As filed with the Securities and Exchange Commission on December 3, 1999
Registration No. 333-87441
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
J.P. MORGAN COMMERCIAL MORTGAGE FINANCE CORP.
(Exact name of registrant as specified in its governing instruments)
Delaware 13-3789046
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
60 Wall Street
New York, New York 10260-0060
(212) 648-3636 (Address,
including zip code, and telephone number,
including area code, of principal executive
offices)
--------------------------
MICHAEL A. JUNGMAN
J.P. Morgan Commercial Mortgage Finance Corp.
60 Wall Street
New York, New York 10260-0060
(212) 648-3636
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copy to:
CARLOS A. RODRIGUEZ
Brown & Wood LLP
One World Trade Center
New York, New York 10048
(212) 839-5300
Approximate Date of Commencement of Proposed Sale to the Public: From time to
time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box:
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================================================================================================
Title of Shares Amount Proposed Maximum Proposed Maximum Amount of
to be Registered to be Offering Price Aggregate Registration
Registered Per Unit(2) Offering Price(2) Fee
========================================================================================================================
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates.... $3,000,000,000(1) 100% $3,000,000,000 $792,000(3)
========================================================================================================================
</TABLE>
(1 $231,262,000 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-63589 referred to below and not previously sold is carried forward in this
Registration Statement pursuant to Rule 429. A registration fee of $64,290.84 in
connection with such unsold amount of Mortgage Pass-Through Certificates was
paid previously under the foregoing Registration Statement.
(2) Estimated solely for the purpose of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(3) $264 was previously paid.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus
which is part of this Registration Statement is a combined prospectus and
includes all information currently required in a prospectus relating to the
securities covered by Registration Statement No. 333-63589 previously filed by
the Registrant.
<PAGE>
Information contained in this prospectus supplement and the accompanying
prospectus is not complete and may be changed. We may not sell these securities
until the final prospectus supplement and prospectus are delivered. This
prospectus supplement and the accompanying prospectus are not an offer to sell
these securities and are not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED DECEMBER 3, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED __________, 199__)
J.P. MORGAN COMMERCIAL MORTGAGE FINANCE CORP.
Depositor
$________________
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _____-C_
THE OFFERED CERTIFICATES:
o The trust fund will issue [_______] classes of certificates. Only the
following classes of certificates are offered hereby:
CLASS INITIAL INITIAL EXPECTED
CLASS PASS- RATINGS
BALANCE OR THROUGH
NOTIONAL AMOUNT RATE
- -------------------------------------------------------------------------------
Class [ ]
Class [ ]
Class [ ]
Class [ ]
Class [ ]
Class [ ]
Class [ ]
Class [ ]
- --------------------------
o The certificates will represent beneficial ownership interests in the
trust fund only. They will not represent interests in or obligations of the
depositor, any of its affiliates or any other entity.
THE TRUST FUND:
o The trust fund will consist primarily of [fixed] [adjustable] rate
mortgage loans secured by mortgages or deeds of trust in multifamily or
commercial properties.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE [o] OF
THIS PROSPECTUS SUPPLEMENT AND PAGE [o] IN THE ACCOMPANYING PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. 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.
The proceeds to the depositor from the initial sale of the offered certificates
will be approximately [o]% of the initial principal balance thereof plus
accrued interest.
J.P. Morgan Securities Inc. is offering the offered certificates from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale.
J.P. MORGAN & CO.
Prospectus Supplement dated ______________
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
WE PROVIDE INFORMATION TO YOU ABOUT THE OFFERED CERTIFICATES IN TWO
SEPARATE DOCUMENTS THAT PROGRESSIVELY PROVIDE MORE DETAIL:
o THE ACCOMPANYING PROSPECTUS, WHICH PROVIDES GENERAL INFORMATION,
SOME OF WHICH MAY NOT APPLY TO THE OFFERED CERTIFICATES AND
o THIS PROSPECTUS SUPPLEMENT, WHICH DESCRIBES THE SPECIFIC TERMS OF
THE OFFERED CERTIFICATES.
YOU SHOULD READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
BEFORE INVESTING IN ANY OF THE OFFERED CERTIFICATES.
You should rely only on the information contained in this prospectus
supplement and accompanying prospectus. If the description of the offered
certificates in the prospectus and in this prospectus supplement varies, you
should rely on the information in this prospectus supplement.
[The photographs of the mortgaged properties included in the prospectus
supplement are not representative of all the mortgaged properties or of any
particular type of mortgaged property.]
LIMITATIONS ON OFFERS OR SOLICITATIONS
We do not intend this document to be an offer or solicitation:
(A) if used in a jurisdiction in which such offer or solicitation
is not authorized;
(B) if the person making such offer or solicitation is not qualified
to do so; or
(C) if such offer or solicitation is made to anyone to whom it is
unlawful to make such offer or solicitation.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER
AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary of the Prospectus Supplement.........................................1
Risk Factors.................................................................8
Description of the Mortgage Pool............................................26
Description of the Certificates.............................................48
Certain Prepayment, Maturity and Yield Considerations.......................58
Master Servicer and Special Servicer........................................63
Description of the Pooling and Servicing Agreement..........................67
Use of Proceeds.............................................................70
Certain Federal Income Tax Consequences.....................................70
State Tax Considerations....................................................71
Erisa Considerations........................................................71
Legal Investment............................................................73
Plan of Distribution........................................................73
Legal Matters...............................................................74
Rating......................................................................74
Annex B Global Clearance, Settlement and Tax Documentation Procedures........1
PROSPECTUS
Prospectus Supplement........................................................3
Available Information........................................................3
Incorporation of Certain Information by Reference............................5
Summary of Prospectus........................................................6
Risk Factors................................................................14
Description of the Trust Funds..............................................22
Use of Proceeds.............................................................28
Yield Considerations........................................................28
The Depositor...............................................................31
Description of the Certificates.............................................32
Description of the Agreements...............................................39
Description of Credit Support...............................................55
Certain Legal Aspects of Mortgage Loans and the Leases......................57
Certain Federal Income Tax Consequences.....................................72
State Tax Considerations....................................................97
ERISA Considerations........................................................97
Legal Investment............................................................99
Plan of Distribution.......................................................101
Legal Matters..............................................................102
Financial Information......................................................102
Rating.....................................................................102
<PAGE>
SUMMARY OF THE PROSPECTUS SUPPLEMENT
You should read carefully the detailed information appearing elsewhere
in this prospectus supplement and the accompanying prospectus in making your
investment decision. The following executive summary does not include all the
information you need to consider to understand all the terms of the
certificates.
<TABLE>
<CAPTION>
THE CERTIFICATES
INITIAL
AGGREGATE WEIGHTED
CERTIFICATE INITIAL AVERAGE PRINCIPAL
PRINCIPAL % OF % CREDIT PASS-THROUGH LIFE(1) WINDOW(1)
CLASS RATING BY AMOUNT TOTAL SUPPORT DESCRIPTION RATE (YEARS) (MONTHS)
----- --------- ------ ----- ------- ----------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
offered certificates
private certificates
(1) Assumes no prepayments or defaults.
[(2) The pass-through rate for the class [ ] certificates will be equal to
the weighted average of the remittance rates on the mortgage loans minus
the weighted average of the pass-through rates on all other classes of
certificates.]] [The initial pass-through rate on the class [ ]
certificates will be _________% per annum.] [The pass-through rate for the
class [ ] certificates will be equal to the weighted average of the
remittance rates on the mortgage loans [minus ___%.]]
</TABLE>
REGISTRATION OF THE OFFERED
CERTIFICATES [The offered certificates initially will be
issued in book-entry form. Certificateholders
acquiring beneficial ownership interests in
the offered certificates may elect to hold
their book-entry certificate interests either
through The Depository Trust Company, in the
United States, or through Cedelbank, societe
anonyme or the Euroclear System, in Europe.]
DENOMINATIONS The certificates will be issuable [on
book-entry records] [in fully registered,
certified form] in denominations of (except
in the case of the class [ ] certificates)
$_____ and integral multiples of $_____ in
excess thereof. The class [ ] certificates
will be issuable in denominations of $_____
notional amount and integral multiples of
$___ notional amount.
THE MORTGAGE LOANS
THE MORTGAGE POOL The trust fund will consist of a pool of __
[fixed] [adjustable] rate mortgage loans
secured by first liens on fee simple and/or
leasehold interests in [office, multifamily,
retail, hospitality, industrial, nursing
home, congregate care, independent living,
mobile home park, storage, mixed use and
other commercial properties] located in __
states [and [other countries]].
General Mortgage Loan Characteristics
(as of the Cut-off Date, unless otherwise indicated)
Mortgage
Pool
--------
Initial Balance $
Number of Mortgage Loans
Number of Mortgaged Properties
Average Mortgage Loan Balance $
Maximum Mortgage Loan Balance $
Minimum Mortgage Loan Balance $
Weighted Average Mortgage Rate %
Range of Mortgage Rates %-%
Weighted Average Remaining Term to the
Earlier of Maturity or Anticipated
Repayment Date
Range of Remaining Term to the Earlier of
Maturity or Anticipated Repayment Date
Percentage of Initial Pool Balance made
up of:
Anticipated Repayment Date Loans %
Fully Amortizing Loans (other than %
Anticipated Repayment Date Loans)
Balloon Loans %
Multi-Property Loans %
Credit Lease Loans %
Crossed Loans %
[other characteristics]
PRINCIPAL PREPAYMENTS Any mortgage loan may contain provisions
which for a period of time:
o prohibit voluntary prepayments,
o require the payment of prepayment
premiums in connection with voluntary
prepayments,
o allow the borrower to defease the loan
by substituting United States Treasury
obligations for the mortgaged property, or
o allow the borrower to make a prepayment
in full or in part.
THE PARTIES
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 the underwriter.
SELLER Morgan Guaranty Trust Company of New York.
Approximately _____% of the mortgage loans
were originated by the seller and the
remaining were originated by various other
institutions. The seller is an affiliate of
the depositor and of J.P. Morgan Securities
Inc., the underwriter.
ORIGINATORS _________ mortgage loans representing
approximately _____% of the initial pool
balance were originated by Morgan Guaranty
Trust Company of New York; __ mortgage loans
representing approximately ____% of the
initial pool balance were originated by
___________________________; __ mortgage
loans representing approximately ____% of the
initial pool balance were originated by
____________________________; and __ mortgage
loan representing approximately ____% of the
initial pool balance was originated by
_______________________.
[MASTER SERVICER ________________, a_______________.]
[SPECIAL SERVICER __________________________________________,
a, __________________. [The special servicer
may be removed without cause under certain
circumstances described herein.]
TRUSTEE __________________________________________,
a, __________________.
[DEAL INFORMATION/ANALYTICS It is anticipated that certain mortgage pool
and certificate information will be available
from the following services:
__________________.]
SIGNIFICANT DATES
CUT-OFF DATE _________ , _____.
DELIVERY DATE On or about _________ ___, _____.
DISTRIBUTION DATES The ____ day of each month or, if such
____ day is not a business day, on the next
succeeding business day, beginning in
_________ _____.
RECORD DATE With respect to each distribution date, the
close of business on the last business day of
the preceding month.
[RATED FINAL DISTRIBUTION DATE The distribution date in ____________.]
DISTRIBUTIONS
INTEREST DISTRIBUTIONS ON
THE CERTIFICATES In general, holders of each class of
certificates will be entitled to receive on
each distribution date in the order of
priority, to the extent available,
distributions allocable to interest equal to
the interest accrued during the interest
accrual period on the related class balance
(or notional amount) at the pass-through
rate. The notional amount of the class [ ]
certificates will equal the aggregate class
balance of all the certificates. The notional
amount does not entitle the class [ ]
certificates to any distributions of
principal.
Distributions will be made on each
distribution date. The chart below sets forth
the priority of each class for the payment of
interest to each class in descending order.
If a class of certificates is entitled to
principal on a distribution date interest on
lower classes on the chart will only be paid
after payment of principal.
-------------------------------------------
| Class [ ], Class [ ], |
| Class [ ] and Class [ ], pro rata |
-------------------------------------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
-------------------------------------------
| Private Certificates |
-------------------------------------------
PRINCIPAL DISTRIBUTIONS ON THE
CERTIFICATES In general, holders of a class of
certificates will be entitled to receive on
each distribution date principal in the order
set forth in the chart below, until the
related class balance is reduced to zero, to
the extent available remaining after the
payment of interest for such class of
certificates.
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
-------------------------------------------
| Private Certificates |
-------------------------------------------
The Class [ ] Certificates do not have a
class balance and are therefore not entitled
to any principal distributions.
ADVANCES The servicers are required to make advances
for delinquent monthly payments on the
mortgage loans and for some expenses. To the
extent that a servicer fails to make any
advance required of it, the trustee shall
make such required advance. As more fully
described herein, if either servicer or the
trustee makes an advance it will be entitled
to reimbursement and interest, on such
advance. Neither the servicers nor the
trustee will be obligated to make an advance
if it determines that the advance would not
be recoverable.
OTHER CONSIDERATIONS
ALLOCATION OF LOSSES Realized losses and collateral value
adjustments on the mortgage loans will be
allocated in descending order:
-------------------------------------------
| Private Certificates |
-------------------------------------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
---------------
| Class [ ] |
---------------
|
|
-------------------------------------------
| Class [ ], Class [ ], |
| Class [ ] and Class [ ], pro rata |
-------------------------------------------
SPECIAL YIELD CONSIDERATIONS A higher than anticipated rate of prepayments
would reduce the aggregate principal balance
of the mortgage loans more quickly than
expected, thereby reducing the aggregate
interest payments with respect to such
mortgage loans. Therefore, a higher rate of
principal prepayments could result in a lower
than expected yield to maturity on classes of
certificates purchased at a premium.
Conversely, a lower than anticipated rate of
principal prepayments could result in a lower
than expected yield to maturity on classes of
certificates purchased at a discount since
payments of principal with respect to the
mortgage loans would occur later than
anticipated.
The yield to investors on the class [ ]
certificates will be especially sensitive to
the rate and timing of prepayments, defaults
and liquidations on the mortgage loans and
could result in the failure of investors in
the class [ ] certificates to recover their
initial investments. The yield on the class [
] 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.
TAX STATUS [One] [Two] [Three] real estate mortgage
investment conduit 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 for
federal income tax purposes, [REMIC I, REMIC
II and REMIC III] will each qualify as a
REMIC under Sections 860A through 860G of the
Internal Revenue Code of 1986, as amended
(the "Code").
The class [ ] certificates will, and the
other offered certificates may, be treated as
having been issued with original issue
discount for federal income tax purposes.
ERISA CONSIDERATIONS Subject to important considerations described
under "ERISA Considerations" in this
prospectus supplement and in the accompanying
prospectus, the class [ ] and class [ ]
certificates will be eligible for purchase by
persons investing assets of employee benefit
plans or individual retirement accounts.
RATING The ratings on the offered certificates
address the likelihood of the receipt by
holders of offered certificates of
distributions principal and interest to which
they are entitled. They do not address the
likely actual rate of prepayments. Such rate
of prepayments, if different than originally
anticipated, could adversely affect the yield
realized by holders of the offered
certificates or cause the class [ ]
certificateholders to fail to recover their
initial investments.
LEGAL INVESTMENT The class [ ] and class [ ] certificates
[will] [will not] 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].
Investors should consult their own legal
advisors to determine whether and to what
extent the offered certificates constitute
legal investments for them.
<PAGE>
RISK FACTORS
[Risk factors will vary depending on the characteristics of the assets
of the trust fund]
You 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. The risks described
in this section, together with those described in the prospectus under "Risk
Factors" summarize material risks relating to the certificates at this time.
THE MORTGAGE LOANS
MORTGAGE LOANS REPRESENTING A
SIGNIFICANT PERCENTAGE OF THE
MORTGAGE POOL AND A SIGNIFICANT
CONCENTRATION OF RELATED
BORROWERS INCREASE RISK OF A
SEVERE LOSS The average principal balance of the mortgage
loans as of the cut-off date is approximately
$________, which is equal to approximately
____% of the initial pool balance. Several of
the mortgage loans have principal balances as
of the cut-off date that are substantially
higher than the average principal balance as
of the cut-off date. In addition, there are
several groups of mortgage loans with related
mortgagors. In general, significant
concentrations can result in losses that are
more severe than would be the case if the
aggregate balance of such pool were more
evenly distributed among the mortgage loans
in such pool. No mortgage loan represents
more than ____% of the initial pool balance
and no mortgage loans with related mortgagors
represent in the aggregate more than _____%
of the initial pool balance
Approximately [o]% of the mortgage loans were
made to affiliated mortgagors. If an entity
that owns or controls several mortgaged
properties experiences financial difficulty
at one mortgaged property, it could defer
maintenance at another mortgaged property in
order to satisfy current expenses with
respect to the troubled mortgaged property.
Alternatively, it could attempt to avert
foreclosure by filing a bankruptcy petition
that might have the effect of interrupting
monthly payments for an indefinite period on
all of the related mortgage loans.
TIMING OF PRINCIPAL PREPAYMENTS
MAYLEAD TO DIFFERENT ASSET
CONCENTRATIONS THAN IN THE
INITIAL MORTGAGE POOL If 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 mortgagors.
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 this risk than classes with a
higher sequential priority.
THE GEOGRAPHIC CONCENTRATION OF
MORTGAGED PROPERTIES SUBJECTS THE
TRUST FUND TO A GREATER EXTENT TO
STATE OR REGIONAL CONDITIONS _____, _____ and _____ of the mortgaged
properties, representing approximately ___,
___ and ___%, respectively, of the aggregate
principal balance of the mortgage loans as of
the cut-off date, are located in _____, ___
and _____, respectively. Except as indicated
in the immediately preceding sentence, no
more than ___% 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.
The concentration of mortgaged properties in
a specific state or region will make the
performance of the mortgage pool as a whole,
more sensitive to the following factors in
the state or region where the mortgagors and
the mortgaged properties are located:
o economic conditions
o conditions in the real estate
market
o changes in governmental rules and
fiscal policies;
o acts of God; and
o other factors which are beyond the
control of the mortgagors.
ENVIRONMENTAL LAWS MAY ADVERSELY
AFFECT THE VALUE OF AND CASH FLOW
FROM A MORTGAGED PROPERTY 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 cleanup of environmental
contamination 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 contamination. The cost of
any required cleanup and the owner's
liability for these costs are generally not
limited under these laws and could exceed the
value of the property and the aggregate
assets of the owner. In addition, the
presence of hazardous or toxic substances, or
the failure to properly clean up
contamination on the property, may adversely
affect the owner's or operator's ability to
borrow using the property as collateral.
Certain environmental laws impose liability
for releases of asbestos into the air. Third
parties may seek recovery from owners or
operators of real property for personal
injury associated with exposure to asbestos.
Under some environmental laws, such as the
federal Comprehensive Environmental Response,
Compensation and Liability Act, 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 threatened release of hazardous
substances on or from a mortgagor's property.
Liability may be imposed on the lender if its
agents or employees are deemed to have
participated in the management of the
mortgagor's property, regardless of whether a
previous owner caused the environmental
damage. The trust fund's potential exposure
to liability for cleanup costs may increase
if the trust fund actually takes possession
of a mortgagor's property, or control of its
day-to-day operations, as, for example,
through the appointment of a receiver.
[An environmental site assessment of each of
the mortgaged properties was performed (in
some cases, prior assessments were updated)
in connection with the initial underwriting
and origination of the mortgage loans. An
environmental site assessment does not
generally include environmental testing. In
certain cases, additional environmental
testing was performed.]
[The following information is based on the
environmental site assessments and has not
been independently verified by the seller,
the depositor, the servicers, the trustee,
the underwriter, or by any of their
respective affiliates. With respect to a
number of the mortgaged properties, the
environmental site assessments revealed the
presence or possible presence of
asbestos-containing materials, radon gas or
other environmental concerns. [None of these
issues constituted a material violation of
any environmental law in the judgment of the
assessor. In these cases, the mortgagors
agreed to establish and implement operations
and maintenance programs or had other
remediation agreements or escrows in place.]]
It is possible that the environmental site
assessments did not reveal all environmental
liabilities, that there are material
environmental liabilities of which neither
the seller nor the depositor are aware or
that the environmental condition of the
mortgaged properties could be affected in the
future by tenants, occupants, or third
parties unrelated to the mortgagors.
[Each mortgagor has represented that:
o except as described in the environmental
reports referred to above, each
mortgaged property was, or to the best
of the mortgagor's knowledge was, in
compliance with applicable environmental
laws and regulations on the date of the
origination of the related mortgage
loan.
o except as described in the environmental
reports, no actions, suits or
proceedings have been commenced or are
pending or, to the best of the
mortgagor's knowledge are threatened,
with respect to any applicable
environmental laws.
o such mortgagor has not received any
notice of violation of any legal
requirement related to the use and
occupancy of any mortgaged property and
has agreed not to use, cause or permit
the presence on the related mortgaged
property of any hazardous materials in a
manner which violates any applicable
law.]
The principal security for the obligations
under each mortgage loan consists of the
mortgaged property. Therefore, if any of the
representations described in the preceding
paragraph 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 response to
such a breach. In addition, most mortgagors
are structured as single asset entities and
therefore have no assets other than the
mortgaged property.
AVAILABLE APPRAISALS AND MARKET
STUDIES OF MORTGAGED PROPERTIES
MAY NOT BE INDICATIVE OF PRESENT
OR FUTURE VALUE An appraisal of each of the mortgaged
properties was made between ________ and
___________. 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.
Appraisals represent the analysis and opinion
of the respective appraisers at or before the
time made and are not guarantees, and may not
be indicative, of present or future value.
Another appraiser may have arrived at a
different valuation, even if such appraiser
used the same general approach to, and the
same method of, appraising the property.
Appraisals seek to establish the amount a
typically motivated buyer would pay a
typically motivated seller. Such amount could
be significantly higher than the amount
obtained from the sale of a mortgaged
property under a distress or liquidation
sale.
SINCE INSPECTIONS MADE OF THE
MORTGAGED PROPERTY WERE LIMITED,
SOME ADVERSE CONDITIONS MAY NOT
HAVE BEEN IDENTIFIED The mortgaged properties were inspected by
licensed engineers at the time the mortgage
loans were originated to assess the
structure, exterior walls, roofing interior
construction, mechanical and electrical
systems and general condition of the site,
buildings and other improvements located on
the mortgaged properties. There can be no
assurance that all conditions requiring
repair or replacement have been identified in
such inspections.
ADDITIONAL DEBT SECURED BY THE
MORTGAGED PROPERTIES MAY ADVERSELY
AFFECT REALIZATION ON COLLATERAL The mortgage loans generally prohibit the
mortgagors from incurring any additional debt
that is secured by the related mortgaged
property without the consent of the
mortgagee.
The existence of such other debt could:
o adversely affect the financial viability
of the mortgagors;
o adversely affect the security interest
of the lender in the equipment or other
assets acquired through such financings;
o complicate bankruptcy proceedings; and
o delay foreclosure on the related
mortgaged property.
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, 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.
CROSS-COLLATERALIZING AND CROSS-
DEFAULTING PROPERTIES CONCENTRATE
BORROWER RISK AND COULD BE
CHALLENGED AS FRAUDULENT
CONVEYANCES [o] of the mortgage loans, representing
approximately [o] of the , representing
approximately ______% of the aggregate
principal balance of the mortgage loans as of
the cut-off date, are cross-collateralized
and/or cross-defaulted with other mortgage
loans in the mortgage pool. These
arrangements attempt to reduce the risk that
one mortgaged property may not generate
enough net operating income to pay debt
service. Securing a mortgage loan with
multiple properties generally reduces the
risk that the net operating income generated
by such properties will not be sufficient to
pay debt service and result in defaults and
ultimate losses. However, such crossed
mortgaged properties generally will be
managed by the same managers or affiliated
managers or will be subject to the management
of the same borrowers or affiliated
borrowers.
Cross-Collateralization arrangements
involving more than one mortgagor could be
challenged as a fraudulent conveyance if:
o one of the mortgagors were to become a
debtor in a bankruptcy case;
o such borrower did not receive fair
consideration or reasonably equivalent
value in exchange for allowing its
mortgaged property to be encumbered and,
among other things;
o at the time the lien was granted, the
mortgagor was:
o insolvent,
o inadequately capitalized or
o unable to pay its debts.
AMOUNT OF BALLOON PAYMENT MAKES A
BALLOON LOAN RISKIER _______ mortgage loans, representing
approximately ______% of the aggregate
principal balance of the mortgage loans as of
the cut-off date, are balloon loans. The
balloon 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 are riskier
because the ability of a mortgagor to make a
balloon payment will depend upon its ability
either to refinance the loan or to sell the
related mortgaged property in a timely
fashion. The ability of a mortgagor to
accomplish either of these goals will be
affected by a number of factors, including :
o the level of available mortgage interest
rates at the time of sale or
refinancing;
o the mortgagor's equity in the related
mortgaged property;
o the financial condition and operating
history of the mortgagor and the related
mortgaged property;
o tax laws;
o rent control laws (with respect to
certain multifamily properties);
o renewability of operating licenses;
o prevailing general economic conditions;
and
o the availability of credit for
commercial or multifamily real
properties.
AMOUNT EXPECTED TO BE PAID ON
ANTICIPATED REPAYMENT DATE MAKES
ANTICIPATED REPAYMENT DATE LOANS
RISKIER ______ mortgage loans, representing
approximately ______% of the aggregate
principal balance of the mortgage loans as of
the cut-off date, are anticipated repayment
date loans. After the anticipated repayment
date, any excess cash flow will be required
to be applied to payments of principal and
interest on the related anticipated repayment
date loan. All of the anticipated repayment
date loans will have substantial principal
balances on their anticipated repayment date.
The failure to pay an anticipated repayment
date loan by the related anticipated
repayment date will not result in an event of
default or acceleration.
The ability of a mortgagor to repay a
mortgage loan on the anticipated repayment
date will depend on its ability either to
refinance the mortgage loan or to 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:
o the level of available mortgage interest
rates at the time of sale or
refinancing;
o the mortgagor's equity in the related
mortgaged property;
o the financial condition and operating
history of the mortgagor and the related
mortgaged property;
o tax laws;
o rent control laws (with respect to
certain multifamily properties);
o renewability of operating licenses.
o prevailing general economic conditions;
and
o the availability of credit for
commercial or multifamily real
properties.
POOR PROPERTY MANAGEMENT WILL
LOWER THE PERFORMANCE OF THE
RELATED MORTGAGED PROPERTY The successful operation of a real estate
project also depends on the performance and
viability of the property manager. Properties
deriving revenues primarily from short-term
sources (such as hotels, nursing homes,
self-storage facilities and health care
facilities) generally are more management
intensive than properties leased to
creditworthy tenants under long-term leases.
The property manager is generally responsible
for:
o operating the properties;
o providing building services;
o establishing and implementing the rental
structure;
o managing operating expenses;
o responding to changes in the local
market; and
o advising the mortgagor with respect to
maintenance and capital improvements.
Property managers may not be in a financial
condition to fulfill their management
responsibilities.
Certain of the mortgaged properties are
managed by affiliates of the applicable
mortgagor. If a mortgage loan is in default
or undergoing special servicing, such
relationship could disrupt the management of
the underlying property. This may adversely
affect cash flow. However, the mortgage loans
generally permit the lender to remove the
property manager upon the occurrence of an
event of default, a decline in cash flow
below a specified level or the failure to
satisfy some other specified performance
trigger.
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
NURSING HOMES, CONGREGATE CARE
PROPERTIES AND ASSISTED LIVING
FACILITIES; THE NEED TO COMPLY
WITH REGULATORY FRAMEWORKS
APPLICABLE TO NURSING HOMES,
CONGREGATE CARE PROPERTIES AND
ASSISTED LIVING FACILITIES MAY
ADVERSELY AFFECT VALUE OF SUCH
PROPERTIES OR COLLATERAL. Approximately ____ of the mortgage loans
representing ____% of the aggregate principal
balance of the mortgage loans as of the
cut-off date are secured by nursing homes,
congregate care properties and assisted
living facilities. Mortgage loans secured by
liens on such residential health care
facilities have risks not associated with
loans secured by liens on other types of
income-producing real estate. These risks may
lead to adverse consequences which may have a
negative impact on the payments of the
offered certificates.
x Providers of long-term nursing care, assisted
living and other medical services are subject
to federal and state laws that relate to:
o the adequacy of medical care;
o distribution of pharmaceuticals;
o rate setting;
o equipment;
o personnel;
o operating policies and additions to
facilities and services; and
o to the reimbursement policies of
government programs and private
insurers.
The failure of any of the mortgagors to
maintain or renew any required license or
regulatory approval could prevent it from
continuing operations or bar it from
participation in certain reimbursement
programs. In the event of foreclosure, the
Trustee or any other purchaser at a
foreclosure sale may not be entitled to the
rights under such licenses and such party may
have to apply in its own right for such a
license. There can be no assurance that a new
license could be obtained.
To the extent any nursing home receives a
significant portion of its revenues from
government reimbursement programs, primarily
Medicaid and Medicare, such revenue may be
subject to:
o statutory and regulatory changes;
o retroactive rate adjustments;
o administrative rulings;
o policy interpretations;
o delays by fiscal intermediaries; and
o government funding restrictions.
Governmental payors have employed
cost-containment measures that limit payments
to health care providers, and there are
various proposals that could materially
change or curtail those payments. There can
be no assurances that payments under
government programs will, in the future, be
sufficient to fully reimburse the cost of
caring for program beneficiaries. Net
operating income of the mortgaged properties
that receive substantial revenues from those
sources, and consequently, the ability of the
related mortgagors to meet their mortgage
loan obligations, could be adversely
affected.
Under applicable federal and state laws and
regulations, including those that govern
Medicare and Medicaid programs, only the
provider who actually furnished the related
medical goods and services may sue for or
enforce its rights to reimbursement. In the
event of foreclosure, none of the trustee,
the master servicer, the special servicer or
a subsequent lessee or operator of the
property would generally be entitled to
obtain from federal or state governments any
outstanding reimbursement payments relating
to services furnished at the respective
properties prior to such foreclosure.
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
HOSPITALITY PROPERTIES;
HOSPITALITY PROPERTIES ARE MORE
SENSITIVE TO ADVERSE ECONOMIC
CONDITIONS Approximately [o]% of the mortgage loans,
representing approximately ______% of the
aggregate principal balance of the mortgage
loans as of the cut-off date, are secured by
full service hotels, limited service hotels,
extended stay hotels or motels. The value and
cash flow of hospitality properties will
depend on the following factors:
o adverse economic conditions; because
hotel rooms generally are rented for
short periods of time, hotels tend to be
more sensitive to adverse economic
conditions and competition than are
other commercial properties;
o the physical condition of the
hospitality property;
o the financial strength and capabilities
of the owner and operator of a hotel;
o financial strength and public perception
of the franchise service mark and the
continued existence of the franchise
license agreement; and
o the continued existence of a liquor
license.
Most of the hospitality properties have
liquor licenses. Some states do not permit
liquor licenses to he held other than by a
natural person. Consequently, liquor licenses
for hotel properties located in such
jurisdictions are held by an individual
affiliated with the related mortgagor or
manager. Generally, a liquor license may not
be transferred without the approval of the
relevant licensing authority. In the event of
a foreclosure of a hospitality property, it
is unlikely that the trustee, master
servicer, Special Servicer or purchaser in
any such sale would be entitled to the rights
under the liquor license for such hospitality
property. Such party would be required to
apply in its own name for such license.
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
RETAIL PROPERTIES; THE FAILURE OF
AN IMPORTANT TENANT WILL HAVE A
NEGATIVE IMPACT ON RETAIL
PROPERTIES Approximately [o]% of the mortgage loans,
representing approximately ______% of the
aggregate principal balance of the mortgage
loans as of the cut-off date, are secured by
single tenant properties. Income from and the
market value of retail, office and industrial
mortgaged properties occupied by a single
tenant would be adversely affected under the
following circumstances:
o if space in such mortgaged properties
could not be leased or relet on terms
comparable to the prior lease;
o if tenants were unable to meet their
lease obligations;
o if a significant tenant were to become a
debtor in a bankruptcy case; and
o if for any other reason rental payments
could not be collected.
Even if vacated space is successfully relet,
the costs associated with reletting,
including tenant improvements, leasing
commissions and free rent, could exceed the
amount of any reserves maintained for such
purpose and could reduce cash flow from the
mortgaged properties. Although certain of the
mortgage loans require the mortgagor to
maintain escrows for such expenses, there can
be no assurance that such factors will not
adversely affect the ability of a mortgagor
to repay a mortgage loan.
The success of its anchor tenant is important
to a shopping center property. An anchor
tenant attracts and maintains other stores
and it generates consumer traffic. The
failure of one or more specified tenants,
such as an anchor tenant, to operate from its
premises may give certain tenants the right
to terminate or reduce rents under their
leases.
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
MOBILE HOME PARK PROPERTIES;
MOBILE HOME PARK PROPERTIES HAVE
LIMITED USES AND OTHER
CHARACTERISTICS THAT MAY
ADVERSELY AFFECT PERFORMANCE Approximately [ ]% of the mortgage loans,
representing [ ]% of the aggregate principal
balance of the mortgage loans as of the
cut-off date, are secured by mobile home park
properties. Various factors may adversely
affect the value and successful operation of
mobile home park properties, including:
o the number of competing mobile home park
properties and other residential
developments, including, apartment
buildings and single family homes, in
the local market;
o the age, appearance and reputation of
the community;
o the ability of management to provide
adequate maintenance and insurance; and
o the types of services and amenities it
provides
Other factors you should consider regarding
mobile home park properties:
o they are a property type that is not
easily converted to another property
type; and
o some mobile home park properties may
lease sites to non-permanent
recreational vehicles, which occupancy
is often very seasonal in nature.
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
SELF-STORAGE FACILITIES; SELF-
STORAGE FACILITIES HAVE LIMITED
USES AND OTHER CHARACTERISTICS
THAT MAY ADVERSELY AFFECT
PROPERTY VALUE Approximately [ ]% of the mortgage loans
representing [ ]% of the aggregate principal
balance of the mortgage loans as of the
cut-off date are secured by self-storage
facilities. Various factors may adversely
affect the value and successful operation of
a self-storage facility, including:
o competition because both acquisition and
development costs and break-even
occupancy are relatively low:
o conversion of self-storage facility to
an alternative use generally requires
substantial capital expenditures;
o security concerns; and
o user privacy and ease of access to
individual storage space may increase
environmental risks, although lease
agreements generally prohibit users from
storing hazardous substances in the
units.
[The environmental assessments conducted with
respect to most of the mortgaged properties
and discussed in this prospectus supplement
did not include an inspection of the contents
of the self-storage units of the self-storage
properties. Accordingly, there is no
assurance that all of the units included in
the self-storage properties are free from
hazardous substances or will remain so in the
future.]
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
OFFICE PROPERTIES; THE PERFORMANCE
OF OFFICE PROPERTIES DEPENDS
ON THE AMENITIES AND LOCATION
THEREOF AND THE QUALITY OF ITS
TENANTS Approximately [ ]% of the mortgage loans
representing [ ]% of the aggregate principal
balance of the mortgage loans as of the
cut-off date are secured by office
properties. The value and cash flow of office
properties will depend on the following
factors:
o the strength, stability, number and
quality of the tenants;
o the physical attributes and amenities of
the building in relation to competing
buildings;
o whether the area is a desirable business
location;
o local labor cost and quality, tax
environment (including tax benefits) and
quality of life issues such as schools
and cultural amenities;
o the financial condition of the owner;
and
o access to transportation
THE MORTGAGE PROPERTIES INCLUDE A
SIGNIFICANT CONCENTRATION OF
MULTIFAMILY PROPERTIES; THE
PERFORMANCE OF MULTIFAMILY
PROPERTIES IS SUBJECT TO
REGULATIONS AND DEMOGRAPHIC
CONDITIONS Approximately [ ]% of the mortgage loans,
representing [ ]% of the aggregate principal
balance of the mortgage loans as of the
cut-off date, are secured by multifamily
properties. The value and cash flow of a
multifamily property will depend on the
following factors;
o the number of competing residential
developments in the local market
(including apartment buildings,
manufactured housing communities and
site-built single family homes);
o the physical attributes and amenities of
the building in relation to competing
buildings;
o the reputation of the multifamily
apartment building; and
o applicable state and local regulations
designed to protect tenants in
connection with evictions and rent
increases.
Other factors that may limit the amount of
rent that can be charged and may result in a
reduction in timely rent payments or a
reduction of occupancy levels include:
o local military base or factory closings;
o national and local politics, to the
extent they result in changes to rent
stabilization and rent control laws and
agreements; and
o the level of mortgage interest rates to
the extent it encourages tenants to
purchase housing.
THE MORTGAGED PROPERTIES INCLUDE
A SIGNIFICANT CONCENTRATION OF
INDUSTRIAL PROPERTIES; THE DESIGN
OF INDUSTRIAL PROPERTIES NEEDS
TO BE ADAPTABLE TO SEVERAL AND NEW
USES TO PROTECT VALUE Approximately [ ]% of the mortgage loans,
representing [ ]% of the aggregate principal
balance of the mortgage loans as of the
cut-off date, are secured by industrial
properties. The value and cash flow of
industrial properties will depend on the
following factors:
o the quality of major tenants, especially
if occupied by a single tenant;
o aspects of building site design such as
clear heights, column spacing, zoning
restrictions, number of bays and bay
depths, divisibility, truck turning
radius and overall functions and
accessibility;
o proximity to supply sources, labor and
customers and accessibility to rail
lines, major roadways and other
distribution channels; and
o the ability to adapt the mortgaged
property as an industry segment develops
or declines.
THE MORTGAGE LOANS INCLUDE A
SIGNIFICANT CONCENTRATION OF
CREDIT LEASE LOANS; THE
PERFORMANCE OF CREDIT LEASE
LOANS WILL DEPEND PRIMARILY ON
THE PERFORMANCE OF THE CREDIT
TENANT Approximately [ ]% of the mortgage loans,
representing [ ]% of the aggregate principal
balance of the mortgage loans as of the
cut-off date, are secured by credit lease
obligations. The performance of credit lease
loans will depend principally on the payment
by the related tenant or by the guarantor, if
any, of such monthly rental payments and
other payments due under the credit lease. In
reliance on the tenant's or guarantor's
credit rating, the credit lease loans were
generally underwritten to lower debt service
coverage ratios and/or higher loan-to-value
ratios than other mortgage loans.
A downgrade in the credit rating of any of
the tenants and/or the guarantors may
adversely affect the rating of the offered
certificates.
If a default occurs before significant
amortization of the credit lease loan has
occurred and no recovery is available from
the related borrower, the tenant or any
guarantor, it is unlikely that the special
servicer will be able to recover in full the
amounts then due under the credit lease loan.
THE VALUE OF PROPERTIES SECURING
CONSTRUCTIONS LOANS IS DEPENDENT
ON COMPLETION The improvements on certain mortgaged
properties representing the security for
____% of the mortgage loans representing [ ]%
of the aggregate principal balance of the
mortgage loans as of the cut-off-date, were
under construction as of the cut-off date.
The cost of developing commercial properties
may exceed projections and construction may
not be completed on schedule, resulting in
increased construction costs. [For each such
mortgage loan, the lender has obtained a
completion guaranty from
____________________. However, if
construction is not completed for any reason
[and the completion guaranty is not honored],
the value of the related mortgage property
could be substantially less than the value
utilized in calculating its loan-to-value
ratio.]
CERTAIN PARTIES MAY HAVE CONFLICTS
OF INTEREST WITH RESPECT TO THE
MORTGAGED PROPERTIES A substantial number of the mortgaged
properties are managed by property managers
affiliated with the respective mortgagors.
These property managers may also manage
additional properties, including properties
that may compete with the mortgaged
properties. Affiliates of the managers and/or
the mortgagors, or the managers and/or the
mortgagors themselves, may also own other
properties, including competing properties.
Therefore, the managers of the mortgaged
properties and the mortgagors may experience
conflicts of interest in the management
and/or ownership of such properties. In
addition, the seller or affiliates thereof
may have other financing arrangements with
affiliates of the mortgagors and may enter
into additional financing relationships in
the future.
[SPECIAL] SERVICER MAY TAKE
ACTIONS WHICH ARE ADVERSE
TO YOU 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 you. The actions of the [special]
servicer will be subject to review and may be
rejected by holders of certificates, who may
have interests that conflict with those of
the holders of the other classes of
certificates. As a result, it is possible
that the [special] servicer may take actions
which conflict with the interests of certain
classes of certificates. In addition, the
[special] servicer may be removed without
cause by some certificateholders.
THE STATUS OF A GROUND LEASE
MAY BE UNCERTAIN IN A BANKRUPTCY
PROCEEDING _______ mortgage loans, representing
approximately _____% of the aggregate
principal balance of the mortgage loans as of
the cut-off date, are secured in part by a
leasehold interest in their respective
mortgaged properties. Pursuant to Section
365(h) of the Bankruptcy Code, ground lessees
are currently afforded rights not to treat a
ground lease as terminated and to remain in
possession of their leased premises upon the
bankruptcy of their ground lessor and the
rejection of the ground lease by the
representative of such ground lessor's
bankruptcy estate.
The leasehold mortgages provide that the
mortgagor may not elect to treat the ground
lease as terminated on account of any such
bankruptcy of, and rejection by, the ground
lessor without the consent of the servicer.
In the event of a bankruptcy of a ground
lessee/mortgagor, the ground lessee/mortgagor
under the protection of the Bankruptcy Code
has the right to assume (i.e. continue) or
reject (i.e. terminate) any or all of its
ground leases.
In the event of concurrent bankruptcy
proceedings involving the ground lessor and
the ground lessee/mortgagor, the master
servicer may be unable to enforce the
bankrupt ground lessee/ mortgagor's
obligation to refuse to treat a ground lease
rejected by a bankrupt ground lessor as
terminated. In such circumstances, a ground
lease could be terminated notwithstanding
lender protection provisions contained
therein or in the mortgage.
THE OFFERED CERTIFICATES
PREPAYMENTS WILL AFFECT YOUR
YIELD Prepayments. The yield to maturity on the
offered certificates will depend on the rate
and timing of principal payments (including
both voluntary prepayments, in the case of
mortgage loans that permit voluntary
prepayment, and involuntary prepayments, such
as prepayments resulting from casualty or
condemnation, defaults and liquidations) on
the mortgage loans and how such payments are
allocated among the offered certificates
entitled to distributions of principal. The
yield to maturity of the class [ ]
certificates will be particularly sensitive
to the rate and timing of receipt of
principal since its sole distribution is
interest based upon the outstanding pool
balance.
In addition, in the event of any repurchase
of a mortgage loan from the trust fund the
purchase price paid would be passed through
to the holders of the certificates with the
same effect as if such mortgage loan had been
prepaid in full (except that no prepayment
premium would be payable with respect to any
such repurchase). No representation is made
as to the anticipated rate of prepayments
(voluntary or involuntary) on the mortgage
loans or as to the anticipated yield to
maturity of any certificate.
Yield. In general, if you purchase an offered
certificate at a premium and principal
distributions occur at a rate faster than you
anticipated at the time of purchase, and no
prepayment premiums are collected, your
actual yield to maturity may be lower than
that you assumed at the time of purchase. In
the case of the class [ ] certificates, this
could result in the failure of investors in
the class [ ] certificates to recover their
initial investment. Conversely, if you
purchase an offered certificate at a discount
and principal distributions thereon occur at
a rate slower than that you assumed at the
time of purchase, your actual yield to
maturity may be lower than that you assumed
at the time of purchase.
The investment performance of the offered
certificates may be materially different from
what you expected if the rate of prepayments
on the mortgage loans is higher or lower than
what you assumed at the time of investment.
The yield on the class [ ] certificates will
be adversely affected if mortgage loans with
higher mortgage interest rates pay faster
than mortgage loans with lower mortgage
interest rates.
Interest Rate Environment. In general,
mortgagors are less likely to prepay if
prevailing interest rates are at or above the
rates borne by such mortgage loans. On the
other hand, mortgagors are more likely to
prepay if prevailing rates fall significantly
below the mortgage rates of the mortgage
loans. Mortgagors are less likely to prepay
mortgage loans with a lockout period or
prepayment premium provision, to the extent
enforceable, than otherwise identical
mortgage loans without such provisions, with
shorter lockout periods or with lower
prepayment premiums.
Premiums. Provisions requiring prepayment
premiums may not be enforceable in some
states and under federal bankruptcy law, and
may constitute interest for usury purposes.
Accordingly, no assurance can be given that
the obligation to pay a prepayment premium
will be enforceable or, if enforceable, that
the foreclosure proceeds will be sufficient
to pay such prepayment premium. Additionally,
although the collateral substitution
provisions related to defeasance are not
intended to be, and do not have the same
effect on the certificateholders as a
prepayment, there can be no assurance that a
court would not interpret such provisions as
requiring a prepayment premium and thus
unenforceable or usurious under applicable
law.
BORROWER DEFAULTS MAY ADVERSELY
AFFECT YOUR YIELD 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 life of
the offered certificates will be affected by
the rate and timing of delinquencies and
defaults on the mortgage loans. Delinquencies
on the mortgage loans, if the delinquent
amounts are not advanced, may result in
shortfalls in distributions of interest
and/or principal to the offered certificates
for the current month. Any late payments
received on or in respect of the mortgage
loans will be distributed to the certificates
in the priorities described more fully
herein, but no interest will accrue on such
shortfall during the period of time such
payment is delinquent.
If you calculate your anticipated yield based
on an assumed rate of default and an assumed
amount of losses on the mortgage loans that
are lower than the default rate and the
amount of losses actually experienced, and if
such losses are allocated to your class of
certificates, your actual yield to maturity
will be lower than the yield so calculated
and could, under certain scenarios, be
negative. The timing of any loss on a
liquidated mortgage loan also will affect the
actual yield to maturity of the offered
certificates to which all or a portion of
such loss is allocable, even if the rate of
defaults and severity of losses are
consistent with your expectations. In
general, the earlier you bear a loss, the
greater the effect on your yield to maturity.
Even if losses on the mortgage loans are
allocated to a particular class of offered
certificates, such losses may affect the
weighted average life and yield to maturity
of other certificates. Losses on the mortgage
loans, to the extent not allocated to such
class of offered certificates, may result in
a higher percentage ownership interest
evidenced by such certificates than would
otherwise have resulted absent such loss. The
consequent effect on the weighted average
life and yield to maturity of the offered
certificates will depend upon the
characteristics of the remaining mortgage
loans.
SERVICER'S RIGHT TO RECEIVE
CERTAIN COMPENSATION TAKES
PRECEDENCE TO YOUR RIGHT TO
RECEIVE DISTRIBUTIONS As and to the extent described herein, the
master servicer, the special servicer or the
trustee, as applicable, will be entitled to
receive interest on unreimbursed advances and
unreimbursed servicing expenses. The right of
the master servicer, the special servicer or
the trustee, as applicable, to receive such
payments of interest is senior to the rights
of certificateholders to receive
distributions on the offered certificates
and, consequently, may result in losses being
allocated to the offered certificates that
would not have resulted absent the accrual of
such interest.
VOTES OF OTHER
CERTIFICATEHOLDERS MAY
ADVERSELY AFFECT YOUR
INTERESTS Under certain circumstances, the consent or
approval of the holders of a specified
percentage of the aggregate certificate
balance of all outstanding certificates 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.
COMPUTERIZED SYSTEMS MAY BE
DISRUPTED BY THE TRANSITION
TO THE YEAR 2000 The transition from the year 1999 to the year
2000 may disrupt the ability of computerized
systems of the master servicer, the special
servicer, the trustee, the mortgagors and
other parties to process information
including:
o the collection of payments on the
mortgage loans,
o the servicing of the mortgage loans; and
o the distributions on your certificates.
[The Master Servicer, the special servicer,
and the Trustee are currently modifying their
computer systems and applications such that
they will be year 2000 compliant by
___________, 1999. If the master servicer,
the special servicer or trustee is unable to
complete such modifications by the year 2000
or if the mortgagors or other third parties
are not year 2000 compliant, the ability of
the master servicer or trustee to service the
mortgage loans and make distributions to the
certificateholders, respectively, may be
materially and adversely affected.]
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The trust fund will consist primarily of a pool of [fixed] [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
$[__________]. Each mortgage loan is evidenced by a promissory note and secured
by a mortgage, deed of trust or other similar security instrument creating a
first lien on a fee simple and/or leasehold interests in an office, multifamily,
retail, hotel, industrial, nursing home and congregate care, mobile home park or
other commercial 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.
The mortgage loans were originated by the Seller or originated for
purchase by the Seller. The Seller is an affiliate of the Depositor and of J.P.
Morgan Securities Inc., the Underwriter. [[_________] provides commercial and
multifamily mortgage loan origination services exclusively for MGT and provides
servicing and asset management services to MGT and others on large pools of
commercial and multifamily mortgage loans. [_________] provided loan origination
services, including loan underwriting, due diligence and closing services, to
MGT in connection with the Mortgage Loans originated directly by MGT, and will
be the Master Servicer.]
The mortgage loans were underwritten generally in conformity with the
guidelines described below. See "--Underwriting Guidelines and Processes" below.
The Seller will sell the mortgage loans to the Depositor on or prior to the
delivery date pursuant to a loan sale agreement. The Depositor will cause the
mortgage loans in the mortgage pool to be assigned to the trustee pursuant to
the pooling and servicing agreement.
See Annex A for additional information with respect to certain of the
mortgage loans and the Diskette for additional information with respect to all
of the mortgage loans.
REPRESENTATIONS AND WARRANTIES
Under the loan sale agreement, the Seller will make certain
representations and warranties to the Depositor. Pursuant to the terms of the
loan sale agreement, the Seller will be obligated to cure any breach of these
representations and warranties or to repurchase any mortgage loan from the
Depositor as to which there exists a breach of any representation or warranty
that materially and adversely affects the interests of the certificateholders in
the mortgage loan. The Seller shall covenant with the Depositor to repurchase
any mortgage loan from the Depositor or cure any breach within 90 days of
receiving notice thereof. Under the pooling and servicing agreement, the
Depositor will assign its rights under the loan sale agreement to the trustee
for the benefit of the certificateholders. 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 representation or warranty which materially and adversely affects the
interest of the certificateholders in the mortgage loan.
The Seller has generally represented and warranted as of the delivery
date with respect to each mortgage loan, among other things, subject to certain
exceptions set forth in the loan sale agreement, that: [(i) the mortgage loan is
not one month or more delinquent in payment of principal and interest and has
not been so delinquent more than once in a twelve-month period prior to the
delivery date and there is no payment default and no other default under the
mortgage loan which has a material adverse effect on the mortgage loan; (ii) the
mortgage loan is secured by a mortgage that is a valid and subsisting first
priority lien on the mortgaged property (or a leasehold interest therein) free
and clear of any liens, claims or encumbrances, subject only to certain
permitted encumbrances; (iii) the mortgage, together with any separate security
agreements, establishes a first priority security interest in favor of the
Seller in all the mortgagor's personal property used in, and reasonably
necessary to operate the mortgaged property, and to the extent a security
interest may be created therein, the proceeds arising from the mortgaged
property and any other collateral securing the mortgage subject only to certain
permitted encumbrances; (iv) there is an assignment of leases and rents
provision creating a first priority security interest in leases and rents
arising in respect of the mortgaged property, subject only to certain permitted
encumbrances; (v) 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; (vi) the mortgagor has good and indefeasible title in fee
simple or leasehold interest 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 mortgaged property, except for rights of first refusal; (vii) 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; (viii) 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; (ix) at the time of the assignment of the mortgage loan to
the Depositor, the Seller had good title to and was the sole owner of the
mortgage loan free and clear of any pledge, lien or encumbrance and the
assignment validly transfers ownership of the mortgage loan to the Depositor
free and clear of any pledge, lien or encumbrance; (x) the mortgage assignment
and the 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; (xi) the Seller's endorsement of the mortgage note constitutes the
legal and binding assignment of the mortgage note and together with an
assignment of the mortgage and the assignment of the assignment of leases and
rents, legally and validly conveys all right, title and interest in the mortgage
loan and the mortgage loan documents; (xii) each mortgage loan document is a
legal, valid and binding obligation of the parties thereto, enforceable in
accordance with its terms, except as 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
the 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 the mortgage loan documents taken as a whole are
enforceable to the extent necessary and customary for the practical realization
of the rights and benefits they afford; (xiii) the Seller has not modified the
terms of the mortgage loan and the mortgage loan documents have not been
modified or waived in any material respect except as set forth in the loan sale
agreement and the mortgage loan documents; (xiv) the mortgage loan has not been
satisfied, canceled, subordinated, released or rescinded and the mortgagor has
not been released from its obligations under any mortgage loan document; (xv)
none of the mortgage loan documents is subject to any right of rescission,
set-off, valid counterclaim or defense; (xvi) each mortgage loan document
complied in all respects with all material applicable state or federal laws
including usury to the extent non-compliance would have a material adverse
effect on the mortgage loan; (xvii) the mortgaged property is, in all material
respects, in compliance with, and is used and occupied in accordance with
applicable law; (xviii) to the Seller's knowledge, (a) in reliance on an
engineering report, the mortgaged property is in good repair and (b) no
condemnation proceedings are pending; (xix) the ESA prepared in connection with
the origination thereof reveals no known circumstances or conditions with
respect to the mortgaged property that would constitute or result in a material
violation of any environmental laws, require any expenditure material in
relation to the principal balance of the mortgage loan to achieve or maintain
compliance in all material respects with any environmental laws or require
substantial cleanup or remedial action or any other extraordinary action in
excess of the amount escrowed for such purposes; (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 knowledge, all
significant leases are in full force and effect, and there has been no material
default by the mortgagor or lessee; and (xxiii) to the Seller's knowledge, there
are no pending or threatened actions, suits or proceedings by or before any
court or other governmental authority against or affecting the mortgagor under
the mortgage loan or the mortgaged property which, if determined against the
mortgagor or property would materially and adversely affect the value of the
property or ability of the mortgagor to pay principal, interest and other
amounts due under the mortgage loan.]
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
All of the mortgage loans are secured by first liens on a fee simple
and/or leasehold interest in the mortgaged properties. 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.
<TABLE>
<CAPTION>
MORTGAGE INTEREST RATES AS OF THE CUT-OFF DATE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
MORTGAGE INTEREST RATES LOANS LOANS DATE DATE
- ----------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
6.7501%-7.0000%
7.0001%-7.2500%
7.2501%-7.5000%
7.5001%-7.7500%
7.7501%-8.0000%
8.0001%-8.2500%
8.2501%-8.5000%
8.5001%-8.7500%
8.7501%-9.0000%
9.2501%-9.5000%
9.5001%-9.7500%
9.7501%-10.0000%
Total 100.0% 100.0%
Weighted Average Mortgage Interest Rate: [____]%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
PRINCIPAL BALANCES MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
AS OF THE CUT-OFF DATE LOANS LOANS DATE DATE
- ---------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
DATE
Under $1,000,000
$1,000,001-2,000,000
$2,000,001-3,000,000
$3,000,001-4,000,000
$4,000,001-5,000,000
$5,000,001-7,500,000
$7,500,001-10,000,000
$10,000,001-12,000,000
$12,000,001-15,000,000
$15,000,001-17,500,000
$20,000,001-25,000,000
$25,000,001-30,000,000
$30,000,001-35,000,000
$35,000,001-40,000,000
$50,000,001-60,000,000
$60,000,001-70,000,000
$80,000,001-90,000,000
Total 100.0% 100.0%
Average Principal Balance per Mortgage Loan as of the Cut-off Date: $[__________]
Average Principal Balance per Mortgaged Property as of the Cut-off Date: $[_________]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL TERM TO MATURITY/ANTICIPATED REPAYMENT DATE IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
ORIGINAL TERM TO MATURITY MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
IN MONTHS LOANS LOANS DATE DATE
- ------------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
60-83
84-119
120-179
180-299
Total 100.0% 100.0%
Weighted Average Original Term to Maturity or Anticipated Repayment Date in Months: [___]
</TABLE>
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY/ANTICIPATED REPAYMENT DATE IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
REMAINING TERM TO MATURITY/ MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
ANTICIPATED REPAYMENT DATE IN MONTHS LOANS LOANS DATE DATE
- ------------------------------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
43-60
73-84
85-108
109-120
121-132
133-144
169-180
217-240
Total 100.0% 100.0%
Weighted Average Remaining Term to Maturity or Anticipated Repayment Date in Months: [___]
</TABLE>
<TABLE>
<CAPTION>
MONTH AND YEAR OF ORIGINATION
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
MONTH/YEAR LOANS LOANS DATE DATE
- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Total 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR OF SCHEDULED MATURITY/ANTICIPATED REPAYMENT DATE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
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>
Total 100.0% 100.0%
[ ] of the Mortgage Loans, representing approximately [_____]% of the
Initial Pool Balance are Balloon Mortgage Loans.
</TABLE>
<TABLE>
<CAPTION>
BALLOON MORTGAGE LOANS
ORIGINAL TERM TO MATURITY IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
ORIGINAL TERM IN MONTHS LOANS LOANS DATE DATE
- ----------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
60 or less
61-84
85-120
121-180
181-300
Total 100.0% 100.0%
Weighted Average Original Term to Maturity in Months: [___]
</TABLE>
<TABLE>
<CAPTION>
BALLOON MORTGAGE LOANS
REMAINING TERM TO MATURITY IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
REMAINING TERM IN MONTHS LOANS LOANS DATE DATE
- ------------------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
72 or less
73-84
85-108
109-120
121-132
133-144
169-180
217-240
Total 100.0% 100.0%
Weighted Average Remaining Term to Maturity in Months: [___]
</TABLE>
<TABLE>
<CAPTION>
BALLOON MORTGAGE LOANS
REMAINING AMORTIZATION TERM
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
REMAINING AMORTIZATION TERM IN MONTHS LOANS LOANS DATE DATE
- ------------------------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
240 or less
241-300
301-360
Total 100.0% 100.0%
Weighted Average Remaining Amortization Term in Months: [___]
[____] of the Mortgage Loans, representing approximately [_____]% of
the Initial Pool Balance are ARD Mortgage Loans.
</TABLE>
<TABLE>
<CAPTION>
ARD MORTGAGE LOANS
ORIGINAL TERM TO ANTICIPATED REPAYMENT DATE IN MONTHS
ORIGINAL TERM IN MONTHS NUMBER PERCENT BY AGGREGATE PERCENT BY
OF NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE MORTGAGE BALANCE AS OF PRINCIPAL
LOANS LOANS THE CUT-OFF BALANCE AS OF
DATE THE CUT-OFF
DATE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
ORIGINAL TERM IN MONTHS LOANS LOANS DATE DATE
- ----------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
84-119
120-179
Total 100.0% 100.0%
Weighted Average Original Term to Anticipated Repayment Date in Months: [___]
</TABLE>
<TABLE>
<CAPTION>
ARD MORTGAGE LOANS
REMAINING TERM TO ANTICIPATED REPAYMENT DATE IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
REMAINING TERM IN MONTHS LOANS LOANS DATE DATE
- ------------------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
60-83
84-119
120-179
Total 100.0% 100.0%
Weighted Average Remaining Term to Anticipated Repayment Date in Months: [___]
</TABLE>
<TABLE>
<CAPTION>
ARD MORTGAGE LOANS
REMAINING AMORTIZATION TERM
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
REMAINING AMORTIZATION TERM IN MONTHS LOANS LOANS DATE DATE
- ------------------------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
180-299
300 or Greater
Total 100.00% 100.0%
Weighted Average Remaining Amortization Term in Months: [___]
</TABLE>
The following two tables set forth the range of Cut-off Date LTV Ratios
and Maturity Date/ Anticipated Repayment Date LTV Ratios of the mortgage loans.
Because the value of mortgaged properties at the maturity date, or, in the case
of an ARD loan, the anticipated repayment date, may be different than the
appraisal value, there can be no assurance that the loan-to-value ratio for any
mortgage loan determined at any time following origination will be lower than
the Cut-off Date LTV Ratio or Maturity Date/Anticipated Repayment Date LTV
Ratio, notwithstanding any positive amortization of the mortgage loan. It is
possible that the market value of a mortgaged property securing a mortgage loan
may decline between the origination and the maturity date, or, in the case of an
ARD Loan the Anticipated Repayment Date.
An appraisal of each of the mortgaged properties was made between
[____________ and ____________]. It is possible that the market value of a
mortgaged property securing a mortgage loan has declined since the most recent
appraisal for the mortgaged property. All appraisals were obtained in accordance
with the requirements of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, as amended ("FIRREA").
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
CUT-OFF DATE LTV RATIO LOANS LOANS DATE DATE
- ---------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
50% or less
50.01%-55.00%
55.01%-60.00%
60.01%-65.00%
65.01%-70.00%
70.01%-75.00%
75.01%-80.00%
80.01%-85.00%
85.01%-90.00%
Total 100.0% 100.0%
Weighted Average Cut-off Date LTV Ratio: [______]%
</TABLE>
<TABLE>
<CAPTION>
MATURITY DATE/ANTICIPATED REPAYMENT DATE
LTV RATIOS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
MATURITY DATE LTV RATIO LOANS LOANS DATE DATE
- ----------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
50% or less
50.01%-55.00%
55.01%-60.00%
60.01%-65.00%
65.01%-70.00%
70.01%-75.00%
Total 100.0% 100.0%
Weighted Average Maturity Date LTV Ratio: [_____]%
</TABLE>
The following table sets forth the range of Underwritten Cash Flow Debt
Service Coverage Ratios for the mortgage loans ("UW DSCR").
"Underwritten NOI" or "UW NOI" means the NOI for the Mortgaged Property
as determined by the Seller in accordance with its underwriting guidelines for
similar properties. Revenue is generally calculated as follows: rental revenue
is calculated using actual rental rates, in some cases, adjusted downward to
market rates with vacancy rates equal to the higher of the Mortgaged Property's
historical rate, the market rate or an assumed vacancy rate; other revenue, such
as parking fees, laundry and other income items are included only if supported
by a trend and/or is likely to be recurring. Operating expenses generally
reflect the Mortgaged Property's historical expenses, adjusted to account for
inflation, significant occupancy increases and a market rate management fee.
Generally, "Net Operating Income" ("NOI") for a Mortgaged Property equals the
operating revenues (consisting principally of rental and related revenue) for
such Mortgaged Property minus the operating expenses (such as utilities, repairs
and maintenance, general and administrative, management fees, marketing and
advertising, insurance and real estate tax expenses) for the Mortgaged Property.
NOI generally does not reflect replacement reserves, capital expenditures, debt
service, tenant improvements, leasing commissions, depreciation, amortization
and similar non-operating items.
The amounts representing "Net Operating Income", "Underwritten NOI" and
"Underwritten Cash Flow" are not a substitute for or an improvement upon net
income as determined in accordance with generally accepted accounting principles
as a measure of the results of the Mortgaged Property's operations or a
substitute for cash flows from operating activities determined in accordance
with generally accepted accounting principles as a measure of liquidity. No
representation is made as to the future net cash flow of the properties, nor is
"Net Operating Income", "Underwritten NOI" and "Underwritten Cash Flow" set
forth herein intended to represent such future net cash flow.
The UW NOIs and NOIs used as a basis for calculating the DSCRs
presented in the following table, in Annex A attached hereto and in the
Diskette, were derived principally from operating statements obtained from the
respective mortgagors. The operating statements were not audited and in most
cases were not prepared in accordance with generally accepted accounting
principles. To increase the level of consistency between the operating
statements, in some instances, adjustments were made. These adjustments were
principally for real estate tax and insurance expenses (e.g., adjusting for the
payment of two years of expense in one year), and to eliminate obvious items not
related to the operation of the mortgaged property. However, these adjustments
were subjective in nature and may not have been made in a uniform manner.
<TABLE>
<CAPTION>
UNDERWRITTEN CASH FLOW DEBT SERVICE COVERAGE RATIOS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
DEBT SERVICE COVERAGE MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
RATIO BASED ON UW CASH FLOWS LOANS LOANS DATE DATE
- ---------------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
1.15x or less
1.16x-1.20x
1.21x-1.25x
1.26x-1.30x
1.31x-1.40x
1.41x-1.50x
1.51x-1.60x
1.61x-1.70x
1.71x-1.80x
1.81x-1.90x
1.91x-2.00x
2.01x-2.10x
Total 100.0% 100.0%
Weighted Average UW DSCR: [____]x
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
PERCENT BY
AGGREGATE AGGREGATE
NUMBER NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGED MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
STATE PROPERTIES LOANS LOANS DATE DATE
- --------------- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENT BY
AGGREGATE AGGREGATE
NUMBER NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGED MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
TYPE PROPERTIES LOANS LOANS DATE DATE
- --------------- ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Office
Multifamily
Hotel
Anchored Retail
Unanchored Retail
Single Tenant
Retail
Retail/Office
Industrial
Nursing Home
Mobile Home Park
Self Storage
Total 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
YEARS SINCE THE MORTGAGED PROPERTIES WERE BUILT
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
PROPERTY AGE IN YEARS LOANS LOANS DATE DATE
- --------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
6 or less
7-11
12-16
17-21
22-26
27-31
32 [or more]
Total 100.0% 100.0%
Weighted Average Property Age in Years: [___]
</TABLE>
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES(1)
MULTIFAMILY AND MOBILE HOME PARK
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
OCCUPANCY PERCENTAGES LOANS LOANS DATE DATE
- --------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
75.001%-80.000%
80.001%-85.000%
85.001%-90.000%
90.001%-95.000%
95.001%-100.000%
Total 100.0% 100.0%
Weighted Average Occupancy Percentage: [____]%
(1)See Annex A for dates as of which occupancy percentages were calculated for
each mortgaged property.
</TABLE>
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES(1)
RETAIL
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
OCCUPANCY PERCENTAGES LOANS LOANS DATE DATE
- --------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
85.001%-90.000%
90.001%-95.000%
95.001%-100.000%
Total 100.0% 100.0%
Weighted Average Occupancy Percentage: [_____]%
(1)See Annex A for dates as of which occupancy percentages were calculated for
each mortgaged property.
</TABLE>
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES(1)
HOTEL
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
OCCUPANCY PERCENTAGES LOANS LOANS DATE DATE
- --------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
65.000% or less
65.001%-70.000%
70.001%-75.000%
75.001%-80.000%
80.001%-85.000%
95.001%-100.000%
Total 100.0% 100.0%
Weighted Average Occupancy Percentage: [____]%
(1)See Annex A for dates as of which occupancy percentages were calculated for
each mortgaged property.
</TABLE>
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES(1)
OFFICE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
OCCUPANCY PERCENTAGES LOANS LOANS DATE DATE
- --------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
90.001%-95.000%
95.001%-100.000%
Total 100.0% 100.0%
Weighted Average Occupancy Percentage: [____]%
(1)See Annex A for dates as of which occupancy percentages were calculated for
each mortgaged property.
</TABLE>
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES(1)
OTHER
PERCENT BY
AGGREGATE AGGREGATE
NUMBER PERCENT BY PRINCIPAL PRINCIPAL
OF NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT-OFF THE CUT-OFF
OCCUPANCY PERCENTAGES LOANS LOANS DATE DATE
- --------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
80.001%-85.000%
85.001%-90.000%
95.001%-100.000%
Total 100.0% 100.0%
Weighted Average Occupancy Percentage: [____]%
(1)See Annex A for dates as of which occupancy percentages were calculated for
each mortgaged property.
</TABLE>
With certain limited exceptions relating to casualty and condemnation
proceeds, or other prepayments beyond the mortgagor's control, [all] of the
mortgage loans prohibit the prepayment thereof until the Lock-out Date, at the
expiration of the Lock-out Period and/or provide that upon any voluntary
principal prepayment of a mortgage loan, the mortgagor will be required to pay a
prepayment premium or yield maintenance penalty. [Certain] mortgage loans
provide for defeasance, in whole and/or in part, during certain periods of time.
The following table sets forth the percentage of the declining aggregate
principal balance of all the mortgage loans that on [_________] 1 of each of the
years indicated will be within their related Lock-out Period, are subject to
defeasance and/or in which a principal prepayment must be accompanied by a
prepayment premium.
<TABLE>
<CAPTION>
PREPAYMENT PROTECTION
PERCENTAGE OF MORTGAGE LOANS BY OUTSTANDING PRINCIPAL BALANCE
AS OF THE CUT-OFF DATE THAT HAVE PREPAYMENT LOCK-OUTS OR PENALTIES
(ASSUMING NO PREPAYMENTS)*
[NOV.] [NOV.] [NOV.] [NOV.]
CURRENT 1999 2000 2001 2002
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Lock-Out/Defeasance (1)
YM1:
T+0bp; 1% Floor (2)
YM2:
T+25bp; 1% Floor (2)
Total Lockout and YM
7.00%-7.99% (3)
6.00%-6.99% (3)
5.00%-5.99% (3)
4.00%-4.99% (3)
3.00%-3.99% (3)
2.00%-2.99% (3)
1.00%-1.99% (3)
0.01%-0.99%
No Prepayment Premium
Total
Aggregate Mortgage Balance (4)
Percentage of Balance Outstanding
</TABLE>
<TABLE>
<CAPTION>
[MAR.] [MAR.] [MAR.] [MAR.] [MAR.] [MAR.]
2003 2004 2005 2006 2007 2008
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Lock-Out/Defeasance (1)
YM1:
T+0bp; 1% Floor (2)
YM2:
T+25bp; 1% Floor (2)
Total Lockout and YM
7.00%-7.99% (3)
6.00%-6.99% (3)
5.00%-5.99% (3)
4.00%-4.99% (3)
3.00%-3.99% (3)
2.00%-2.99% (3)
1.00%-1.99% (3)
0.01%-0.99%
No Prepayment Premium
Total
Aggregate Mortgage Balance (4)
Percentage of Balance
Outstanding
(1) Certain mortgage loans permit the applicable mortgagor after a specified
period (in most cases not less than two years from the delivery date), to
obtain the release of the mortgaged property from the lien of the mortgage
upon substitution of direct non-callable obligations of the United States
providing payments in amounts equal to the scheduled payments due on the
mortgage loan to the maturity date or, in certain of the ARD Loans, the
Anticipated Repayment Date. The master servicer shall, on behalf of the
mortgagor, purchase such obligations of the United States for deposit into
the trust fund. Any such substitution shall be subject to, among other
things, the receipt of written confirmation from the Rating Agencies that
such substitution will not result in a downgrade, qualification or
withdrawal of the then current rating of any certificate. Such substitution
of collateral is referred to herein as defeasance. For purposes of this
table, to the extent a mortgagor may elect to defease the mortgage loan,
that mortgage loan will be reflected in the "Lock-Out/Defeasance" category.
(2) The mortgage loan generally requires the payment of a prepayment premium in
connection with any principal prepayment, in whole or in part. Any
Prepayment Premium will equal the present value, as of the date of
prepayment, of the remaining Monthly Payments from the date of prepayment
through the stated maturity (including the balloon payment), determined by
discounting the payments at a U.S. Treasury rate specified therein (or a
specified number of basis points in excess thereof), minus the then
outstanding principal balance, subject to a minimum prepayment premium equal
to the indicated percentage of the principal balance of the mortgage loan
being prepaid ("Yield Maintenance").
(3) The mortgage loan requires a prepayment premium equal to indicated
percentage of amount prepaid.
(4) Millions of dollars.
Key: YM = Yield Maintenance; T = U.S. Treasury Rate
*See Annex A and the Diskette for Mortgaged Property level information.
</TABLE>
[BORROWER CONCENTRATION AND RELATED BORROWERS]
CERTAIN TERMS AND CONDITIONS OF THE MORTGAGE LOANS
ARD Loans. [_____] of the mortgage loans representing approximately
[_____]% of the aggregate principal balance of the mortgage loans as of the
Cut-off Date are ARD Loans. The ARD Loans substantially fully amortize over
their stated terms, which are at [least 60 months] after their related
Anticipated Repayment Dates. If the mortgagor elects to prepay an ARD Loan in
full on the anticipated repayment date, a substantial amount of principal will
be due. If a mortgagor elects not to prepay an ARD Loan on or before its
Anticipated Repayment Date, all or a substantial portion of the Excess Cash Flow
collected after that date shall be applied towards the prepayment of the ARD
Loan. The Anticipated Repayment Date for any such ARD Loan is set forth on Annex
A.
Once the principal balance of an ARD Loan has been reduced to zero all
Excess Cash Flow will be applied to the payment of accrued Excess Interest. With
respect to any ARD Loan, payment of Excess Interest will be deferred until the
principal of the ARD Loan has been paid in full.
Commencing on the respective Anticipated Repayment Date each ARD Loan
generally will bear interest at a Revised Rate. Until the principal balance of
each mortgage loan has been reduced to zero, the mortgage loan will only be
required to pay interest at the mortgage interest rate and the interest accrued
at the excess of the Revised Rate over the mortgage interest rate will be
deferred. Excess Interest so accrued will, except where limited by applicable
law, not be added to the principal balance of the Mortgage Loan but will accrue
interest at the Revised Rate. Each mortgagor under the ARD Loans has agreed to
have all revenue from the mortgaged property deposited after the Anticipated
Repayment Date into a Lockbox Account controlled by the master servicer.
From and after the Anticipated Repayment Date, in addition to paying
interest (at the mortgage interest rate) and principal (based on the
amortization schedule), the mortgagor generally will be required to apply all
monthly cash flow from the mortgaged property to pay the following amounts in
the following order of priority: (i) required payments for the tax and insurance
fund and ground lease escrows fund, (ii) payment of monthly debt service, (iii)
payments to any other required escrow funds, (iv) payment of operating expenses
pursuant to the terms of an annual budget approved by the master servicer or in
an amount which [is capped at 1/12 of 105% of the prior year's operating
expenses], (v) principal on the mortgage loan until the principal is paid in
full and (vi) to Excess Interest. As described below, each ARD Loan generally
provides that the mortgagor is prohibited from prepaying the mortgage loan until
[one to six months] prior to the Anticipated Repayment Date but, upon the
commencement of such period, may prepay the loan, in whole or in part, without
payment of a prepayment premium. The failure to pay an ARD Loan, including any
Excess Interest due, by the Anticipated Repayment Date will not result in a
default or acceleration of the mortgage loan. The Anticipated Repayment Date for
each ARD Loan is listed in Annex A.
The ARD Loans are as follows:
PRINCIPAL
LOAN LOAN NO. BALANCE
---- -------- ---------
ESCROWS
[_________] mortgage loans which represent approximately [____]% of the
initial pool balance, provide for monthly escrows to cover property taxes on the
mortgaged properties and [_________] of the mortgage loans, which represents
approximately [_____]% of the initial pool balance, provide for monthly escrows
to cover insurance premiums on the mortgaged properties. With respect to the
mortgage loans which do not require monthly escrows to cover insurance premiums,
if the mortgagor does not maintain the required insurance, then (i) the master
servicer may obtain such coverage at the cost of the mortgagor or (ii) with
respect to most of the mortgage loans, the master servicer may require monthly
escrows in addition to providing force-placed coverage.
[___________] of the mortgage loans, which represent approximately
[_____]% of the initial pool balance, also require monthly escrows to cover
ongoing replacements of furniture, fixtures and equipment and/or capital
expenditures.
[________] of the mortgage loans, which represent approximately
[_____]% of the initial pool balance, also required upfront or monthly escrows
for the full term or a portion of the term of the mortgage loan to cover
anticipated re-leasing costs, including tenant improvements and leasing
commissions. [_____] of the mortgage loans, which represent approximately
[_____]% of the initial pool balance, have front-end escrows to cover various
other contingencies.
See Annex A and the Diskette for additional information pertaining to
mortgage loan escrows.
UNDERWRITING GUIDELINES AND PROCESS
MGT created, and provided each of the other originators with,
guidelines establishing certain procedures with respect to underwriting the
mortgage loans, as described more fully below. The mortgage loans were generally
originated in accordance with these guidelines. In some instances, one or more
provisions of the guidelines were waived or modified where it was determined not
to adversely affect the mortgage loans in any material respect.
Property Analysis. Each of the originators is required to perform a
site inspection to evaluate the location and quality of each mortgaged property.
The inspection includes an evaluation of functionality, design, attractiveness,
visibility, and accessibility, as well as convenience to major thoroughfares,
transportation centers, employment sources, retail areas and educational or
recreational facilities. Each of the originators also is required to assess the
submarket in which the property is located to evaluate competitive or comparable
properties as well as market trends. In addition, each of the originators is to
evaluate the property's age, physical condition, operating history, leases and
tenant mix, and management.
Cash Flow Analysis. Each of the originators is required to review
operating statements provided by the mortgagor and to make adjustments in order
to determine the debt service coverage ratio. See "Description of the Mortgage
Pool--Certain Characteristics of the Mortgage Loans" herein.
Appraisal and Loan-to-Value Ratio. For each mortgaged property, each of
the originators is required to obtain a current full narrative appraisal
conforming at least to the requirements of FIRREA. The appraisal must be based
on the highest and best use of the mortgaged property and must include an
estimate of the current market value of the property in its current condition.
Each of the originators is required to determine the loan-to-value ratio of the
mortgage loan at the date of origination based on the value set forth in the
appraisal.
Evaluation of Mortgagor. Each of the originators is required to
evaluate the mortgagor and its principals with respect to credit history and
prior experience as an owner and operator of commercial real estate properties.
The evaluation generally is to include obtaining and reviewing a credit report
or other reliable indication of the mortgagor's financial capacity; obtaining
and verifying credit references and/or business and trade references; and
obtaining and reviewing certifications provided by the mortgagor as to prior
real estate experience and current contingent liabilities. Finally, although the
mortgage loans generally are non-recourse in nature, in the case of certain
mortgage loans, the mortgagor and certain principals thereof may be required to
assume legal responsibility for liabilities relating to fraud,
misrepresentation, misappropriation of funds, breach of environmental or
hazardous waste requirements and unauthorized transfer of title to the property.
Each of the originators is required to evaluate the financial capacity of the
mortgagor and such principals to meet any obligations that may arise with
respect to these liabilities.
Environmental Site Assessment. Each of the originators is required at
origination to obtain or update an ESA for each mortgaged property prepared by a
qualified environmental firm approved by the Seller. Each of the originators is
required to review the ESA to verify the absence of reported violations of
applicable laws and regulations relating to environmental protection and
hazardous waste. In cases in which the ESA identifies such violations, each of
the Originators must require the mortgagor to carry out satisfactory remediation
activities prior to the origination of the mortgage loan, or to establish an
operations and maintenance plan and to place sufficient funds in escrow at the
time of origination of the mortgage loan to complete such remediation within
twelve months.
Physical Assessment Report. Each of the originators is required at
origination to obtain a physical assessment report ("PAR") for each mortgaged
property prepared by a qualified structural engineering firm approved by the
Seller. Each of the originators is required to review the PAR to verify that the
property is reported to be in satisfactory physical condition, and to determine
the anticipated costs of necessary repair, replacement and major maintenance or
capital expenditure needs over the term of the mortgage loan. In cases in which
the PAR identifies material repairs or replacements needed immediately, each of
the originators is generally obligated to require the mortgagor to carry out
such repairs or replacements prior to the origination of the mortgage loan, or
to place sufficient funds in escrow at the time of origination of the mortgage
loan to complete such repairs or replacements within not more than twelve
months.
Title Insurance Policy. The mortgagor is required to provide, and each
of the originators is required to review, a title insurance policy for each
mortgaged property. The title insurance policy must meet the following
requirements: (a) the risk in connection with any one mortgage loan assumed by
one title insurance company may not be more than 40% of the sum of the company's
capital, surplus and reserves (exceptions can be made where re-insurance or
co-insurance by another title insurance company will cover excess risk), (b) the
policy must be written by a title insurer licensed to do business in the
jurisdiction where the mortgaged property is located, (c) the policy must be in
an amount equal to the original principal balance of the loan, (d) the
protection and benefits must run to the mortgagee and its successors and
assigns, (e) the policy should be written on a standard policy form of the
American Land Title Association or equivalent policy promulgated in the
jurisdiction where the Mortgaged Property is located and (f) the legal
description of the Mortgaged Property in the title policy must conform to that
shown on the survey of the mortgaged property, where a survey has been required.
Property Insurance. The mortgagor is required to provide, and each of
the originators is required to review, certificates of required insurance with
respect to the mortgaged property. Such insurance generally may include: (1)
commercial general liability insurance for bodily injury or death and property
damage; (2) an "All Risk of Physical Loss" policy; (3) if applicable, boiler and
machinery coverage; (4) if the mortgaged property is located in a flood hazard
area, flood insurance; and (5) any other coverage that each of the originators
may require based on the specific characteristics of the mortgaged property.
ADDITIONAL INFORMATION
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the offered certificates and will be filed, together with the
pooling and servicing agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the offered certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued pursuant to the pooling and servicing
agreement and will include the following eight classes of offered certificates
designated as the Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [
], Class [ ] and Class [ ] Certificates. In addition to the offered
certificates, the certificates will also include the Class [ ], Class [ ], Class
[ ], 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 fixed 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 REO property
which is mortgaged property acquired on behalf of the trust fund through
foreclosure or deed in lieu of foreclosure; (iii) any 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; and (iv) the rights of
the mortgagee under all insurance policies with respect to the mortgage loans.
The Class [ ], Class [ ] and Class [ ] Certificates will evidence
approximately an initial [___]% undivided interest in the trust fund. The Class
[ ] Certificates will evidence approximately an initial [___]% undivided
interest in the trust fund. The Class [ ] Certificates will evidence
approximately an initial [___]% undivided interest in the trust fund. The Class
[ ] Certificates will evidence approximately an initial [___]% undivided
interest in the trust fund. The Class [ ] Certificates will evidence
approximately an initial [____]% undivided interest in the trust fund.
The offered certificates, DTC registered, will be issued, maintained
and transferred on the book-entry records of The Depository Trust Company
("DTC") and its participants. The DTC registered certificates (other than the
Class [ ] Certificates) will be issued in minimum denominations of $25,000 and
integral multiples of $1 in excess thereof. The Class [ ] Certificates 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 beneficial
owner who acquires an interest in the DTC registered certificates will be
entitled to receive a definitive certificate representing that beneficial
owner'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 Cedelbank, societe anonyme
("Cedelbank") or Euroclear, in Europe, through participants of these systems, or
indirectly through organizations which are participants in these systems.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
Book-Entry Registration. The offered certificates will be initially
issued through the book-entry facilities of DTC, or Cedelbank or the Euroclear
System ("Euroclear") 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 the certificates will be
DTC's nominee. Cedelbank and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositories, which in turn
will hold omnibus positions in customers' securities accounts in the
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 participants that include
DTC's participating organizations, Cedelbank and Euroclear, and facilitates the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes in the participants' accounts.
Participants 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 the participants are indirect participants that have indirect
access to DTC's clearance system.
Because of time zone differences, the securities account of a Cedelbank
or Euroclear participant as a result of a transaction with a DTC participant
(other than a depositary holding on behalf of Cedelbank or Euroclear) will be
credited during the securities settlement processing day (which must be a
business day for Cedelbank or Euroclear, as the case may be) immediately
following the DTC settlement date. Any credits or transactions in securities
settled during such processing will be reported to the relevant Euroclear
participant or Cedelbank participant on that business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank participant or Euroclear participant to a DTC participant (other than
the depository for Cedelbank or Euroclear) will be received with value on the
DTC settlement date, but will be available in the relevant Cedelbank 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 Cedelbank 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 Cedelbank
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, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the 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.
Cedelbank Participants or Euroclear Participants may not deliver instructions
directly to the Depositories.
Cedelbank, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Cedelbank participants through electronic
book-entry changes in the accounts of Cedelbank participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, Cedelbank is subject to regulation by the Luxembourg Monetary
Institute.
Euroclear was created to hold securities for participants of Euroclear
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, under
contract with Euroclear Clearance Systems S.C., a Belgian co-operative
corporation. All operations are conducted by Morgan Guaranty Trust Company, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Morgan Guaranty Trust Company, not Euroclear Clearance Systems
S.C. Euroclear Clearance Systems S.C. establishes policies for Euroclear on
behalf of Euroclear participants. Morgan Guaranty Trust Company 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 Morgan Guaranty Trust Company are governed by the terms and
conditions governing use of Euroclear and the related operating procedures of
the Euroclear System and applicable Belgian law. These 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 the participants, each of which will be responsible for disbursing
the 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 required voting rights required. 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 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 these 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, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of the offered certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
Definitive Certificates. Certificates initially issued in book-entry
form will be issued in the form of definitive certificates that are fully
registered and certificated to the beneficial owners or their nominees, 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 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 15th day of each month or, if such 15th day is not a business day,
then on the next succeeding business day, commencing in _________ _____. 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 Certificateholder will
have provided the trustee with wiring instructions as provided in the pooling
and servicing agreement or, if no such instructions have been provided, by check
mailed to the address listed for the Certificateholder on the Certificate
Register. The final distribution on any certificate will be made in like manner,
but only upon presentment or surrender of the 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 the class
based on their respective percentage 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 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 occurring in the remittance period immediately preceding, and
collected as of, the determination date (to the extent not distributed on
previous distribution dates) and unscheduled payments and other collections on
the mortgage loans collected during the remittance period and (ii) the aggregate
amount of any P&I Advances made by a servicer or the trustee 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 remittance
period, (ii) any amounts payable or reimbursable therefrom to any servicer or
the trustee or (iii) any servicing and trustee compensation.
Pass-Through Rate on the Offered Certificates. The pass-through rates
on the Class [ ], Class [ ], Class [ ], Class [ ], Class [ ], Class [ ] and
Class [ ] Certificates are fixed and are set forth on the cover hereof. The
pass-through rate on the Class [ ] Certificates will be equal to the weighted
average of the remittance rates in effect from time to time on the mortgage
loans minus the weighted average (by Class [ ] Balance) of the pass-through
rates on all other classes of certificates. The pass-through rate on the Class [
] Certificates for the initial distribution date will be [________]% per annum.
The remittance rate for any mortgage loan is equal to the excess of the mortgage
interest rate thereon (without giving effect to any modification or other
reduction following the Cut-off Date) over the sum of the applicable basic
servicing fee rate.
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 that
distribution date (net of any net prepayment premium), distributions allocable
to interest in an 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) on the Class [ ] balance (or the notional
amount, in the case of the Class [ ] Certificates) of the class of certificates
outstanding immediately prior to the distribution date, at the then-applicable
pass-through rate, plus any shortfall as described in the penultimate sentence
of this paragraph, less such class' pro rata share of any interest shortfall not
related to a mortgagor delinquency or default, such as prepayment interest
shortfalls and shortfalls associated with exemptions provided by the Relief Act
(as defined in the Prospectus), and less, with respect to each class of
certificates other than the Class [ ], any collateral value adjustment
Capitalization Amount allocated to the class as described under
"--Subordination" below (and not reversed). The notional amount of the Class [ ]
Certificates will equal the aggregate of the Class [ ] balances of all the other
certificates. The notional amount does not entitle the Class [ ] 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 the shortfall on
subsequent distribution dates. Any such shortfall will bear interest at the
related pass-through rate.
To the extent not necessary to reimburse the master servicer for
reductions in its compensation to cover prepayment interest shortfalls, in
addition to the related interest distribution amount, each class of certificates
(other than the Class [ ] Certificates) will receive on each distribution date
the product of (a) any net prepayment premium paid with respect to the mortgage
loans if such net prepayment premium is calculated by reference to a U.S.
Treasury rate, (b) the related class prepayment fraction and (c) the related
allocation fraction. On each distribution date, the net prepayment premium not
payable to the master servicer or the holders of a class of certificates, other
than the Class [ ] Certificates, will be paid to the holders of the Class [ ]
Certificates. On each distribution date, the net prepayment premium not payable
to the master servicer or the holders of the offered certificates will be paid
the holders of one or more classes of other certificates. The class prepayment
fraction for any class of offered certificates and any distribution date will
equal a fraction the numerator of which is the amount of principal paid to the
class in reduction of the Class [ ] balance thereof on that distribution date
and the denominator of which is the amount of principal paid to all classes of
certificates in reduction of their respective Class [ ] balances on that
distribution date. The allocation fraction for any class of offered certificates
and any distribution date will equal a fraction (not greater than one and not
less than zero) (x) the numerator of which is the excess of (a) the pass-through
rate of such class of offered certificates over (b) the discount rate used to
calculate the related net prepayment premium and (y) the denominator of which is
the excess of (a) the mortgage interest rate on the mortgage loan over (b) the
discount rate referenced in clause (x) above. To the extent not necessary to
reimburse the master servicer, as described above, any net prepayment premium
paid with respect to a mortgage loan which is not calculated by reference to a
U.S. Treasury rate will be distributed solely to the holders of the Class [ ]
Certificates.
To the extent any mortgage loan is prepaid in full or in part between a
determination date and the due date immediately following such determination
date, an interest shortfall may result on the second distribution date following
the determination date because interest on prepayments in full or in part will
only accrue to the date of payment. To the extent any mortgage loan is prepaid
in full or in part between the due date and the determination date immediately
following the due date, the interest on such prepayment will be included in the
available distribution amount for the immediately succeeding distribution date
as prepayment interest excess. If a mortgage loan is prepaid in full or in part
during any remittance period, any prepayment interest shortfall shall be offset
to the extent of any prepayment interest excess and any prepayment premium
collected during the remittance period. If the prepayment interest shortfall for
any remittance period exceeds any prepayment interest excess and any prepayment
premiums collected during the remittance period, such shortfall shall only be
offset by an amount up to the portion of the master servicing fee payable to the
master servicer on the distribution date. To the extent that any such shortfall
shall have been offset by a portion of the master servicing fee, the master
servicer shall be entitled to any excess of the prepayment interest excess and
prepayment premiums over the prepayment interest shortfall for any subsequent
period.
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 remittance period over (b) the prepayment interest shortfall for any
remittance period over the prepayment interest excess for any remittance period.
The pass-through rate on the Class [ ] 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
event in connection with any bankruptcy proceeding involving the mortgagor. 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 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 that distribution date for the class of
certificates and each other class of certificates with a higher priority for
interest payments (as described under "Priority of Distributions" below),
distributions in respect of principal in an 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 whether or not received and all scheduled balloon
payments received on or before the related determination date, (ii) if the
scheduled balloon payment is not received, with respect to any balloon mortgage
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 the balloon
mortgage 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 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 undistributed after payment of any interest payable on the
certificates for the related or any prior distribution date, including any
principal prepayments received during the related remittance period and
prepayment interest excess not offset by any prepayment interest shortfall
occurring during the remittance period or otherwise required to reimburse the
master servicer and interest distributions on the mortgage loans, in excess of
interest distributions on the certificates, resulting from the allocation of
certain amounts described in this clause (iv) to principal distributions on the
certificates. The Class [ ] balance for any class of certificates on any
distribution date will equal the initial Class [ ] balance thereof reduced by
any distributions 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 [ ] Certificates do not have a Class [ ] balance and are
therefore not entitled to any principal distributions.
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 each
distribution date on the Class [ ], Class [ ], Class [ ] and Class [ ]
Certificates, pro rata, based on their respective interest distribution amounts;
(b) to distributions of the principal distribution amount for each
distribution date to Class [ ] Certificates until the Class [ ] balance is
reduced to zero;
(c) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(d) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(e) to distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(f) to distribution of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance thereof to zero) for each distribution
date to the Class [ ] Certificates, until the Class [ ] balance is reduced to
zero;
(g) to distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(h) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date to the
Class [ ] Certificates until the Class [ ] balance is reduced to zero;
(i) to the distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(j) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(k) to distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(l) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(m) to distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(n) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(o) to distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(p) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(q) to distributions of the interest distribution amount for each
distribution date on the Class [ ] Certificates;
(r) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class [ ] Certificates, until the Class [ ] balance is reduced to zero;
(s) to distributions of the interest distribution amount for each
distribution date on the Class NR Certificates; and
(t) to distributions of the principal distribution amount (or the
portion thereof remaining after the distribution to the Class [ ] Certificates
in reduction of the Class [ ] balance to zero) for each distribution date on the
Class NR Certificates, until the Class [ ] balance is reduced to zero.
To the extent only the Class [ ], Class [ ] and Class [ ] 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 [ ], Class [ ] and Class [ ] Certificates pro rata based on their
respective Class [ ] balances.
OTHER CERTIFICATES
The Class [ ], Class [ ], Class [ ], Class NR, Class R-I, Class R-II
and Class R-III Certificates are not offered hereby. The pass-through rates on
the Class [ ], Class [ ], Class [ ] and Class NR Certificates for any
distribution date will equal [___]%, [___]%, [___]% and [___]%, respectively,
per annum. The aggregate Class [ ] balance for the Class [ ], Class [ ], Class [
] and Class NR Certificates will equal $[__________].
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
master servicer, the special servicer, the underwriter, 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 [ ],
Class [ ] and Class [ ] Certificates, in that order, second, to the Class [ ]
Certificates, third, to the Class [ ] Certificates, fourth, to the Class [ ]
Certificates, fifth, to the Class [ ] Certificates, and thereafter, to the Class
[ ], Class [ ] and Class [ ] 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 that class.
In addition to realized losses, shortfalls will also occur as a result
of a servicer's and the trustee's right to receive payments of interest with
respect to unreimbursed advances, the special servicer's right to additional
compensation with respect to 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)
the date on which a receiver is appointed 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 designated as 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 been conducted within the 12 month period preceding such event).
As a result of the 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 below. Notwithstanding the foregoing, a collateral value adjustment
will be zero with respect to such a mortgage loan if (i) the event giving rise
to the collateral value adjustment is the extension of the maturity of the
mortgage loan, (ii) the payments on the mortgage loan were not delinquent during
the twelve month period immediately preceding such extension and (iii) the
payments on the mortgage loan are then current, provided, that if at any later
date there occurs a delinquency in payment, 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 the 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 the mortgaged property over (ii) the sum of (A) to
the extent not previously advanced by a servicer, all unpaid interest on the
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 the mortgaged
property (net of any amount escrowed or otherwise available for payment of the
amount due on the 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 any mortgage loan became a loss mortgage loan, (c) any
advances made by a servicer or the trustee 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 clause (c). A loss
mortgage loan is any mortgage loan (a) which is finally liquidated, (b) with
respect to which a determination has been made 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 the mortgage loan or (c) with respect to
which a portion of the principal balance 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 the
mortgage loan after the Cut-off Date, to the extent received from the mortgagor
or advanced and distributed to certificateholders, (ii) any unscheduled amounts
of principal received with respect to the mortgage loans, to the extent
distributed to certificateholders and (iii) any realized loss previously
allocated with respect to the mortgage loan.
[As a result of calculating collateral value adjustment with respect to
a Mortgage Loan, the payment advance for such mortgage loan for the distribution
date will be reduced, which will have the effect of reducing the amount of
interest available for distribution to the Certificates (other than the Class [
] and Class [ ] Certificates) in reverse alphabetical order of the Classes. See
"-- Advances" below. In addition, any collateral value adjustment will be
allocated to the certificates (other than the Class [ ] and Class [ ]
Certificates) in reverse alphabetical order of the Classes for purposes of
determining Voting Rights and the Monitoring Certificateholders. See
"Description of the Pooling and Servicing Agreement -- Voting Rights" below and
"Master Servicer and Special Servicer -- Responsibilities of the Special
Servicer" below. 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 further reduce any
payment advances for the related mortgage loan. A higher appraised value will
reverse the collateral value adjustment by the amount of the reported increase.]
[The collateral value adjustment will be allocated on each distribution
date, for purposes of determining distributions in respect of interest on such
distribution date, to the Class [ ] balance of the most subordinate class of
certificates that would otherwise receive distributions of interest, up to an
aggregate amount (net of any positive adjustments) equal to the Class [ ]
balance thereof. For so long as a more senior class of certificates is
outstanding, the amount of interest otherwise distributable on each distribution
date to each class of certificates to which a collateral value adjustment has
been allocated (to the extent not reversed) with respect to prior distribution
dates will be reduced by interest accrued at the pass-through rate on the
portion of the Class [ ] balance of the class equal to the sum of the aggregate
collateral value adjustment allocated to the class for each distribution date
and accrued and unpaid interest at the pass-through rate on the collateral value
adjustment amount for prior distribution dates. Such accrued and unpaid
interest, the collateral value adjustment capitalization amount will be added to
the certificate balance of such class or classes of certificates, and an equal
amount will be included in the principal distribution amount to be distributed
to holders of the most senior classes of certificates on each distribution date
as described herein, to the extent actually paid by the mortgagor or received as
interest in respect of any REO Property. Interest distributions on the Class [ ]
Certificates will not be affected by collateral value adjustments. 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 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 of the affected
class or classes of certificates be reduced by such reversal or reduction except
as otherwise set forth herein. 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 (and under certain circumstances, the special servicer) will be
obligated to make payment advances out of its own funds or funds held in the
collection account that are not required to be part of the available
distribution amount for such distribution date, 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 payment advance required of it prior to each
distribution date, the trustee shall make the required payment advance on the
distribution date, as provided in the pooling and servicing agreement. In
addition, the master servicer will be required to advance certain property
related expenses. The servicers generally may not advance any amounts, other
than payment advances, unless such advance is contemplated in the related asset
strategy report for the 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 and
the trustee from late payments, insurance proceeds, liquidation proceeds,
condemnation proceeds or amounts paid in connection with the purchase of the
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 and the trustee 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 and the trustee will be required to advance
the full amount of any balloon payment not made by the mortgagor. To the extent
a servicer and the trustee are required to make a payment advance on and after
the due date for any balloon payment, such payment 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 maturity date.
Any failure by a servicer to make a payment 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 payment advance (together with
interest thereon) made by it in the same manner and to the same extent, but
prior to, the servicers.
[Notwithstanding the foregoing, if a collateral value adjustment has
been made with respect to any mortgage loan, then, with respect to the
distribution date immediately following the date of such determination and with
respect to each subsequent distribution date, to the extent such collateral
value adjustment has not been reversed, in the event of subsequent delinquencies
thereon, the interest portion of the payment advance in respect of such mortgage
loan will be reduced (no reduction to be made in the principal portion, however)
to equal the product of (i) the amount of the interest portion of such payment
advance that would otherwise be required to be made for such distribution date
without regard to this sentence, multiplied by (ii) a fraction (expressed as a
percentage), the numerator of which is equal to the stated principal balance of
such mortgage loan, net of such collateral value adjustment, and the denominator
of which is equal to the stated principal balance of such mortgage loan. See "--
Subordination" above.]
Each servicer and the trustee shall be entitled to interest on the
aggregate amount of all advances made by the servicer or the trustee 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.
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. The rate of principal payments on the
offered certificates will correspond to the rate of principal payments
(including prepayments) on the mortgage loans.
Each mortgage loan either prohibits voluntary prepayments during a
certain number of years following the origination and/or allows the mortgagor to
prepay the principal balance in whole during a certain number of years following
the origination if accompanied by payment of a prepayment premium. See Annex A
hereto, the Diskette and the table entitled "Prepayment Protection" under
"Description of the Mortgage Pool--Certain Characteristics of the Mortgage Loan"
herein. Any net prepayment premium collected on a mortgage loan will be
distributed to the holders of the certificates as described herein. See "Risk
Factors--Special Prepayment Considerations" herein, "Description of the
Certificates--Distributions--Interest Distributions on the Certificates" and
"Certain Prepayment, Maturity and Yield Considerations" herein, and "Yield
Considerations" in the Prospectus.
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 and the collection and allocation of any prepayment premium thereon. 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 master servicing fee for such distribution date.
ARD loans may be prepayed in full on or after the anticipated repayment
date without the payment of any prepayment premium. Excess Cash Flow on an ARD
loan will be applied to reduce the principal thereof after its respective
anticipated repayment date and the related mortgage rate will be reset at the
Revised Rate. There can be no assurance that any of mortgage loan will be
prepaid on that date or any date prior to maturity. The failure to pay an ARD
loan by the anticipated repayment date will not result in an event of default.
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.
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 the
distribution date in [__________], 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, all ARD loans will pay on their
respective anticipated repayment dates, 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, condemnation proceeds 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 the 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 the certificates and sets forth the percentage of the
initial principal amount of the 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 15th day of each month, commencing in _________ _____; (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; (vii) the offered certificates are
purchased on [_________ __], _____; (viii) all of the ARD loans are fully
prepaid on their related anticipated repayment date and all of the other
mortgage loans are paid in full on their maturity date; and (ix) any mortgage
loan maturing after the first and prior to the fifteenth day of any month will
be assumed to mature on the first day of such month and any mortgage loan
maturing on or after the fifteenth day of any month will be assumed to mature on
the first day of the next month.
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 mortgage
loans is the same as any of the specified assumptions.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS [ ] BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
CLASS [ ] CLASS [ ] CLASS [ ]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION [0% 5% 10% 15%] [0% 5% 10% 15%] [0% 5% 10% 15%]
DATE
Initial percentage 100 100 100 100 100 100 100 100 100 100 100 100
</TABLE>
Weighted
Average
life in years(2)
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D CLASS E
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION [0% 5% 10% 15%] [0% 5% 10% 15%] [0% 5% 10% 15%] [0% 5% 10% 15%]
DATE
Initial 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
percentage
Weighted Average
life in years(2)
(1) Prepayments are assumed to occur after the Lock-out Period and/or yield
maintenance penalty period.
(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.
</TABLE>
CLASS [ ] CERTIFICATES YIELD CONSIDERATIONS
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class [ ] Certificates to various constant rates of prepayment
on the mortgage loans by projecting the monthly aggregate payments on the Class
[ ] 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 Prepayment, Maturity and Yield
Considerations--Weighted Average Life of the Offered Certificates" herein,
including the assumptions regarding the performance of the mortgage loans which
may differ from the actual performance thereof and assuming the aggregate
purchase price and pass-through rate set forth below and assuming further that
the initial notional amount of the Class [ ] Certificates is as set forth
herein. Any differences between these 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 the table. Discrepancies between
assumed 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.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS [ ] CERTIFICATES
ASSUMED
PURCHASE PRICE CPR PREPAYMENT ASSUMPTION RATE(2)
AS A PERCENTAGE ASSUMED ---------------------------------------------
OF THE NOTIONAL PASS-THROUGH
AMOUNT RATE (1) [0%] [5%] [10%] [15%]
- --------------- ------------ ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
[______]% [______]% [____]% [____]% [____]% [____]%
(1) Calculated based on the weighted average of the remittance rates on the
mortgage loans as of the Cut-off Date and the initial weighted average of
the pass-through rates of the certificates. The pass-through rate on the
Class [ ] Certificates will be subject to adjustment on each distribution
date.
(2) Prepayments are assumed to occur after the Lock-out period and/or yield
maintenance penalty period.
</TABLE>
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 [ ] Certificates would
cause the discounted present value of the assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price of the Class [ ] 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 [ ] Certificates,
and thus do not reflect the return on any investment in the Class [ ]
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 [
] 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 [ ] 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 [ ] Certificates should
fully consider the risk that an extremely rapid rate of prepayments on the
mortgage loans could result in a failure to fully recover their investments. In
addition, holders of the Class [ ] Certificates generally have rights to
relatively larger portions of interest payments on mortgage loans with higher
mortgage interest rates; thus, the yield on the Class [ ] Certificates will be
materially and adversely affected to a greater extent than on the other offered
certificates if the mortgage loans with higher mortgage interest rates prepay
faster than the mortgage loans with lower mortgage rates.
For additional considerations relating to the yield on the
certificates, see "Yield Considerations" in the Prospectus.
The yield to maturity on the Class [ ] Certificates will be extremely
sensitive to losses on the mortgage loans (and the timing thereof) because any
losses will be allocated to reduce the Class [ ] balance of the certificates and
therefore will reduce the notional amount of the Class [ ] Certificates.
Investors in the Class [ ] Certificates should fully consider the risk
that realized losses on the mortgage loans could result in a failure to fully
recover their investments.
MASTER SERVICER AND SPECIAL SERVICER
MASTER SERVICER
[_____________ ("_________________") is the master servicer. _________
was organized under the laws of the state of _________in __________ as a
____________________. _________ is a real estate financial services company
which provides commercial and multifamily mortgage loan origination services
exclusively for MGT and provides loan servicing and asset management for large
pools of commercial and multifamily real estate assets.
___________________ address is ____________________________________.
As of [_____________], _________ was responsible for the servicing of
approximately [___] commercial and multifamily loans with an aggregate principal
balance of approximately $[___] billion, the collateral for which is located in
[___] states and Canada. Property type concentrations within the portfolio
include multifamily, office, retail, hotel/motel and other types of income
producing properties.
_________ may have a direct or indirect interest in approximately
[___]% of the Class NR Certificates.
The information set forth herein concerning _________ has been provided
by it and neither the Depositor nor the underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
SPECIAL SERVICER
[The duties of the special servicer will be performed by
______________________, a _______________________("__________________-"). As of
[__________], the special servicer was responsible for performing certain
servicing functions with respect to approximately [______] commercial and
multifamily loans with an aggregate principal balance of approximately $[____]
billion, the real property securing which is located in [__] states, Puerto Rico
and the District of Columbia. The special servicer has been approved as a
special servicer for investment grade-rated commercial and multifamily
mortgage-backed securities by Fitch and Standard & Poor's. The information set
forth herein concerning the special servicer has been provided by it, and
neither the Depositor nor the underwriter makes any representation or warranty
as to the accuracy or completeness of the information.
The special servicer has indicated its intention to purchase
approximately [___]% of the Class NR Certificates.]
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
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 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 that 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 and without regard to (a)
any relationship between itself and any Mortgagor, (b) any ownership of the
Certificates, (c) its obligation to make advances, (d) any debt that it extended
to any mortgagor and (e) any servicing compensation to which the servicer may be
entitled.
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, in consultation with
the special servicer, 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
generally transferred to the special servicer upon the occurrence of certain
servicing transfer events, including the following: (i) the mortgage loan
becomes a defaulted mortgage loan because it 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; (ii) the 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; (iii) the master
servicer shall have received notice of the foreclosure or proposed foreclosure
of any other lien on the mortgaged property; (iv) the 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; (v) any other default has occurred which
has materially and adversely affected the value of the mortgage loan and has
continued unremedied for the applicable grace period specified in the mortgage
note; (vi) the related Mortgaged Property becomes an REO property; or (vii) if
for any reason an assumption agreement cannot be entered into upon the transfer
by the mortgagor of the mortgaged property. A mortgage loan serviced by the
special servicer is referred to herein as a specially serviced mortgage loan.
The special servicer will collect certain payments on the 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 the 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 the
specially serviced mortgage loans. To the extent that any 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 at least three
consecutive months, the special servicer will cease to service such mortgage
loan.
[_____________] will act as the 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 mortgaged
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 properties and REO properties 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 that are similar to the mortgage
loans, mortgaged properties and REO properties, 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.
The special servicer, on behalf of the trust fund, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage note, obtain a deed in lieu of foreclosure, or otherwise acquire, on
behalf of the trust fund, 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 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 any 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 (the costs of 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 actions that 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) 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.
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 the
property or (ii) the special servicer provides to the trustee 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 a manner that is reasonably
likely to realize a fair price for the property and (ii) accept an offer
received from any person that constitutes a fair price and which is in the best
interest of the certificateholders as determined by the special servicer in
accordance with the 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 the 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 the specially serviced mortgaged loans. 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 pooling and servicing
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 servicing compensation on the specially serviced mortgaged
loans.
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
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 or extension of any
mortgage loan to a date later than three years prior to the rated final
distribution date. Notwithstanding the foregoing, the special servicer may not
permit any modification with respect to a balloon mortgage loan if it results in
the extension of such maturity date beyond the amortization term of the balloon
mortgage loan absent the related balloon payment. The special servicer will
prepare the asset strategy report for each mortgage loan which becomes a
specially serviced mortgage loan not later than thirty (30) days after the
servicing of the mortgage loan is transferred to the special servicer. Pursuant
tot he Pooling and Servicing Agreement, the holders of the fewest number of
classes of certificates representing the most subordinate interests in the trust
fund that equals at least a [1.50]% interest (by Class [ ] balance (adjusted for
collateral value adjustments)) in the trust fund will designate one
certificateholder as 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 the 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 the asset
strategy report. If the directing certificateholder disapproves the asset
strategy report and the special servicer has not made the affirmative
determination described above, the special servicer will revise the asset
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 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 mortgage loan
documents.
The directing certificateholder may at any time terminate the special
servicer and appoint a replacement to perform the duties under substantially the
same terms and conditions as those applicable to the special servicer. Such
holder(s) shall designate a replacement to so serve by the delivery to the
trustee of a written notice stating such designation. The trustee shall,
promptly after receiving any such notice, so notify the rating agencies. The
designated replacement shall become the replacement special servicer as of the
date the trustee receives: (i) written confirmation from each rating agency
stating that if the designated replacement were to serve as special servicer
under the pooling and servicing agreement, none of the then-current rating or
ratings of all outstanding classes of the certificates would be qualified,
downgraded or withdrawn as a result thereof; (ii) a written acceptance of all
obligations of the special servicer, executed by the designated replacement; and
(iii) an opinion of counsel (obtained at the expense of the directing
certificateholder) to the effect that the designation of the replacement to
serve as replacement special servicer is in compliance with the pooling and
servicing agreement, that the designated replacement will be bound by the terms
of the pooling and servicing agreement and that the pooling and servicing
agreement will be enforceable against such designated replacement in accordance
with its terms. The special servicer shall be deemed to have resigned from its
duties simultaneously with the designated replacement's becoming the replacement
special servicer under the pooling and servicing agreement. Any replacement
special servicer may be similarly so replaced by the directing
certificateholder.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the master servicer in respect
of its servicing activities will be the master servicing fee. The master
servicing fee will be payable monthly and will accrue at the applicable master
servicing fee rate and will be computed on the basis of the principal balance
(after giving effect to all scheduled (whether or not received) and unscheduled
payments of principal in reduction thereof) and for the same period respecting
which any related interest payment on each mortgage loan is computed. The master
servicing fee rate will be [____]% per annum of the then outstanding balance for
the [__________________ ____________________] and [____]% per annum of the then
outstanding balance for all other mortgage loans.
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 equal [______]% per annum of the then outstanding
balance of each mortgage loan and an additional [____]% per annum of the then
outstanding balance of any specially serviced mortgaged loans.
The sum of the master servicing fee rate and the special servicing fee
rate is referred to herein as the basic servicing fee rate.
The pooling and servicing agreement will provide that the servicers
will be entitled to indemnification from the trust fund for any and all costs,
expenses, losses, damages, claims and liabilities incurred in connection with
any legal action relating to any mortgage loan and the pooling and servicing
agreement, other than any cost, expense, damage, claim or liability incurred by
reason of willful misfeasance, bad faith or negligence of the servicer in the
performance of duties thereunder or by reason of reckless disregard of such
obligations and duties.
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.
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 _________ 1, _____, by and among the Depositor, the
master servicer, the special servicer and the trustee. 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, upon
written request, a copy (without exhibits) of the pooling and servicing
agreement. Requests should be addressed to
[_______________________________________________________], Attention: Corporate
Trust Department--J.P. Morgan Commercial Mortgage Finance Corp., Series
_____-C_.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the delivery date, the Depositor will assign or cause to
be assigned the mortgage loans, without recourse, to the trustee for the benefit
of the certificateholders. On or prior to the delivery date, the Depositor will,
as to each mortgage loan, deliver to the trustee, among other things, the
following documents comprising 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
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; (vii) the originals or certificates of a lender's title
insurance policy issued on the date of the origination of the 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 UCC financing statements; (ix) originals or copies of
any guaranties related to such mortgage loan; (x) originals or copies of
insurance policies related to the mortgaged property; (xi) originals or
certified copies of any environmental liabilities agreement; (xii) originals or
copies of any escrow agreements; (xiii) originals or certified copies of any
prior assignments of mortgage if the originator is not the originator of record;
(xiv) any collateral assignments of property management agreements and other
servicing agreements; (xv) any appraisals of the mortgaged property; (xvi) a PAR
of the mortgaged property; (xvii) an ESA of the mortgaged property; (xviii)
originals or certified copies of any lease subordination agreements and tenant
estoppels; and (xix) any opinions of mortgagor's counsel. The pooling and
servicing agreement will require the Depositor to cause each assignment of the
mortgage described in clause (iii) above to be submitted for recording in the
real property records of the jurisdiction in which the mortgaged property is
located. Any such assignment delivered in blank will be completed to the order
of the trustee prior to recording. The pooling and servicing agreement will also
require the Depositor to cause the endorsements on the mortgage notes delivered
in blank to be completed to the order of the trustee.
TRUSTEE
[_________________] shall serve as trustee under the pooling and
servicing agreement pursuant to which the certificates are being issued. Except
in circumstances involving defaults (when it might request assistance from other
departments in the bank), its responsibilities as trustee are carried out by its
Corporate Trust Department. The trustee will be entitled to a fee equal to
[_____]% per annum of the mortgage loans by aggregate principal balance as of
the Cut-off Date. Its principal corporate trust office is located at
[_________________], Attention: J.P. Morgan Commercial Mortgage Finance Corp.,
Series _____-C_.
ACCOUNTS
The master servicer is required to deposit all amounts received with
respect to the mortgage loans, net of certain amounts retained by the master
servicer as additional servicing compensation and certain amounts to be
deposited into escrow accounts, into a separate collection account maintained by
the master servicer on behalf of the trust fund. The master servicer is required
to deposit on the business day preceding each distribution date all amounts
received with respect to the mortgage loans into a separate certificate account
maintained with the trustee. The trustee will be entitled to make withdrawals
from the certificate account to pay the trustee fee or to reimburse the trustee
for expenses not otherwise reimbursed from the collection account. Interest or
other income earned on funds in the collection account will be paid to the
master servicer maintaining the account as additional servicing compensation.
See "Description of the Trust Funds--Mortgage Loans" and "Description of the
Agreements--Distribution Account and Other collection accounts" 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, 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. In addition, within a reasonable period of time
after each calendar year, the trustee shall furnish to each person who at any
time during the 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 the calendar
year or portion thereof during which such person was a certificateholder. Unless
and until definitive certificates are issued, these statements or reports will
be furnished only to Cede, 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 a copy and provides to the trustee a certification, in form
acceptable to the trustee, stating that it is the beneficial owner of a
certificate. The trustee will make available the monthly statement to
certificateholders and certain other information through its Corporate Trust
home page on the world wide web and/or by facsimile through its Street Fax
automated fax-back system. The web page is located at
"corporatetrust.statestreet.com". CMBS information is available by clicking the
"Investor Information & Reporting" button, and selecting the appropriate
transaction. Interested parties can register for Street Fax by calling (617)
664-5600 and requesting an account application by following the instructions
provided by the system. Any asset strategy report that has been delivered to the
trustee shall be made available by the trustee upon written 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. For those
who have obtained an account number and PIN on the trustee's Street Fax system,
the foregoing report may be obtained from the trustee via automated facsimile by
calling (617) 664-5600 and requesting the report code associated with J.P.
Morgan Commercial Mortgage Finance Corp., Series _____-C_. Report codes may be
obtained by calling the same telephone number and requesting a report listing.
In addition, if the Depositor so directs the trustee and on terms acceptable to
the trustee, the trustee will make certain information related to the mortgage
loans available through its Corporate Trust web site.
VOTING RIGHTS
At all times during the term of this agreement, [98.00]% of all voting
rights shall be allocated among the classes of certificates, including the Other
Certificates, (other than the Class [ ], Class R-I, Class R-II and Class R-III
Certificates) in proportion to the respective Class [ ] balances, [1.00]% of all
voting rights shall be allocated to the Class [ ] 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. Allocations of
realized losses and collateral value adjustments to a class of certificates and
any other event which changes the Class [ ] balance will result in a
corresponding change to such class' voting rights.
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 the notice
of termination.
Any 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 requirements, among other things, that the aggregate stated principal
balance of the mortgage loans then in the trust fund is less than (i) [1%] of
the aggregate principal balance of the mortgage loans as of the Cut-off Date,
and (ii) the purchaser provides to the trustee an opinion of independent
counsel, addressed to the trustee, to the effect that the resulting termination
will be a "qualified liquidation" under Section 860F(a)(4) of the Code with
respect to REMICs I, II and III.
USE OF PROCEEDS
The net proceeds from the sale of the offered certificates will be used
by the Depositor to pay 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. This
summary is based on laws, regulations, including the REMIC regulations
promulgated by the Treasury Department, rulings and decisions now in effect or
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 [ ] Certificates), the Other
Certificates (other than the Class R-I, Class R-II and Class R-III Certificates)
and each component of the Class [ ] 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 [ ] 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 the Certificates on the date the amount of the 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 the certificate at the time of its
acquisition by the certificateholder. Holders of such class of certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize the 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)(5)(B) of the Code generally in the same proportion
that the assets of the REMIC underlying the 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 the offered certificates are treated as "real estate assets"
under Section 856(c)(5)(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" 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
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 [
], Class [ ], Class [ ] and Class [ ] Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the 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 these classes of offered certificates must not be
subordinate to the rights and interests evidenced by the other certificates of
the same trust. Third, the 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 Ratings Group, a division of The McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating
Co. or Fitch IBCA, Inc. Fourth, the trustee cannot be an affiliate of any member
of the "Restricted Group," which consists of the underwriter, the Depositor, the
seller, the sub-servicer, the master servicer, the special servicer and any
mortgagor with respect to mortgage loans constituting more than [5]% of the
aggregate unamortized principal balance of the mortgage loans 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 underwriter must represent not more than
reasonable compensation for underwriting the 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 that person's services under the pooling
and servicing agreement and reimbursement of that 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 [ ], Class [ ], Class [ ] and Class [ ] 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 [ ], Class [ ] and Class [ ]
Certificates that they be rated "AAA" by Fitch and Standard & Poor's and it is a
condition to the issuance of the Class [ ] Certificates that they be rated "AAA"
by Fitch and "AAAr" by Standard & Poor's. The Depositor expects that the fourth
general condition set forth above will be satisfied with respect to each class
of certificates. A fiduciary of a Plan contemplating purchasing any 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 class
of certificate. Each purchaser purchasing Class [ ], Class [ ], Class [ ] or
Class [ ] 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 [ ], Class [ ], Class [ ] and Class [ ] Certificates do not
satisfy the second condition described above because they are subordinated to
the Class [ ], Class [ ], Class [ ] and Class [ ] Certificates, and accordingly,
may not be purchased with the assets of a Plan, and furthermore the Class [ ]
and Class [ ] Certificates are not expected to satisfy the third condition
described above.
Before purchasing any class of 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 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 [
]xemption 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 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 [ ], Class [ ], Class [ ], Class [ ] and Class [ ]
Certificates will be "mortgage related securities" within the meaning of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("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 [ ], Class
[ ] and Class [ ] 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 the 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.
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 underwriter, the Depositor has agreed to
sell to the underwriter and the underwriter has agreed to purchase from the
Depositor upon issuance, the offered certificates.
The obligations of the underwriter under the Underwriting Agreement are
subject to certain conditions precedent and the underwriter will be obligated to
purchase all of the offered certificates if any are purchased.
Distribution of the offered certificates will be made by the
underwriter 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 approximately [____]% of the initial aggregate
principal balance thereof, plus accrued interest from the Cut-off Date. In
connection with the purchase and sale of the offered certificates, the
underwriter shall receive an underwriting fee equal to [____]% of the aggregate
Class [ ] balance of the offered certificates.
The Depositor also has been advised by the underwriter that the
underwriter currently expects to make a market in the offered certificates;
however, the underwriter 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 underwriter against, or make
contributions to the underwriter 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. The underwriter is an affiliate of the seller and the Depositor.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor, the master
servicer and for the Underwriter by Brown & Wood LLP, New York, New York.
RATING
It is a condition of the issuance of the Class [ ], Class [ ] and Class
[ ] Certificates that they be rated "AAA" by _____________. ("_____________")
and _______________ ("______________"). It is a condition of the issuance of the
Class [ ] Certificates that they be rated "AAA" by _________ and "AAAr" by
________________. [Standard & Poor's assigns the additional symbol of "r" to
highlight classes of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit risks;
however, the absence of an "r" symbol should not be taken as an indication that
a class will exhibit no volatility or variability in total return.] It is a
condition of the issuance of the Class [ ] Certificates that they be rated not
lower than "AA" by _________ and _______________. It is a condition of the
issuance of the Class [ ] Certificates that they be rated not lower than "A" by
___________ and ________________. It is a condition of the issuance of the Class
[ ] Certificates that they be rated not lower than "BBB" by ________ and
_________________. It is a condition of the issuance of the Class [ ]
Certificates that they be rated not lower than "BBB?" by __________ and
_________________.
A rating on mortgage pass-through certificates addresses the likelihood
of the receipt of distributions of principal and interest 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 voluntary or involuntary principal prepayments on the mortgage loans, (ii)
the degree to which such prepayments might differ from those originally
anticipated, (iii) whether and to what extent prepayment premiums will be
received or (iv) does not address receipt of Excess Interest or default
interest. Also, a security rating does not represent any assessment of the yield
to maturity that investors may experience. In general, the ratings thus address
credit risk and not prepayment risk. The rating of the Class [ ] Certificates
does not address the possibility that the holders of such certificates may fail
to fully recover their initial investments due to a rapid rate of prepayments,
defaults or liquidations.
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, Moody's or Standard & Poor's pursuant to the
Depositor's request. The Depositor only requested that Fitch issue a rating with
respect to the Class [ ] Certificates.
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 downgrade, qualification 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.
<PAGE>
GLOSSARY OF TERMS
"Adjusted Available Distribution Amount " means the available
distribution amount for each distribution date net of any prepayment premium.
"Anticipated Repayment Date" means the date specified in the related
mortgage loan on which all or substantially all Excess Cash Flow is required to
be applied toward prepayment of an ARD Loan and on which any such mortgage loan
begins accruing Excess Interest.
"Cut-off Date" means a day in the month of formation of the related
trust fund, as defined in the prospectus supplement.
"Cut-off Date LTV Ratios" means a fraction, expressed as a percentage,
the numerator of which is the Cut-off Date principal balance of a mortgage loan,
and the denominator of which is the appraised value of the mortgaged property as
determined by an appraisal obtained in connection with the origination of the
mortgage loan.
"Depositor" means J.P. Morgan Commercial Mortgage Finance Corp.
"Excess Cash Flow" means, with respect to ARD Loans, the cash flow
collected after the applicable Anticipated Repayment Date, where the mortgagor
elects not to prepay the ARD Loan on or before its Anticipated Repayment Date.
"Excess Interest" means, with respect to ARD Loans, the excess of
interest, at a higher rate, over interest at the mortgage interest after the
applicable Anticipated Repayment Date.
"Lock-out Date" means the date of expiration of the Lock-out Period
"Lock-out Period" means a period during which prepayments on a mortgage
loan are prohibited.
"Maturity Date/Anticipated Repayment Date LTV Ratios" means a fraction,
expressed as a percentage, the numerator of which is the principal balance of a
mortgage loan on the related maturity date, or , in case of an ARD Loan, the
related anticipated repayment date assuming all prior scheduled payments due
have been 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 obtained in connection with the origination of the mortgage loan.
"NOI" means "Net Operating Income". Generally, "Net Operating Income"
or "NOI" for a mortgaged property equals the operating revenues (consisting
principally of rental and related revenue) for the mortgaged property minus the
operating expenses (such as utilities, repairs and maintenance, general and
administrative, management fees, marketing and advertising, insurance and real
estate tax expenses) for the mortgaged property. NOI generally does not reflect
replacement reserves, capital expenditures, debt service, tenant improvements,
leasing commissions, depreciation, amortization and similar non-operating items.
"Revised Rate" means a fixed rate per annum equal to the mortgage
interest rate plus a specified percentage, no more than 2%, so long as the
mortgage loan is included in the trust fund.
"Seller" means _________________________________.
"Underwritten Cash Flow" means the Underwritten Net Operating Income
for the mortgaged property decreased by an amount that the Seller has determined
to be an appropriate allowance for average annual tenant improvements, leasing
commissions, and replacement reserves for capital items based upon its
respective underwriting guidelines.
"Underwritten Cash Flow Debt Service Coverage Ratio" or "UW DSCR"
means, for any mortgage loan for any period as presented in Annex A or the
diskette, the ratio of Underwritten Cash Flow calculated for the related
mortgaged property for a period to the amounts of principal and interest due
under the mortgage loan for the same period.
"Underwritten Net Operating Income" or "UW NOI" means the NOI for the
mortgaged property as determined by the seller in accordance with its
underwriting guidelines for similar properties. Revenue is generally calculated
as follows: rental revenue is calculated using actual rental rates, in some
cases, adjusted downward to market rates with vacancy rates equal to the higher
of the mortgaged property's historical rate, the market rate or an assumed
vacancy rate; other revenue, such as parking fees, laundry and other income
items are included only if supported by a trend and/or is likely to be
recurring. Operating expenses generally reflect the mortgaged property's
historical expenses, adjusted to account for inflation, significant occupancy
increases and a market rate management fee.
<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. Mortgage Pass-Through Certificates,
Series _____-C_ (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, Cedelbank or Euroclear. The Global Securities will be tradable 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 B have the meanings assigned to them in
the Prospectus Supplement and the Prospectus.
Secondary market trading between investors holding Global Securities
through Cedelbank 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 Cedelbank or Euroclear and DTC
participants holding certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank 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, Cedelbank 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 Cedelbank 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 Cedelbank and/or Euroclear participants. Secondary
market trading between Cedelbank participants or Euroclear participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case 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 Cedelbank
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 Cedelbank or Euroclear cash debit will be valued instead as of the actual
settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank 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, Cedelbank 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 overdraft charges, although this result will depend on
each Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases, Cedelbank 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 Cedelbank participant or
Euroclear participant the following day, and receipt of the cash proceeds in the
Cedelbank 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 Cedelbank 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 Cedelbank participant's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase Global
Securities from DTC participants for delivery to Cedelbank participants or
Euroclear participants should note that these trades would 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 Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank 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 Cedelbank 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 Cedelbank participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank 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 includable 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.
The attached diskette contains two spreadsheet files (the "Spreadsheet
Files") that can be put on a user-specified hard drive or network drive. These
two files are "_____C_.XLW" and "_____C_.WK4". The file "_____C_.XLW" is a
Microsoft Excel(1), Version 4.0 spreadsheet, and the file "_____C_.WK4" is a
Lotus 123(1), Version 4.01 spreadsheet. Each file provides, in electronic
format, certain statistical information that appears under the caption
"Description of the Mortgage Pool--Certain Characteristics of the Mortgage
Loans" in the Prospectus Supplement and in Annex A to the Prospectus Supplement.
Defined terms used in the Spreadsheet Files but not otherwise defined therein
shall have the respective meanings assigned to them in the Prospectus
Supplement. All the information contained in the Spreadsheet Files are subject
to the same limitations and qualifications contained in this Prospectus
Supplement. Prospective investors are strongly urged to read the Prospectus
Supplement in its entirety prior to accessing the Spreadsheet Files.
(1) Microsoft Excel and Lotus 123 are registered trademarks of Microsoft
Corporation and Lotus Development Corporation, respectively.
<PAGE>
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 3, 1999
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
J.P. MORGAN COMMERCIAL MORTGAGE FINANCE CORP.
DEPOSITOR
J.P. Morgan Commercial Mortgage Finance Corp. will periodically offer
certificates in one or more series. Each series of certificates will represent
the entire beneficial ownership interest in a trust fund. 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 the
depositor, any servicer or any of their respective affiliates. 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 prospectus supplement.
The primary asset of the trust fund may include:
o multifamily and commercial mortgage loans, including participations
therein;
o mortgage-backed securities evidencing interest in or secured by
multifamily and commercial mortgage loans, including participations
therein, and other mortgage-backed securities;
o direct obligations of the United States or other government agencies;
or
o a combination of the assets described above
INVESTING IN THE OFFERED CERTIFICATES INVOLVES RISKS. YOU SHOULD REVIEW THE
INFORMATION APPEARING UNDER THE CAPTION "RISK FACTORS" ON PAGE __ AND IN THE
RELATED PROSPECTUS SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE CERTIFICATES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
______________, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate
documents that provide progressively more detail:
o this prospectus, which provides general information, some of which may
not apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THE ACCOMPANYING PROSPECTUS
SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
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.
Some capitalized terms used in this prospectus are defined in the Glossary
attached hereto.
-------------------
Until 90 days after the date of each prospectus supplement, all dealers
effecting transactions in the offered certificates covered by such prospectus
supplement 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.
You should rely only on any information or representations contained or
incorporated by reference in this prospectus and the related prospectus
supplement. This prospectus and any prospectus supplement do not constitute an
offer to sell or a solicitation of an offer to buy any securities in any state
or other jurisdiction in which such offer would be unlawful.
<PAGE>
TABLE OF CONTENTS
Page
Prospectus..................................................................1
Important Notice about Information Presented in this Prospectus and
the Accompanying Prospectus Supplement...................................2
Additional Information......................................................4
Incorporation of Certain Information by Reference...........................4
Summary of Prospectus.......................................................5
Risk Factors................................................................9
Description of the Trust Funds.............................................16
Use of Proceeds............................................................20
Yield Considerations.......................................................20
The Depositor..............................................................23
Description of the Certificates............................................24
Description of the Agreements..............................................30
Description of Credit Support..............................................43
Certain Legal Aspects of the Mortgage Loans and the Leases.................45
Federal Income Tax Consequences............................................59
ERISA Considerations.......................................................85
Legal Investment...........................................................87
Plan of Distribution.......................................................88
Legal Matters..............................................................89
Financial Information......................................................89
Rating.....................................................................89
<PAGE>
ADDITIONAL INFORMATION
The depositor has filed with the Securities and Exchange 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 do not contain all of the
information set forth in the registration statement. For further information,
you should refer to the registration statement and the exhibits attached
thereto. Such registration statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Securities
and Exchange 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 Securities and Exchange 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 Securities and
Exchange Commission.
The depositor will file or cause to be filed with the Securities and
Exchange Commission such periodic reports with respect to each trust fund as are
required under the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the Securities and Exchange Commission thereunder. 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
We are incorporating herein by reference all documents and reports
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. You may obtain, without charge, a copy
of any or all documents or reports incorporated herein by reference, to the
extent such documents or reports relate to an offered certificate. Exhibits to
those documents will be provided to you only if such exhibits were specifically
incorporated by reference in those 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.
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is a brief description of the main terms of the
offered certificates. For this reason, the summary does not contain all the
information that may be important to you. You will find a detailed description
of the terms of the offered certificates following this summary and in the
accompanying prospectus supplement.
THE TRUST ASSETS Each series of certificates will represent in
the entire beneficial ownership interest in a
trust fund consisting primarily of any of the
following:
o mortgage assets;
o collection accounts;
o forms of credit support; and
o cash flow agreements.
THE MORTGAGE ASSETS The mortgage assets with respect to each
series of certificates may consist of any of
the following:
o multifamily and commercial mortgage
loans, including participations
therein;
o direct obligations of the United
States or other government
agencies; and
o mortgage-backed securities.
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 mortgage loans will be
primarily secured by first or junior liens
on, or security interests in fee simple,
leasehold or a similar interest in any of the
following types of properties:
o residential properties consisting
of five or more rental or
cooperatively owned dwelling units;
o office buildings;
o retail buildings or centers;
o hotels and motels;
o nursing homes;
o congregate care facilities;
o assisted living facilities;
o industrial properties;
o mini-warehouse facilities or
self-storage facilities;
o mobile home parks; and
o mixed use and other types of
commercial properties.
The mortgage loans may also be secured by
additional collateral.
Some or all of the mortgage loans may also be
secured by an assignment of one or more
leases of one or more lessees of all or a
portion of the related mortgaged properties.
A significant or the sole source of payments
on certain commercial loans will be the
rental payments due under the related leases.
A mortgage loan may have an interest rate
that has any of the following features:
o is fixed over its term,
o adjusts from time to time,
o is partially fixed and partially
floating,
o is floating based on one or
more indices,
o may be converted from a floating
to a fixed interest rate,
o may be converted from a fixed to a
floating interest rate, or
o interest is not paid currently but
is accrued and added to the
principal balance.
A mortgage loan may provide for any of the
following:
o scheduled payments to maturity,
o payments that adjust from time to
time,
o negative amortization or
accelerated amortization,
o full amortization or require a
balloon payment due on its
stated maturity date,
o prohibitions on prepayment,
o releases or substitutions of
collateral, including defeasance
thereof with direct obligation
of the United States, and
o payment of a premium or a yield
maintenance penalty in connection
with a principal prepayment.
The mortgaged properties may be located
anywhere in the world. 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. 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 mortgage-backed securities will evidence
ownership interests in or be secured by
mortgage loans similar to those described
above and other mortgage-backed securities.
Some mortgage-backed securities 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 prospectus supplement.
COLLECTION ACCOUNTS Each trust fund will include one or more
accounts established and maintained on behalf
of the certificateholders. All payments and
collections received or advanced with respect
to the mortgage assets and other assets in
the trust fund will be deposited into those
accounts. The accounts may be maintained as
an interest bearing or a non-interest bearing
account, and funds may be held as cash or
reinvested.
CREDIT SUPPORT The following types of credit support may be
used to enhance the likelihood of
distributions on certain classes of
certificates:
o subordination of junior
certificates,
o letters of credit,
o insurance policies,
o guarantees,
o reserve funds, or
o other types of credit support
described in the prospectus
supplement and a combination of
any of the above.
CASH FLOW AGREEMENTS Cash flow agreements are used to reduce the
effects of interest rate or currency exchange
rate fluctuations on the underlying mortgage
assets and increase the likelihood of timely
distributions on the certificates. The trust
fund may include any of the following types
of cash flow agreements: guaranteed
investment contracts, interest rate swap or
exchange agreements, interest rate cap or
floor agreements, currency exchange
agreements, yield supplement agreements.
DESCRIPTION OF CERTIFICATES Each series of certificates will include one
or more classes. Each series of certificates
will represent in the aggregate the entire
beneficial ownership interest in the trust
fund. The offered certificates are the
classes of certificates being offered to you
pursuant to the prospectus supplement. The
non-offered certificates are the classes of
certificates not being offered to you
pursuant to the prospectus supplement.
Information on the non-offered certificates
is being provided solely to assist you in
your understanding of the offered
certificates.
DISTRIBUTIONS ON CERTIFICATES The certificates may provide for different
methods of distributions to specific classes.
Any class of certificates may:
o provide for the accrual of interest
thereon based on fixed, variable
or floating rates;
o be senior or subordinate to one
or more other classes of
certificates with respect to
interest or principal distribution
and the allocation of losses on
the assets of the trust fund;
o be entitled to principal
distributions, with
disproportionately low,
nominal or no interest
distributions;
o be entitled to interest
distributions, with
disproportionately low, nominal
or no principal distributions;
o provide for distributions of
accrued interest only after
the occurrence of certain events,
such as the retirement of one or
more other classes of
certificates;
o provide for distributions of
principal sequentially, based on
specified payment schedules or
other methodologies; and
o provide for distributions based on
a combination of any of the
above features.
Interest on each class of offered
certificates of each series will accrue at
the applicable pass-through rate on the
outstanding certificate balance or notional
balance. 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
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. Distributions of
principal will be made on each distribution
date to the class or classes of certificates
entitled thereto until the certificate
balance of such certificates is reduced to
zero. Distributions of principal to any class
of certificates will be made on a pro rata
basis among all of the certificates of such
class.
ADVANCES A servicer may be obligated as part of its
servicing responsibilities to make certain
advances with respect to delinquent scheduled
payments and property related expenses which
it deems recoverable. The trust fund may be
charged interest for any advance. Neither the
depositor nor any of its affiliates will have
any responsibility to make such advances.
TERMINATION A series of certificates may be subject to
optional early termination through the
repurchase of the mortgage assets in the
related trust fund.
REGISTRATION OF CERTIFICATES One or more classes of the offered
certificates may initially be represented by
one or more certificates registered in the
name of Cede & Co., as the nominee of The
Depository Trust Company. If your offered
certificates is so registered, you will not
be entitled to receive a definitive
certificate representing your interest except
in the event that physical certificates are
issued under the limited circumstances.
TAX STATUS OF THE CERTIFICATES The certificates of each series will
constitute either: "regular interests" or
"residual interests" in a trust fund treated
as a "real estate mortgage investment
conduit" under the Internal Revenue Code of
1986, or interests in a trust fund treated as
a grantor trust under applicable provisions
of the Internal Revenue Code of 1986.
ERISA CONSIDERATIONS If you are a fiduciary of an employee benefit
plan or other retirement plan or arrangement
that is subject to the Employee Retirement
Income Security Act of 1974, as amended, or
Section 4975 of the Internal Revenue Code of
1986, as amended, or any person which
proposes to use "plan assets" of any of these
plans to acquire any offered certificates,
you should carefully review with your legal
counsel whether the purchase or holding of
any offered certificates could give rise to
transactions not permitted under these laws.
The prospectus supplement will specify if
investment in some certificates may require a
representation that the investor is not a
plan or similar arrangement or investing on
behalf of a plan or similar arrangement.
LEGAL INVESTMENT The prospectus supplement will specify
whether the offered certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984. If your investment
authority is subject to legal restrictions
you should consult your legal counsel to
determine whether and to what extent the
offered certificates constitute legal
investments for you.
RATING At the date of issuance, as to each series,
each class of offered certificates will not
be rated lower than investment grade by one
or more nationally recognized statistical
rating agencies. 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.
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE RISK
FACTORS IN THE PROSPECTUS SUPPLEMENT, IN DECIDING TO PURCHASE ANY OF THE OFFERED
CERTIFICATES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW, TOGETHER WITH THOSE
DESCRIBED IN THE PROSPECTUS SUPPLEMENT UNDER "RISK FACTORS," SUMMARIZE THE
MATERIAL RISKS RELATING TO YOUR CERTIFICATES.
YOUR ABILITY TO RESELL
CERTIFICATES MAY BE LIMITED
BECAUSE OF THEIR CHARACTERISTICS. You may not be able to resell your
certificates and the value of your
certificates may be less than you anticipated
for a variety of reasons including:
o A secondary market for your
certificates does not develop;
o Interest rate fluctuations;
o The absence of redemption rights;
o The availability of other mortgage-
backed securities including those
backed by loans on single family
residential properties; and
o The request for information in addition
to that provided in the prospectus, the
prospectus supplement and the monthly
report to certificateholders.
THE ASSETS OF THE TRUST FUND MAY
NOT BE SUFFICIENT TO PAY YOUR
CERTIFICATES. 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 of the depositor 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. 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. 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 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 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 may be
withdrawn under certain conditions. 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 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 the
prospectus supplement.
PREPAYMENTS AND REPURCHASES OF
THE MORTGAGE ASSETS WILL AFFECT
THE TIMING OF YOUR CASH FLOW AND
MAY AFFECT YOUR YIELD. Prepayments (including those caused by
defaults on the mortgage loans and
repurchases for breach of representation or
warranty) 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
voluntary prepayments on the mortgage assets
in any trust fund will conform to any model
described herein or in any prospectus
supplement.
The rate of voluntary prepayments will also
be affected by:
o the voluntary prepayment terms of the
mortgage loan including prepayment
lock-out periods and prepayment
premiums
o the ability of a servicer to collect
prepayment premiums
o then-current interest rates being
charged on similar mortgage loans
o the availability of mortgage credit.
If a mortgage loan is in default it may not
be possible to collect a prepayment premium.
No person will be required to pay any premium
if a mortgage loan is repurchased for a
breach of representation or warranty.
The yield on your certificates may be less
than anticipated because the prepayment
premium or yield maintenance required under
certain prepayment scenarios may not be
enforceable in some states or under federal
bankruptcy laws.
o Some courts may consider the prepayment
premium to be usurious.
o Even if the prepayment premium is
enforceable, we cannot assure you that
foreclosure proceeds will be sufficient
to pay the prepayment premium.
o Although the collateral substitution
provisions related to are not suppose
to be treated as a prepayment and should
not affect certificates, we cannot
assure you that a court will not
interpret the defeasance provisions as
requiring a prepayment premium; nor can
we assure you that if it is treated as
a prepayment premium, the court will
find the defeasance income stream
enforceable.
As a result, the actual maturity of your
certificates could occur significantly
earlier than expected and additional cash
flow may not be available to offset any
effect this may have on your yield. 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, a holder might,
in some prepayment scenarios, fail to recoup
its original investment.
RATINGS DO NOT GUARANTEE PAYMENT
AND DO NOT ADDRESS PREPAYMENT
RISKS. 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. Ratings do not
address:
o the likelihood that principal prepayment
(including those caused by defaults) on
the related mortgage assets will be
made,
o the degree to which the rate of such
prepayments might differ from that
originally anticipated,
o the likelihood of early optional
termination of the series of
certificates,
o 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
o that an investor purchasing a
certificate at a significant premium
might fail to recoup its initial
investment under certain prepayment
scenarios.
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
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 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.
NET CASH FLOW PRODUCED BY A
MORTGAGED PROPERTY MAY BE
INADEQUATE TO REPAY THE
MORTGAGE LOAN. Payment on each mortgage loan is dependent
primarily on:
o the net operating income of the
related mortgaged property; and
o at maturity (whether at scheduled
maturity or, in the event of a default
under the mortgage loan, upon the
acceleration of such maturity), the
market value of the related mortgaged
property (taking into account any
adverse effect of a foreclosure
proceeding on such market value) or
the ability of the related mortgagor
to refinance the mortgage loan.
If a mortgage loan has a relatively high loan
to value ratio or relatively low debt service
coverage ratio, a foreclosure sale is less
likely to provide enough money to satisfy the
outstanding debt. Therefore, the servicer may
have to modify the mortgage loans that it is
servicing in order to try to maximize
recoveries. However, such flexibility may not
result in a greater recovery on a net present
value basis than liquidation.
NONRECOURSE LOANS LIMIT THE
REMEDIES AVAILABLE FOLLOWING A
MORTGAGOR DEFAULT. The mortgage loans will not be an obligation
of, or be insured or guaranteed by, any
governmental entity, by any private mortgage
insurer, or by the depositor, the
originators, the Servicers, the Trustee or
any of their respective affiliates.
Each mortgage loan generally is a nonrecourse
loan. If there is a default (other than a
default resulting from voluntary bankruptcy,
fraud or willful misconduct) there will
generally only be recourse against the
specific properties and other assets that
have been pledged to secure such mortgage
loan. Even if a mortgage loan provides for
recourse to a mortgagor or its affiliates, it
is unlikely the trust fund ultimately could
recover any amounts not covered by the
mortgaged property.
FUTURE CASH FLOWS AND PROPERTY
VALUES ARE NOT PREDICTABLE. Commercial and multifamily property values
and cash flows are volatile and may be
insufficient to cover debt service on the
related mortgage loan at any given time. If
the cash flow from a mortgaged property is
reduced (for example, if leases are not
obtained or renewed), the mortgagor may not
be able to repay the loan. Cash flow will
determine the mortgagor's ability to cover
debt service and property values affect the
ability to refinance the property and the
amount of the recovery of proceeds upon
foreclosure. Cash flow and property value
depend upon a number of factors, including:
o national, regional and local economic
conditions;
o local real estate conditions, such as
an oversupply of space similar to the
related mortgaged property;
o changes or weakness in a specific
industry segment;
o the nature of expenses:
o as a percentage of revenue;
o whether expenses are fixed or vary
with revenue; and
o the level of required capital
expenditures for proper maintenance
and demanded by tenants;
o demographic factors;
o changes required by retroactive
building or similar codes;
o capable management and adequate
maintenance;
o location;
o with respect to properties with uses
subject to significant regulation,
changes in applicable laws;
o perceptions by prospective tenants and,
if applicable, their customers, of the
safety, convenience, services and
attractiveness of the property;
o the age, construction quality and
design of a particular property; and
o whether the mortgaged properties are
readily convertible to alternative uses.
POOR PROPERTY MANAGEMENT WILL
ADVERSELY AFFECT THE PERFORMANCE
OF THE RELATED MORTGAGED PROPERTY. The successful operation of a real estate
project also depends on the performance and
viability of the property manager. Properties
deriving revenues primarily from short-term
sources generally are more management
intensive than properties leased to
creditworthy tenants under long-term leases.
The property manager is generally responsible
for:
o operating the properties;
o providing building services;
o establishing and implementing the rental
structure;
o managing operating expenses;
o responding to changes in the local
market; and
o advising the mortgagor with respect
to maintenance and capital
improvements.
Property managers may not be in a financial
condition to fulfill their management
responsibilities.
Certain of the mortgaged properties are
managed by affiliates of the applicable
mortgagor. If a mortgage loan is in default
or undergoing special servicing, such
relationship could disrupt the management of
the underlying property. This may adversely
affect cash flow. However, the mortgage loans
generally permit the lender to remove the
property manager upon the occurrence of an
event of default, a decline in cash flow
below a specified level or the failure to
satisfy some other specified performance
trigger.
THE SERVICER WILL HAVE DISCRETION
TO HANDLE OR AVOID OBLIGOR
DEFAULTS IN A MANNER WHICH MAY
BE ADVERSE TO YOUR INTERESTS. In order to maximize recoveries on defaulted
mortgage loans, a 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. In
addition, a servicer may receive a workout
fee based on receipts from or proceeds of
such mortgage loans. While the servicer will
be required to follow accepted servicing
standards, there can be no assurance that
such flexibility 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.
MORTGAGORS OF COMMERCIAL MORTGAGE
LOANS ARE SOPHISTICATED AND MAY
TAKE ACTIONS ADVERSE TO YOUR
INTERESTS. 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 MAY NOT COVER
LOSSES OR RISKS WHICH COULD
ADVERSELY AFFECT PAYMENT ON YOUR
CERTIFICATES. The prospectus supplement for a series of
certificates will describe any credit support
in the related trust fund. Any credit support
will be limited in amount and coverage and
will not cover all potential risks. Use of
credit support will be subject to the
conditions and limitations described herein
and in the 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, if
so provided in the 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, holders of certificates
evidencing an interest in one covered trust
will be subject to the risk that the 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.
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.
SOME ACTIONS ALLOWED BY THE
MORTGAGE MAY BE LIMITED BY LAW. The 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. The
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.
Some of 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 the rents. Such
assignments are typically not perfected as
security interests prior to actual possession
of the cash flow. 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.
ONE ACTION JURISDICTION MAY LIMIT
THE ABILITY OF THE SERVICER TO
FORECLOSE ON A MORTGAGED
PROPERTY. 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
need to obtain advice of counsel prior to
enforcing any of the trust fund's rights
under any of the mortgage loans that include
mortgaged properties where the rule could be
applicable.
In the case of a mortgage loan secured by
mortgaged properties located in multiple
states, the special servicer may be required
to foreclose first on properties located in
states where such "one action" rules apply
(and where non-judicial foreclosure is
permitted) before foreclosing on properties
located in states where judicial foreclosure
is the only permitted method of foreclosure.
RIGHTS AGAINST TENANTS MAY BE
LIMITED IF LEASES ARE NOT
SUBORDINATE TO MORTGAGE
OR DO NOT CONTAIN ATTORNMENT
PROVISIONS. Some of the tenant leases contain provisions
that require the tenant to attorn to (that
is, recognize as landlord under the lease) a
successor owner of the property following
foreclosure. Some of the leases may be either
subordinate to the liens created by the
mortgage loans or else contain a provision
that requires the tenant to subordinate the
lease if the mortgagee agrees to enter into a
non-disturbance agreement.
In some states, if tenant leases are
subordinate to the liens created by the
mortgage loans and such leases do not contain
attornment provisions, such leases may
terminate upon the transfer of the property
to a foreclosing lender or purchaser at
foreclosure. Accordingly, in the case of the
foreclosure of a mortgaged property located
in such a state and leased to one or more
desirable tenants under leases that do not
contain attornment provisions, such mortgaged
property could experience a further decline
in value if such tenants' leases were
terminated (e.g., if such tenants were paying
above-market rents).
If a mortgage is subordinate to a lease, the
lender will not (unless it has otherwise
agreed with the tenant) possess the right to
dispossess the tenant upon foreclosure of the
property, and if the lease contains
provisions inconsistent with the mortgage
(e.g., provisions relating to application of
insurance proceeds or condemnation awards),
the provisions of the lease will take
precedence over the provisions of the
mortgage.
IF MORTGAGED PROPERTIES ARE NOT
IN COMPLIANCE WITH CURRENT ZONING
LAWS YOU MAY NOT BE ABLE TO
RESTORE IT FOLLOWING A CASUALTY
LOSS. Due to changes in applicable building and
zoning ordinances and codes which have come
into effect after the construction of
improvements on certain of the mortgaged
properties, some improvements may not comply
fully with current zoning laws (including
density, use, parking and set-back
requirements) but qualify as permitted
non-conforming uses. Such changes may limit
the ability of the related mortgagor to
rebuild the premises "as is" in the event of
a substantial casualty loss. Such limitations
may adversely affect the ability of the
mortgagor to meet its mortgage loan
obligations from cash flow. Insurance
proceeds may not be sufficient to pay off
such mortgage loan in full. In addition, if
the mortgaged property were to be repaired or
restored in conformity with then current law,
its value could be less than the remaining
balance on the mortgage loan and it may
produce less revenue than before such repair
or restoration.
INSPECTIONS OF THE MORTGAGED
PROPERTIES WERE LIMITED. The mortgaged properties were inspected by
licensed engineers at the time the mortgage
loans were originated to assess the
structure, exterior walls, roofing interior
construction, mechanical and electrical
systems and general condition of the site,
buildings and other improvements located on
the mortgaged properties. There can be no
assurance that all conditions requiring
repair or replacement have been identified in
such inspections.
COMPLIANCE WITH AMERICANS WITH
DISABILITIES ACT MAY RESULT IN
ADDITIONAL LOSSES. Under the Americans with Disabilities Act of
1990, all public accommodations are required
to meet certain federal requirements related
to access and use by disabled persons. To the
extent the mortgaged properties do not comply
with the act, the mortgagors may be required
to incur costs to comply with the act. In
addition, noncompliance could result in the
imposition of fines by the federal government
or an award of damages to private litigants.
LITIGATION CONCERNS. There may be legal proceedings pending and,
from time to time, threatened against the
mortgagors or their affiliates relating to
the business of or arising out of the
ordinary course of business of the mortgagors
and their affiliates. There can be no
assurance that such litigation will not have
a material adverse effect on the
distributions to certificateholders.
<PAGE>
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund are mortgage assets which include
(i) one or more multifamily and/or commercial mortgage loans and participations
therein, (ii) CMBS, or (iii) a combination of mortgage loans and CMBS. Mortgage
loans refers to both whole mortgage loans, participations therein and mortgage
loans underlying CMBS. 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 have been registered under the Securities Act of 1933, as
amended. The mortgage assets 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 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, which may be an affiliate of the depositor and may or may
not be the originator of the mortgage loan or the issuer of the CMBS.
Unless otherwise specified in the 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 on the assets of any other trust
fund established by the depositor. If specified in the 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 mortgaged properties
consisting of (i) multifamily properties which are residential properties
consisting of five or more rental or cooperatively owned dwelling units in
high-rise, mid-rise or garden apartment buildings or (ii) commercial properties
which are 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 located in any one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico and, if so specified in the related
prospectus supplement. To the extent specified in the 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 the mortgaged property. A
multifamily property may include mixed commercial and residential structures and
may include apartment buildings owned by Cooperatives. The mortgaged properties
may include leasehold interests in properties, the title to which is held by
third party lessors. Each mortgage loan will be originated by an originator who
is a person other than the depositor. The prospectus supplement will indicate if
any originator is an affiliate of the depositor. The mortgage loans will be
evidenced by mortgage notes secured by 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.
LEASES
To the extent specified in the prospectus supplement, the commercial
properties may be leased to lessees that occupy all or a portion of these
properties. Pursuant to a lease assignment, a mortgagor may assign its rights,
title and interest as lessor along with the income derived under each lease to
the 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 lessee 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 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 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 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 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. Some
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 prospectus supplement, 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 by the mortgagors) are
insufficient to pay all of the scheduled principal and interest on the mortgage
loans, the mortgagors must rely on other income including security deposits
generated by the mortgaged property to make payments on the mortgage loan. To
the extent specified in the 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 prospectus
supplement, some leases may expire prior to the stated maturity of the 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 the mortgage loans unless the lease is
renewed. As specified in the prospectus supplement, some 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. Some leases may provide that it is the lessor's responsibility to restore
the mortgaged property after a casualty to its original condition. Some leases
may provide a right of termination to the lessee if a taking of a material or
specified percentage of the leased space in the mortgaged property occurs, or if
the access to the leased space is 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 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.
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 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 in the case of 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 mortgage
loan. 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 also subject to default risks 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 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 the 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 the date of appraisal), the income capitalization method (a
projection of value based upon the property's projected net cash flow), or upon
an interpolation of the values derived from such methods. Each 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 be considered by the Originators of the multifamily and
commercial loans, or that, for any of the mortgage loans, they are complete or
relevant. See "Risk Factors." Net cash flow produced by a mortgaged property may
be inadequate to repay the mortgage loan," "Nonrecourse loans limit the remedies
available following a mortgagor default. Prepayments and repurchases of the
mortgage assets will affect the timing of your cashflow and may affect your
yield. The assets of the trust fund may not be sufficient to pay your
certificates. The servicer will have discretion to handle or avoid obligor
defaults in a manner which may be adverse to your interests. Mortgagors of
commercial loans are sophisticated and may take actions adverse to your
interests.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information 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 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 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 the 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 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 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 prospectus supplement. Each mortgage loan may provide for no
accrual of interest or for accrual of interest thereon at an 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 interest rate, or from a fixed to a floating 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
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 prospectus supplement. Each mortgage loan may contain a Lock-out Period and
a Lock-out Date, or require a Prepayment Premium in connection with a
prepayment, in each case as described in the prospectus supplement. In the event
that holders of any class or classes of certificates will be entitled to all or
a portion of any Prepayment Premiums collected in respect of the mortgage loans,
the 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 Equity Participations, as described in the prospectus
supplement. In the event that holders of any class or classes of certificates
will be entitled to all or a portion of an Equity Participation, the 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
Distributions of any principal or interest, as applicable, will be made
on CMBS on the dates specified in the prospectus supplement. The CMBS may be
issued in one or more classes with characteristics similar to the classes of
certificates described in this prospectus.
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 will be a function of
certain characteristics of the mortgage loans or underlying CMBS and other
factors and generally will be 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 related
issuer, servicer and 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 underlying mortgage
loans, the underlying CMBS or directly to such CMBS, (viii) the terms on which
the underlying mortgage loans or underlying 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 related servicing
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 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 prospectus supplement will 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 reinvested. See "Description of the Agreement --Distribution account and
Other Collection Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some types of 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 the 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. 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 each series of certificates. See
"Risk Factors--Credit support may not cover losses or risks which could
adversely affect payment on your certificates" 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 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 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 a
distribution date. In addition, if so specified in the 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 the 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 prospectus supplement.
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 the 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, the mortgage loans are likely to
be the subject of higher principal prepayments than if prevailing rates remain
at or above the rates borne by the mortgage loans. In this regard, it should be
noted that some mortgage assets may consist of mortgage loans with different
mortgage interest rates and the stated pass-through or pay-through interest rate
of some 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 the mortgage
assets, and by the extent to which the servicer of any mortgage loan is able to
enforce these 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 the rate actually experienced on the mortgage
assets, the actual yield to maturity will be lower than the rate thus
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 the rate actually experienced on
the mortgage assets, the actual yield to maturity will be higher 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 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 these classes.
When a full prepayment is made on a mortgage loan, the mortgagor is
charged interest on the principal amount of the mortgage loan prepaid for the
number of days in the month actually elapsed up to the date of the prepayment.
Unless otherwise specified in the 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 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
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 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.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the mortgage
assets included in a trust fund and the rate at which payments are made from any
credit support or cash flow agreement for a series of certificates may affect
the ultimate maturity and the weighted average life of each class of such
certificates. 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.
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 the Series.
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.
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 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 the
mortgage assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model such as CPR, a constant prepayment rate model.
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 the 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 the 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
the 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.
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 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 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 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 the 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 mortgaged property. With respect to any
whole loans, unless otherwise provided in the prospectus supplement, the master
servicer, on behalf of the trust fund, will be required to exercise (or waive
its right to exercise) any 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.
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 based on fixed, variable or floating rates;
(ii) include senior certificates or subordinate certificates; (iii) Stripped
Principal Certificates; (iv) Stripped Interest Certificates; (v) Accrual
Certificates; (vi) provide for payments of principal sequentially, based on
specified payment schedules, from only a portion of the trust assets in the
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 the registration of
a 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 as
physical certificates or as book-entry certificates, as provided in the related
prospectus supplement. See "Description of the Certificates--Book-Entry
Registration and Physical Certificates." Physical 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--Your ability to resell
certificates may be limited because of their characteristics" and "The assets of
the trust fund may not be sufficient to pay your certificates."
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 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 a record date specified in the prospectus supplement, and the amount
of each distribution will be determined as of the close of business on the
determination date specified in the prospectus supplement. All distributions
with respect to each class of certificates on each distribution date will be
allocated pro rata among the outstanding certificates in the class or by random
selection, as described in the prospectus supplement or otherwise established by
the 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 prospectus supplement (and, if so provided in the
prospectus supplement, holds certificates in the requisite amount specified
therein), or by check mailed to the address of the person entitled to such
payments as it appears on the certificate register; provided, however, that the
final distribution in retirement of the certificates (whether physical
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, in
accordance with the terms described in the prospectus supplement. Unless
provided otherwise in the 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 the 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 the 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 may have a different Pass-Through Rate. The
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 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 that class and distribution date, subject
to the sufficiency of the portion of the available distribution amount allocable
to the class on the distribution date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on the 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), the 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 described below. Unless otherwise provided in the
prospectus supplement, the 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 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 the accrual period on the
mortgage loans comprising or underlying the mortgage assets in the trust fund
for the 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 prospectus supplement.
The 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 trust fund. Unless otherwise provided in the prospectus
supplement, any reduction in the amount of the Accrued Certificate Interest
otherwise distributable on a class of certificates by reason of the allocation
to that class of a portion of any deferred interest on the mortgage loans
comprising or underlying the mortgage assets in the trust fund will result in a
corresponding increase in the certificate balance of the class. See "Risk
Factors--Prepayments and repurchases of the mortgage assets will affect the
timing of your cash flow and may affect your yield." 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
prospectus supplement, by the amount of losses incurred in respect of the
related mortgage assets. The certificate balance may be increased in respect of
deferred interest on the mortgage loans to the extent provided in the 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 Accrued Certificate Interest. Unless otherwise provided in the
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 prospectus supplement. Unless otherwise
provided in the 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 the prospectus supplement
until the certificate balance of that 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 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 that 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 those sections to
certificate balance and Pass-Through Rate refer to the principal balance, if
any, of any of the components and the Pass-Through Rate, if any, on any
component, respectively.
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF
EQUITY PARTICIPATIONS
If so provided in the prospectus supplement, Prepayment Premiums or
payments in respect of Equity Participations that are collected on the mortgage
assets in the 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 the 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 the 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 the 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 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 the trust fund and were delinquent on the related
determination date, subject to the servicer's (or another entity's) good faith
determination that such advances will be reimbursable from the loan proceeds. In
the case of a series of certificates that includes one or more classes of
subordinate certificates and if so provided in the 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 the
servicer's (or another entity's) good faith determination that such advances
will be reimbursable not only from the loan proceeds but also from collections
on other trust assets otherwise distributable on one or more classes of
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 prospectus supplement, advances of a servicer's (or
another entity's) funds will be reimbursable only out of recoveries on the
mortgage loans (including amounts received under any form of credit support)
respecting which advances were made 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 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 is not
ultimately recoverable from the Related Proceeds or, if applicable, from
collections on other trust assets otherwise distributable on the Subordinate
Certificates. If advances have been made by a servicer from excess funds in the
Distribution account, the 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 that distribution date are less than payments
required to be made to certificateholders on such date. If so specified in the
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 prospectus supplement.
If and to the extent so provided in the 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 the 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 prospectus supplement, will forward
to each certificateholder, 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 the distribution to holders of certificates of such
class applied to reduce the certificate balance thereof;
(ii) the amount of the distribution to holders of certificates of such
class allocable to Accrued Certificate Interest;
(iii) the amount of the 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 the distribution, and
the aggregate amount of any unreimbursed advances at the close of business on
the distribution date;
(vi) the aggregate principal balance of the mortgage assets at the
close of business on the 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, (b) the unpaid balance, (c) whether the delinquency
is in respect of any balloon payment, (d) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances, (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, (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 the mortgage loan and (b) the
amount of any loss to certificateholders;
(xi) with respect to each REO Property relating to a whole loan and
included in the trust fund as of the end of a reporting 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 a reporting period, (a) the fair
market value based on the most recent appraisal obtained by a servicer, (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 and (d) if applicable, the aggregate amount of
interest accrued and payable on related servicing expenses and related advances;
(xiii) with respect to any REO Property sold during a reporting period
(a) the loan number of the related mortgage loan, (b) the aggregate amount of
sale proceeds, (c) the portion of the 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 the distribution date, separately
identifying any reduction in the 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 a
reporting 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 the distribution date;
(xvii) in the case of certificates with a variable Pass-Through Rate,
the Pass-Through Rate applicable to the distribution date, and, if available,
the immediately succeeding distribution date, as calculated in accordance with
the method specified in the 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 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 prospectus supplement, will forward to each
holder and to the depositor, 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 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, aggregated for such calendar year or the applicable
portion thereof during which such person was a certificateholder. This
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 Internal Revenue Code as are from time to time in force.
Unless and until physical certificates are issued, or unless otherwise
provided in the prospectus supplement, such statements or reports will be
forwarded by the master servicer or the trustee to Cede & Co.. 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 who
requests a copy and certifies to the trustee or the master servicer, as
applicable, that he or she is the beneficial owner of a certificate. See
"Description of the Certificates--Book-Entry Registration and Physical
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 those 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 prospectus
supplement. In no event, however, will the trust created by the agreements
continue beyond the date specified in the 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 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
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
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 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 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 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.
Unless otherwise provided in the 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 Certificates
may do so only as beneficial owners, that is, through participants and indirect
participants. In addition, such 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,
as nominee for DTC, on each such date DTC will forward payments to its
participants which thereafter will be required to forward them to indirect
participants or beneficial owners. Unless otherwise provided in the prospectus
supplement, the only certificateholder will be Cede & Co., 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 those beneficial ownership interests.
Unless otherwise specified in the prospectus supplement, physical
certificates that are initially issued in book-entry form will be issued in
fully registered, certificated form to beneficial owners or their nominees,
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 physical 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 to the beneficial owners identified in the instructions the
physical certificates to which they are entitled, and thereafter the trustee
will recognize the holders of such physical certificates as certificateholders
under the agreement.
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 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, if
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 the 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 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.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of certificates, the depositor
will assign 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 specified in the
prospectus supplement, 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
that 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 Loan-to-Value Ratio as of the date indicated and prepayment
provisions, if applicable, and (ii) in respect of each CMBS included in the
related trust fund, including without limitation, the names of the issuer,
servicer and 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 mortgage loan, the Depositor will deliver 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 depositor 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 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
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor, the master servicer, the relevant asset sellers 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 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
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" 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 trust 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.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the prospectus supplement the depositor,
or another party specified therein, will, with respect to each mortgage loan,
make as of a specified date covering, by way of example, the following types of
matters: (i) the accuracy of the information set forth for such mortgage 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 mortgage
loan; (iv) the payment status of the mortgage 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
sellers 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 mortgage 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 the
mortgage loan.
Unless otherwise specified in the prospectus supplement, in the event
of a breach of any representation or warranty, the warranting party will be
obligated to reimburse the trust fund for losses caused by any such breach or
either cure the 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. The warranting
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 the whole loan or the interests therein of
the certificateholders. If the warranting party cannot cure such breach within a
specified period following the date on which the party was notified of the
breach, then the warranting party will be obligated to repurchase the 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 mortgage 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 period specified in the agreement 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 mortgage loan as to which a breach has occurred, will
have the option, within a specified period after initial issuance of the series
of certificates, to cause the removal of that mortgage loan from the trust fund
and substitute in its place one or more other mortgage 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 the 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 mortgage loans.
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 the 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
a breach to the servicer by the trustee or the depositor, or to the 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 the pooling
and 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 one or more separate accounts for the collection of payments on the
related mortgage assets, which must generally, among others 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 so that the certificateholders have a
claim with respect to the funds on account or a perfected first priority
security interest against any collateral securing these funds that is superior
to the claims of any other depositors or general creditors of the institution
with which the 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 that 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 as 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 permitted investments under the agreement.
Unless otherwise provided in the 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 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;
(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
insurance 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 and all other liquidation proceeds
received and retained in connection with the liquidation of defaulted mortgage
loans in the trust fund, by foreclosure, condemnation or otherwise, 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 proceeds from REO Properties and penalties or modification
fees which may be retained by the primary servicer. Proceeds shall be maintained
in an account by the special servicer.
Once a month the special servicer remits funds on deposit in the
account each maintains together with any 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 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 the 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 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
these 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
(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 "real estate mortgage investment
conduit", 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 that 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 distribution accounts. 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
sellers 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 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 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 collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
PRIMARY SERVICER
The master servicer or if so specified in the property supplement, a
primary servicer is required to make reasonable efforts to collect all scheduled
payments under the mortgage loans and will follow 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 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.
The 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 accordance with the servicing
standard; attempting to cure delinquencies; supervising foreclosures; inspecting
mortgaged properties under certain circumstances; and maintaining accounting
records relating to the mortgage loans.
MASTER SERVICER
If so specified in the related prospectus supplement, 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 all reasonable steps 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 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. 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 that 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 prospectus supplement, upon
the occurrence of any of the following servicing transfer events with respect to
a mortgage loan, servicing for such mortgage loan will be transferred from the
primary servicer to the special servicer and the loan will thereafter be
designated as a specially serviced mortgage loan:
(a) the 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,
(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 the 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 any other actions 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 prospectus
supplement. The 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 the
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 the 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
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 not later than the end of the third
calendar year following the year 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 the end of the third year following the
year in which such acquisition occurred 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 or 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 the first (and,
if multiple bids are contemporaneously received, the highest) cash bid or offer
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 the 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 the mortgaged property. Unless
otherwise specified in the related prospectus supplement, any 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 that difference. The servicers 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 the 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 with interest thereon.
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 the coverage required under the related mortgage.
Unless otherwise specified in the prospectus supplement, the 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, the
co-insurance 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 the 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 other insurance coverage with respect
to the related mortgaged property as is consistent with the terms of the
mortgage, which insurance may typically include flood insurance (if the
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 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 lease due to a casualty event, such 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 the 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 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 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 and employees of the
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 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 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.
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.
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 prospectus supplement. Certain other expenses,
including 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 pooling and 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 pooling and 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 the servicer has
fulfilled its obligations in all material respects under the agreement
throughout the preceding calendar year or other specified twelve-month period.
Unless otherwise provided in the related prospectus supplement, copies
of such annual accountants' statement and 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
prospectus supplement; provided that such beneficial owner shall have certified
to the master servicer that he or she is the beneficial owner of a certificate.
CERTAIN MATTERS REGARDING EACH SERVICER AND THE DEPOSITOR
The master 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 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 that servicer's
obligations and duties under the related pooling and servicing agreement. Unless
otherwise specified in the prospectus supplement, the master servicer shall
assume the obligations of any other servicer which resigns.
Unless otherwise specified in the related prospectus supplement, each
pooling and 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 pooling and servicing agreement, in good faith pursuant to the
related pooling and servicing agreement; provided, however, that no servicer nor
any of its officers, employees or agents will be protected against any breach of
a representation or warranty made in the 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 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 prospectus supplement, each pooling and servicing agreement
will further provide that each servicer will be entitled to indemnification by
the related trust fund against any loss, liability or expense incurred in
connection with any legal action relating to the pooling and 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
pooling and 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 pooling and 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 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 the servicer to
distribute to the trustee, another servicer or the certificateholders, any
required payment within one business day of the date due; (ii) any failure by
the servicer to timely deliver a report that continues unremedied for two days
after receipt of notice of such failure has been given to the servicer by the
trustee or another servicer; (iii) any failure by the 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 the servicer; (iv) any breach of a
representation or warranty made by the 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 the 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 the servicer indicating its insolvency or inability
to pay its obligations; and (vi) any failure by the servicer to maintain a
required license to do business or service the mortgage loans pursuant to the
related agreements which remains uncured as specified in the agreement. 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 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 the default is 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 the 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 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
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 the agreement, unless those 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 Physical certificates," unless and until Physical 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 an 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 certificates are outstanding.
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 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 its 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 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 the 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.
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 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 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
more than one trust is covered by the same credit support holders of
certificates evidencing interests in the trusts will be subject to the risk that
that credit support will be exhausted by the claims of other trusts prior to
receiving any of its intended share of 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 the 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 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 may not cover
losses or risks which could adversely affect payment on your certificates."
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 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.
INSURANCE OR GUARANTEES WITH RESPECT TO THE MORTGAGE LOANS
If so provided in the prospectus supplement for a series of
certificates, the mortgage loans in the related trust fund will be covered for
various default risks by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the prospectus supplement for a series of
certificates, deficiencies in amounts otherwise payable on the certificates or
certain classes thereof will be covered by one or more letters of credit, issued
by a bank or financial institution specified in the prospectus supplement. Under
a letter of credit, the letter of credit issuer 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 prospectus
supplement. The obligations of the letter of credit issuer under the letter of
credit for each series of certificates will expire at the earlier of the date
specified in the 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 the 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 the 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 the 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 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
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.
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 prospectus supplement, any reinvestment income
or other gain from such investments will be credited to the reserve fund for the
series, and any loss resulting from such investments will be charged to the
reserve fund. However, such income may be payable to any 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 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 the
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, 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 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 asset sellers 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 Uniform Commercial Code; 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 Uniform Commercial Code, 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.
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
Uniform Commercial Code. In order to perfect its security interest therein, the
lender generally must file Uniform Commercial Code 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 certificates, the mortgage loans may also consist of cooperative
apartment loans secured by security interests in shares issued by 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 agreements. 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
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.
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, 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. IN some cases payment to
the holders of junior mortgages 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.
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 exercising 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 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 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
and must be exercised prior to foreclosure sale. Equity of redemption is
different 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. As a result, the lender is forced 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.
Under the REMIC provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year of acquisition. 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
pooling and servicing 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. 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. Other states give the lender 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 such as:
o the right of the leasehold mortgagee to receive notices from the
ground lessor of any defaults by the mortgagor;
o the right to cure such defaults, with adequate cure periods; if a
default is not susceptible of cure by the leasehold mortgagee;
o 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
o 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 Code). 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. The ground leases and the
mortgage that secures the mortgage loan may not contain some of these
provisions. 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. This is subject 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 Uniform
Commercial Code and the security agreement relating to those shares. Article 9
of the Uniform Commercial Code 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 Uniform Commercial Code 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.
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. This leaves the lender unsecured
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 in the form of 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 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. This 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 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%
of the remaining term of the lease, but not more than three years.
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 any damages occurring after such date caused by the
nonperformance of any obligation of the lessor under the lease after such date
against rents reserved under the lease. 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 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 mortgaged property could 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.
Whether actions taken by a lender would constitute such participation
in the management of a facility or property, so that the lender loses the
protection of this "second creditor exclusion," has been a matter of judicial
interpretation of the statutory language, and court decisions have historically
been inconsistent. In 1990, the United States Court of Appeals for the Eleventh
Circuit suggested, in United States v. Fleet Factors Corp., that the mere
capacity of the lender to influence a borrower's decisions regarding disposal of
hazardous substances was sufficient participation in the management of the
borrower's business to deny the protection of the secured creditor exclusion to
the lender, regardless of whether the lender actually exercised such influence.
Other judicial decisions did not interpret the secured creditor exclusion as
narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996 (the "Asset Conservation Act"), which took effect on September 30, 1996.
The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a secured property, a lender must actually
participate in the operational affairs of the property or of the borrower. The
Asset Conservation Act also provides that participation in the management of the
property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the secured property.
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 pooling and servicing 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 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
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 pooling and servicing 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.
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. In any event, it
is likely that if any environmental assessments was conducted, with respect to
any of the mortgaged properties, it 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, the seller of the mortgage loan or another
person identified therein will represent and warrant that based on an
environmental audit, as of the date of the origination of a mortgage loan, the
related mortgaged property is not affected by 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.
No such person will however, be responsible for any such 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, a servicer, or
any other person. It may not always be possible to determine whether such a
condition arose prior or subsequent to the date of the origination of the
related mortgage loan.
"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.
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 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) the mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) the 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 mortgaged 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 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
Disabilities Act, 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 Disabilities Act may also impose such
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 Disabilities Act 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, 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.
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 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 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 the trust fund will be classified as a grantor trust
under subpart E, Part I of subchapter J of Chapter 1 of Subtitle A 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 in this
section of the prospectus.
a. 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 loans and/or MBS in the pool. Any amounts
received by a grantor trust certificateholder in lieu of amounts due with
respect to any mortgage loan and/or MBS 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 the 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, 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 the
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 these 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 under Code Section
68(b)--which amount will be adjusted for inflation--will be reduced by the
lesser of
o 3% of the excess of adjusted gross income over the applicable
amount and
o 80% of the amount of itemized deductions otherwise allowable for
such taxable year.
In general, a grantor trust certificateholder using the CASH METHOD OF
ACCOUNTING must take into account its pro rata share of income as and deductions
as and when collected by or paid to the master servicer or, with respect to
original issue discount or certain other income items for which the
certificateholder has made an election, as the amounts are accrued by the trust
fund on a constant interest basis, and will entitled to claim its pro rata share
of deductions, subject to the foregoing limitations, when the amounts are paid
or the certificateholder would otherwise be entitled to claim the deductions had
it held the mortgage loans and/or MBS directly. A grantor trust
certificateholder using an ACCRUAL METHOD OF ACCOUNTING must take into account
its pro rata share of income as payment becomes due or is made to the master
servicer, whichever is earlier and may deduct its pro rata share of expense
items, subject to the foregoing limitations, when the amounts are paid or the
certificateholder otherwise would be entitled to claim the deductions had it
held the mortgage loans and/or MBS directly. If the servicing fees paid to the
master servicer are deemed to exceed reasonable servicing compensation, the
amount of the 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 loans and/or MBS. The mortgage loans and/or MBS would then be
subject to the "coupon stripping" rules of the Code discussed below under
"--Stripped Bonds and Coupons."
Unless otherwise specified in the related prospectus supplement or
otherwise provided below in this section of the prospectus, as to each series of
certificates, counsel to depositor will have advised depositor that:
o 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 loans
and/or MBS 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 loans and/or MBS represented by that
grantor trust certificate are of a type described in that Code
section;
o a grantor trust certificate owned by a real estate investment
trust representing an interest in mortgage loans and/or MBS will
be considered to represent "real estate assets" within the meaning
of Code Section 856(c)(4)(A), and interest income on the mortgage
loan and/or MBS 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 loans and/or
MBS represented by that grantor trust certificate are of a type
described in that Code section; and
o 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 that constitute "stripped bonds" or "stripped coupons" as
those terms are defined in Section 1286 of the Code, and, as a result, these
assets would be subject to the stripped bond provisions of the Code. Under these
rules, these 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 the holder's undivided interest in each mortgage loan
and/or MBS based on each asset's relative fair market value, so that the
holder's undivided interest in each asset will have its own tax basis. A grantor
trust certificateholder that acquires an interest in mortgage loans and/or MBS
at a premium may elect to amortize the premium under a constant interest method,
provided that the underlying mortgage loans with respect to the mortgage loans
and/or MBS 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 mortgage loan or MBS or any other debt instrument
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 representing an
interest in a mortgage loan or MBS acquired at a premium should recognize a loss
if a mortgage loan or an underlying mortgage loan with respect to an 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 the 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.
The Internal Revenue Service has issued Amortizable Bond Premium
Regulations. The Amortizable Bond Premium Regulations specifically do not apply
to prepayable debt instruments or any pool of debt instruments the yield on
which may be affected by prepayments, such as the trust fund, which are subject
to Section 1272(a)(6) of the Code. Absent further guidance from the IRS and to
the extent set forth in the related prospectus supplement, the trustee will
account for amortizable bond premium in the manner described in this section.
Prospective purchasers should consult their tax advisors regarding amortizable
bond premium and the Amortizable Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described in this prospectus, the OID
Regulations will be applicable to a grantor trust certificateholder's interest
in those mortgage loans and/or MBS 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 borrowers 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 loans or MBS may be subject to the market
discount rules of Code Sections 1276 through 1278 to the extent an undivided
interest in the 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 the mortgage loan or MBS allocable to the
holder's undivided interest over the 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 product of
o the total remaining market discount and
o 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
o the total remaining market discount and
o 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 the grantor trust 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 the 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 this 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 "--Premium" in this prospectus. The
election to accrue interest, discount and premium on a constant yield method
with respect to a certificate is irrevocable without consent of the IRS.
Anti-Abuse Rule. The IRS can apply or depart from the rules contained
in the OID Regulations as necessary or appropriate to achieve a reasonable
result where a principal purpose in structuring a mortgage loan, MBS, or grantor
trust certificate or applying the otherwise applicable rules is to achieve a
result that is unreasonable in light of the purposes of the applicable statues,
which generally are intended to achieve the clear reflection of income for both
issuers and holders of debt instruments.
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 Section 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.
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
principal balance of the assets in the trust fund, 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 an asset by asset basis, which
could result in some mortgage loans and/or MBS 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".
Although not entirely clear, a stripped bond certificate generally
should be treated as an interest in mortgage loans and/or MBS issued on the day
the certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a mortgage loan or MBS 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". However, a purchaser of a stripped bond
certificate will be required to account for any discount on the mortgage loans
and/or MBS as market discount rather than OID if either
o the amount of OID with respect to the mortgage loans and/or MBS is
treated as zero under the OID de minimis rule when the certificate
was stripped or
o no more than 100 basis points, including any excess servicing, is
stripped off of the trust fund's mortgage loans and/or MBS.
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 loan or MBS. Unless
otherwise specified in the related prospectus supplement, all payments from a
mortgage loan or MBS underlying a stripped coupon certificate will be treated as
a single installment obligation subject to the OID rules of the Code, in which
case, all payments from the mortgage loan or MBS would be included in the stated
redemption price at maturity for the mortgage loan and/or MBS for purposes of
calculating income on the certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
mortgage loans and/or MBS will give rise to a loss to the holder of a stripped
bond certificate purchased at a premium or a stripped coupon certificate. If the
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 the grantor trust certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate sufficiently faster than the assumed prepayment rate
so that the certificateholder will not recover its investment. However, if the
certificate is treated as an interest in discrete mortgage loans or MBS, or if
no prepayment assumption is used, then when a mortgage loan or MBS is prepaid,
the holder of the certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the certificate that is allocable to the
mortgage loan or MBS.
Holders of stripped bond certificates and striped 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 loans and/or MBS 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 loans and/or MBS. 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,
each class of grantor trust certificates, to the extent set forth in the related
prospectus supplement, should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(4)(A) 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 loans
and/or MBS and interest on such mortgage loans and/or MBS 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 by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A) and "permitted assets" within the meaning of Code Section
860L(c).
2. Grantor Trust Certificates Representing Interests in Loans Other
Than Adjustable Rate Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to a certificateholder's interest in those mortgage loans
and/or MBS 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 borrowers -- 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 loans and/or MBS. 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 loans and/or MBS
other than adjustable rate 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 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 loans and/or MBS 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
issued relevant to prepayable securities.
Under the Code, the mortgage loans and/or MBS 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 loans and/or MBS is generally the amount lent to the lender, which may
be adjusted to take into account certain loans origination fees. The stated
redemption price at maturity of a mortgage loans and/or MBS is the sum of all
payments to be made on these assets 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, to the extent set forth in
the related prospectus supplement, utilize the Prepayment Assumption on the
issue date of such grantor trust certificate 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. In the absence of such regulations, the Prepayment Assumption used will
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.
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 in this section, of the OID on the grantor trust certificate
for each day on which it owns the certificate, including the date of purchase
but excluding the date of disposition. In the case of the 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 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
o adding (1) 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 (2) any
payments included in the stated redemption price at maturity
received during such accrual period, and
o subtracting from that total the "adjusted issued 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 the mortgage loans and/or MBS acquired by a certificateholder are purchased
at a price equal to the then unpaid principal amount of the asset, no original
issue discount attributable to the difference between the issue price and the
original principal amount of the asset--i.e., points--will be includible by the
holder. Other original issue discount on the mortgage loans and/or MBS--e.g.,
that arising from a "teaser" rate--would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in Adjustable
Rate Loans
The OID Regulations do not address the treatment of instruments, such
as the grantor trust certificates, which represent interests in adjustable rate
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 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
Adjustable Rate 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 deferred interest to the principal balance of an adjustable rate
loan may require the inclusion of the amount in the income of the grantor trust
certificateholder when the 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.
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, except
to the extent described above with respect to market discount and will generally
be long-term capital gain if the grantor trust certificate has been owned for
more than one year. Long-term capital gains of individuals are subject to
reduced maximum tax rates while capital gains recognized by individuals on
capital assets held less than twelve months are generally subject to ordinary
income tax rates. The use of capital losses is limited.
It is possible that capital gain realized by holders of one or more
classes of grantor trust certificates could be considered gain realized upon the
disposition of property that was part of a "conversion transaction." A sale of a
grantor trust certificate will be part of a conversion transaction if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and:
o the holder entered the contract to sell the grantor trust
certificate substantially contemporaneously with acquiring the
grantor trust certificate;
o the grantor trust certificate is part of a straddle;
o the grantor trust certificate is marketed or sold as producing
capital gain; or
o other transactions to be specified in Treasury regulations that
have not yet been issued. If the sale or other disposition of a
grantor trust certificate is part of a conversion transaction, all
or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital
gain.
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
The term "U.S. Person" means
o a citizen or resident of the United States;
o a corporation (or entity treated as a corporation for tax
purposes) created or organized in the United States or under the
laws of the United States or of any state;
o a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the
United States or of any state (unless provided otherwise by future
Treasury regulations);
o an estate whose income is includible in gross income for United
States income tax purposes regardless of its source; or,
o a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more U.S. Persons have authority to control all substantial
decisions of the trust. Notwithstanding the last clause of the
preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and
treated as U.S. Persons prior to such date, may elect to continue
to be U.S. Persons.
Generally, to the extent that a grantor trust certificate evidences
ownership in underlying mortgage loans and/or MBS 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
o an owner that is not a U.S. Person or
o 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, unless
such income is effectively connected with a U.S. trade or business
of such owner or beneficial owner.
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 loans and/or MBS
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 the grantor trust certificateholder is not
a U.S. Person and providing the name and address of the grantor trust
certificateholder. To the extent payments to grantor trust certificateholders
that are not U.S. Persons are payments of "contingent interest" on the
underlying mortgage loans and/or MBS, or the grantor trust certificateholder is
ineligible for the exemption described in the preceding sentence, the 30%
withholding tax will apply unless such withholding taxes are reduced or
eliminated by an applicable tax treaty and such holder meets the eligibility and
certification requirements necessary to obtain the benefits of such treaty.
Additional restrictions apply to mortgage loans and/or MBS where the borrower is
not a natural person in order to qualify for the exemption from withholding. If
capital gain derived from the sale, retirement or other disposition of a grantor
trust certificate is effectively connected with a U.S. trade or business of a
grantor trust certificateholder that is not a U.S. Person, certificateholder
will be taxed on the net gain under the graduated U.S. federal income tax rates
applicable to U.S. Persons and, with respect to grantor trust certificates held
by or on behalf of corporations, also may be subject to branch profits tax. In
addition, if the trust fund acquires a United States real property interest
through foreclosure, deed in lieu of foreclosure or otherwise on a mortgage loan
or MBS secured by such an interest, which for this purpose includes real
property located in the United States and the Virgin Islands, a grantor trust
certificateholder that is not a U.S. person will potentially be subject to
federal income tax on any gain attributable to such real property interest that
is allocable to such holder. Non-U.S. Persons should consult their tax advisors
regarding the application to them of the foregoing rules.
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, the information as may be deemed
necessary or desirable to assist certificateholders in preparing their federal
income tax returns, or to enable holders to make the 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 to
registered owners who are not "exempt recipients." In addition, upon the sale of
a grantor trust certificate to, or through, a broker, the broker must withhold
31% of the entire purchase price, unless either
o the broker determines that the seller is a corporation or other
exempt recipient, or
o the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. person, certifies that
the seller is a Non-U.S. Person, and other conditions are met.
Such a sale must also be reported by the broker to the IRS, unless either
o the broker determines that the seller is an exempt recipient or
o the seller certifies its non-U.S. Person status and other
conditions are met.
Certification of the registered owner's non-U.S. Person status normally would be
made on IRS Form W-8 under penalties of perjury, although in some cases it may
be possible to submit other documentary evidence. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit against
the recipient's federal income tax liability.
On October 6, 1997, the Treasury Department issued new regulations
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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 income
tax (see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions and Other Taxes" 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 the year and thereafter. In that event, the entity may be
taxable as a separate corporation, and the REMIC Certificates may not be
accorded the status or given the tax treatment described below in this section.
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 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 Agreement, the trust fund will qualify as a REMIC, and the related
certificates will be considered to be REMIC Regular Certificates or a sole class
of REMIC Residual Certificates. 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 includes any obligation,
including certificates of participation in such an obligation and any "regular
interest" in another REMIC, 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,
o 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);
o certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A); and
o 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.
Tiered REMIC Structures. For certain series of certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs 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 or REMICs, respectively, will be
considered REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Other than the residual interest in a Subsidiary REMIC, only REMIC
Certificates issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC or REMICs and the Master REMIC will be treated as one REMIC
solely for purposes of determining whether the REMIC Certificates will be:
o "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code;
o "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and
o whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code.
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, the 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 the 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 Tax Reform Act of 1986. The
REMIC Regular Certificates 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 the 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 closing date, the issue price for that class will be treated as
the fair market value of that 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 the distributions constitute "qualified stated interest."
Qualified stated interest generally means interest payable at a single fixed
rate or qualified variable rate provided that the 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 the
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 certificates exceeds its issue price for purposes of the de
minimis rule described below in this section. The OID Regulations suggest that
all interest on a long first period REMIC 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
certificate's 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 the 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
the 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 the 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
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 loans and/or MBS exceed
those estimated under the Prepayment Assumption. The IRS might contend, however,
that certain contingent payment rules contained in final regulations issued on
June 11, 1996, with respect to original issue discount, should apply to such
certificates. Although such rules are not applicable to instruments governed by
Code Section 1272(a)(6), they represent the only guidance regarding the current
views of the IRS with respect to contingent payment instruments. These proposed
regulations, if applicable, generally would require holders of Regular Interest
Certificates to take the payments considered contingent interest payments into
income on a yield to maturity basis in accordance with a schedule of projected
payments provided by the depositor and to make annual adjustments to income to
account for the difference between actual payments received and projected
payment amounts accrued. 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 "--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. 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 treated as a super-premium certificate and the rules described
below under "--Premium" should apply. However, it is possible that holders or
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" 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
o adding (1) 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 (2) any payments included in the stated redemption price at
maturity received during such accrual period, and
o 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:
(1) 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
(2) 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:
o the interest is unconditionally payable at least annually;
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
o 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," 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 the REMIC Regular Certificates.
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 at the rate applicable on the date they are issued. 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. No guidance is currently available as to how OID would be determined
for debt instruments subject to Code Section 1272(a)(6) that provide for
contingent interest. The treatment of REMIC Regular Certificates as contingent
payment debt instruments may affect the timing of income accruals on the 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 discount 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
"--Premium" below. The election to accrue interest, discount and premium on a
constant yield method with respect to a certificate is irrevocable without the
consent of the IRS.
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 (1) 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 (2) 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, the election
will apply to all market discount bonds acquired by the certificateholder on or
after the first day of the first taxable year to which the 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 the REMIC Regular Certificate's stated redemption price at
maturity multiplied by the 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 the 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 the 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 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
1) the total remaining market discount and
2) 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
1) the total remaining market discount and
2) 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 the 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 the 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 the interest payment. The Amortizable Bond Premium Regulations do not
apply to prepayable securities described in Section 1272(a)(6) of the Code, such
as the REMIC Regular Certificates. Certificateholders should consult their tax
advisors regarding the possibility of making an election to amortize any such
bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of deferred interest with respect to one or more
adjustable rate loans. Any deferred interest that accrues with respect to a
class of REMIC Regular Certificates will constitute income to the holders of
certificates prior to the time distributions of cash with respect to the
deferred interest are made. It is unclear, under the OID Regulations, whether
any of the interest on 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.
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 an allocable portion of
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.
Such capital gain or loss will generally be long-term capital gain or
loss if the REMIC Regular Certificate was held for more than one year. Long-term
capital gains of individuals are subject to reduced maximum tax rates while
capital gains recognized by individuals on capital assets held less than twelve
months are generally subject to ordinary income tax rates. The use of capital
losses is limited.
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 the gain does not exceed the excess, if any, of
o the amount that would have been includible in the 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
o the amount actually includible in such holder's income.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be capital gain will be treated as ordinary income if the REMIC
Regular Certificate is held as part of a "conversion transaction" as defined in
Code Section 1258(c), up to the amount of interest that would have accrued on
the REMIC Regular certificateholder's net investment in the conversion
transaction at 120% of the appropriate applicable federal rate under Code
Section 1274(d) in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction, or if the
REMIC Regular Certificate is held as part of a straddle. Potential investors
should consult their tax advisors with respect to tax consequences of ownership
and disposition of an investment in REMIC Regular Certificates in their
particular circumstances.
It is possible that capital gain realized by holders of one or more
classes of REMIC Regular Certificates could be considered gain realized upon the
disposition of property that was part of a "conversion transaction." A sale of a
REMIC Regular Certificate will be part of a "conversion transaction" if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and:
o the holder entered the contract to sell the REMIC Regular
Certificate substantially contemporaneously with acquiring the
REMIC Regular Certificate;
o the REMIC Regular Certificate is part of a straddle;
o the REMIC Regular Certificate is marketed or sold as producing
capital gains; or
o other transactions to be specified in Treasury regulations that
have not yet been issued. If the sale or other disposition of a
REMIC Regular Certificate is part of a conversion transaction, all
or a portion of the gain realized upon the sale or other
disposition of the REMIC Regular Certificate would be treated as
ordinary income instead of capital gain.
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 this
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 provide information
pertaining to the appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. 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 distribution date. The period between the
closing date for payment lag certificates and their first distribution date may
or may not exceed the interval. Purchasers of payment lag certificates for which
the period between the closing date and the first distribution date does not
exceed the 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 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 Certificate's 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 the 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.
Effects of Defaults, Delinquencies and Losses. 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 loans and/or
MBS, 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 the subordinated certificates attributable to
defaults and delinquencies on the mortgage loans and/or MBS, except to the
extent that it can be established that the 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 the 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 loans and/or MBS.
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. 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. These taxpayers are advised to consult their tax
advisors regarding the treatment of losses on certificates.
Non-U.S. Persons. Generally, payments of interest on the REMIC Regular
Certificates, including any payment with respect to accrued OID, to a REMIC
Regular certificateholder who is not a U.S. Person as defined in "-- Grantor
Trust Funds; Non-U.S. Persons and is not engaged in a trade or business within
the United States will not be subject to federal withholding tax if:
o the 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;
o the REMIC Regular certificateholder is not a controlled foreign
corporation, within the meaning of Code Section 957, related to
the issuer; and
o the REMIC Regular certificateholder complies with identification
requirements, including delivery of a statement, signed by the
REMIC Regular certificateholder under penalties of perjury,
certifying that the REMIC Regular certificateholder is a foreign
person and providing the name and address of the REMIC Regular
certificateholder.
If a REMIC Regular certificateholder is not exempt from withholding,
distributions of interest to the holder, including distributions in respect of
accrued OID, may be subject to a 30% withholding tax, subject to reduction under
any applicable tax treaty. If the interest on a REMIC Regular Certificate is
effectively connected with the conduct by the Non-U.S. REMIC Regular
Certificateholder of a trade or business within the United States, then the
Non-U.S. REMIC Regular Certificateholder will be subject to U.S. income tax at
regular graduated rates. Such a Non-U.S. REMIC Regular Certificateholder also
may be subject to the branch profits tax.
Further, a REMIC Regular Certificate will not be included in the estate
of a non-resident alien individual that does not actually or constructively own
10% or more of the combined voting power of all classes of equity in the Issuer
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,
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. In addition, the IRS may assert that non-U.S. Persons that own
directly or indirectly, a greater than 10% interest in any borrower, and foreign
corporations that are "controlled foreign corporations" as to the United States
of which such a borrower is a "United States shareholder" within the meaning of
Section 951(b) of the Code, are subject to United States withholding tax on
interest distributed to them to the extent of interest concurrently paid by the
related borrower.
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 that year, the 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 the information available to beneficial
owners or financial intermediaries that hold the 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 to registered
owners who are not "exempt recipients." In addition, upon the sale of a REMIC
Regular Certificate to, or through, a broker, the broker must withhold 31% of
the entire purchase price, unless either:
o the broker determines that the seller is a corporation or other
exempt recipient, or
o the seller provides, in the required manner, identifying
information and, in the case of a non-U.S. Person, certifies that
such seller is a non-U.S. Person, and other conditions are met.
o A sale of a REMIC Regular Certificate to, or through, a broker
must also be reported by the broker to the IRS, unless either:
o the broker determines that the seller is an exempt recipient, or
o the seller certifies its non-U.S. Person status and other
conditions are met.
Certification of the registered owner's non-U.S. Person status normally would be
made on IRS Form W-8 under penalties of perjury, although in certain cases it
may be possible to submit other documentary evidence. 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.
On October 6, 1997, the Treasury Department issued the New Regulations,
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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 the 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 the 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 loans
and/or MBS 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 or cause the REMIC Residual Certificate to have negative
"value." Investors should consult their own tax advisors concerning the federal
income tax treatment of a REMIC Residual Certificate and the impact of the 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 the REMIC Residual Certificateholder owns
the 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 the
REMIC Residual Certificate at a price greater than or less than the adjusted
basis the 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 the 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
o the income from the mortgage loans and/or MBS and the REMIC's
other assets and
o 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:
o the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
o all bad loans will be deductible as business bad debts; and
o 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 loans
and/or MBS may differ from the time of the actual loss on the assets. 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. The
aggregate basis will be allocated among the mortgage loans and/or MBS and other
assets of the REMIC in proportion to their respective fair market value. A
mortgage loan or MBS 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 the income, under a method
similar to the method described above for accruing OID on the REMIC Regular
Certificates. The REMIC may elect under Code Section 171 to amortize any premium
on the mortgage loans and/or MBS. Premium on any mortgage loan or MBS to which
the election applies would be amortized under a constant yield method. It is not
clear whether the yield of a mortgage loan or MBS 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.
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 Regular Certificate to reflect any
difference between the actual cost of the REMIC Residual Certificate to the
holder and the adjusted basis the 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. The 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 the
net loss exceeds the holder's adjusted basis in the REMIC Residual Certificate.
Any net loss that is not currently deductible by reason of this limitation may
only be used by the 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 has finalized Mark-to-Market
Regulations which provide that a REMIC Residual Certificate acquired after
January 3, 1995 cannot be marked to market. The Mark-to-Market Regulations
replaced the temporary regulations which allowed a Residual Certificate to be
marked to market provided that it was not a "negative value" residual interest
and did not have the same economic effect as a "negative value" residual
interest.
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:
o 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
o 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 applicable amount
will be reduced by the lesser of
o 3% of the excess of the individual's adjusted gross income over
the applicable amount or
o 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. Accordingly, investment in REMIC Residual
Certificates will in general not be suitable for individuals or for certain
pass-through entities, such as partnerships and S corporations, that have
individuals as partners or shareholders.
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:
o may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual
Certificateholder;
o 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,
as discussed under "--Tax-Exempt Investors" below; and
o 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, as discussed under "--Residual Certificate
Payments--Non-U.S. Persons" below.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar quarter
is the excess, if any, of (1) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual Certificate
over (2) the sum of the "daily accruals" for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds a 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" 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 the 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 the 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 the 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 the 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 the residual holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, the amount of
any alternative minimum tax net operating loss deductions must be computed
without regard to any excess inclusions. Third, a residual holder's alternative
minimum taxable income for a tax year cannot be less than excess inclusions for
the year. The effect of this last statutory amendment is to prevent the use of
nonrefundable tax credits to reduce a taxpayer's income tax below its tentative
minimum tax computed only on 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 the REMIC Residual Certificate. To the extent a distribution
exceeds the adjusted basis, it will be treated as gain from the sale of the
REMIC Residual Certificate.
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 in the
next paragraph. A holder's adjusted basis in a REMIC Residual Certificate
generally equals the cost of the REMIC Residual Certificate to the REMIC
Residual Certificateholder, increased by the taxable income of the REMIC that
was included in the income of the REMIC Residual Certificateholder with respect
to the REMIC Residual Certificate, and decreased--but not below zero--by the net
losses that have been allowed as deductions to the REMIC Residual
Certificateholder with respect to the REMIC Residual Certificate and by the
distributions received thereon by the REMIC Residual Certificateholder. In
general, the gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. The capital gain or loss will
generally be long-term capital gain or loss if the REMIC Regular Certificate was
held for more than one year. Long-term capital gains of individuals are subject
to reduced maximum tax rates while capital gains recognized by individuals on
capital assets held less than twelve months are generally subject to ordinary
income tax rates. The use of capital losses is limited. 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. In addition, a transfer of a REMIC Residual
Certificate that is a "noneconomic residual interest" may be subject to
different rules. See "--Tax Related Restrictions on Transfers of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" below.
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". In general, subject to certain specified
exceptions, a prohibited transaction means:
o the disposition of a mortgage loan or MBS,
o the receipt of income from a source other than a mortgage loan or
MBS or certain other permitted investments,
o the receipt of compensation for services, or
o gain from the disposition of an asset purchased with the payments
on the mortgage loans and/or MBS 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 the trust fund as a REMIC made after the day on
which the trust fund issues all of its interests could result in the imposition
of 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 the 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 certificate arises out of or
results from
o a breach of the servicer's, trustee's or depositor's obligations,
as the case may be, under the related Agreement for such series,
such tax will be borne by the servicer, trustee or depositor, as
the case may be, out of its own funds or
o J.P. Morgan Commercial Mortgage Finance Corp.'s obligation to
repurchase a mortgage loan,
such tax will be borne by J.P. Morgan Commercial Mortgage Finance Corp. In the
event that the servicer, trustee or depositor, as the case may be, fails to pay
or is not required to pay any prohibited transactions tax, contributions tax,
tax on net income from foreclosure property or state or local income or
franchise tax, the tax will be payable out of the trust fund for the series and
will result in a reduction in amounts available to be distributed to the
certificateholders of the series.
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. 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 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
the entity are not held by "disqualified organizations". 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 transfer 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 government
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" 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,
provided that all partners of an "electing large partnership" as defined in
Section 775 of the Code, are deemed to be disqualified organizations. 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:
o a regulated investment company, real estate investment trust or
common trust fund;
o a partnership, trust or estate; and
o 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. Electing large
partnerships --generally, non-service partnerships with 100 or more members
electing to be subject to simplified IRS reporting provisions under Code
sections 771 through 777 -- will be taxable on excess inclusion income as if all
partners were disqualified organizations.
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 consent
to a proposed transfer only if it receives the following:
o 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
organization, and
o 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 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,
o 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
o 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:
o the transferor conducted a reasonable investigation of the
transferee, and
o 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 the 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 or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless the person provides the trustee with a
duly completed IRS Form 4224 or applicable successor form adopted by the IRS for
such purpose and the trustee consents to the 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.
<PAGE>
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose certain restrictions on employee
benefit plans subject to ERISA and on certain other retirement plans and
arrangements (including, but not limited to individual retirement accounts and
Keogh plans) ("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 or Section 4975 of the Code, and assets of these 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
governmental or church plan that is not subject to ERISA but 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, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes 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 exception applies.
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 this event, the Depositor, the servicers, the trustee, any insurer
of the mortgage assets 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 the plan assets unless such
transactions are subject to a statutory, regulatory 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
25% or more of the value of any class of equity interest (excluding from the
calculation the value of equity interests held by persons who have discretionary
authority or control with respect to the assets of the entity (or held by
affiliates of such persons)). "Benefit plan investors" include Plans and
employee benefit plans not subject to ERISA (e.g., governmental and foreign
plans) and entities whose underlying assets include plan assets by reason of
Plan investment in such entities. To fit within this safe harbor, benefit plan
investors must own less than 25% of 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 these asset-backed pass-through trusts, provided that the
general conditions and certain other conditions set forth in the Exemption are
satisfied.
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 IBCA, Inc., Moody's Investors Service,
Inc. and Standard & Poor's Ratings Group (each, a "rating agency");
(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.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates evidencing interests in such other investment pools
must have been rated in one of the three highest rating categories of a rating
agency for at least one year prior to the Plan's acquisition of the
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of the certificates.
On July 21, 1997, Labor published in the Federal Register an amendment
to the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage loans
or other secured receivables supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent (25%) of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month period following the
closing date, instead of requiring that all such receivables be either
identified or transferred on or before the closing date. The relief is available
when certain conditions are met.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
any person who has discretionary authority or renders investment advice with
respect to the investment of plan assets causes a Plan to acquire certificates
in a trust, provided that, among other requirements: (i) such person (or its
affiliate) is an obligor with respect to five percent or less of the fair market
value of the obligations or receivables contained in the trust; (ii) the Plan is
not a plan with respect to which any member of the Restricted Group is the "plan
sponsor" (as defined in Section 3(16)(B) of ERISA); (iii) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust fund is acquired by persons
independent of the Restricted Group; (iv) a Plan's investment in certificates of
any class does not exceed twenty-five percent of all of the certificates of that
class outstanding at the time of the acquisition; and (v) immediately after the
acquisition, no more than twenty-five percent of the assets of any Plan with
respect to which such person has discretionary authority or renders investment
advice are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The Exemption does
not apply to Plans sponsored by any member of the Restricted Group.
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
prospectus supplement with respect to a series of certificates may contain
additional information regarding the application of the Exemption, or another
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 the
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
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 them.
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 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 the 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 the series.
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.
The offered certificates will be sold primarily to institutional
investors. Purchasers of the 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.
<PAGE>
GLOSSARY OF TERMS
"Accrual Certificates" means certificates which 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
"Accrued Certificate Interest" means, with respect to each class of
certificates and each distribution date, other than certain classes of Stripped
Interest Certificates, the amount equal to the interest accrued for a specified
period on the outstanding certificate balance immediately prior to the
distribution date, at the applicable pass-through rate, as described in
"Distributions of Interest on the Certificates" in this prospectus.
"ARM Loans" means mortgage loans with floating mortgage interest rates.
"Available Distribution Amount" means 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.
"Cede" means Cede & Company.
"CMBS" means 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.
"CMBS Trustee" means a trustee or a custodian under the CMBS Agreement.
"Constant Prepayment Rate" or "CPR" means a rate that represents an
assumed constant rate of prepayment each month (which is expressed on a per
annum bases) relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR does not purport to be
either a historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of any
mortgage loans.
"Cooperative" means a private cooperative housing corporation.
"Covered Trust" means a form of credit support that covers more than
one series of certificates.
"Debt Service Coverage Ratio" means, with respect to a mortgage loan
at any given time, the ratio of the Net Operating Income for a twelve-month
period to the annualized scheduled payments on the mortgage loan.
"DTC" means The Depository Trust Company.
"Equity Participations" means provisions entitling the lender to a
share of profits realized from the operation or disposition of a mortgaged
property.
"Loan-to-Value Ratio" means, with respect to a mortgage loan at any
given time, 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.
"Lock-out Date" means the date of expiration of the Lockout Period.
"Lock-out Period" means a period during which prepayments on a mortgage
loan are prohibited.
"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 that period, minus the total operating
expenses incurred in respect of the mortgaged property during that 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.
"Pass-Through Rate" means the fixed, variable or floating rate per
annum at which any class of certificates accrues interest.
"REMIC" means a "real estate mortgage investment conduit" under the
Internal Revenue Code of 1986.
"REMIC certificates" means a certificate issued by a trust fund
relating to a series of certificate where an election is made to treat the trust
fund as a REMIC.
"RED Property" means any mortgaged property acquired on behalf of the
trust fund in respect of a defaulted mortgage loan through foreclosure, deed in
lieu of foreclosure or otherwise.
"Retained Interest" means an interest in an asset which represents a
specified portion of the interest payable. the Retained Interest will be
deducted from borrower payments as received and will not be part of the related
trust fund.
"Senior Certificates" means certificates which are senior to one or
more other classes of certificates in respect of certain distributions on the
certificates.
"Stripped Interest Certificates" means certificates which are entitled
to interest distributions with disproportionately low, nominal or no principal
distributions.
"Stripped Principal Certificates" means certificates which are entitled
to principal distributions with disproportionately low, nominal or no interest
distributions.
"Subordinate Certificates" means certificates which are subordinate to
one or more other classes of certificates in respect of certain distributions on
the certificates.
"Warranting Party" means the person making or assigning representations
and warranties
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates being offered hereunder,
other than underwriting discounts and commissions:
SEC Registration Fee......................................$ 792,000
Printing and Engraving Fees...............................$ 300,000
Legal Fees and Expenses...................................$ 600,000
Accounting Fees and Expenses..............................$ 300,000
Trustee Fees and Expenses.................................$ 90,000
Rating Agency Fees........................................$ 1,500,000
Miscellaneous.............................................$ 18,000
Total................................................$ 3,600,000
* All amounts except the SEC Registration Fee are estimates of expenses
in connection with the issuance and distribution of three Series of
Certificates in an aggregate principal amount assumed for these
purposes to be equal to $3,000,000,000.
Item 15. Indemnification of Directors and Officers.
Under the proposed form of Underwriting Agreement, the Underwriter is
obligated under certain circumstances to indemnify officers and directors of
J.P. Morgan Commercial Mortgage Finance Corp. (the "Company") who sign the
Registration Statement, and certain controlling persons of the Company, against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Act") and the Securities Exchange Act of 1934, as amended.
The Company's Certificate of Incorporation provides for indemnification
of directors and officers of the Company to the full extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are or
were such directors, officers, employees or agents, against expenses incurred in
any such action, suit or proceeding. The Delaware General Corporation Law also
provides that the Registrant may purchase insurance on behalf of any such
director, officer, employee or agent.
The Pooling and Servicing Agreement will provide that no director,
officer, employee or agent of the Company will be liable to the Trust Fund or
the Certificateholders for any action taken or for refraining from the taking of
any action pursuant to the Pooling and Servicing Agreement, except for such
person's own misfeasance, bad faith or gross negligence in the performance of
duties. The Pooling and Servicing Agreement will provide further that, with the
exceptions stated above, any director, officer, employee or agent of the Company
will be indemnified and held harmless by the Trust Fund against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement or the Certificates, other than any loss,
liability or expense (i) related to any specific Mortgage Loan or Mortgage Loans
(except as
<PAGE>
any such loss, liability or expense shall be otherwise reimbursable pursuant to
the Pooling and Servicing Agreement), (ii) incurred in connection with any
violation by him or her of any state or federal securities law or (iii) imposed
by any taxing authority if such loss, liability or expense is not specifically
reimbursable pursuant to the terms of the Pooling and Servicing Agreement.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Servicing Agreement*
5.1O pinion of Brown & Wood LLP as to legality of the Certificates*
8.1 Opinion of Brown & Wood LLP as to certain tax matters*
24.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1 hereto)*
25.1 Powers of Attorney (included in Part II)*
----------------
* Previously filed.
Item 17. Undertakings.
A. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
B. Undertaking pursuant to Rule 415 Offering.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Act;
(ii) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change of such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
C. Undertaking in respect of incorporation by reference.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Act, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities and Exchange Act of 1934
that is incorporated by reference in the Registration Statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on December 1,
1999.
J.P. MORGAN COMMERCIAL MORTGAGE
FINANCE CORP.
By /s/ Bianca A. Russo
----------------------------
Bianca A. Russo
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on December 1, 1999.
Signature Title
* Director, Chairman of the Board
- ------------------------------------
William S. Demchak
* Director, President
- ------------------------------------ (Principal Executive Officer)
Michael A. Jungman
* Director
- ------------------------------------
Debra F. Stone
* Controller
- ------------------------------------ (Principal Accounting and
Robert Salvucci Financial Officer)
*By: /s/ Bianca A. Russo
-------------------------------
Bianca A. Russo
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Servicing Agreement*
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates*
8.1 Opinion of Brown & Wood LLP as to certain tax matters*
24.1 Consent of Brown & Wood LLP (included in Exhibits 5.1
and 8.1 hereto)*
25.1 Powers of Attorney (included in Part II)*
- -----------
* Previously filed
