liability on "owners or operators"
but do not incorporate the secured-creditor exemption.
The validity of the EPA rule was challenged in the U.S. Court of Appeals for the
District of Columbia in Kelley v. EPA. In an opinion issued on February 4, 1994,
the D.C. Circuit Court invalidated EPA's lender liability rule, holding that EPA
exceeded its authority in enacting the rule. The U.S. Supreme Court denied
certiorari on January 17, 1995. Legislation has been proposed that would
clarify, by statute, the range of activities a secured creditor may undertake
without being deemed to have participated in the management of the facility, and
thus losing the benefit of the secured-creditor exemption.
Under the Kelley case, the secured-creditor exemption under CERCLA will be
subject to existing case law interpretations. Some of those cases have
interpreted the exemption extremely narrowly, but most of the cases since
promulgation of the EPA rule have held that a lender is entitled to the
protection of the secured-creditor exemption provided that a lender complies
with the provisions set out in the EPA rule and does not itself (or through its
agents) cause or contribute to contamination. As a result of Kelley, the cases
applying the EPA rule have little, if any, precedential value and, thus, lenders
should expect a return to the narrower interpretations of the exemption.
In September 1995, EPA issued a guidance document stating that, in its
enforcement of CERCLA, EPA would apply the protections afforded to secured
creditors under the lender liability rule that was invalidated in the Kelley
decision. However, this EPA policy is not binding on the courts nor on states or
private parties.
The secured-creditor exemption does not protect a lender from liability under
CERCLA in cases where the lender arranges for disposal of hazardous substances
or for transportation of hazardous substances. The definition of "hazardous
substances" under CERCLA specifically excludes petroleum products, and the
secured-creditor exemption does not govern liability for cleanup costs under
federal laws other than CERCLA, in particular Subtitle I of the federal Resource
Conservation and Recovery Act ("RCRA"), which regulates underground petroleum
(other than heating oil) storage tanks. However, the EPA has adopted a lender
liability rule for underground storage tanks under Subtitle I of RCRA. Under
such rule, a holder of a security interest in an underground storage tank or
real property containing an underground storage tank is not considered an
operator of the underground storage tank as long as petroleum is not added to,
stored in or dispensed from the tank. It should be noted, however, that
liability for cleanup of petroleum contamination may be governed by state law,
which may not provide for any specific protections for secured creditors.
If a lender is or becomes liable, it may bring an action for contribution
against the owner or operator who created the environmental hazard, but that
person or entity may be bankrupt or otherwise judgment proof. It is possible
that cleanup costs could become a liability of the Trust Fund and occasion a
loss to Certificateholders in certain circumstances described above if such
remedial costs were incurred.
The related Agreement will provide that the Special Servicer, acting on behalf
of the Trustee, may not acquire title to a Mortgaged Property or take over its
operation unless the Special Servicer has previously determined, based on a
report prepared by a person who regularly conducts environmental assessments,
that: (i) such Mortgaged Property is in compliance with applicable environmental
laws, or, if not, that taking such actions as are necessary to bring the
Mortgaged Property in compliance therewith is likely to produce a greater
recovery on a present value basis, after taking into account any risks
associated therewith, than not taking such actions and (ii) there are no
circumstances present at the Mortgaged Property relating to the use, management
or disposal of any Hazardous Materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under any
federal, state or local law or regulation. This requirement effectively
precludes enforcement of the security for the related Mortgage Note until a
satisfactory environmental inquiry is undertaken, or
67
<PAGE>
that, if any Hazardous Materials are present for which such action could be
required, taking such actions with respect to the affected Mortgaged Property is
reasonably likely to produce a greater recovery on a present value basis, after
taking into account any risks associated therewith, than not taking such
actions, reducing the likelihood that a given Trust Fund will become liable for
any condition or circumstance that may give rise to any environmental claim (an
"Environmental Hazard Condition") affecting a Mortgaged Property, but making it
more difficult to realize on the security for the Mortgage Loan. However, there
can be no assurance that any environmental assessment obtained by the Special
Servicer will detect all possible Environmental Hazard Conditions, that any
estimate of the costs of effecting compliance at any Mortgaged Property and the
recovery thereon will be correct, or that the other requirements of the
Agreement, even if fully observed by the Master Servicer or Special Servicer, as
the case may be, will in fact insulate a given Trust Fund from liability for
Environmental Hazard Conditions. Any additional restrictions on acquiring titles
to a Mortgaged Property may be set forth in the related Prospectus Supplement.
See "Description of the Agreements Realization Upon Defaulted Whole Loans."
Unless otherwise specified in the related Prospectus Supplement, the Depositor
generally will not have determined whether environmental assessments have been
conducted with respect to the Mortgaged Properties relating to the Mortgage
Loans included in the Mortgage Pool for a Series, and it is likely that any
environmental assessments which would have been conducted with respect to any of
the Mortgaged Properties would have been conducted at the time of the
origination of the related Mortgage Loans and not thereafter. If specified in
the related Prospectus Supplement, a Warranting Party will represent and warrant
that based on an environmental audit commissioned by Warranting Party, as of the
date of the origination of a Mortgage Loan, the related Mortgaged Property is
not affected by a Disqualifying Condition (as defined below). No such person
will however, be responsible for any Disqualifying Condition which may arise on
a Mortgaged Property after the date of origination of the related Mortgage Loan,
whether due to actions of the Mortgagor, the Master Servicer, the Primary
Servicer, the Special Servicer or any other person. It may not always be
possible to determine whether a Disqualifying Condition arose prior or
subsequent to the date of the origination of the related Mortgage Loan.
A "Disqualifying Condition" is defined generally as a condition which would
reasonably be expected to (1) constitute or result in a violation of applicable
environmental laws, (2) require any expenditure material in relation to the
principal balance of the related Mortgage Loan to achieve or maintain compliance
in all material respects with any applicable environmental laws, or (3) require
substantial cleanup, remedial action or other extraordinary response under any
applicable environmental laws in excess of a specified escrowed amount.
"Hazardous Materials" are generally defined under several federal and state
statutes, and include dangerous toxic or hazardous pollutants, chemicals, wastes
or substances, including, without limitation, those so identified pursuant to
CERCLA, and specifically including, asbestos and asbestos containing materials,
polychlorinated biphenyls, radon gas, petroleum and petroleum products and urea
formaldehyde.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain due-on-sale and due-on-encumbrance
clauses. These clauses generally provide that the lender may accelerate the
maturity of the loan if the Mortgagor sells or otherwise transfers or encumbers
the mortgaged property. Certain of these clauses may provide that, upon an
attempted breach thereof by the Mortgagor of an otherwise non-recourse loan, the
Mortgagor becomes personally liable for the mortgage debt. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms subject to certain limited
exceptions. Unless otherwise provided in the related Prospectus Supplement, a
Master Servicer, on behalf of the Trust Fund, will determine whether to exercise
any right the Trustee may have as mortgagee to accelerate payment of any such
Mortgage Loan or to withhold its consent to any transfer or further encumbrance
in a manner consistent with the Servicing Standard.
68
<PAGE>
In addition, under federal bankruptcy laws, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
SUBORDINATE FINANCING
Where the Mortgagor encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the Mortgagor may have
difficulty servicing and repaying multiple loans. In addition, if the junior
loan permits recourse to the Mortgagor (as junior loans often do) and the senior
loan does not, a Mortgagor may be more likely to repay sums due on the junior
loan than those on the senior loan. Second, acts of the senior lender that
prejudice the junior lender or impair the junior lender's security may create a
superior equity in favor of the junior lender. For example, if the Mortgagor and
the senior lender agree to an increase in the principal amount of or the
interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the Mortgagor is
additionally burdened. Third, if the Mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
DEFAULT INTEREST, PREPAYMENT CHARGES AND PREPAYMENTS
Forms of notes and mortgages used by lenders may contain provisions obligating
the Mortgagor to pay a late charge or additional interest if payments are not
timely made, and in some circumstances may provide for prepayment fees or yield
maintenance penalties if the obligation is paid prior to maturity or prohibit
such prepayment for a specified period. In certain states, there are or may be
specific limitations upon the late charges which a lender may collect from a
Mortgagor for delinquent payments. Certain states also limit the amounts that a
lender may collect from a Mortgagor as an additional charge if the loan is
prepaid. The enforceability, under the laws of a number of states of provisions
providing for prepayment fees or penalties upon, or prohibition of, an
involuntary prepayment is unclear, and no assurance can be given that, at the
time a Prepayment Premium is required to be made on a Mortgage Loan in
connection with an involuntary prepayment, the obligation to make such payment,
or the provisions of any such prohibition, will be enforceable under applicable
state law. The absence of a restraint on prepayment, particularly with respect
to Mortgage Loans having higher Mortgage Interest Rates, may increase the
likelihood of refinancing or other early retirements of the Mortgage Loans.
ACCELERATION ON DEFAULT
Unless otherwise specified in the related Prospectus Supplement, some of the
Mortgage Loans included in the Mortgage Pool for a Series will include a
"debt-acceleration" clause, which permits the lender to accelerate the full debt
upon a monetary or nonmonetary default of the Mortgagor. The courts of all
states will enforce clauses providing for acceleration in the event of a
material payment default after giving effect to any appropriate notices. The
equity courts of the state, however, may refuse to foreclose a mortgage or deed
of trust when an acceleration of the indebtedness would be inequitable or unjust
or the circumstances would render the acceleration unconscionable. Furthermore,
in some states, the Mortgagor may avoid foreclosure and reinstate an accelerated
loan by paying only the defaulted amounts and the costs and attorneys' fees
incurred by the lender in collecting such defaulted payments.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act of
1980, enacted in March 1980 ("Title V"), provides that state usury limitations
shall not apply to certain types of residential (including multifamily but not
other commercial) first mortgage loans originated by certain lenders after March
31, 1980. A similar federal statute was in effect with respect to mortgage loans
made during the first three months of 1980. The statute authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
69
<PAGE>
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that residential first mortgage loans that are originated on or after
January 1, 1980 are subject to federal preemption. Therefore, in a state that
has not taken the requisite action to reject application of Title V or to adopt
a provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would not
apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected or a
provision limiting discount points or other charges is adopted, no Mortgage Loan
originated after the date of such state action will be eligible for inclusion in
a Trust Fund unless (i) such Mortgage Loan provides for such interest rate,
discount points and charges as are permitted in such state or (ii) such Mortgage
Loan provides that the terms thereof shall be construed in accordance with the
laws of another state under which such interest rate, discount points and
charges would not be usurious and the Mortgagor's counsel has rendered an
opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious loan.
One group of statutes requires the lender to forfeit the interest due above the
applicable limit or impose a specified penalty. Under this statutory scheme, the
borrower may cancel the recorded mortgage or deed of trust upon paying its debt
with lawful interest, and the lender may foreclose, but only for the debt plus
lawful interest. A second group of statutes is more severe. A violation of this
type of usury law results in the invalidation of the transaction, thereby
permitting the borrower to cancel the recorded mortgage or deed of trust without
any payment or prohibiting the lender from foreclosing.
CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTIES
The Mortgaged Properties will be subject to compliance with various federal,
state and local statutes and regulations. Failure to comply (together with an
inability to remedy any such failure) could result in material diminution in the
value of a Mortgage Property which could, together with the possibility of
limited alternative uses for a particular Mortgaged Property (e.g., a nursing or
convalescent home or hospital), result in a failure to realize the full
principal amount of the related Mortgage Loan. Mortgages on Mortgaged Properties
which are owned by the Mortgagor under a condominium form of ownership are
subject to the declaration, by-laws and other rules and regulations of the
condominium association. Mortgaged Properties which are hotels or motels may
present additional risk in that hotels and motels are typically operated
pursuant to franchise, management and operating agreements which may be
terminable by the operator, and the transferability of the hotel's operating,
liquor and other licenses to the entity acquiring the hotel either through
purchases or foreclosure is subject to the vagaries of local law requirements.
In addition, Mortgaged Properties which are multifamily residential properties
may be subject to rent control laws, which could impact the future cash flows of
such properties.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the Mortgagor in its capacity as owner or landlord, the ADA
may also impose such
70
<PAGE>
requirements on a foreclosing lender who succeeds to the interest of the
Mortgagor as owner of landlord. Furthermore, since the "readily achievable"
standard may vary depending on the financial condition of the owner or landlord,
a foreclosing lender who is financially more capable than the Mortgagor of
complying with the requirements of the ADA may be subject to more stringent
requirements than those to which the Mortgagor is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related Series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-related
crimes or of criminal violations of the Racketeer Influenced and Corrupt
Organizations ("RICO") statute can be seized by the government if the property
was used in, or purchased with the proceeds of, such crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control
Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it establishes
that: (i) its mortgage was executed and recorded before commission of the crime
upon which the forfeiture is based, or (ii) the lender was, at the time of
execution of the mortgage, "reasonably without cause to believe" that the
property was used in, or purchased with the proceeds of, illegal drug or RICO
activities.
71
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood llp, counsel to the Depositor. This
summary is based on laws, regulations, including the REMIC regulations
promulgated by the Treasury Department (the "REMIC Regulations"), rulings and
decisions now in effect or (with respect to regulations) proposed, all of which
are subject to change either prospectively or retroactively. Brown & Wood llp
will deliver an opinion to the Depositor that the information set forth under
this caption, "Certain Federal Income Tax Consequences," to the extent that it
constitutes matters of law or legal conclusions, is correct in all material
respects. This summary does not address the federal income tax consequences of
an investment in Certificates applicable to all categories of investors, some of
which (for example, banks and insurance companies) may be subject to special
rules. Prospective investors should consult their tax advisors regarding the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary depending on
whether an election is made to treat the Trust Fund relating to a particular
Series of Certificates as a REMIC under the Code. The Prospectus Supplement for
each Series of Certificates will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If a REMIC election is not made, Brown & Wood llp will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
SINGLE CLASS OF GRANTOR TRUST CERTIFICATES CHARACTERIZATION. The Trust Fund may
be created with one class of Grantor Trust Certificates. In this case, each
Grantor Trust Certificateholder will be treated as the owner of a pro rata
undivided interest in the interest and principal portions of the Trust Fund
represented by the Grantor Trust Certificates and will be considered the
equitable owner of a pro rata undivided interest in each of the Mortgage Assets
in the Pool. Any amounts received by a Grantor Trust Certificateholder in lieu
of amounts due with respect to any Mortgage Asset because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its federal
income tax return in accordance with such Grantor Trust Certificateholder's
method of accounting its pro rata share of the entire income from the Mortgage
Loans in the Trust Fund represented by Grantor Trust Certificates, including
interest, original issue discount ("OID"), if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the Master Servicer. Under Code Sections 162 or 212 each Grantor Trust
Certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the Master Servicer, provided that such
amounts are reasonable compensation for services rendered to the Trust Fund.
Grantor Trust Certificateholders that are individuals, estates or trusts will be
entitled to deduct their share of expenses as itemized deductions only to the
extent such expenses plus all other Code Section 212 expenses exceed two percent
of its adjusted gross income. In addition, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds the applicable amount (which amount will be adjusted for
inflation) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. A Grantor Trust
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Master Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the Master Servicer, whichever is earlier. If the
servicing fees paid to the Master
72
<PAGE>
Servicer are deemed to exceed reasonable servicing compensation, the amount of
such excess could be considered as an ownership interest retained by the Master
Servicer (or any person to whom the Master Servicer assigned for value all or a
portion of the servicing fees) in a portion of the interest payments on the
Mortgage Assets. The Mortgage Assets would then be subject to the "coupon
stripping" rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates Brown & Wood llp will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent "loans . . secured by an interest in real property which
is . . residential property" within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Mortgage Assets represented by
that Grantor Trust Certificate are of a type described in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment trust
representing an interest in Mortgage Assets will be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(5)(A), and
interest income on the Mortgage Assets will be considered "interest on
obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] . . which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of the bad
debt reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
STRIPPED BONDS AND COUPONS. Certain Trust Funds may consist of Government
Securities which constitute "stripped bonds" or "stripped coupons" as those
terms are defined in Section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code.
Under these rules, such Government Securities are treated as having original
issue discount based on the purchase price and the stated redemption price at
maturity of each Security. As such, Grantor Trust Certificateholders would be
required to include in income their pro rata share of the original issue
discount on each Government Security recognized in any given year on an economic
accrual basis even if the Grantor Trust Certificateholder is a cash method
taxpayer. Accordingly, the sum of the income includible to the Grantor Trust
Certificateholder in any taxable year may exceed amounts actually received
during such year.
PREMIUM. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage
73
<PAGE>
loan with respect to a Mortgage Asset) prepays in full, equal to the difference
between the portion of the prepaid principal amount of such Mortgage Loan (or
underlying mortgage loan) that is allocable to the Certificate and the portion
of the adjusted basis of the Certificate that is allocable to such Mortgage Loan
(or underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
ORIGINAL ISSUE DISCOUNT. The Internal Revenue Service (the "IRS") has stated in
published rulings that, in circumstances similar to those described herein, the
special rules of the Code relating to original issue discount ("OID") (currently
Code Sections 1271 through 1273 and 1275) and Treasury regulations issued on
January 27, 1994, under such Sections (the "OID Regulations"), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate Mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
MARKET DISCOUNT. A Grantor Trust Certificateholder that acquires an undivided
interest in Mortgage Assets may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Asset is considered to have been purchased at a "market discount." Generally,
the amount of market discount is equal to the excess of the portion of the
principal amount of such Mortgage Asset allocable to such holder's undivided
interest over such holder's tax basis in such interest. Market discount with
respect to a Grantor Trust Certificate will be considered to be zero if the
amount allocable to the Grantor Trust Certificate is less than 0.25% of the
Grantor Trust Certificate's stated redemption price at maturity multiplied by
the weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment or a
prepayment) or any gain on disposition of a market discount bond acquired by the
taxpayer after October 22, 1986 shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the
74
<PAGE>
product of (i) the total remaining market discount and (ii) a fraction, the
numerator of which is the OID accruing during the period and the denominator of
which is the total remaining OID at the beginning of the accrual period. For
Grantor Trust Certificates issued without OID, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the amount of
stated interest paid during the accrual period and the denominator of which is
the total amount of stated interest remaining to be paid at the beginning of the
accrual period. For purposes of calculating market discount under any of the
above methods in the case of instruments (such as the Grantor Trust
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor Trust
Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also may
be required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry such
Grantor Trust Certificate purchased with market discount. For these purposes,
the de minimis rule referred above applies. Any such deferred interest expense
would not exceed the market discount that accrues during such taxable year and
is, in general, allowed as a deduction not later than the year in which such
market discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
ELECTION TO TREAT ALL INTEREST AS OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. STRIPPED BONDS AND STRIPPED COUPONS
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the "Stripped
Bond Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess servicing") will
be treated under the stripped bond rules. If the excess servicing fee is less
than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by
75
<PAGE>
Mortgage Asset basis, which could result in some Mortgage Assets being treated
as having more than 100 basis points of interest stripped off. See "--Non-REMIC
Certificates" and "Multiple Classes of Grantor Trust Certificates--Stripped
Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally should be
treated as an interest in Mortgage Assets issued on the day such Certificate is
purchased for purposes of calculating any OID. Generally, if the discount on a
Mortgage Asset is larger than a de minimis amount (as calculated for purposes of
the OID rules) a purchaser of such a Certificate will be required to accrue the
discount under the OID rules of the Code. See "--Non-REMIC Certificates" and
"--Single Class of Grantor Trust Certificates--Original Issue Discount" herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the Mortgage Assets as market discount rather than OID if
either (i) the amount of OID with respect to the Mortgage Assets is treated as
zero under the OID de minimis rule when the Certificate was stripped or (ii) no
more than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are urged
to consult with their own tax advisors regarding the proper treatment of these
Certificates for federal income tax purposes.
TREATMENT OF CERTAIN OWNERS. Several Code sections provide beneficial treatment
to certain taxpayers that invest in Mortgage Assets of the type that make up the
Trust Fund. With respect to these Code sections, no specific legal authority
exists regarding whether the character of the Grantor Trust Certificates, for
federal income tax purposes, will be the same as that of the underlying Mortgage
Assets. While Code Section 1286 treats a stripped obligation as a separate
obligation for purposes of the Code provisions addressing OID, it is not clear
whether such characterization would apply with regard to these other Code
sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(6)(B)
and "loans . . . secured by, an interest in real property which is . . .
residential real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest income attributable to Grantor Trust Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the underlying Mortgage Assets and
76
<PAGE>
interest on such Mortgage Assets qualify for such treatment. Prospective
purchasers to which such characterization of an investment in Certificates is
material should consult their own tax advisors regarding the characterization of
the Grantor Trust Certificates and the income therefrom. Grantor Trust
Certificates will be "obligation[s] . . which [are] principally secured,
directly or indirectly, by an interest in real property" within the meaning of
Code Section 860G(a)(3).
2. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN ARM
LOANS
The original issue discount rules of Code Sections 1271 through 1275 will be
applicable to a Certificateholder's interest in those Mortgage Assets as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate Mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgage in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions, or under certain circumstances,
by the presence of "teaser" rates on the Mortgage Assets. OID on each Grantor
Trust Certificate must be included in the owner's ordinary income for federal
income tax purposes as it accrues, in accordance with a constant interest method
that takes into account the compounding of interest, in advance of receipt of
the cash attributable to such income. The amount of OID required to be included
in an owner's income in any taxable year with respect to a Grantor Trust
Certificate representing an interest in Mortgage Assets other than Mortgage
Assets with interest rates that adjust periodically ("ARM Loans") likely will be
computed as described below under "--Accrual of Original Issue Discount." The
following discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). The OID Regulations
generally are effective for debt instruments issued on or after April 4, 1994,
but may be relied upon as authority with respect to debt instruments, such as
the Grantor Trust Certificates, issued after December 21, 1992. Alternatively,
proposed Treasury regulations issued December 21, 1992 may be treated as
authority for debt instruments issued after December 21, 1992 and prior to April
4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may be
treated as authority for instruments issued before December 21, 1992. In
applying these dates, the issue date of the Mortgage Assets should be used, or,
in the case of Stripped Bond Certificates or Stripped Coupon Certificates, the
date such Certificates are acquired. The holder of a Certificate should be
aware, however, that neither the proposed OID Regulations nor the OID
Regulations adequately address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust Certificate
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such Mortgage Asset's stated redemption
price at maturity over its issue price. The issue price of a Mortgage Asset is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a Mortgage Asset is the sum of all payments to be made on such Mortgage Asset
other than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described below under "--Accrual of Original Issue
Discount," will, unless otherwise specified in the related Prospectus
Supplement, utilize the original yield to maturity of the Grantor Trust
Certificate calculated based on a reasonable assumed prepayment rate for the
mortgage loans underlying the Grantor Trust Certificates (the "Prepayment
Assumption"), and will take into account events that occur during the
calculation period. The Prepayment Assumption will be determined in the manner
prescribed by regulations that have not yet been issued. The legislative history
of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until
77
<PAGE>
further guidance is issued, the Master Servicer intends to calculate and report
OID under the method described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. Generally, the owner of a Grantor Trust
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing during such accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined according
to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income as
it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Assets acquired by a Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Asset, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Asset (i.e., points) will be
includible by such holder. Other original issue discount on the Mortgage Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as the
Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors are
urged to consult their tax advisors regarding how income will be includible with
respect to such Certificates.
78
<PAGE>
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences ownership in
underlying Mortgage Assets that were issued on or before July 18, 1984, interest
or OID paid by the person required to withhold tax under Code Section 1441 or
1442 to (i) an owner that is not a U.S. Person (as defined below) or (ii) a
Grantor Trust Certificateholder holding on behalf of an owner that is not a U.S.
Person will be subject to federal income tax, collected by withholding, at a
rate of 30% or such lower rate as may be provided for interest by an applicable
tax treaty. Accrued OID recognized by the owner on the sale or exchange of such
a Grantor Trust Certificate also will be subject to federal income tax at the
same rate. Generally, such payments would not be subject to withholding to the
extent that a Grantor Trust Certificate evidences ownership in Mortgage Assets
issued after July 18, 1984, by natural persons if such Grantor Trust
Certificateholder complies with certain identification requirements (including
delivery of a statement, signed by the Grantor Trust Certificateholder under
penalties of perjury, certifying that such Grantor Trust Certificateholder is
not a U.S. Person and providing the name and address of such Grantor Trust
Certificateholder). Additional restrictions apply to Mortgage Assets of where
the Mortgagor is not a natural person in order to qualify for the exemption from
withholding.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable time
after the end of each calendar year, to each person who was a Certificateholder
at any time during such year, such information as may be deemed necessary or
desirable to assist Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such Certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be treated as a
REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal
79
<PAGE>
income tax (see, however "--Taxation of Owners of REMIC Residual Certificates"
and "--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood llp will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ("REMIC Regular Certificates") or a sale class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(6)(B); and (iii) interest on Certificates held by a real estate
investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
Mortgage Assets held pending distribution on the REMIC Certificates will be
considered to be real estate assets for purposes of Code Section 856(c).
TIERED REMIC STRUCTURES. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood llp, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) "real estate assets"
within the meaning of Section 856(c)(6)(B) of the Code; (ii) "loans secured by
an interest in real property" under Section 7701(a)(19)(C) of the Code; and
(iii) whether the income on such Certificates is interest described in Section
856(c)(3)(B) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of the bad
debt reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
80
<PAGE>
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the "stated redemption price at maturity" of a REMIC Regular Certificate and its
"issue price." Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the 1986 Act. Holders of REMIC
Regular Certificates (the "REMIC Regular Certificateholders") should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and 1275.
These rules require that the amount and rate of accrual of OID be calculated
based on the Prepayment Assumption and the anticipated reinvestment rate, if
any, relating to the REMIC Regular Certificates and prescribe a method for
adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on REMIC Regular Certificates with respect to which Deferred Interest
will accrue will not constitute qualified stated interest payments, and the
stated redemption price at maturity of such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date on a
REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC
81
<PAGE>
Regular Certificate that is issued with non-de minimis OID, as determined under
the foregoing rule, will be treated as OID. Where the interval between the issue
date and the first Distribution Date on a REMIC Regular Certificate is shorter
than the interval between subsequent Distribution Dates, interest due on the
first Distribution Date in excess of the amount that accrued during the first
period would be added to the Certificates stated redemption price at maturity.
REMIC Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a REMIC
Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the REMIC Regular Certificate multiplied by the weighted average
maturity of the REMIC Regular Certificate. For this purpose, the weighted
average maturity of the REMIC Regular Certificate is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for certain
REMIC Regular Certificates to be issued at prices significantly exceeding their
principal amounts or based on notional principal balances (the "Super-Premium
Certificates"). The income tax treatment of such REMIC Regular Certificates is
not entirely certain. For information reporting purposes, the Trust Fund intends
to take the position that the stated redemption price at maturity of such REMIC
Regular Certificates is the sum of all payments to be made on such REMIC Regular
Certificates determined under the Prepayment Assumption, with the result that
such REMIC Regular Certificates would be issued with OID. The calculation of
income in this manner could result in negative original issue discount (which
delays future accruals of OID rather than being immediately deductible) when
prepayments on the Mortgage Assets exceed those estimated under the Prepayment
Assumption. If the Super Premium Certificates were treated as contingent payment
obligations, it is unclear how holders of those Certificates would report income
or recover their basis. In the alternative, the IRS could assert that the stated
redemption price at maturity of such REMIC Regular Certificates should be
limited to their principal amount (subject to the discussion below under
"--Accrued Interest Certificates"), so that such REMIC Regular Certificates
would be considered for federal income tax purposes to be issued at a premium.
If such a position were to prevail, the rules described below under "--Taxation
of Owners of REMIC Regular Certificates--Premium" would apply. It is unclear
when a loss may be claimed for any unrecovered basis for a Super-Premium
Certificate. It is possible that a holder of a Super-Premium Certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments, assuming no further prepayments or when the final payment is received
with respect to such Super-Premium Certificate.
The Internal Revenue Service (the "IRS") recently issued final regulations (the
"Contingent Regulations") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations specifically do not
apply for the purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the REMIC Regular Certificates. Additionally, the
OID Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in the Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
Under the REMIC Regulations, if the issue price of a REMIC Regular Certificate
(other than REMIC Regular Certificate based on a notional amount) does not
exceed 125% of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, such REMIC Regular Certificate generally
should not be
82
<PAGE>
treated as a Super-Premium Certificate and the rules described below under
"--REMIC Regular Certificates-- Premium" should apply. However, it is possible
that holders of REMIC Regular Certificates issued at a premium, even if the
premium is less than 25% of such Certificate's actual principal balance, will be
required to amortize the premium under an original issue discount method or
contingent interest method even though no election under Code Section 171 is
made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, a calculation
will be made of the portion of the OID that accrues during each successive
period (an "accrual period") that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the REMIC Regular Certificates as calculated under
the Prepayment Assumption) of all remaining payments to be received on the REMIC
Regular Certificates under the Prepayment Assumption and (b) any payments
included in the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that REMIC Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase at original issue.
VARIABLE RATE REMIC REGULAR CERTIFICATES. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates,"
83
<PAGE>
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a variable
rate of interest will accrue in the manner described above under "--Original
Issue Discount and Premium" by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the Certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a REMIC
Regular Certificate that is a weighted average of the net interest rates on
Mortgage Loans as qualified stated interest.
In such case, the weighted average rate used to compute the initial pass-through
rate on the REMIC Regular Certificates will be deemed to be the index in effect
through the life of the REMIC Regular Certificates. It is possible, however,
that the IRS may treat some or all of the interest on REMIC Regular Certificates
with a weighted average rate as taxable under the rules relating to obligations
providing for contingent payments. Such treatment may effect the timing of
income accruals on such REMIC Regular Certificates.
ELECTION TO TREAT ALL INTEREST AS OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
MARKET DISCOUNT. A purchaser of a REMIC Regular Certificate may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of (i) the REMIC Regular Certificate's stated principal amount or, in
the case of a REMIC Regular Certificate with OID, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be considered
to be zero if the amount allocable to the REMIC Regular Certificate is less than
0.25% of such REMIC Regular Certificate's stated redemption price at maturity
multiplied by such REMIC Regular Certificate's weighted average maturity
remaining after the date of purchase. If market discount on a REMIC Regular
Certificate is considered to be zero under this rule, the actual amount of
market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment or a
prepayment) or any gain on disposition of a market discount bond acquired by the
taxpayer after October 22, 1986, shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment.
84
<PAGE>
The amount of accrued market discount for purposes of determining the tax
treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the Treasury, rules described in the Legislative
History will apply. Under those rules, the holder of a market discount bond may
elect to accrue market discount either on the basis of a constant interest
method rate or according to one of the following methods. For REMIC Regular
Certificates issued with OID, the amount of market discount that accrues during
a period is equal to the product of (i) the total remaining market discount and
(ii) a fraction, the numerator of which is the OID accruing during the period
and the denominator of which is the total remaining OID at the beginning of the
period. For REMIC Regular Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of (a) the total
remaining market discount and (b) a fraction, the numerator of which is the
amount of stated interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid at the
beginning of the period. For purposes of calculating market discount under any
of the above methods in the case of instruments (such as the REMIC Regular
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same Prepayment
Assumption applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also may
be required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry such
Certificate purchased with market discount. For these purposes, the de minimis
rule referred to above applies. Any such deferred interest expense would not
exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases the REMIC
Regular Certificate at a cost (not including accrued qualified stated interest)
greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
DEFERRED INTEREST. Certain classes of REMIC Regular Certificates may provide
for the accrual of Deferred Interest with respect to one or more ARM Loans. Any
Deferred Interest that accrues with respect to a class of REMIC Regular
Certificates will constitute income to the holders of such Certificates prior to
the time distributions of cash with respect to such Deferred Interest are made.
It is unclear, under the OID Regulations, whether any of
85
<PAGE>
the interest on such Certificates will constitute qualified stated interest or
whether all or a portion of the interest payable on such Certificates must be
included in the stated redemption price at maturity of the Certificates and
accounted for as OID (which could accelerate such inclusion). Interest on REMIC
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates and, therefore, applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such REMIC Regular Certificates.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in "--REMIC Regular Certificates--Treatment of Realized
Losses" below.
SALE, EXCHANGE OR REDEMPTION. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under "--Market Discount" above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
The Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from the sale of a REMIC
Regular Certificate by a bank or a thrift institution to which such Section
applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a statement of
the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
86
<PAGE>
ACCRUED INTEREST CERTIFICATES. Certain of the REMIC Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a REMIC Regular
Certificate is allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the REMIC Regular Certificate provides for
a payment of stated interest on the first payment date (and the first payment
date is within one year of the issue date) that equals or exceeds the amount of
the pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of
pre-issuance accrued interest, rather than as an amount payable on the REMIC
Regular Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates. Therefore, in the case
of a Payment Lag Certificate, the Trust Fund intends to include accrued interest
in the issue price and report interest payments made on the first Distribution
Date as interest to the extent such payments represent interest for the number
of days that the Certificateholder has held such Payment Lag Certificate during
the first accrual period.
Investors should consult their own tax advisors concerning the treatment for
federal income tax purposes of Payment Lag Certificates.
NON-INTEREST EXPENSES OF THE REMIC. Under temporary Treasury regulations, if
the REMIC is considered to be a "single-class REMIC," a portion of the REMIC's
servicing, administrative and other non-interest expenses will be allocated as a
separate item to those REMIC Regular Certificateholders that are "pass-through
interest holders." Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Regular Certificates. See "Pass-Through of Non-Interest
Expenses of the REMIC" under "--Taxation of Owners of REMIC Residual
Certificates" below.
TREATMENT OF REALIZED LOSSES. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
NON-U.S. PERSONS. Generally, payments of interest (including any payment with
respect to accrued OID) on the REMIC Regular Certificates to a REMIC Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding tax
if (i) such REMIC Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the Issuer; (ii) such REMIC Regular Certificateholder is not a controlled
foreign corporation (within the meaning of Code Section 957) related to the
Issuer; and (iii) such REMIC Regular Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by
87
<PAGE>
the REMIC Regular Certificateholder under penalties of perjury, certifying that
such REMIC Regular Certificateholder is a foreign person and providing the name
and address of such REMIC Regular Certificateholder). If a REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest to
such holder, including distributions in respect of accrued OID, may be subject
to a 30% withholding tax, subject to reduction under any applicable tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of a
non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons related to
such holders should not acquire any REMIC Residual Certificates, and holders of
REMIC Residual Certificates (the "REMIC Residual Certificateholder") and persons
related to REMIC Residual Certificateholders should not acquire any REMIC
Regular Certificates without consulting their tax advisors as to the possible
adverse tax consequences of doing so.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Master Servicer will furnish
or make available, within a reasonable time after the end of each calendar year,
to each person who was a REMIC Regular Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist REMIC
Regular Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to beneficial owners or
financial intermediaries that hold such REMIC Regular Certificates on behalf of
beneficial owners. If a holder, beneficial owner, financial intermediary or
other recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Taxes" below. Instead, each original holder of a REMIC
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any REMIC Residual Certificates. The
taxable income of the REMIC for each day will be determined by allocating the
taxable income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day
will be based on the portion of the outstanding REMIC Residual Certificates that
such holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the holders of REMIC Residual
Certificates without regard to the timing or amounts of cash distributions by
the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to the
limitations on the deductibility of "passive losses." As residual interests, the
REMIC Residual Certificates will be subject to tax rules, described below, that
differ from those that would apply if the REMIC Residual Certificates were
treated for federal income tax purposes as direct ownership interests in the
Certificates or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable income
from the REMIC Residual Certificate in excess of the cash distributed. For
example, a structure where principal distributions are made serially on regular
interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a
88
<PAGE>
REMIC Residual Certificate and the impact of such tax treatment on the after-tax
yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such REMIC Residual Certificateholder owns such
REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See "--Sale or Exchange of REMIC
Residual Certificates" below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
TAXABLE INCOME OF THE REMIC ATTRIBUTABLE TO RESIDUAL INTERESTS. The taxable
income of the REMIC will reflect a netting of (i) the income from the Mortgage
Assets and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and OID on the REMIC Regular Certificates and, except as described
above under "--Taxation of Owners of REMIC Regular Certificates--Non-Interest
Expenses of the REMIC," other expenses. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that (i) the limitations on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts, and (iii)
the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. The REMIC's gross income includes interest,
original issue discount income, and market discount income, if any, on the
Mortgage Loans, reduced by amortization of any premium on the Mortgage Loans,
plus income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
REMIC Regular Certificates. Note that the timing of cancellation of indebtedness
income recognized by REMIC Residual Certificateholders resulting from defaults
and delinquencies on Mortgage Assets may differ from the time of the actual loss
on the Mortgage Asset. The REMIC's deductions include interest and original
issue discount expense on the REMIC Regular Certificates, servicing fees on the
Mortgage Loans, other administrative expenses of the REMIC and realized losses
on the Mortgage Loans. The requirement that REMIC Residual Certificateholders
report their pro rata share of taxable income or net loss of the REMIC will
continue until there are no Certificates of any class of the related Series
outstanding.
For purposes of determining its taxable income, the REMIC will have an initial
aggregate tax basis in its assets equal to the sum of the issue prices of the
REMIC Regular Certificates and the REMIC Residual Certificates (or, if a class
of Certificates is not sold initially, its fair market value). Such aggregate
basis will be allocated among the Mortgage Assets and other assets of the REMIC
in proportion to their respective fair market value. A Mortgage Asset will be
deemed to have been acquired with discount or premium to the extent that the
REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC Regular
Certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to REMIC Regular
Certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders described therein will not apply.
89
<PAGE>
A REMIC Residual Certificateholder will not be permitted to amortize the cost of
the REMIC Residual Certificate as an offset to its share of the REMIC's taxable
income. However, REMIC taxable income will not include cash received by the
REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See "--Sale or Exchange of REMIC Residual
Certificates" below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see "--Allocation of the Income of
the REMIC to the REMIC Residual Certificates" above.
NET LOSSES OF THE REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
MARK TO MARKET RULES. Prospective purchasers of a REMIC Residual Certificate
should be aware that the IRS recently released finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Certificate
acquired after January 3, 1995 can not be marked-to-market.
PASS-THROUGH OF NON-INTEREST EXPENSES OF THE REMIC. As a general rule, all of
the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that compute
their income in the same manner as individuals) who own an interest in a REMIC
Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g., a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts.
90
<PAGE>
REMIC Residual Certificateholders that are pass-through interest holders should
consult their own tax advisors about the impact of these rules on an investment
in the REMIC Residual Certificates.
EXCESS INCLUSIONS. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as "unrelated business taxable income" within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see "--Tax-Exempt Investors" below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "--Non-U.S. Persons" below.
With respect to any REMIC Residual Certificateholder, the excess inclusions for
any calendar quarter is the excess, if any, of (i) the income of such REMIC
Residual Certificateholder for that calendar quarter from its REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for all
days during the calendar quarter on which the REMIC Residual Certificateholder
holds such REMIC Residual Certificate. For this purpose, the daily accruals with
respect to a REMIC Residual Certificate are determined by allocating to each day
in the calendar quarter its ratable portion of the product of the "adjusted
issue price" (as defined below) of the REMIC Residual Certificate at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the REMIC Residual Certificate is issued. For this
purpose, the "adjusted issue price" of a REMIC Residual Certificate at the
beginning of any calendar quarter equals the issue price of the REMIC Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the REMIC Residual Certificate before the beginning of such quarter. The
"federal long-term rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published monthly
by the IRS.
In the case of any REMIC Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such REMIC Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
REMIC Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three rules
for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
PAYMENTS. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
91
<PAGE>
SALE OR EXCHANGE OF REMIC RESIDUAL CERTIFICATES. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such Section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller of a
REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the "wash
sale" rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived from
"prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election has
been made to treat such Trust Fund as a REMIC made after the day on which such
Trust Fund issues all of its interests could result in the imposition of a tax
on the Trust Fund equal to 100% of the value of the contributed property (the
"Contributions Tax"). No Trust Fund for any Series of Certificates will accept
contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat such
Trust Fund as a REMIC may also be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income from
foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer, Trustee or Seller, as
the case may be, out of its own funds or (ii) the Seller's obligation to
repurchase a Mortgage Loan, such tax will be borne by the Seller. In the event
that such Master Servicer, Trustee or Seller, as the case may be, fails to pay
or is not required to pay any such tax as provided above, such tax will be
payable out of the Trust Fund for such Series and will result in a reduction in
amounts available to be distributed to the Certificateholders of such Series.
92
<PAGE>
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of Code
Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC Regular
Certificates. If a REMIC Residual Certificateholder's adjusted basis in the
REMIC Residual Certificate exceeds the amount of cash distributed to such REMIC
Residual Certificateholder in final liquidation of its interest, then it would
appear that the REMIC Residual Certificateholder would be entitled to a loss
equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the REMIC
generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a REMIC Residual Certificate that
is considered an excess inclusion. See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above.
RESIDUAL CERTIFICATE PAYMENTS NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons (see
"--Taxation of Owners of REMIC Regular Certificates--Non-U.S. Persons" above)
are treated as interest for purposes of the 30% (or lower treaty rate) United
States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as "portfolio interest," subject to the conditions
described in "--Taxation of Owners of REMIC Regular Certificates" above, but
only to the extent that the underlying mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a REMIC Residual
Certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the REMIC Residual Certificate is
disposed of) under rules similar to those for withholding upon disposition of
debt instruments that have OID. The Code, however, grants the Treasury
Department authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of
93
<PAGE>
REMIC Residual Certificates--Excess Inclusions" above. If the amounts paid to
REMIC Residual Certificateholders that are not U.S. persons are effectively
connected with their conduct of a trade or business within the United States,
the 30% (or lower treaty rate) withholding will not apply. Instead, the amounts
paid to such non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of REMIC
Residual Certificates, see "--Tax-Related Restrictions on Transfers of REMIC
Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders should not
acquire any REMIC Residual Certificates, and REMIC Residual Certificateholders
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates, without consulting their tax advisors as to the
possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. An entity may not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that residual interests in such
entity are not held by "disqualified organizations" (as defined below). Further,
a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (A) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (B) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a pass-
through entity as a nominee for another will, with respect to such interest, be
treated as a pass-through entity. The tax on pass-through entities is generally
effective for periods after March 31, 1988, except that in the case of regulated
investment companies, real estate investment trusts, common trust funds and
publicly-traded partnerships the tax shall apply only to taxable years of such
entities beginning after December 31, 1988.
In order to comply with these rules, the Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified
94
<PAGE>
organization and (ii) a covenant by the proposed transferee to the effect that
the proposed transferee agrees to be bound by and to abide by the transfer
restrictions applicable to the REMIC Residual Certificate.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a "U.S. Person," as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a REMIC
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person unless such transferee's income in
respect of the REMIC Residual Certificate is effectively connected with the
conduct of a United States trade or business. A REMIC Residual Certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
amounts that will equal at least 30 percent of each excess inclusion, and that
such amounts will be distributed at or after the time the excess inclusion
accrues and not later than the end of the calendar year following the year of
accrual. If the non-U.S. Person transfers the REMIC Residual Certificate to a
U.S. Person, the transfer will be disregarded, and the foreign transferor will
continue to be treated as the owner, if the transfer has the effect of allowing
the transferor to avoid tax on accrued excess inclusions. The provisions in the
REMIC Regulations regarding transfers of REMIC Residual Certificates that have
tax avoidance potential to foreign persons are effective for all transfers after
June 30, 1992. The Agreement will provide that no record of beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with a
duly completed I.R.S. Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer restrictions shall
be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a pass-
through entity.
95
<PAGE>
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain Federal
Income Tax Consequences," potential investors should consider the state income
tax consequences of the acquisition, ownership, and disposition of the Offered
Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA
("Plans") and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Certificates without regard to
the ERISA considerations described below, subject to other applicable federal
and state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan from
engaging in certain transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes (or, in some cases, a civil penalty may
be assessed pursuant to Section 502(i) of ERISA) on parties in interest which
engage in nonexempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold plan assets
by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Mortgage Loans and any other assets held by
the Trust. In such an event, the Depositor, the Servicers, the Trustee and other
persons, in providing services with respect to the assets of the Trust, may be
parties in interest, subject to the fiduciary responsibility provisions of Title
I of ERISA, including the prohibited transaction provisions of Section 406 of
ERISA (and of Section 4975 of the Code), with respect to transactions involving
such assets unless such transactions are subject to a statutory or
administrative exemption.
The regulations contain a DE MINIMIS safe-harbor rule that exempts any entity
from plan assets status as long as the aggregate equity investment in such
entity by Plans is not significant. For this purpose, equity participation in
the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own at
least 25% of the value of any class of equity interest. "Benefit plan investors"
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25%
96
<PAGE>
limitation must be met with respect to each class of certificates, regardless of
the portion of total equity value represented by such class, on an ongoing
basis.
AVAILABILITY OF UNDERWRITER'S EXEMPTION FOR CERTIFICATES
Labor has granted to J.P. Morgan Securities Inc. Prohibited Transaction
Exemption 90-23 (the "Exemption"), which exempts from the application of the
prohibited transaction rules transactions relating to: (1) the acquisition, sale
and holding by Plans of certain certificates representing an undivided interest
in certain asset-backed pass-through trusts, with respect to which J.P. Morgan
Securities Inc. or any of its affiliates is the sole underwriter or the manager
or co-manager of the underwriting syndicate; and (2) the servicing, operation
and management of such asset-backed pass-through trusts, provided that the
general conditions and certain other conditions set forth in the Exemption are
satisfied.
GENERAL CONDITIONS OF THE EXEMPTION. Section II of the Exemption sets forth the
following general conditions which must be satisfied before a transaction
involving the acquisition, sale and holding of the Certificates or a transaction
in connection with the servicing, operation and management of the Trust Fund may
be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms (including the
price for such Certificates) that are at least as favorable to the investing
Plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the Certificates acquired by the Plan
are not subordinated to the rights and interests evidenced by other
certificates of the Trust Fund;
(3) The Certificates acquired by the Plan have received a rating at the time of
such acquisition that is in one of the three highest rating categories from
any of Duff & Phelps Inc., Fitch Investors Service, Inc., Moody's Investors
Service, Inc. and Standard & Poor's Ratings Group;
(4) The Trustee is not an affiliate of the Underwriters, the Depositor, the
Servicers, any borrower whose obligations under one or more Mortgage Loans
constitute more than 5% of the aggregate unamortized principal balance of
the assets in the Trust, or any of their respective affiliates (the
"Restricted Group");
(5) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Depositor pursuant to the sale of
the Mortgage Loans to the Trust represents not more than the fair market
value of such Mortgage Loans; the sum of all payments made to and retained
by the Servicers represent not more than reasonable compensation for the
Servicers' services under the Agreements and reimbursement of the Servicer's
reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself confirm (a)
that the Certificates constitute "certificates" for purposes of the Exemption
and (b) that the specific and general conditions set forth in the Exemption and
the other requirements set forth in the Exemption would be satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Certificates on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Certificates,
a fiduciary of a Plan subject to the fiduciary responsibility provisions of
ERISA or an employee benefit plan subject to the prohibited transaction
provisions of the Code should make its own determination as to the availability
of the exemptive relief provided in the Exemption, and also consider the
availability of any other prohibited transaction exemptions. The
97
<PAGE>
Prospectus Supplement with respect to a Series of Certificates may contain
additional information regarding the application of the Exemption, PTCE 83-1, or
any other exemption, with respect to the Certificates offered thereby.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Offered Certificates will identify
those classes of Offered Certificates, if any, which constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Such classes will constitute "mortgage related
securities" for so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
(the "SMMEA Certificates"). As "mortgage related securities," the SMMEA
Certificates will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia enacted legislation, on or
before the October 4, 1991 cutoff established by SMMEA for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in mortgage related securities, in most cases by
requiring the affected investors to rely solely upon existing state law, and not
SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in SMMEA Certificates only to the extent provided in such
legislation. Accordingly, investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to determine whether
and to what extent the Offered Certificates constitute legal investments for
them.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
Institutions where investment activities are subject to legal investment laws or
regulations or review by certain regulatory authorities may be subject to
restrictions on investment in certain classes of Offered Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the National Credit Union Administration ("NCUA") or other federal or
state agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing any Offered Certificate. The
Federal Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement"). The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain classes of Offered Certificates), except
under limited circumstances, and sets forth certain investment practices deemed
to be unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
In September 1993 the National Association of Insurance Commissioners released a
draft model investment law (the "Model Law") which sets forth model investment
guidelines for the insurance industry. Institutions subject to
98
<PAGE>
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Certificates offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of this
Offered Certificate under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Certificates, may be subject to significant interpretive uncertainties.
Notwithstanding SMMEA, there may be other restrictions on the ability of certain
investors, including depository institutions, either to purchase any Offered
Certificates or to purchase Offered Certificates representing more than a
special percentage of the investors' assets.
Except as to the status of SMMEA Certificates identified in the Prospectus
Supplement for a Series as "mortgage related securities" under SMMEA, the
Depositor will make no representations as to the proper characterization of the
Certificates for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase any Offered
Certificates under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the
Certificates) may adversely affect the liquidity of the Certificates.
The foregoing does not take into consideration the applicability of statutes,
rules, regulations, orders, guidelines or agreements generally governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits and provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors, including
depository institutions, either to purchase Offered Certificates or to purchase
Offered Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors.
PLAN OF DISTRIBUTION
The Offered Certificates offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Certificates may
be effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Certificates will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by J.P. Morgan Securities Inc.
("JPMSI") acting as underwriter with other underwriters, if any, named therein.
In such event, the Prospectus Supplement may also specify that the underwriters
will not be obligated to pay for any Offered Certificates agreed to be purchased
by purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of Offered Certificates, underwriters may receive
compensation from the Depositor or from purchasers of Offered Certificates in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered Certificates
will be distributed by JPMSI acting as agent or in some cases as principal with
respect to Offered Certificates that it has previously purchased or agreed to
purchase. If JPMSI acts as agent in the sale of Offered Certificates, JPMSI will
receive a selling commission with respect to such Offered Certificates,
depending on market conditions, expressed as a percentage of the aggregate
Certificate Balance or notional amount of such Offered Certificates as of the
Cut-off Date. The exact percentage for each Series of Certificates will be
disclosed in the related Prospectus Supplement. To the extent that JPMSI elects
to purchase Offered Certificates as principal, JPMSI may realize losses or
profits based upon the difference between its purchase price and the sales
price. The Prospectus Supplement with respect to any Series offered other than
through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such Series.
99
<PAGE>
The Depositor will indemnify JPMSI and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments JPMSI and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, JPMSI and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's mortgage loans pending the sale
of such mortgage loans or interests therein, including the Certificates.
Offered Certificates will be sold primarily to institutional investors.
Purchasers of Offered Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933 in connection with reoffers and sales
by them of Offered Certificates. Certificateholders should consult with their
legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Certificates, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment grade class may be initially retained by the Depositor, and may
be sold by the Depositor at any time in private transactions.
LEGAL MATTERS
Certain legal matters in connection with the Certificates, including certain
federal income tax consequences, will be passed upon for the Depositor by Brown
& Wood llp, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates and
no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will he
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of receipt
by certificateholders of all distributions on the underlying mortgage loans.
These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by Mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
100
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON
WHICH
TERM IN THE PROSPECTUS TERM IS DEFINED
<S> <C>
1986 Act......................................................................................... 77
Accounts......................................................................................... 42
Accrual Certificates............................................................................. 9, 31
Accrual Period................................................................................... 82
Accrued Certificate Interest..................................................................... 32, 82
ADA.............................................................................................. 70
Agreements....................................................................................... 9
Applicable Amount................................................................................ 90
Amortizable Bond Premium Regulations............................................................. 74, 85
ARM Loans........................................................................................ 24, 77
Asset Seller..................................................................................... 21
Available Distribution Amount.................................................................... 32
Balloon Mortgage Loans........................................................................... 16
Bankruptcy Code.................................................................................. 63
Beneficial Owners................................................................................ 37
Benefit Plan Investors........................................................................... 96
Book-Entry Certificates.......................................................................... 31
Cash Flow Agreement.............................................................................. 7, 27
Cash Flow Agreements............................................................................. 1
Cede............................................................................................. 4, 38
CERCLA........................................................................................... 18, 66
Certificate...................................................................................... 39
Certificate Balance.............................................................................. 9, 33
Certificateholder................................................................................ 38
Certificateholders............................................................................... 20
Certificates..................................................................................... 6
Closing Date..................................................................................... 81
CMBS............................................................................................. 1, 5, 21
CMBS Agreement................................................................................... 25
CMBS Issuer...................................................................................... 25
CMBS Servicer.................................................................................... 25
CMBS Trustee..................................................................................... 25
Code............................................................................................. 11
Commercial Loans................................................................................. 21
Commercial Properties............................................................................ 6, 21
Commission....................................................................................... 4
Contributions Tax................................................................................ 92
Cooperative...................................................................................... 58
Cooperative Loans................................................................................ 58
Cooperatives..................................................................................... 21
Covered Trust.................................................................................... 17, 54
CPR.............................................................................................. 29
Credit Support................................................................................... 1, 8, 26
Crime Control Act................................................................................ 71
Cut-off Date..................................................................................... 10
Debt Service Coverage Ratio...................................................................... 22
</TABLE>
101
<PAGE>
<TABLE>
<S> <C>
Deferred Interest................................................................................ 78
Definitive Certificates.......................................................................... 31, 38
Depositor........................................................................................ 21
Determination Date............................................................................... 31
Disqualifying Condition.......................................................................... 68
Distribution Account............................................................................. 44
Distribution Date................................................................................ 10
DTC.............................................................................................. 4, 37
Environmental Hazard Condition................................................................... 68
EPA.............................................................................................. 66
Equity Participations............................................................................ 25
ERISA............................................................................................ 12, 96
Excess Servicing................................................................................. 75
Exchange Act..................................................................................... 5
Exemption........................................................................................ 97
FDIC............................................................................................. 42, 98
Grantor Trust Certificates....................................................................... 11
Hazardous Materials.............................................................................. 68
Indirect Participants............................................................................ 37
Insurance Proceeds............................................................................... 43
IRS.............................................................................................. 74
JPMSI............................................................................................ 99
Labor............................................................................................ 96
L/C Bank......................................................................................... 55
Lease............................................................................................ 4, 7
Lease Assignment................................................................................. 1
Legislative History.............................................................................. 77
Lessee........................................................................................... 4, 9
Liquidation Proceeds............................................................................. 42, 43
Loan-to-Value Ratio.............................................................................. 24
Lock-out Date.................................................................................... 25
Lock-out Period.................................................................................. 25
Master REMIC..................................................................................... 80
Master Servicer.................................................................................. 6
Model Law........................................................................................ 98
Mortgage Assets.................................................................................. 1, 21
Mortgage Loans................................................................................... 1, 6, 20
Mortgage Notes................................................................................... 21
Mortgage Interest Rate........................................................................... 7, 25
Mortgaged Properties............................................................................. 7
Mortgages........................................................................................ 21
Mortgagor........................................................................................ 56
Multifamily Loans................................................................................ 20
Multifamily Properties........................................................................... 6, 20
NCUA............................................................................................. 98
Net Operating Income............................................................................. 23
Nonrecoverable Advance........................................................................... 34
Offered Certificates............................................................................. 1
OID.............................................................................................. 72, 74
OID Regulations.................................................................................. 74
Originator....................................................................................... 21
</TABLE>
102
<PAGE>
<TABLE>
<S> <C>
OTS.............................................................................................. 98
Participants..................................................................................... 37
Parties in Interest.............................................................................. 96
Pass-Through Rate................................................................................ 9, 32
Payment Lag Certificates......................................................................... 87
Permitted Investments............................................................................ 42
Plans............................................................................................ 96
Policy Statement................................................................................. 98
Pre-Issuance Accrued Interest.................................................................... 87
Prepayment....................................................................................... 29
Prepayment Assumption............................................................................ 77
Prepayment Premium............................................................................... 24
Primary Servicer................................................................................. 6
Prohibited Transactions Tax...................................................................... 92
Proposed Mark-to-Market Regulations.............................................................. 90
Purchase Price................................................................................... 41
Qualified Mortgage............................................................................... 80
Rating Agency.................................................................................... 12
RCRA............................................................................................. 67
Record Date...................................................................................... 31
Refinance Loans.................................................................................. 24
Related Proceeds................................................................................. 34
Relief Act....................................................................................... 71
REMIC............................................................................................ 11
REMIC Certificates............................................................................... 79
REMIC Regular Certificateholders................................................................. 80
REMIC Regular Certificates....................................................................... 11, 80
REMIC Regulations................................................................................ 72
REMIC Residual Certificateholder................................................................. 88
REMIC Residual Certificates...................................................................... 11, 80
Restricted Group................................................................................. 97
Retained Interest................................................................................ 49
RICO............................................................................................. 71
Senior Certificates.............................................................................. 9, 29
Series........................................................................................... 1
Servicer......................................................................................... 10
Servicing Standard............................................................................... 45
Servicing Transfer Event......................................................................... 45
SMMEA............................................................................................ 98
SMMEA Certificates............................................................................... 98
Special Servicer................................................................................. 6
Specially Serviced Mortgage Loan................................................................. 45
Stripped ARM Obligations......................................................................... 78
Stripped Bond Certificates....................................................................... 75
Stripped Coupon Certificates..................................................................... 75
Stripped Interest Certificates................................................................... 9, 31
Stripped Principal Certificates.................................................................. 9, 31
Subordinate Certificates......................................................................... 9, 31
Subsidiary REMIC................................................................................. 80
Super-Premium Certificates....................................................................... 82
Thrift Institutions.............................................................................. 91
</TABLE>
103
<PAGE>
<TABLE>
<S> <C>
Title V.......................................................................................... 69
Trust Assets..................................................................................... 4
Trust Fund....................................................................................... 1
Trustee.......................................................................................... 6
U.S. Person...................................................................................... 79
UCC.............................................................................................. 37
Underlying CMBS.................................................................................. 21
Underlying Mortgage Loans........................................................................ 21
Value............................................................................................ 24
Voting Rights.................................................................................... 19
Warrantying Party................................................................................ 13, 41
</TABLE>
104
