As filed with the Securities Exchange Commission on November 8, 1996
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
MIDLAND REALTY ACCEPTANCE CORP.
(Exact name of registrant as specified in its charter)
Missouri 43-1745475
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
(816) 843-6272
(Address, including zip code, and telephone number, including area code
of registrant's principal executive offices)
Alan L. Atterbury
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
(816) 843-6272
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------------------
Copy to:
William A. Hirsch, Esq. Marie Martineau
Morrison & Hecker L.L.P. O'Melveny & Meyers
2600 Grand Avenue 153 East 53rd Street
Kansas City, Missouri 64108 New York, New York 10022
Approximate date of commencement of proposed sale to the public: From time to
time 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, please 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 of 1933, 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 of 1933, please 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
under the Securities Act of 1933, please check the following box.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================================================
Title of securities to Amount to be Proposed maximum Proposed maximum Amount of
be registered registered<F1> offering price per aggregate offering registration fee(1)
security<F2> price<F2>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage Pass- Through
Certificates, issued in $575,261,000 100% $575,261,000 $192,096.26
series
==============================================================================================================================
<FN>
<F1>$425,261,000.00 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration No. 333- 3885
referred to below and not previously sold are consolidated in this Registration
Statement pursuant to Rule 429. $146,641.72 has been previously paid by the
Registrant under the foregoing Registration Statement in connection with such
unsold amount of Mortgage Pass-Through Certificates.
<F2>Estimated solely for the purpose of calculating the registration fee.
</FN>
</TABLE>
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 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 and
Prospectus Supplement contained in this Registration Statement also relates to
the Registrant's Registration Statement on Form S-3. This Registration Statement
which is a new registration statement, also constitutes a post-effective
amendment to Registration Statement 333-3885. Such post-effective amendment
shall hereafter become effective concurrently with the effectiveness of this
Registration Statement in accordance with Section 8(a) of the Securities Act of
1933.
<PAGE>
CROSS REFERENCE SHEET
Showing Location of Items in Prospectus
Required by Items of Form S-3
Item Caption in Prospectus
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus Forepart of Registration Statement and
Outside Front Cover Page**
2. Inside Front and Outside Back Cover Pages of
Prospectus................... Inside Front and Outside Back Cover Pages**
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges. Risk Factors; The Depositor**
4. Use of Proceeds.............. Use of Proceeds**
5. Determination of Offering Price*
6. Dilution..................... *
7. Selling Security Holders..... *
8. Plan of Distribution......... Plan of Distribution**
9. Description of Securities to
Be Registered ............... OutsideeFront Cover Page; Description of the
Certificates; The Mortgage Pools; Servicing
of the Mortgage Loans; Enhancement; Certain
Legal Aspects of the Mortgage Loans;
Material Federal Income Tax
Consequences; ERISA Considerations; Legal
Investment**
10. Interest of Named Experts and
Counsel...................... *
11. Material Changes............. *
12. Incorporation of Certain Information by
Reference.................... Incorporation of Certain Information by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities.............. *
- -----------------
* Omitted, since item is not applicable or answer is negative.
** To be completed or provided from time to time by Prospectus Supplement.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. 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 SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS SUPPLEMENT, DATED NOVEMBER 8, 1996
SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(To Prospectus dated November , 1996)
[Midland Logo]
$ (Approximate)
Midland Realty Acceptance Corp. (Depositor)
Midland Loan Services, L.P. (Master Servicer and Special Servicer)
Commercial Mortgage Pass-Through Certificates, Series 1996-C2
The Commercial Mortgage Pass-Through Certificates, Series 1996-C2 (the
"Certificates") will consist of 17 Classes of Certificates, designated as the
Class A-1 Certificates, the Class A-2
Certificates, the Class A-3
Certificates, the Class A-EC
Certificates, the Class B Certificates, the Class C Certificates, the Class D
Certificates, the Class E Certificates, the Class F Certificates, the Class G
Certificates, the Class H Certificates, the Class J Certificates, the Class K-1
Certificates, the Class K-2 Certificates (collectively, the "Regular
Certificates"), the Class R-I Certificates, the Class R-II Certificates and the
Class R-III Certificates (together, the "Residual Certificates"). Only the Class
A-1, Class A-2, Class A-3, Class B, Class C, Class D, Class E and Class F
Certificates (the "Offered
Certificates") are offered hereby. (continued on next page)
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE MORTGAGE LOAN SELLERS, THE MASTER SERVICER, THE SPECIAL SERVICER,
THE TRUSTEE, THE FISCAL AGENT OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE
OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospective Investors should review fully this Prospectus Supplement and
the Prospectus, including, without limitation, the factors discussed under "RISK
FACTORS" at page S-26 in this Prospectus Supplement and Page 9 of the Prospectus
before
purchasing any of the Offered Certificates.
=====================================================================
Initial Rated Price
Class Certificate Pass-Through Final to
- ---------------------------------------------------------------------
Class A-1..... $ %
-----
%
- ---------------------------------------------------------------------
Class A-2 .... $ %
-----
%
- ---------------------------------------------------------------------
Class A-3 .... $ %
-----
%
- ---------------------------------------------------------------------
Class B ..... $ %
%(6)
- ---------------------------------------------------------------------
Class C .... $ %
-----
%(7)
- ---------------------------------------------------------------------
Class D .... $ %
-----
%(8)
- ---------------------------------------------------------------------
Class E .... $ %
-----
%(9)
- ---------------------------------------------------------------------
Class F .... $ %
-----
%(10)
=====================================================================
(1) Approximate, subject to an upward or downward variance of up to 5%.
(2) In addition to distributions of principal and interest, holders of certain
Classes of Certificates will be entitled to receive a portion of the Prepayment
Premiums received from the borrowers as described herein. See "DESCRIPTION OF
THE CERTIFICATES--Distributions--Prepayment Premiums" herein.
(3) The Rated Final Distribution Date (the "Rated Final Distribution Date") for
each Class of Offered Certificates is the Distribution Date occurring two years
after the latest Assumed Maturity Date of any of the Mortgage Loans. The
"Assumed Maturity Date" of (a) any Mortgage Loan that is not a Balloon Loan
is the maturity date of such Mortgage Loan and (b) any Balloon Loan is the date
on which such Mortgage Loan would be deemed to mature in accordance with
its original amortization schedule absent its Balloon Payment.
(4) Proceeds to the Depositor from the sale of the Offered Certificates will
be approximately $ , before deducting underwriting fees of % of
the aggregate initial Certificate Balance on the Offered Certificates and
certain expenses expected to be approximately $ payable by the
Depositor.
(5) Plus accrued interest at the applicable Pass-Through Rate from
December , 1996.
(6) Initial Pass-Through Rate. The Class B Certificates accrue interest at the
Weighted Average Unmodified Net Mortgage Rate less ______%.
(7) Initial Pass-Through Rate. The Class C Certificates accrue interest at the
Weighted Average Unmodified Net Mortgage Rate less ______%.
(8) Initial Pass-Through Rate. The Class D Certificates accrue interest at the
Weighted Average Unmodified Net Mortgage Rate less ______%.
(9) Initial Pass-Through Rate. The Class E Certificates accrue interest at the
Weighted Average Unmodified Net Mortgage Rate less ______%.
(10) Initial Pass-Through Rate. The Class F Certificates accrue interest at the
Weighted Average Unmodified Net Mortgage Rate less ______%.
The Offered Certificates are offered by Prudential Securities Incorporated and
____________________ (the "Underwriters"), subject to prior sale, when, as and
if delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that delivery of the Offered
Certificates will be made in book-entry form through the Same-Day Funds
Settlement System of The Depository Trust Company ("DTC"), on or about December
, 1996 (the "Delivery Date"), against payment therefor in immediately
available funds.
Prudential Securities Incorporated [ ]
December , 1996
<PAGE>
(continued from previous page)
The Certificates will represent beneficial ownership interests in a trust
fund (the "Trust Fund") to be created by Midland Realty Acceptance Corp. (the
"Depositor"). The Trust Fund will consist primarily of a pool (the "Mortgage
Pool") of fixed-rate mortgage loans [and one mortgage loan whose interest rate
resets one time during its term,] secured by first liens on commercial and
multifamily residential properties (each, a "Mortgaged Property").
The Mortgaged Properties consist of [multifamily
residential housing, nursing homes, congregate care
facilities, retail properties, office buildings, mini
warehouse facilities, industrial properties, hotels,
mobile home parks] and mixed use properties.
[ of the Mortgage Loans were
originated by Midland Loan Services, L.P. ("Midland"), and
subsequently sold by Midland to Midland Commercial
Financing Corp. ("MCFC"), one of the Mortgage Loan Sellers
hereunder. of the
Mortgage Loans were originated either by
(" ") or by correspondents of, or other
entities related to , and of
the Mortgage Loans were purchased by
from various unaffiliated banks, savings institutions or
other entities in the secondary market.] The Mortgage Loans will be sold to the
Depositor by the Mortgage Loan Seller[s] on or prior to the date of initial
issuance of the Certificates. The characteristics of the Mortgage Loans and the
related Mortgaged Properties are described under "RISK FACTORS" and "DESCRIPTION
OF THE MORTGAGE POOL" herein.
The Class A-1, Class A-2, Class A-3, Class B, Class C, Class D, Class E,
Class F, Class G, Class H and Class J Certificates (the "P&I Certificates") will
be entitled to distributions of interest on their respective Certificate
Balances at the applicable Pass-Through Rate for each such Class. The Class A-EC
Certificates will be entitled to distributions of Class A-EC Excess Interest, on
each Distribution Date. "Class A-EC Excess Interest" is an amount equal to the
Class A-EC Pass-Through Rate multiplied by the Class A-EC Notional Balance. With
respect to each Distribution Date, the Class K-2 Certificates will be entitled
to distributions of interest at the Class K-2 Pass-Through Rate on the Class K-2
Notional Balance. The Class K-1 Certificates are principal only and will not be
entitled to distributions of interest. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein.
Distributions of principal and interest, as applicable, on the Regular
Certificates will be made, to the extent of Available Funds, on the 25th day of
each month or, if any such day is not a Business Day, on the next succeeding
Business Day, beginning in January, 1996 (each, a "Distribution Date").
Distributions allocable to interest on the Certificates will be made as
described under "DESCRIPTION OF THE CERTIFICATES--Distributions" herein. The
rights of the holders of the Class B, Class C, Class D, Class E, Class F, Class
G, Class H, Class J, Class K-1 and Class K-2 Certificates (the "Subordinate
Certificates") to receive distributions of principal and interest will be
subordinate to such rights of the holders of the Class A-1, Class A-2, Class A-3
and Class A-EC Certificates (the "Senior Certificates"); the rights of the
holders of the Class C, Class D, Class E, Class F, Class G, Class H, Class J,
Class K-1 and Class K-2 Certificates to receive such distributions will be
subordinate to such rights of the holders of the Class B Certificates; the
rights of the Class D, Class E, Class F, Class G, Class H, Class J, Class K-1
and Class K-2 Certificates to receive distributions will be subordinate to such
rights of the holders of the Class C Certificates; the rights of the Class E,
Class F, Class G, Class H, Class J, Class K-1 and Class K-2 Certificates to
receive distributions will be subordinate to such rights of the Class D
Certificates; the rights of the holders of the Class F, Class G, Class H, Class
J, Class K-1 and Class K-2 Certificates to receive distributions will be
subordinate to such rights of the Class E Certificates; the rights of the
holders of the Class G, Class H, Class J, Class K-1 and Class K-2 Certificates
to receive distributions will be subordinate to such rights of the holders of
the Class F Certificates; the rights of the Class H, Class J, Class K-1 and
Class K-2 Certificates to receive distributions will be subordinate
S-2
<PAGE>
to such rights of the holders of the Class G Certificates; the rights of the
Class J, Class K-1 and Class K-2 Certificates to receive distributions will be
subordinate to such rights of the holders of the Class H Certificates; and the
rights of the Class K-1 and Class K-2 Certificates to receive distributions will
be subordinate to such rights of the holders of the Class J Certificates. In
addition, each Class of Regular Certificates will have the benefit of
subordination of the Residual Certificates to the extent of any distributions to
which the Residual Certificates would otherwise be entitled. See "DESCRIPTION OF
THE CERTIFICATES--Subordination" herein.
The Residual Certificates are not entitled to distributions of interest or
principal.
The yield to maturity on each Class of the Regular Certificates will be
sensitive, and, in the case of the Class A-EC, Class K-1 and Class K-2
Certificates, will be very sensitive, to the amount and timing of debt service
payments (including both voluntary and involuntary prepayments, defaults and
liquidations) on the Mortgage Loans, and payments with respect to repurchases
thereof that are applied in reduction of the Certificate Balance of such Class
(or, in the case of the Class A-EC or Class K-2 Certificates, which reduce the
Class A-EC Notional Balance or the Class K-2 Notional Balance, respectively). No
representation is made as to the rate of prepayments on or liquidations of the
Mortgage Loans or as to the anticipated yield to maturity of any Class of
Regular Certificates. All but __________ of the Mortgage Loans generally provide
that for a specified amount of time during which a prepayment is permitted, it
must be accompanied by payment of a Prepayment Premium. See "DESCRIPTION OF THE
MORTGAGE POOL--Certain Terms and Conditions of the Mortgage Loans--Prepayment
Provisions" herein. Prepayment Premiums, to the extent collected, are
distributable to the holders of the Regular Certificates as and to the extent
described under "DESCRIPTION OF THE CERTIFICATES--Distributions--Prepayment
Premiums" herein.
The yield to investors on each Class of the Regular Certificates will also
be very sensitive to the timing and magnitude of losses on the Mortgage Loans
due to liquidations to the extent that the Certificate Balances of the Class or
Classes of Certificates that are subordinate to such Class have been reduced to
zero. A loss on any one of the Mortgage Loans included in the Mortgage Pool
could result in a significant loss, and in some cases a complete loss, of an
investor's investment in any Class of the Regular Certificates. No
representation is made as to the rate of liquidations of or losses on the
Mortgage Loans.
The Certificates are being issued pursuant to a Pooling and Servicing
Agreement dated as of December 1, 1996 (the "Pooling and Servicing Agreement"),
by and among the Depositor, Midland Loan Services, L.P., as servicer (in such
capacity, the "Master Servicer") and special servicer (in such capacity, the
"Special Servicer"), LaSalle National Bank, as trustee (the "Trustee"), and ABN
AMRO Bank N.V., as fiscal agent (the "Fiscal Agent"). The obligations of the
Master Servicer with respect to the Certificates will be limited to its
contractual servicing obligations and the obligation under certain circumstances
to make Advances with respect to the Mortgage Loans. See "THE POOLING AND
SERVICING AGREEMENT" herein.
It is a condition to the issuance of the Certificates that: the Class A-1,
Class A-2, Class A-3 and Class A-EC Certificates be rated "AAA" by Fitch
Investors Service, L.P. ("Fitch") and "__________" by Moody's Investor Services,
Inc. ("Moody's" and together with Fitch, the "Rating Agencies"); the Class B
Certificates be rated "AA" by Fitch and "__________" by Moody's; the Class C
Certificates be rated "A" by Fitch and "__________" by Moody's; the Class D
Certificates be rated "BBB+" by Fitch and "__________" by Moody's; the Class E
Certificates be rated "BBB" by Fitch and "__________" by Moody's; the Class F
Certificates be rated "BBB-" by Fitch and "__________" by Moody's; the Class G
Certificates be rated "BB" by Fitch and "__________" by Moody's; the Class H
Certificates be rated "BB-" by Fitch and "__________"
S-3
<PAGE>
by Moody's; and the Class J Certificates be rated "B" by Fitch and "__________"
by Moody's. The Class K-1, Class K-2, Class R-I, Class R-II and Class R-III
Certificates are unrated.
Elections will be made to treat designated portions of the Trust Fund (such
portions of the Trust Fund, the "Trust REMICs"), and the Trust REMICs will
qualify, as three separate "real estate mortgage investment conduits" (each a
"REMIC" or, alternatively, "REMIC I," "REMIC II" and "REMIC III") for federal
income tax purposes. As described more fully herein, the Class A-1, Class A-2,
Class A-3, Class A-EC, Class B, Class C, Class D, Class E, Class F, Class G,
Class H, Class J, Class K-1 and Class K-2 Certificates will constitute "regular
interests" in REMIC III, and the Class R-I Certificates, the Class R-II
Certificates and the Class R-III Certificates will constitute the sole Class of
"residual interests" in REMIC I, REMIC II and REMIC III, respectively. See
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES," "DESCRIPTION OF THE
CERTIFICATES--Delivery, Form and Denomination" and "ERISA CONSIDERATIONS" herein
and "MATERIAL FEDERAL INCOME TAX CONSEQUENCES," "DESCRIPTION OF THE
CERTIFICATES" and "ERISA CONSIDERATIONS" in the Prospectus.
There is currently no secondary market for the Certificates. The
Underwriters have advised the Depositor that they currently intend to make a
secondary market in the Certificates, but they are under no obligation to do so.
There can be no assurance that such a market will develop or, if it does
develop, that it will continue or will provide investors with a sufficient level
of liquidity of investment. See "RISK FACTORS--Limited Liquidity" herein.
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional Information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement and
the Prospectus in full. Sales of the Offered Certificates may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
Prospectus. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments and subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED CERTIFICATES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), with respect to the Offered Certificates. This
Prospectus Supplement and the accompanying Prospectus, which form a part of the
Registration Statement, omit certain information contained in such Registration
Statement pursuant to the rules and regulations of the Commission. The
Registration Statement can be inspected and copied at the Public Reference Room
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W, Washington D.C. 20549.
S-4
<PAGE>
EXECUTIVE SUMMARY
Prospective investors are advised to read carefully, and should rely solely
on, the detailed information appearing elsewhere in this Prospectus Supplement
and the Prospectus relating to the Offered Certificates in making their
investment decision. The following Executive Summary does not include all
relevant information relating to the Offered Certificates or the Mortgage Loans,
particularly with respect to the risks and special considerations involved with
an investment in the Offered Certificates and is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus
Supplement and the Prospectus. Prior to making any investment decision, a
prospective investor should review fully this Prospectus Supplement and the
Prospectus. Capitalized terms used and not otherwise defined herein have the
respective meanings assigned to them in this Prospectus Supplement and the
Prospectus.
- ---------------------------------------------------------------
Approximate Approximate
Percent Credit
of Support
Total
---------------------------------------------
% Class A-EC Class A-1 Ratings: %
(AAA/____)
Excess
interest on
Class A-1
through Class E
Ratings:
(AAA/____)
----------------------------
% Class A-2 Ratings: %
(AAA/____)
----------------------------
% Class A-3 Ratings: %
(AAA/____)
----------------------------
% Class B Ratings: %
(AA/___)
----------------------------
% Class C Ratings: %
(A/___)
----------------------------
% Class D Ratings: %
(BBB+/____)
----------------------------
% Class E Ratings: %
(BBB/____)
-----------------
---------------------------------------------
% Class F Ratings: (BBB-/____) %
---------------------------------------------
% Class G Ratings: (BB/___) %
---------------------------------------------
% Class H Ratings: (BB-/___) %
---------------------------------------------
% Class J Ratings: (B/___) %
---------------------------------------------
% Class Class K-1 Principal
K-2 only
Interest only Unrated
Unrated
---------------------------------------------
Not offered hereby: Classes A-EC, G, H, J, K-1 and K-2.
Ratings: (Fitch/Moody's)
- ---------------------------------------------------------------
S-5
<PAGE>
======================================================================
Rating u l
Class by Initial % of DescriptPass-Thro Weighted Principa
- ----------------------------------------------------------------------
Senior Certificates
- ----------------------------------------------------------------------
Fixed
A-1 AAA/____ $ % Rate %
- ----------------------------------------------------------------------
Fixed
A-2 AAA/____ $ % Rate %
- ----------------------------------------------------------------------
Fixed
A-3 AAA/____ $ % Rate %
- ----------------------------------------------------------------------
Excess
A-EC AAA/____ N/A N/A Interest % (2) N/A N/A
- ----------------------------------------------------------------------
Subordinate Certificates
- ----------------------------------------------------------------------
[Variabl
B AA/___ $ % Rate] e % (3)
- ----------------------------------------------------------------------
[Variabl
C A/___ $ % Rate] e % (4)
- ----------------------------------------------------------------------
_ [Variabl
D BBB+/___ $ % Rate] e % (5)
- ----------------------------------------------------------------------
[Variabl
E BBB/____ $ % Rate] e % (6)
- ----------------------------------------------------------------------
_ [Variabl
F BBB-/___ $ % Rate] e % (7)
- ----------------------------------------------------------------------
[Variabl
G BB/___ $ % Rate] e % (7)
- ----------------------------------------------------------------------
[Variabl
H BB-/___ $ % Rate] e % (7)
- ----------------------------------------------------------------------
[Variabl
J B/___ $ % Rate] e % (7)
- ----------------------------------------------------------------------
Principa
K-1 Unrated $ % Only l %
- ----------------------------------------------------------------------
Interest 7
K-2 Unrated $ N/A Only % ( ) N/A N/A
======================================================================
(1) Based respectively on Scenario 2, which assumes a 0%
CPR, no defaults and an Auction in December, 2007, and
Scenario 1, which assumes a 0% CPR and no defaults. See
"YIELD AND MATURITY CONSIDERATIONS--Weighted Average Life"
herein.
(2) Initial Pass-Through Rate. [The Certificate
Pass-Through Rate will be equal to a fraction, the
numerator of which is the sum of (i) the excess of the
Weighted Average Unmodified Net Mortgage Rate over the
weighted averages of the Pass-Through Rates of the Class
A-1, Class A-2 and Class A-3 Certificates multiplied by
the Class A-EC Notional Component A, (ii) the Class B
Strip multiplied by the Class B Certificate Balance, (iii)
the Class C Strip multiplied by the Class C Certificate
Balance, (iv) the Class D Strip multiplied by the Class D
Certificate Balance, and (v) the Class E Strip multiplied
by the Class E Certificate Balance, and the denominator of
which is the Class A-EC Notional Balance.]
(3) Initial Pass-Through Rate. The Pass-Through Rate
will be the Weighted Average Unmodified Net Mortgage Rate
less _____% (the "Class ____ Strip").
(4) Initial Pass-Through Rate. The Pass-Through Rate
will be the Weighted Average Unmodified Net Mortgage Rate
less _____% (the "Class ____ Strip").
<PAGE>
(5) Initial Pass-Through Rate. The Pass-Through Rate
will be the Weighted Average Unmodified Net Mortgage Rate
less _____% (the "Class ____ Strip").
(6) Initial Pass-Through Rate. The Pass-Through Rate
will be the Weighted Average Unmodified Net Mortgage Rate
less _____% (the "Class ____ Strip").
(7) Initial Pass-Through Rate. Weighted Average
Unmodified Net Mortgage Rate.
S-6
<PAGE>
Securities:
Distribution Dates The 25th day of each month, or if such 25th day is
not a Business Day, the Business Day immediately
following such day, commencing on January 25, 1997. See
"DESCRIPTION OF THE CERTIFICATES--Distributions" herein.
Scheduled Final
Distribution Date
Scheduled
Final
Class Designation
Distribution Date
Class A-1.............
Class A-2.............
Class A-3.............
Class A-EC............
Class B...............
Class C...............
Class D...............
Class E...............
Class F...............
Class G...............
Class H...............
Class J...............
Class K-1.............
Class K-2.............
The Scheduled Final Distribution Dates set forth above
have been determined on the basis of the assumptions
described in "DESCRIPTION OF THE CERTIFICATES--Scheduled
Final Distribution Date" herein.
Rated Final
Distribution Date As to each Class of Certificates,
.
Early Termination The Trust Fund is subject to early termination
if less than 10% of the Initial Pool Balance remains
outstanding. See "DESCRIPTION OF THE CERTIFICATES--Early
Termination"
herein.
Auction Call Date On or after the Distribution Date occurring in
[December 2007], the Trust Fund is subject to early
termination pursuant to the auction procedures described
herein. See "DESCRIPTION OF THE CERTIFICATES--Auction"
herein.
Master Servicer.. Midland Loan Services, L.P. See
"MIDLAND LOAN SERVICES, L.P." herein.
Special Servicer. Midland Loan Services, L.P. See
"MIDLAND LOAN SERVICES, L.P." herein.
S-7
<PAGE>
Trustee.......... LaSalle National Bank. See "THE
POOLING AND SERVICING AGREEMENT--The
Trustee" herein.
Fiscal Agent..... ABN AMRO Bank N.V. See "THE POOLING
AND SERVICING AGREEMENT--The Fiscal Agent" herein.
Federal Tax Status Elections will be made to treat designated
portions of the Trust Fund as three separate "real estate
mortgage investment conduits" ("REMIC").
ERISA............ The Senior Certificates should
qualify for an exemption from the
prohibited transaction provisions of
ERISA. The Subordinate Certificates
may be acquired by employee benefit
plans subject to ERISA only if an
exemption from the prohibited
transaction provisions of ERISA is
applicable. See "ERISA
CONSIDERATIONS" herein and in the
Prospectus.
SMMEA............ None of the Offered Certificates are
mortgage-related securities pursuant
to the Secondary Mortgage Market
Enhancement Act of 1984.
DTC Eligibility.. The Offered Certificates are being delivered
through the facilities of The Depository Trust Company
("DTC").
Closing Date..... On or about December , 1996.
Structural Summary:
Interest Payments On each Distribution Date, each Class of
Certificates (other than the Class K-1 Certificates)
generally will be entitled to receive interest
distributions in an amount equal to the Class Interest
Distribution Amount for such Class and Distribution Date,
together with any unpaid Class Interest Shortfalls
remaining from prior Distribution Dates, in each case to
the extent of Available Funds remaining after payment to
each outstanding Class of Certificates bearing an earlier
sequential Class designation of (i) the Class Interest
Distribution Amount and any unpaid Class Interest Shortfall
for such Classes, (ii) the Pooled Principal Distribution
Amount for such Distribution Date for such Classes and
(iii) payment of the unreimbursed amount of Realized Losses
previously allocated to such Classes. See "DESCRIPTION OF
THE CERTIFICATES--Distributions" herein.
Principal Payments The Pooled Principal Distribution
Amount for each Distribution Date
will be distributed, first, to the
Class A-1 Certificates, until the
Certificate Balance thereof has
been reduced to zero and
thereafter, sequentially to each
other Class of Regular Certificates
(other than the Class A-EC and
Class K-2 Certificates), until its
Certificate Balance is reduced to
zero, in each case, to the extent
of Available Funds remaining after
(i) payment of the Class Interest
Distribution Amount,
S-8
<PAGE>
............... any unpaid Class Interest Shortfalls
remaining from prior Distribution
Dates, the Pooled Principal
Distribution Amount and the
unreimbursed amount of Realized
Losses, if any, up to an amount equal
to the aggregate of such unreimbursed
amount previously allocated to each
other outstanding Class of
Certificates having an earlier
sequential Class designation and
(ii) payment of the Class Interest
Distribution Amount and any unpaid
Class Interest Shortfalls remaining
from prior Distribution Dates to such
Class (or, with respect to the Class
K-1 Certificates, to the Class K-2
Certificates) and to any other
outstanding Class that is pari passu
with such Class.
Credit Enhancement The Class A-1, Class A-2, Class A-3
and Class A-EC Certificates are
credit enhanced by the Classes of
Subordinate Certificates, which
consist of the Class B, Class C,
Class D, Class E, Class F, Class G,
Class H, Class J, Class K-1 and
Class K-2 Certificates. Each other
Class of Regular Certificates will
likewise be protected by the
subordination offered by the other
Classes of Certificates that bear a
later sequential designation.
............... Realized Losses of principal and
interest from any Mortgage Loan and
certain other losses experienced by
the Trust Fund will generally be
allocated to the Classes of Regular
Certificates (other than the Class A-
EC and Class K-2 Certificates) in
reverse sequential order starting
with the Class K-1 Certificates.
Realized Losses allocated to the
Class K-1 Certificates will reduce
the Class K-2 Notional Balance.
Realized Losses allocated to the
Class A-1, Class A-2, Class A-3,
Class B, Class C, Class D or Class E
Certificates will reduce the Class
A-EC Notional Balance.
Advances......... Subject to the limitations described herein, the Master
Servicer is required to make advances (each such amount, a
"P&I Advance") in respect of delinquent Monthly Payments
(but not Balloon Payments) on the Mortgage Loans. If the
Master Servicer fails to make an Advance required to be
made, the Trustee shall then be required to make such
Advance. If both the Master Servicer and the Trustee fail
to make such Advance, the Fiscal Agent shall be required to
make such Advance. See "THE POOLING AND SERVICING
AGREEMENT--Advances" herein.
Collateral Overview;
Loan Details...... See Annex A hereto for certain
characteristics of Mortgage Loans on a loan-by-loan basis.
All numerical information provided herein with respect to
the Mortgage Loans is provided on an approximate basis. All
weighted average information regarding the Mortgage Loans
reflects weighting of the Mortgage Loans by their Cut-off
Date Principal Balances. The "Cut-off Date Principal
Balance" of each Mortgage Loan is equal to the unpaid
principal balance thereof as of the Cut-off Date, after
application of all payments of principal due on
S-9
<PAGE>
............... or before such date, whether or not
received. See also "DESCRIPTION OF
THE MORTGAGE POOL" for additional
statistical information regarding the
Mortgage Loans.
Characteristics
Aggregate Cut-off Date Principal Balance $
Number of Mortgage Loans....
Weighted Average Mortgage Rate %
Weighted Average Remaining Term to Maturity months
----
Weighted Average DSCR (1)... x
Average Mortgage Loan Balance $
Balloon Mortgage Loans...... %
(1) Debt Service Coverage Ratio ("DSCR") is calculated based on the ratio of
Underwritten Cash Flow to the Annual Debt Service. For more information on
the Debt Service Coverage Ratios, see "DESCRIPTION OF THE MORTGAGE
POOL--Certain Characteristics of the Mortgage Pool" herein.
Cut-off Date Principal Balances
% by Cut-off Number
Date Principal of
Cut-off Date Principal
Balance
Balance Mortgage Loans
$ 500,000- $ 999,999......... %
$ 1,000,000-$ 1,499,999.......... %
$ 1,500,000-$ 1,999,999.......... %
$ 2,000,000-$ 2,499,999.......... %
$ 2,500,000-$ 2,999,999.......... %
$ 3,000,000-$ 3,499,999.......... %
$ 3,500,000-$ 3,999,999.......... %
$ 4,000,000-$ 4,499,999.......... %
$ 4,500,000-$ 4,999,999.......... %
$ 5,000,000-$ 5,499,999.......... %
$ 5,500,000-$ 5,999,999.......... %
$ 6,500,000-$ 6,999,999.......... %
$ 7,000,000-$ 7,499,999.......... %
$ 8,000,000-$ 8,499,999.......... %
$ 9,000,000-$ 9,499,999.......... %
$10,000,000-$10,499,999.......... %
$17,500,000-$17,999,999.......... %
S-10
<PAGE>
Geographical Distribution
% by Cut-off Number
Date Principal of
Jurisdiction
Balance Mortgage Loans
- -------------- --------------
____________________................ %
____________________................ %
____________________................ %
____________________................ %
____________________................ %
____________________................ %
Other (1)........................... %
(1).................................No other jurisdiction
has Mortgage Loans
aggregating more than
_____% of the Initial
Pool Balance.
Debt Service Coverage Ratios (1)
% by Cut-off Number
Date Principal of
Range of Debt Service Coverage
Ratios
Balance Mortgage Loans
1.00-1.04........................... %
1.15-1.19........................... %
1.20-1.24........................... %
1.25-1.29........................... %
1.30-1.34........................... %
1.35-1.39........................... %
1.40-1.44........................... %
1.45-1.49........................... %
1.50-1.54........................... %
1.55-1.59........................... %
1.60-1.64........................... %
1.65-1.69........................... %
1.70-1.74........................... %
1.75-1.79........................... %
1.85-1.89........................... %
2.15-2.19........................... %
2.25-2.29..........................%
(1).................................Calculated based on
the ratio of
Underwritten Cash Flow
to Annual Debt
Service. See
"DESCRIPTION OF THE
MORTGAGE POOL--Certain
Characteristics of the
Mortgage Pool" herein
for more information
relating to the
calculation of debt
service coverage
ratios.
S-11
<PAGE>
Loan to Value Ratios
% by Cut-off Number
Date Principal of
Range of Loan to Value
Ratios
Balance Mortgage Loans
25.0% to less than 30.0%............ %
30.0% to less than 35.0%............ %
40.0% to less than 45.0%............ %
45.0% to less than 50.0%............ %
50.0% to less than 55.0%............ %
55.0% to less than 60.0%............ %
60.0% to less than 65.0%............ %
65.0% to less than 70.0%............ %
70.0% to less than 75.0%............ %
75.0% to less than 80.0%............ %
Property Types
% by Cut-off Number
Date Principal of
Property
Types
Balance Mortgage Loans
[Congregate Care]................... %
[Hotel]............................. %
[Industrial]........................ %
[Mini Warehouse].................... %
[Mini Warehouse & Office/Warehouse]. %
[Mobile Home Park].................. %
[Multifamily]....................... %
[Nursing Home]...................... %
[Office]............................ %
[Office/Retail]..................... %
[Retail, Anchored].................. %
[Retail, Single Tenant]............. %
[Retail, Unanchored]................ %
S-12
<PAGE>
Maturity Years
% by Cut-off Number
Date Principal of
Year
Balance Mortgage Loans
1999.............................. %
2001.............................. %
2002.............................. %
2003.............................. %
2004.............................. %
2005.............................. %
2006.............................. %
2008.............................. %
2009.............................. %
2010.............................. %
2011.............................. %
2012.............................. %
Delinquency Status as of [November] 1, 1996
% by Cut-off Number
Date Principal of
Status
Balance Mortgage Loans
No Delinquencies.................... %
S-13
<PAGE>
<TABLE>
<CAPTION>
Prepayment Lockout/Premium Analysis <F1>
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prepayment Restrictions
Lockout.....
Greater of Yield
Maintenance or
Percentage Premium of:
5.00% or greater
4.00% to 4.99%
3.00% to 3.99%
2.00% to 2.99%
1.00% to 1.99%
0.00% to 0.99%
Total of Yield Maintenance
Total of Yield Maintenance
and Lockout
Percentage Premium:
5.00% or greater
4.00 to 4.99%
3.00 to 3.99%
2.00 to 2.99%
1.00 to 1.99%
Total with Percentage
Premium..
Open........
Total.......
% of Initial Pool
Balance <F2>
- ------------------
<FN>
<F1> This table sets forth an analysis of the percentage of the declining
balance of the Mortgage Pool that, on December 1, in each of the years
indicated, will be within a Lockout Period or in which Principal
Prepayments must be accompanied by the indicated Prepayment Premium or
yield maintenance charge. See "DESCRIPTION OF THE MORTGAGE POOL--Certain
Terms and Conditions of the Mortgage Loans--Prepayment Provisions" for the
assumptions used in preparing this table.
<F2> Represents the approximate percentage of the Initial Pool Balance that
will remain outstanding at the indicated date based upon the assumptions
used in preparing this table.
</FN>
</TABLE>
S-14
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Capitalized terms used herein and not otherwise defined herein have
the meanings assigned in the Prospectus. See "INDEX OF SIGNIFICANT DEFINITIONS"
herein and in the Prospectus.
Title of Certificates. Midland Realty Acceptance Corp.
Commercial Mortgage Pass- Through
Certificates, Series 1996-C2 (the
"Certificates").
The Certificates...... $
initial aggregate principal
balance ("Certificate Balance") of
Class A-1 Certificates;
................. $ initial
---------------
Certificate Balance of Class A-2
Certificates;
................. $ initial
---------------
Certificate Balance of Class A-3
Certificates;
................. Class A-EC Certificates;
................. $ initial
Certificate Balance of Class B
Certificates;
................. $ initial
Certificate Balance of Class C
Certificates;
................. $ initial
Certificate Balance of Class D
Certificates;
................. $ initial
Certificate Balance of Class E
Certificates;
................. $ initial
Certificate Balance of Class F
Certificates;
................. $ initial
Certificate Balance of Class G
Certificates;
................. $ initial
Certificate Balance of Class H
Certificates;
................. $ initial
Certificate Balance of Class J
Certificates;
................. $ initial
---------------
Certificate Balance of Class K-1
Certificates;
................. Class K-2 Certificates;
................. Class R-I Certificates;
................. Class R-II Certificates; and
................. Class R-III Certificates.
................. The aggregate initial Certificate
Balance of all Classes of
Certificates is subject to a
permitted variance of plus or
minus 5% as described herein. The
Certificates will be issued
pursuant to a Pooling and
Servicing Agreement to be dated as
of
S-15
<PAGE>
................. December 1, 1996 (the "Pooling and
Servicing Agreement") among the
Depositor, the Master Servicer,
the Special Servicer, the
Trustee and the Fiscal Agent.
................. Only the Class A-1, Class A-2,
Class A-3, Class B, Class C, Class
D, Class E and Class F
Certificates are offered hereby.
................. The Class A-EC, Class G, Class H,
Class J, Class K-1, Class K- 2,
Class R-I, Class R-II and Class
R-III Certificates (collectively,
the "Private Certificates") have
not been registered under the
1933 Act and are not offered
hereby. Accordingly, to the
extent this Prospectus Supplement
contains information regarding the
terms of the Private Certificates,
such information is provided
solely because of its relevance to
a prospective purchaser of an
Offered Certificate.
Depositor............. Midland Realty Acceptance Corp., a
Missouri corporation and a wholly
owned subsidiary of Midland Loan
Services, L.P. (the Master
Servicer and the Special
Servicer). See "THE DEPOSITOR" in
the Prospectus.
Master Servicer....... Midland Loan Services, L.P., a
Missouri limited partnership.
See "MIDLAND LOAN SERVICES, L.P."
herein.
Special Servicer...... Midland Loan Services, L.P., a
Missouri limited partnership.
See "MIDLAND LOAN SERVICES, L.P."
herein.
Trustee............... LaSalle National Bank, a
nationally chartered bank. See
"THE POOLING AND SERVICING
AGREEMENT--The Trustee" herein.
Fiscal Agent.......... ABN AMRO Bank N.V., a Netherlands
banking corporation, and the
corporate parent of the Trustee.
See "THE POOLING AND SERVICING
AGREEMENT--The Fiscal Agent" herein.
Cut-off Date.......... December 1, 1996, [except with
respect to Mortgage Loans
for which the Cut-off Date is
December , 1996.]
Closing Date.......... On or about December , 1996.
Distribution Date..... The 25th day of each month, or if
such 25th day is not a Business
Day, the Business Day immediately
following such day, commencing on
January 25, 1997. As used herein,
a "Business Day" is any day other
than a Saturday, Sunday or a day
in which banking institutions in
the States of New York, Missouri
or Illinois are authorized or
obligated by law, executive order
or governmental decree to close.
S-16
<PAGE>
Record Date........... With respect to each Distribution
Date, the close of business on the last Business Day of
the month preceding the month in which such Distribution
Date occurs.
Interest Accrual Period.With respect to any Distribution Date,
the calendar month preceding the month in which such
Distribution Date occurs. Interest for each Interest
Accrual Period is calculated based on a 360-day year
consisting of twelve 30-day months.
Collection Period..... With respect to each Distribution
Date and any Mortgage Loan, the
period beginning on the day
following the Determination Date
in the month preceding the month
in which such Distribution Date
occurs (or, in the case of the
Distribution Date occurring in
January, 1997 on the day after the
Cut-off Date) and ending on the
Determination Date in the month in
which such Distribution Date
occurs.
Determination Date.... The 17th day of any month, or if
such 17th day is not a Business
Day, the Business Day immediately
preceding such 17th day,
commencing on January 17, 1997.
Due Date.............. With respect to any Collection
Period and Mortgage Loan, the date
on which scheduled payments are
due on such Mortgage Loan (without
regard to grace periods), which
date, for the Mortgage Loans, is
the first day of the month;
[provided, however, that (a)
of the Mortgage Loans provide for
Monthly Payments to be due on the
day of each month and (b) Loan # (the "Quarterly
Payment Loan") provides for payments to be due on a
quarterly basis on the first day of each January, April,
July and October during the term of such Mortgage Loan].
Denominations......... The Class A-1, Class A-2, Class
A-3, Class B, Class C, Class D,
Class E and Class F Certificates
will be issued in minimum
denominations of Certificate
Balance or Notional Balance, as
applicable, of $100,000 and
integral multiples of $1,000 in
excess thereof and will be
registered in the name of a
nominee of The Depository Trust
Company ("DTC" and, together with
any successor depository selected
by the Depositor, the
"Depository") and beneficial
interests therein will be held
by investors through the
book-entry facilities of the
Depository. The Depositor has
been informed by DTC that its
nominee will be Cede & Co.
Beneficial Owners will hold and
transfer their respective
ownership interests in and to
such Book-Entry Certificates
through the book-entry facilities
of DTC and will not be entitled to
definitive, fully registered
Certificates except in the
limited circumstances set forth
herein. See "DESCRIPTION OF THE
CERTIFICATES--Delivery, Form and
Denomination" herein.
S-17
<PAGE>
Distributions......... On each Distribution Date, each
Class of Certificates (other than
the Class K-1 Certificates) will
be entitled to receive
interest distributions in an
amount equal to the Class Interest
Distribution Amount for such Class
and Distribution Date, together
with any unpaid Class Interest
Shortfalls remaining from prior
Distribution Dates, in each case
to the extent of Available Funds,
if any, remaining after (i)
payment of the Class Interest
Distribution Amount and any unpaid
Class Interest Shortfalls
remaining from prior Distribution
Dates for each other outstanding
Class of Certificates, if any,
having an earlier sequential Class
designation, (ii) payment of the
Pooled Principal Distribution
Amount for such Distribution Date
to each outstanding Class of
Certificates having an earlier
sequential Class designation and
(iii) payment of the unreimbursed
amount of Realized Losses, if any,
up to an amount equal to the
aggregate of such unreimbursed
amount previously allocated to
each other outstanding Class of
Certificates having an earlier
sequential Class designation.
References herein to the
sequential Class designation of
such Classes of Certificates means
such Classes in alphabetical
order; provided, however, that the
Class A-1, Class A-2, Class A-3
and Class A-EC Certificates will
be treated pari passu (other than
with respect to distributions of
principal) and the Class K-1 and
Class K-2 Certificates will be
treated pari passu.
................. The "Class Interest Distribution
Amount" with respect to any
Distribution Date and any Class of
Regular Certificates other than
the Class K-1 and Class K-2
Certificates is equal to interest
accrued during the related
Interest Accrual Period at the
applicable Pass-Through Rate for
such Class and such Interest
Accrual Period on the Certificate
Balance of such Class; provided
that reductions of the Certificate
Balance or Notional Balance of
such Class as a result of
distributions in respect of
principal or the allocation of
losses on the Distribution Date
occurring in such Interest Accrual
Period will be deemed to have
been made as of the first day of
such Interest Accrual Period.
With respect to any Distribution
Date and the Class K-2
Certificates, the "Class Interest
Distribution Amount" will equal an
amount equal to the product of the
Class K-2 Pass-Through Rate and
the Class K-2 Notional Balance;
provided that reductions of the
Notional Balance of such Class as
a result of distributions in
respect of principal or the
allocation of losses on the
Distribution Date occurring in
such Interest Accrual Period will
be deemed to have been made as
of the first day of such Interest
Accrual Period. The Class
Interest Distribution Amount of
each Class will be reduced by its
allocable sum of the amount of any
Prepayment Interest Shortfalls not
offset by Prepayment Interest
Surplus, the Servicing Fee and,
if the Master Servicer and the
Special Servicer are the same
person, the Special Servicing
Fee with
S-18
<PAGE>
................. respect to such Distribution Date,
all as provided herein. The Class K-1 Certificates are
principal only certificates and have no Class Interest
Distribution Amount.
................. The Pooled Principal Distribution
Amount for each Distribution Date
will be distributed, first, to the
Class A-1 Certificates, until the
Certificate Balance thereof has
been reduced to zero and
thereafter, sequentially to each
other Class of Regular
Certificates (other than the Class
A-EC and Class K-2 Certificates,
neither of which has a Certificate
Balance and neither of which is
entitled to distributions in
respect of principal) until its
Certificate Balance is reduced to
zero, in each case, to the extent
of Available Funds remaining after
(i) payment of the Class
Interest Distribution Amount, any
unpaid Class Interest Shortfalls
remaining from prior Distribution
Dates, the Pooled Principal
Distribution Amount and the
unreimbursed amount of Realized
Losses, if any, up to an amount
equal to the aggregate of such
unreimbursed amount previously
allocated to each other
outstanding Class of Certificates
having an earlier sequential Class
designation and (ii) payment of
the Class Interest Distribution
Amount and any unpaid Class
Interest Shortfalls remaining from
prior Distribution Dates to such
Class (or, with respect to the
Class K-1 Certificates, to the
Class K-2 Certificates) and to any
other outstanding Class that is
pari passu with such Class.
................. The "Pooled Principal Distribution
Amount" for any Distribution Date
is equal to the sum (without
duplication), for all Mortgage
Loans, of (i) the principal
component of all scheduled Monthly
Payments (other than Balloon
Payments) that become due
(regardless of whether received)
on the Mortgage Loans during the
related Collection Period; (ii)
the principal component of all
Assumed Scheduled Payments as
applicable, deemed to become due
(regardless of whether received)
during the related Collection
Period with respect to any
Mortgage Loan that is delinquent
in respect of its Balloon Payment;
(iii) the Scheduled Principal
Balance of each Mortgage Loan that
was repurchased from the Trust
Fund in connection with the breach
of a representation or warranty or
purchased from the Trust Fund
pursuant to the Pooling and
Servicing Agreement, in either
case, during the related
Collection Period; (iv) the
portion of Unscheduled Payments
allocable to principal of any
Mortgage Loan that was liquidated
during the related Collection
Period; (v) the principal
component of all Balloon Payments
received during the related
Collection Period; (vi) all other
Principal Prepayments received in
the related Collection Period; and
(vii) any other full or partial
recoveries in respect of
principal, including Insurance
Proceeds, Condemnation Proceeds,
Liquidation Proceeds and Net REO
Proceeds.
S-19
<PAGE>
................. Additional Master Servicer or
Special Servicer compensation,
interest on Advances,
extraordinary expenses of the
Trust Fund and other similar items
will create a shortfall in
Available Funds, which generally
will result in a Class Interest
Shortfall for the most subordinate
Class then outstanding.
................. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein.
Advances.............. Subject to the limitations
described herein, the Master
Servicer is required to make
advances (each such amount, a "P&I
Advance") in respect of delinquent
Monthly Payments on the Mortgage
Loans. The Master Servicer will
not be required to advance the
full amount of any Balloon Payment
not made by the related borrower
on its due date, but will advance
an amount equal to the monthly
payment (or portion thereof not
received) deemed to be due on
the Mortgage Loan after such
default, calculated on the
original amortization schedule of
such Mortgage Loan with interest
as described herein. Upon
determination of the Anticipated
Loss with respect to any Seriously
Delinquent Loan, the amount of any
P&I Advance required to be made
with respect to such Seriously
Delinquent Loan on any
Distribution Date will be an
amount equal to the product of (A)
the amount of the P&I Advance that
would be required to be made in
respect of such Seriously
Delinquent Loan without regard to
the application of this sentence,
multiplied by (B) a fraction, the
numerator of which is equal to the
Scheduled Principal Balance of
such Seriously Delinquent Loan as
of the immediately preceding
Determination Date less the
Anticipated Loss and the
denominator of which is such
Scheduled Principal Balance. See
"THE POOLING AND SERVICING
AGREEMENT--Advances" herein. If
the Master Servicer fails to make
a required P&I Advance, the
Trustee, acting in accordance with
the servicing standard, will be
required to make such P&I Advance,
and if the Trustee fails to make a
required P&I Advance, the Fiscal
Agent will be required to make
such P&I Advance. See "THE
POOLING AND SERVICING
AGREEMENT--The Fiscal Agent" herein.
Subordination ........ As a means of providing a certain
amount of protection to the
holders of the Senior Certificates
against losses associated with
delinquent and defaulted Mortgage
Loans, the rights of the holders
of the Subordinate Certificates to
receive distributions of interest
and principal, as applicable, will
be subordinated to such rights of
the holders of the Senior
Certificates. Each other Class of
Regular Certificates will likewise
be protected by the subordination
offered by the other Classes of
Certificates that bear a later
sequential Class designation. This
subordination will be effected in
two ways: (i) by the preferential
right of the
S-20
<PAGE>
................. holders of a Class of Certificates
to receive, on any Distribution
Date, the amounts of both interest
and principal, as applicable,
distributable in respect of such
Certificates on such Distribution
Date prior to any distribution
being made on such Distribution
Date in respect of any Classes of
Certificates subordinate thereto,
and (ii) by the allocation of
Realized Losses to the
Certificates in reverse order of
their sequential Class
designations, provided that
Realized Losses are allocated pro
rata to the Class A-1, Class A- 2
and Class A-3 Certificates in
accordance with their respective
Certificate Balances. In
addition, each Class of Regular
Certificates will have the benefit
of subordination of the Residual
Certificates to the extent of any
distributions to which the
Residual Certificates would
otherwise be entitled. See
"DESCRIPTION OF THE
CERTIFICATES--Subordination"
herein. No other form of credit
enhancement is offered for the
benefit of the holders of the
Offered Certificates.
Early Termination..... Any holder of the Class R-I
Certificates representing more
than a 50% Percentage Interest of
the Class R-I Certificates, the
Master Servicer and the Depositor
will each have the option to
purchase, at the purchase price
specified herein, all of the
Mortgage Loans, and all property
acquired through exercise of
remedies in respect of any
Mortgage Loans, remaining in the
Trust Fund, and thereby effect a
termination of the Trust Fund and
early retirement of the then
outstanding Certificates, on any
Distribution Date on which the
aggregate Scheduled Principal
Balance of the Mortgage Loans
remaining in the Trust Fund is
less than 10% of the Initial Pool
Balance. See "DESCRIPTION OF THE
CERTIFICATES--Early Termination"
herein.
Auction Call Date..... If the Trust Fund has not been
terminated earlier as described
under "DESCRIPTION OF THE
CERTIFICATES--Early Termination"
herein, the Trustee will on the
Distribution Date occurring in
[September] of each year from and
including 2007 and on any date
after the Distribution Date
occurring in [September] 2007 on
which the Trustee receives an
unsolicited bona fide offer to
purchase all (but not less than
all) of the Mortgage Loans (each,
an "Auction Valuation Date"),
request that four independent
financial advisory or investment
banking or investment brokerage
firms nationally recognized in the
field of real estate analysis and
reasonably acceptable to the
Master Servicer provide the
Trustee with an estimated value at
which the Mortgage Loans and all
other property acquired in respect
of any Mortgage Loan in the Trust
Fund could be sold pursuant to an
auction. If the aggregate value
of the Mortgage Loans and all
other property acquired in respect
of any Mortgage Loan, as
determined by the average of the
three highest such estimates,
equals or exceeds the aggregate
amount of the Certificate Balances
of all Certificates outstanding on
the Auction Valuation
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<PAGE>
................. Date, plus unpaid interest
thereon, the anticipated Auction
Fees, unpaid servicing
compensation, unreimbursed
Advances (together with interest
thereon at the Advance Rate) and
unpaid Trust Fund expenses, the
Trustee will auction the Mortgage
Loans and such property and
thereby effect a termination of
the Trust Fund and early
retirement of the then outstanding
Certificates on or after the
Distribution Date in [December]
2007. The Trustee will accept no
bid lower than the Minimum Auction
Price. See "DESCRIPTION OF THE
CERTIFICATES--Auction" herein.
Certain Federal Income
Tax Consequences.... Elections will be made to treat
the Trust REMICs, and the Trust
REMICs will qualify, as three
separate real estate mortgage
investment conduits (each, a
"REMIC" or, alternatively, "REMIC
I", "REMIC II" and "REMIC III")
for federal income tax purposes.
The Class A-1, Class A-2, Class
A-3, Class A-EC, Class B, Class C,
Class D, Class E, Class F, Class
G, Class H, Class J, Class K-1 and
Class K-2 Certificates
(collectively, the "Regular
Certificates") will represent
"regular interests" in REMIC III
and the Class R-III Certificates
will be designated as the sole
Class of "residual interest" in
REMIC III. Certain uncertificated
classes of interests will
represent "regular interests" in
REMIC I and REMIC II and the
Class R-I and Class R-II
Certificates will be designated as
the sole Class of "residual
interest" in REMIC I and REMIC
II, respectively.
................. Because they represent regular
interests, the Regular
Certificates generally will be
treated as newly originated debt
instruments for federal income tax
purposes. Holders of the Regular
Certificates will be required to
include in income all interest on
such Certificates in accordance
with the accrual method of
accounting, regardless of a
Certificateholder's usual method
of accounting. None of the
Offered Certificates are expected
to be treated for federal income
tax reporting purposes as having
been issued with original
issue discount. For the
purposes of determining the rate
of accrual of market discount,
original issue discount and
premium for federal income tax
purposes, it has been assumed
that the Mortgage Loans will
prepay at the rate of % CPR
---
and that the Trust Fund will be
terminated on the Distribution
Date occurring in [December] 2007
pursuant to the auction
termination procedure described
herein. No representation is
made as to whether the Mortgage
Loans will prepay at that rate or
any other rate or whether the
Trust Fund will be terminated on
such date. See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES--Taxation
of Regular Interests--Interest and
Acquisition Discount" in the
Prospectus.
................. Certain Classes of the Offered
Certificates may be treated for federal income tax
purposes as having been issued at a premium.
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<PAGE>
................. 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. Holders of such
Classes of Certificates should
consult their own tax advisors
regarding the possibility of
making an election to amortize any
such premium. See "MATERIAL
FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Regular
Interests" in the Prospectus.
................. Offered Certificates held by a
mutual savings bank or domestic
building and loan association will
represent interests in
"qualifying real property loans"
within the meaning of Section
593(d) of the Code. Offered
Certificates held by a real estate
investment trust will constitute
"real estate assets" within the
meaning of Section 856(c)(6)(B) of
the Code, and income with respect
to Offered Certificates will be
considered "interest on
obligations secured by mortgages
on real property or on interests
in property" within the meaning of
Section 856(c)(3)(B) of the Code.
Offered Certificates held by a
domestic building and loan
association will generally
constitute "a regular or a
residual interest in a REMIC" with
the meaning of Section
7701(a)(19)(C)(xi) of the Code
only in the proportion that the
Mortgage Loans are secured by
multifamily apartment buildings.
See "MATERIAL FEDERAL INCOME TAX
CONSE- QUENCES--Taxation of the
REMIC and its Holders" in the
Prospectus.
................. For further information regarding
the federal income tax
consequences of investing in
the Offered Certificates, see
"MATERIAL FEDERAL INCOME TAX
CONSE- QUENCES--Taxation of the
REMIC" in the Prospectus and
"MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" herein.
ERISA Considerations.. The United States Department of
Labor has issued to Prudential
Securities Incorporated an
individual prohibited transaction
exemption, Prohibited Transaction
Exemption 90-32, which generally
exempts from the application of
certain of the prohibited
transaction provisions of Section
406 of the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), and the excise
taxes imposed by Sections 4975(a)
and (b) of the Code and the civil
penalties imposed by 502(i) of
ERISA, transactions relating to
the purchase, sale and holding of
pass- through certificates such as
the Senior Certificates by (a)
employee benefit plans and
certain other retirement
arrangements, including individual
retirement accounts and Keogh
plans, which are subject to ERISA,
the Code or a governmental plan
subject to any Similar Law (all of
which are hereinafter referred to
as "Plans"), (b) collective
investment
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<PAGE>
................. funds in which such Plans are
invested, (c) other persons
acting on behalf of any such Plan
or using the assets of any such
Plan or any entity whose
underlying assets include Plan
assets by reason of a Plan's
investment in the entity
(within the meaning of Department
of Labor Regulations Section
2510.3-101) and (d) insurance
companies that are using assets of
any insurance company separate
account or general account in
which the assets of such Plans
are invested (or which are deemed
pursuant to ERISA or any Similar
Law to include assets of such
Plans) and the servicing and
operation of mortgage pools such
as the Mortgage Pool, provided
that certain conditions are
satisfied. See "ERISA
CONSIDERATIONS" herein.
................. THE SUBORDINATE CERTIFICATES DO
NOT MEET THE REQUIREMENTS OF THE
FOREGOING EXEMPTION AND,
ACCORDINGLY, THE SUBORDINATE
CERTIFICATES MAY NOT BE PURCHASED
BY OR TRANSFERRED TO A PLAN OR
PERSON ACTING ON BEHALF OF ANY
PLAN OR USING THE ASSETS OF ANY
SUCH PLAN, OTHER THAN AN INSURANCE
COMPANY USING ASSETS OF ITS
GENERAL ACCOUNT UNDER
CIRCUMSTANCES IN WHICH SUCH
PURCHASE OR TRANSFER AND
SUBSEQUENT HOLDING OF SUCH
CERTIFICATES WOULD NOT CONSTITUTE
OR RESULT IN A PROHIBITED
TRANSACTION. THE RESIDUAL
CERTIFICATES MAY NOT BE PURCHASED
BY OR TRANSFERRED TO A PLAN.
Ratings............... It is a condition to the issuance
of the Certificates that: the
Class A-1, Class A-2, Class A-3
and Class A-EC Certificates each
be rated "AAA" by Fitch and
"____________" by Moody's; the
Class B Certificates be rated "AA"
by Fitch and "__________" by
Moody's; the Class C Certificates
be rated "A" by Fitch and
"___________" by Moody's; the
Class D Certificates be rated
"BBB+" by Fitch and "_______" by
Moody's; the Class E Certificates
be rated "BBB" by Fitch and
"_______" by Moody's; the Class F
Certificates be rated "BBB-" by
Fitch and "_______" by Moody's;
the Class G Certificates be rated
"BB" by Fitch and "_______" by
Moody's; the Class H Certificates
be rated "BB-" by Fitch and
"_______" by Moody's; and the
Class J Certificates be rated "B"
by Fitch and "_______" by Moody's.
The Class K-1, Class K-2, Class
R-I, Class R-II and Class R-III Certificates are
unrated. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning
rating organization. A security rating does not address
the likelihood or frequency of prepayments (both
voluntary and involuntary) or the possibility that
Certificateholders might suffer a lower than anticipated
yield, nor does a security rating address
S-24
<PAGE>
................. the likelihood of receipt of
Prepayment Premiums or the
likelihood of collection by the
Master Servicer of Default
Interest. The Class A-EC
Certificate Notional Balance upon
which interest is calculated is
reduced by the allocation of
Realized Losses and prepayments,
whether voluntary or involuntary.
The Rating does not address the
timing or magnitude of reduction
of such Notional Balance, but only
the obligation to pay interest
timely on the Notional Balance as
so reduced from time to time.
Accordingly, the ratings of the
Class A-EC Certificates should be
evaluated independently from
similar ratings on other types of
securities. See "RISK FACTORS"
and "RATINGS" herein.
Legal Investment...... The Certificates will not
constitute "mortgage related
securities" within the meaning of
the Secondary Mortgage Market
Enhancement Act of 1984. The
appropriate characterization of
the Certificates under various
legal investment restrictions, and
thus the ability of investors
subject to these restrictions to
purchase the Certificates, may be
subject to significant
interpretative uncertainties.
Accordingly, investors should
consult their own legal advisors
to determine whether and to what
extent the Certificates constitute
legal investments for them. See
"LEGAL INVESTMENT" herein and in
the Prospectus.
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<PAGE>
RISK FACTORS
Prospective holders of Certificates should consider, among other things,
the factors listed below and in the Prospectus under "RISK FACTORS" in
connection with the purchase of the Certificates.
Investment in Commercial and Multifamily Mortgage Loans
Commercial and Multifamily Lending Generally. Commercial and multifamily
lending generally is viewed as exposing a lender to risks which are different
than many of the risks faced in connection with other types of lending, such as
consumer lending. Commercial and multifamily lending generally involves larger
loans, thereby providing lenders with less diversification of risk and the
potential for greater losses resulting from the delinquency and/or default of
individual loans. Many of the Mortgage Loans are non-recourse obligations of the
related borrowers, the repayment of which is often solely dependent upon the
successful operation of the related Mortgaged Properties. Commercial and
multifamily property values and net operating income are subject to volatility.
Many of the Mortgage Loans are also balloon loans, which may pose additional
risks associated with both the value of the related Mortgaged Property and the
borrower's ability to obtain financing as of the maturity of the related
Mortgage Loan. A borrower's ability to repay its loan may be impaired if future
operating results are not comparable to historical operating results. This may
occur for a variety of reasons, including an increase in vacancy rates, a
decline in rental rates, an increase in operating expenses and/or an increase in
necessary capital expenditures. The income from and market value of a Mortgaged
Property may also be adversely affected by such factors as changes in the
general economic climate, the existence of an oversupply of comparable space or
a reduction in demand for real estate in the area, the attractiveness of the
property to tenants and guests and perceptions regarding such property's safety,
convenience and services. Real estate values and income are also affected by
such factors as government regulations and changes in real estate, zoning or tax
laws, the willingness and ability of a property owner to provide capable
management, changes in interest rate levels, the availability of financing and
potential liability under environmental and other laws.
a. Aging and Deterioration of Commercial and Multifamily Properties.
The age, construction quality and design of a particular Mortgaged Property may
affect the occupancy level as well as the rents that may be charged for
individual leases or, in the case of the Nursing Home Properties and the Hotel
Properties, the amounts that customers may be charged for the occupancy thereof.
The effects of poor construction quality are likely to require the borrower to
spend increasing amounts of money over time for maintenance and capital
improvements. Even Mortgaged Properties that were well constructed and have been
well maintained will require ongoing capital improvements in order for such
Mortgaged Properties to remain competitive in the market and retain tenants and
other occupants.
b. Leases. Repayment of the Mortgage Loans may be affected by the
expiration or termination of occupancy leases and the ability of the related
borrowers to renew such leases with the existing occupants or to relet the space
on economically favorable terms to new occupants, or the existence of a market
which requires a reduced rental rate, substantial tenant improvements or
expenditures or other concessions to a tenant in connection with a lease
renewal. No assurance can be given that leases that expire can be renewed, that
the space covered by leases that expire or are terminated can be leased in a
timely manner at comparable rents or on comparable terms or that the borrower
will have the cash or be able to obtain the financing to fund any required
tenant improvements. Income from and the market value of the Mortgaged
Properties would be adversely affected if vacant space in the Mortgaged
Properties could not be leased for a significant period of time, if tenants were
unable to meet their lease obligations or if, for any other reason, rental
payments could not be collected. Upon the occurrence of an event of default by a
tenant, delays and costs in enforcing the lessor's rights could occur. If a
significant portion of a Mortgaged Property is leased to a single tenant, the
consequences of the failure of the borrower to relet such portion of such
Mortgaged Property in the event that such tenant vacates the space leased to it
(either as a result of the expiration of the
S-26
<PAGE>
term of the lease or a default by the tenant) or a failure of such tenant to
perform its obligations under the related lease, will be more pronounced than if
such Mortgaged Property were leased to a greater number of tenants. See
"--Tenant Matters" herein. Certain tenants at the Mortgaged Properties may be
entitled to terminate their leases or reduce their rents based upon negotiated
lease provisions, e.g. if an anchor tenant ceases operations at the related
Mortgaged Property. In such cases, there can be no assurance that the operation
of such provisions will not allow such a termination or rent reduction. A
tenant's lease may also be terminated or otherwise affected if such tenant
become the subject of a bankruptcy proceeding.
c. Competition. Other multifamily and commercial properties located in
the areas of the Mortgaged Properties compete with the Mortgaged Properties of
similar types to attract customers, tenants and other occupants. Such properties
generally compete on the basis of rental rates, location, condition and features
of the property. If any oversupply of available space exists in a particular
market (either as a result of the building of new construction or a decrease in
the number of customers, tenants or other occupants due to a decline in economic
activity in the area), the rental rates for the Mortgaged Properties may be
adversely affected. Commercial or multifamily properties may also face
competition from other types of property as such properties are converted to
competitive uses in the future. Such conversions may occur based upon future
trends in the use of property by tenants and occupants, e.g. the establishment
of more home based offices and businesses and the conversion of warehouse space
for multifamily use. Increased competition could adversely affect income from
and the market value of the Mortgaged Properties.
d. Quality of Management. The successful operation of the Mortgaged
Properties is also dependent on the performance of the respective property
managers of the Mortgaged Properties. Such property managers are responsible for
responding to changes in the local market, planning and implementing the rental
rate structure, including establishing levels of rent payments, and advising the
related borrower so that maintenance and capital improvements can be carried out
in a timely fashion.
[Risks Particular to Nursing Home Facilities. The operation of a nursing
home facility is dependent upon the operator of such facility satisfying all
applicable legal requirements, such as possessing any required licenses to
operate such facility and/or dispense pharmaceuticals and, in some instances
obtaining the approval of applicable regulatory agencies. The failure of a
borrower under a Nursing Home Loan to maintain or renew any required license or
to obtain any required regulatory approval could prevent it from continuing
operations at the related Nursing Home Property or, if applicable, bar it from
participation in government reimbursement programs. In addition, because there
are a limited number of qualified operators of nursing home facilities, there
may be additional difficulties and costs associated with the operation and sale
or transfer thereof following foreclosure.
Nursing home facilities may receive a substantial portion of their revenues
from government reimbursement programs, primarily Medicaid and Medicare.
Medicaid and Medicare are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings, policy interpretations,
delays by fiscal intermediaries and government funding restrictions. Moreover,
governmental payors have employed cost-containment measures that limit payments
to health care providers, and from time to time Congress has considered various
proposals for national health care reform that could further limit those
payments. Accordingly, there can be no assurance that payments under government
reimbursement programs will, in the future, be sufficient to reimburse fully the
cost of caring for program beneficiaries. If not, net operating income of the
Nursing Home Properties that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their Mortgage Loan
obligations, could be adversely affected.]
[Risks Particular to Mini Warehouse Facilities.
Tenant privacy, anonymity and unsupervised access may
heighten environmental risks to a lender making a loan
secured by a Mini Warehouse Property. The environmental
site assessments discussed herein did not include an
inspection of the
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<PAGE>
contents of the self-storage units included in the Mini Warehouse Properties and
there is no assurance that all of the units included in the Mini Warehouse
Properties are free from hazardous substances or other pollutants or
contaminants or will remain so in the future. See "--Environmental Risks" below.
Mini Warehouse Properties are also subject to more volatility in terms of supply
and demand than loans secured by other types of properties. Additionally,
because of the construction utilized in connection with certain mini warehouse
facilities, it might be difficult or costly to convert such a facility to an
alternative use. Thus, the liquidation value of such Mini Warehouse Properties
may be substantially less than would be the case if the same were readily
adaptable to other uses.]
[Risks Particular to Hotel Properties. The Mortgage Pool contains
__________ Mortgage Loans, representing approximately _________% of the Initial
Pool Balance, secured by Mortgages encumbering Hotel Properties. These Mortgaged
Properties are subject to operating risks common to the hotel industry. These
risks include, among other things, a high level of continuing capital
expenditures to keep necessary furniture, fixtures and equipment updated,
competition from other hotels, increases in operating costs (which increases may
not necessarily in the future be offset by increased room rates), dependence on
business and commercial travelers and tourism, increases in energy costs and
other expenses of travel and adverse effects of general and local economic
conditions. These factors could adversely affect the related borrower's ability
to make payments on the related Mortgage Loans. Since limited service hotels are
relatively quick and inexpensive to construct and may quickly reflect a positive
value, an over-building of such hotels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Additionally, the
revenues of certain hotels, particularly those located in regions whose economy
depends upon tourism, may be highly seasonal in nature.
Hotel Properties may present additional risks as compared to the other
property types in that: (i) hotels are typically operated pursuant to franchise,
management and operating agreements that may be terminable by the franchisor,
the manager or the operator; (ii) the transferability of a hotel's operating,
liquor and other licenses to the entity acquiring such hotel either through
purchase or foreclosure is subject to the vagaries of local law requirements;
(iii) the potential difficulty of terminating an ineffective operator of a Hotel
Property subsequent to a foreclosure of such Hotel Property; and (iv) future
occupancy rates may be adversely affected by, among other factors, any negative
perception of such Hotel Property based upon its historical reputation.
____ of the Hotel Properties, are respectively a _______________ franchise
and a _______________ franchise. The continuation of such franchises is subject
to specified operating standards and other terms and conditions. The franchisor
periodically inspects its licensed properties to confirm adherence to its
operating standards. The failure of the Hotel Properties to maintain such
standards or adhere to such other terms and conditions could result in the loss
or cancellation of the franchise licenses. It is possible that the franchisor
could condition the continuation of a franchise license on the completion of
capital improvements or the making of certain capital expenditures that the
related borrower determines are too expensive or are otherwise unwarranted in
light of general economic conditions or the operating results or prospects of
the affected hotels. In that event, the related borrower may elect to allow the
franchise license to lapse. In any case, if the franchise is terminated, the
related borrower may seek to obtain a suitable replacement franchise or to
operate such Hotel Property independently of a franchise license. The loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the hotel covered by the franchise because of the loss
of associated name recognition, marketing support and centralized reservation
systems provided by the franchisor.]
[Risks Particular to Congregate Care Facilities.
Loans secured by liens on properties of this type pose
additional risks not associated with loans secured by
liens on other types of income-producing real estate.
While congregate care facilities are not typically subject
to extensive licensing requirements, it
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<PAGE>
is possible that such facilities may be subject to increased governmental
regulation and supervision given the growing number of senior citizens in the
general population. Additionally, the operator of a congregate care facility may
face increased operational expenses in providing tenants with the varied array
of personal services required for such facility to compete with other similar
facilities. Some of such competing facilities may offer services not offered by
such operators or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators.]
[Risks Particular to Mobile Home Parks. Mortgage lenders whose loans are
secured by mortgages encumbering Mobile Home Park Properties may be subject to
additional risks not faced by lenders whose loans are secured by other types of
income producing properties. Since the borrower often does not own the mobile
homes located upon the related Mortgaged Property, the borrower (and the lender
subsequent to any foreclosure) may face additional costs and delays in obtaining
evictions of tenants and the removal of mobile homes upon a default or
abandonment by a tenant.]
No Guaranty. No Mortgage Loan is insured or guarantied by the United States
of America, any governmental agency or instrumentality, any private mortgage
insurer or by the Depositor, MCFC, __________, Midland, the Master Servicer, the
Special Servicer, the Trustee or the Fiscal Agent or any of their respective
affiliates. However, as more fully described under "DESCRIPTION OF THE MORTGAGE
POOL--General" and "--Representations and Warranties; Repurchase" herein, MCFC,
Midland and __________ will be obligated to repurchase a Mortgage Loan if
certain of their respective representations or warranties concerning such
Mortgage Loan are breached. There can be no assurance that MCFC, Midland or
__________ will be in a financial position to effect such repurchase. See
"MIDLAND LOAN SERVICES, L.P.," and "MORTGAGE LOAN SELLERS" herein.
Limited Recourse. The majority of the Mortgage Loans are non-recourse loans
wherein recourse generally may be had only against the specific Mortgaged
Property securing such Mortgage Loan and such limited other assets as have been
pledged to secure such Mortgage Loan, and not against the borrower's other
assets. Consequently, the payment of each non-recourse Mortgage Loan is
primarily dependent upon the sufficiency of the net operating income from the
related Mortgaged Property and, at maturity, upon the market value of such
Mortgaged Property. See "DESCRIPTION OF THE MORTGAGE POOL--General" herein.
Concentration of Mortgage Loans and Borrowers. In general, a mortgage pool
with a significant portion of its loans having larger average balances and a
smaller number of loans may be subject to losses that are more severe than other
pools having the same or similar aggregate principal balance and composed of
smaller average loan balances and a greater number of loans. In all cases, each
Investor should carefully consider all aspects of any loans representing a
significant percentage of the outstanding principal balance of a mortgage pool
in order to ensure that such loans are not subject to risks unacceptable to such
Investor. Additionally, a mortgage pool with a high concentration of Mortgage
Loans to the same borrower or related borrowers is subject to the potential risk
that a borrower undergoing financial difficulties might divert its resources or
undertake remedial actions (such as a bankruptcy) in order to alleviate such
difficulties, to the detriment of the Mortgaged Properties. See "DESCRIPTION OF
THE MORTGAGE POOL--Certain Characteristics of the Mortgage Pool--Concentration
of Mortgage Loans and Borrowers" herein.
Tax Considerations Related to Foreclosure. [REMIC III] might become subject
to federal (and possibly state or local) tax, at the highest marginal corporate
rate (currently 35%), on certain of its net income from the operation and
management of a Mortgaged Property subsequent to the Trust Fund's acquisition of
a Mortgaged Property pursuant to a foreclosure or deed-in-lieu of foreclosure,
thereby reducing net proceeds available for distribution to Certificateholders.
Such taxable net income does not include qualifying "rents from real property,"
or any rental income based on the net profits of a tenant or sub-tenant or
allocable to a service that is customary in the area and for the type of
property involved. See "MATERIAL FEDERAL
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<PAGE>
INCOME TAX CONSEQUENCES--Taxation of Regular Interests," "--Taxation of the
REMIC" and "--Taxation of Holders of Residual Certificates" in the Prospectus.
Future Changes in the Composition of the Mortgage Pool. As principal
payments or if prepayments are made on the Mortgage Loans at different rates
based upon the varied amortization schedules and maturities of the Mortgage
Loans, the Mortgage Pool may be subject to more concentrated risk with respect
to the reduction in both the diversity of types of Mortgaged Properties and the
number of borrowers. Because principal on the Certificates is payable in
sequential order, and no Class receives principal until the Certificate Balance
of the preceding sequential Class or Classes has been reduced to zero, Classes
that have a later sequential designation are more likely to be exposed to such
risk of concentration than Classes with an earlier sequential priority.
Geographic Concentration. Repayments by borrowers and the market values of
the Mortgaged Properties could be affected by economic conditions generally or
in the regions where the borrowers and the Mortgaged Properties are located,
conditions in the real estate markets where the Mortgaged Properties are
located, changes in governmental rules and fiscal policies, natural disasters
(which may result in uninsured losses) and other factors that are beyond the
control of the borrowers. The economy of any state or region in which a
Mortgaged Property is located may be adversely affected to a greater degree than
that of other areas of the country by certain developments affecting industries
concentrated in such state or region.
Moreover, in recent periods, several regions of the United States have
experienced significant downturns in the market value of real estate. To the
extent that general economic or other relevant conditions in states or regions
in which Mortgaged Properties securing significant portions of the aggregate
principal balance of the Mortgage Loans are located decline and result in a
decrease in commercial property, housing or consumer demand in the region, the
income from and market value of the Mortgaged Properties may be adversely
affected. See "DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the
Mortgage Pool--Geographic Concentration" herein.
Environmental Risks. If an adverse environmental condition exists with
respect to a Mortgaged Property, the Trust Fund may be subject to the following
risks: (i) a diminution in the value of a Mortgaged Property or the inability to
foreclose against such Mortgaged Property; (ii) the inability to lease such
Mortgaged Property to potential tenants; (iii) the potential that the related
borrower may default on a Mortgage Loan due to such borrower's inability to pay
high remediation costs or difficulty in bringing its operations into compliance
with environmental laws; or (iv) in certain circumstances as more fully
described below, liability for clean-up costs or other remedial actions, which
liability could exceed the value of such Mortgaged Property. Additionally, the
environmental condition of a Mortgaged Property may be affected by the
operations of tenants and occupants thereof, and current and future
environmental laws, ordinances or regulations, may impose additional compliance
obligations on business operations that can be met only by significant capital
expenditures.
Under certain federal and state laws, the reimbursement of remedial costs
incurred by state and federal regulatory agencies to correct environmental
conditions are secured by a statutory lien over the subject property, which
lien, in some instances, may be prior to the lien of an existing mortgage. Any
such lien arising with respect to a Mortgaged Property would adversely affect
the value of such Mortgaged Property and could make impracticable the
foreclosure by the Special Servicer on such Mortgaged Property in the event of a
default by the related borrower.
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real property, as well as certain other
categories of parties, may be liable for the costs of removal or remediation of
hazardous or toxic substances on, under, adjacent to or in such property. The
cost of any required remediation and the owner's liability therefor as to any
property is generally not limited under applicable federal, state or local laws,
and could exceed the value of the property and/or the aggregate assets
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of the owner. Under some environmental laws, a secured lender (such as the Trust
Fund) may be deemed an "owner" or "operator" of the related Mortgaged Property
if the lender is deemed to have participated in the management of the borrower,
regardless of whether the borrower actually caused the environmental damage. In
such cases, a secured lender may be liable for the costs of any required removal
or remediation of hazardous substances. One court has held that a lender will be
deemed to have participated in the management of the borrower if the lender
participated in the financial management of the borrower to a degree indicating
the capacity to influence the borrower's treatment of hazardous waste. The Trust
Fund's potential exposure to liability for cleanup costs will increase if the
Trust Fund actually takes possession of a Mortgaged Property or control of its
day-to-day operations; such potential exposure to environmental liability may
also increase if a court grants a petition to appoint a receiver to operate the
Mortgaged Property in order to protect the Trust Fund's collateral. See "CERTAIN
LEGAL ASPECTS OF THE MORTGAGE LOANS--Environmental Risks" in the Prospectus, and
"DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage
Pool--Environmental Risks" herein.
The Pooling and Servicing Agreement requires that the Special Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto on behalf of the Trust Fund or assuming its operation.
Such requirement may effectively preclude enforcement of the security for the
related Note until a satisfactory environmental site assessment is obtained (or
until any required remedial action is thereafter taken), but will decrease the
likelihood that the Trust Fund will become liable under any environmental law.
However, there can be no assurance that such environmental site assessment will
reveal the existence of conditions or circumstances that would result in the
Trust Fund becoming liable under any environmental law, or that the requirements
of the Pooling and Servicing Agreement will effectively insulate the Trust Fund
from potential liability under environmental laws. See "THE POOLING AND
SERVICING AGREEMENT--Realization Upon Mortgage Loans--Standards for Conduct
Generally in Effecting Foreclosure or the Sale of Defaulted Loans" herein and
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Environmental Risks" in the
Prospectus.
Other Financing. In general, the borrowers are prohibited from encumbering
the related Mortgaged Property with additional secured debt or the mortgagee's
approval is required for such an encumbrance. However, a violation of such
prohibition may not become evident until the related Mortgage Loan otherwise
defaults. In cases in which one or more subordinate liens are imposed on a
Mortgaged Property or the borrower incurs other indebtedness, the Trust Fund is
subject to additional risks, including, without limitation, the risks that the
necessary maintenance of the Mortgaged Property could be deferred to allow the
borrower to pay the required debt service on the subordinate financing and that
the value of the Mortgaged Property may fall as a result, and that the borrower
may have a greater incentive to repay the subordinate or unsecured indebtedness
first and that it may be more difficult for the borrower to refinance the
Mortgage Loan or to sell the Mortgaged Property for purposes of making any
Balloon Payment upon the maturity of the Mortgage Loan. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Secondary Financing; Due-on- Encumbrance
Provisions" in the Prospectus, and "DESCRIPTION OF THE MORTGAGE POOL--Certain
Characteristics of the Mortgage Pool--Other Financing" herein.
Bankruptcy of Borrowers. The borrowers may be either individuals or legal
entities. Most of the borrowers which are legal entities are not
bankruptcy-remote entities. The borrowers that are not bankruptcy- remote
entities may be more likely to become insolvent or the subject of a voluntary or
involuntary bankruptcy proceeding because such borrowers may be (a) operating
entities with businesses distinct from the operation of the property with the
associated liabilities and risks of operating an ongoing business and (b)
individuals who may have personal liabilities unrelated to the property.
However, any borrower, even a bankruptcy- remote entity, as owner of real estate
will be subject to certain potential liabilities and risks as such an owner. No
assurance can be given that a borrower will not file for bankruptcy protection
or that creditors of a borrower or a corporate or individual general partner or
member will not initiate a bankruptcy or similar
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proceeding against such borrower or corporate or
individual general partner or member. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Foreclosure--Bankruptcy Laws"
in the Prospectus.
Limitations of Appraisals and Engineering Reports. In general, appraisals
represent the analysis and opinion of qualified experts and are not guaranties
of present or future value. Moreover, appraisals seek to establish the amount a
willing buyer would pay a willing seller. Such amount could be significantly
higher than the amount obtained from the sale of a Mortgaged Property under a
distress or liquidation sale. Information regarding the values of the Mortgaged
Properties as of the Cut-off Date is presented under "DESCRIPTION OF THE
MORTGAGE POOL--Certain Characteristics of the Mortgage Pool" herein for
illustrative purposes only. The architectural and engineering reports represent
the analysis of the individual engineers or site inspectors at or before the
origination of the respective Mortgage Loans, have not been updated since they
were originally conducted and may not have revealed all necessary or desirable
repairs, maintenance or capital improvement items.
Zoning Compliance. The Mortgaged Properties are typically subject to
applicable building and zoning ordinances and codes ("Zoning Laws") affecting
the construction and use of real property. Since the Zoning Laws applicable to a
Mortgaged Property (including, without limitation, density, use, parking and set
back requirements) are generally subject to change by the applicable regulatory
authority at any time, certain of the improvements upon the Mortgaged Properties
may not comply fully with all applicable current and future Zoning Laws. Such
changes may limit the ability of the related borrower to rehabilitate, renovate
and update the premises, and to rebuild or utilize the premises "as is" in the
event of a substantial casualty loss with respect thereto.
Costs of Compliance with Applicable Laws and Regulations. A borrower may be
required to incur costs to comply with various existing and future federal,
state or local laws and regulations applicable to the related Mortgaged
Property, e.g. Zoning Laws, and the Americans with Disabilities Act of 1990. See
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Americans With Disabilities Act"
in the Prospectus. The expenditure of such costs, or the imposition of
injunctive relief, penalties or fines in connection with the borrower's
noncompliance could negatively impact the borrower's cash flow, and
consequently, its ability to pay its Mortgage Loan.
Limitations on Enforceability of Cross-Collateralization. Arrangements
whereby certain of the Mortgage Loans (the "Cross-Collateralized Loans") are
cross-collateralized and cross-defaulted with one or more related
Cross-Collateralized Loans could be challenged as fraudulent conveyances by
creditors of any of the related borrowers or by the representative of the
bankruptcy estate of such borrowers if one or more of such borrowers were to
become a debtor in a bankruptcy case. Generally, under federal and most state
fraudulent conveyance statutes, the incurring of an obligation or the transfer
of property (including the granting of a mortgage lien) by a person will be
subject to avoidance under certain circumstances if the person did not receive
fair consideration or reasonably equivalent value in exchange for such
obligation or transfer and (i) was insolvent or was rendered insolvent by such
obligation or transfer, (ii) was engaged in a business or a transaction, or was
about to engage in a business or a transaction, for which properties remaining
with the person constitute an unreasonably small capital or (iii) intended to
incur, or believed that it would incur, debts that would be beyond the person's
ability to pay as such debts matured. Accordingly, a lien granted by any such
borrower could be avoided if a court were to determine that (x) such borrower
was insolvent at the time of granting the lien, was rendered insolvent by the
granting of the lien, was left with inadequate capital or was not able to pay
its debts as they matured and (y) the borrower did not, when it allowed its
Mortgaged Property to be encumbered by the liens securing the indebtedness
represented by the other Cross- Collateralized Loans, receive fair consideration
or reasonably equivalent value for pledging such Mortgaged Property for the
equal benefit of the other related borrowers. No assurance can be given that a
lien granted by a borrower on a Cross-Collateralized Loan to secure the Mortgage
Loan of an affiliated borrower, or any payment thereon, would not be avoided as
a fraudulent conveyance. See "DESCRIPTION OF THE
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MORTGAGE POOL--Certain Characteristics of the Mortgage Pool--Limitations on
Enforceability of Cross-Collateralization" herein for more information regarding
the Cross-Collateralized Loans.
Tenant Matters. Certain of the Mortgaged Properties are leased wholly or in
large part to a single tenant or are wholly or in large part owner-occupied
(each such tenant or owner-occupier, a "Major Tenant"). Any default by a Major
Tenant could adversely affect the related borrower's ability to make payments on
the related Mortgage Loan. There can be no assurance that any Major Tenant will
continue to perform its obligations under its lease (or, in the case of an
owner-occupied Mortgaged Property, under the related Mortgage Loan documents).
See "DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage
Pool--Tenant Matters" and "Annex A" herein.
Ground Leases. Mortgage Loans secured by a Mortgage encumbering a leasehold
interest are subject to certain risks not applicable to a Mortgage over a fee
interest. The most serious of such risks is the potential for the total loss of
the security for the related Mortgage Loan upon the termination or expiration of
the ground lease creating the mortgaged leasehold interest. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Foreclosure--Leasehold Risks" in the Prospectus
and "DESCRIPTION OF THE MORTGAGE POOL--Security for the Mortgage Loans--Ground
Leases; Estates for Years" herein.
Litigation. From time to time, there may be legal proceedings pending or
threatened against the borrowers and their affiliates relating to the business
of, or arising out of the ordinary course of business of, the borrowers and
their affiliates. There can be no assurance that any such litigation will not
have a material adverse effect on any borrower's ability to meet its obligations
under the related Mortgage Loan and, thus, on the distributions to
Certificateholders.
Condemnations. From time to time, there may be Condemnations pending or
threatened against one or more of the Mortgaged Properties. There can be no
assurance that the proceeds payable in connection with a total Condemnation will
be sufficient to restore the related Mortgaged Property or to satisfy the
remaining indebtedness of the related Mortgage Loan. The occurrence of a partial
Condemnation may have a material adverse effect on the continued use of the
affected Mortgaged Property, or on any borrower's ability to meet its
obligations under the related Mortgage Loan. Therefore, no assurance can be made
that the occurrence of any Condemnation will not have a negative impact upon the
distributions to Certificateholders.
Repurchase of Mortgage Loans
As more fully described under "DESCRIPTION OF THE MORTGAGE POOL--General"
and "--Representations and Warranties; Repurchase" herein, (a) MCFC and Midland
will be obligated to repurchase a Mortgage Loan if certain of their respective
representations or warranties concerning such Mortgage Loan in the MCFC Mortgage
Loan Purchase Agreement are breached, [(b) Midland will be obligated to
repurchase a Mortgage Loan if certain of its representations or warranties
concerning such Mortgage Loan in the Midland Mortgage Loan Purchase Agreement
are breached, and (c) _______________ will be obligated to repurchase a Mortgage
Loan if certain of its representations or warranties to Midland (as assigned by
Midland to the Depositor) concerning such Mortgage Loan in the - _______________
Mortgage Loan Purchase Agreement are breached]. However, there can be no
assurance that either MCFC, Midland [or _______________], as applicable, will be
in a financial position to effect such repurchase. See "MIDLAND LOAN SERVICES,
L.P." and "MORTGAGE LOAN SELLERS" herein. MCFC, Midland [and _______________]
generally will have the right to require the entity from which they respectively
acquired a Mortgage Loan to repurchase such Mortgage Loan if a representation or
warranty in the agreement pursuant to which MCFC, Midland [or _______________],
as applicable, acquired such Mortgage Loan is also breached. The ability of
Midland to perform its obligations as Master Servicer and Special Servicer under
the Pooling and Servicing Agreement may be jeopardized if it incurs significant
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liabilities for the repurchase of Midland Mortgage Loans as to which there has
been a breach of a representation or warranty.
Prepayment and Yield Considerations
Effect of Borrower Defaults and Delinquencies. The aggregate amount of
distributions on the Regular Certificates, the yield to maturity of the Regular
Certificates, the rate of principal payments on the Regular Certificates and the
weighted average life of the Regular Certificates will be affected by the rate
and the timing of delinquencies, defaults, losses or other shortfalls
experienced on the Mortgage Loans. If a purchaser of a Regular Certificate of
any Class calculates its anticipated yield based on an assumed default rate and
amount of losses on the Mortgage Loans that is lower than the default rate and
amount of losses actually experienced and such additional losses are allocable
to such Class of Certificates or, with respect to the Class A-EC or Class K-2
Certificates, such losses result in a reduction of the Class A-EC Notional
Balance or the Class K-2 Notional Balance, respectively, such purchaser's actual
yield to maturity will be lower than the anticipated yield calculated and could,
under certain extreme scenarios, be negative. The timing of any loss on a
liquidated Mortgage Loan will also affect the actual yield to maturity of the
Regular Certificates to which a portion of such loss is allocable, even if the
rate of defaults and severity of losses are consistent with an investor's
expectations. In general, the earlier a loss borne by an investor occurs, the
greater will be the effect on such investor's yield to maturity.
Most of the Mortgage Loans are Balloon Loans, which involve a greater risk
of default than self- amortizing loans because the ability of a borrower to make
a Balloon Payment typically will depend upon its ability either to refinance the
related Mortgaged Property or to sell such Mortgaged Property at a price
sufficient to permit the borrower to make the Balloon Payment. The ability of a
borrower to accomplish either of these goals will be affected by a number of
factors at the time of attempted sale or refinancing, including the level of
available mortgage rates, the fair market value of the related Mortgaged
Property, the borrower's equity in the related Mortgaged Property, the financial
condition of the borrower and the operating history of the related Mortgaged
Property, tax laws, prevailing economic conditions and the availability of
credit for multifamily or commercial properties (as the case may be) generally.
See "YIELD AND MATURITY CONSIDERATIONS--Yield Considerations--Balloon Payments"
herein.
Regardless of whether losses ultimately result, prior to the liquidation of
any defaulted Mortgage Loan, delinquencies on the Mortgage Loans may
significantly delay the receipt of payments by the holder of a Regular
Certificate to the extent that Advances or the subordination of another Class of
Certificates does not fully offset the effects of any delinquency or default.
The Available Funds generally consist of, as more fully described herein,
principal and interest on the Mortgage Loans actually collected or advanced. The
Master Servicer's, the Trustee's or the Fiscal Agent's obligation, as
applicable, to make Advances is limited to the extent described under "THE
POOLING AND SERVICING AGREEMENT--Advances" herein. In particular, upon
determination of the Anticipated Loss with respect to any Seriously Delinquent
Loan, the amount of any P&I Advance required to be made with respect to such
Seriously Delinquent Loan on any Distribution Date will be an amount equal to
the product of (A) the amount of the P&I Advance that would be required to be
made in respect of such Seriously Delinquent Loan without regard to the
application of this sentence, multiplied by (B) a fraction, the numerator of
which is equal to the Scheduled Principal Balance of such Seriously Delinquent
Loan as of the immediately preceding Determination Date less the Anticipated
Loss and the denominator of which is such Scheduled Principal Balance. In
addition, no Advances are required to be made to the extent that, in the good
faith judgment of the Master Servicer, the Trustee or the Fiscal Agent, as
applicable, any such Advance, if made, would be nonrecoverable from proceeds of
the Mortgage Loan to which such Advance relates. See "THE POOLING AND SERVICING
AGREEMENT--Advances" herein.
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Effect of Prepayments and other Unscheduled Payments. The investment
performance of the Certificates may vary materially and adversely from the
investment expectations of investors due to the rate of prepayments on the
Mortgage Loans being higher or lower than anticipated by investors. In addition,
in the event of any repurchase of a Mortgage Loan by MCFC [or _______________]
from the Trust Fund under the circumstances described under "DESCRIPTION OF THE
MORTGAGE POOL--Representations and Warranties; Repurchase" herein, the
repurchase price paid will 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 will 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. Furthermore, the distribution of Liquidation Proceeds to the
Class or Classes of Certificates then entitled to distributions in respect of
principal will reduce the weighted average lives of such Classes and may reduce
or increase the weighted average life of other Classes of Certificates. See
"YIELD AND MATURITY CONSIDERATIONS" herein.
In general, the yield on Certificates purchased at a premium or at a
discount and the yield on the Class A-EC and Class K-2 Certificates, which have
no Certificate Balances, will be sensitive to the amount and timing of principal
distributions thereon (or of reductions of the respective Notional Balances).
The occurrence of principal distributions at a rate faster than that anticipated
by an investor at the time of purchase will cause the actual yield to maturity
of a Certificate purchased at a premium to be lower than anticipated. The yield
to maturity of the Class A-EC and Class K-2 Certificates will be especially
sensitive to the occurrence of high rates of principal distributions which could
result in the failure of the holders of such Classes to recover fully their
initial investments. Conversely, if a Certificate is purchased at a discount
(especially the Class K-1 Certificates) and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than assumed at the time of purchase.
Effect of Prepayment Premiums. The rate and timing of principal payments
made on a Mortgage Loan will be affected by restrictions on voluntary
prepayments contained in the related Note (e.g., lockout periods and Prepayment
Premiums). Most of the Mortgage Loans provide that for a specified amount of
time during which a prepayment is permitted, it must be accompanied by a
Prepayment Premium. The existence of Prepayment Premiums generally will result
in the Mortgage Loans prepaying at a lower rate. However, the requirement that a
prepayment be accompanied by a Prepayment Premium may not provide a sufficient
economic disincentive to a borrower seeking to refinance at a more favorable
interest rate. In addition, since holders of the Class A-EC Certificates are
anticipated to receive most, if not all, Prepayment Premiums, potential
purchasers of this Class should especially consider that 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 under applicable state or federal law or, if enforceable, that the
foreclosure proceeds received with respect to a defaulted Mortgage Loan will be
sufficient to make such payment. See "DESCRIPTION OF THE MORTGAGE POOL--Certain
Terms and Conditions of the Mortgage Loans--Prepayment Provisions" herein.
Effect of Interest on Advances, Special Servicing Fees and other Servicing
Expenses. As and to the extent described herein, the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, will be entitled to receive interest
on unreimbursed Advances at the Advance Rate from the date on which the related
Advance is made to the date on which such amounts are reimbursed (which in no
event will be later than the Determination Date following the date on which
funds are available to reimburse such Advance with interest thereon at the
Advance Rate). The Master Servicer's, the Trustee's or the Fiscal Agent's right,
as applicable, to receive such payments of interest is prior to the rights of
Certificateholders to receive distributions on the Regular Certificates and,
consequently, may result in decreased distributions to the Regular Certificates
that would not otherwise have resulted, absent the accrual of such interest. See
"THE POOLING AND SERVICING AGREEMENT--Advances" herein. In addition, certain
circumstances, including delinquencies
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in the payment of principal and interest, will result in a Mortgage Loan being
specially serviced. The Special Servicer is entitled to additional compensation
for special servicing activities, including Special Servicing Fees, Disposition
Fees and Workout Fees, which may result in decreased distributions to the
Regular Certificates that would not otherwise have resulted absent such
compensation. See "THE POOLING AND SERVICING AGREEMENT--Special Servicing"
herein.
Limited Liquidity
There is currently no secondary market for the Regular Certificates. The
Underwriters have advised the Depositor that they currently intend to make a
secondary market in the Regular Certificates, but they are under no obligation
to do so. Accordingly, there can be no assurance that a secondary market for the
Regular Certificates will develop. Moreover, if a secondary market does develop,
there can be no assurance that it will provide holders of Regular Certificates
with liquidity of investment or that it will continue for the life of the
Regular Certificates. The Regular Certificates will not be listed on any
securities exchange.
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of _____ multifamily and commercial "whole"
mortgage loans (the "Mortgage Loans"). The Mortgage Loans have an aggregate
Cut-off Date Principal Balance of approximately $___________ (the "Initial Pool
Balance"), subject to a variance of plus or minus 5%. The "Cut-off Date
Principal Balance" of each Mortgage Loan is the unpaid principal balance thereof
as of the Cut-off Date, after application of all payments of principal due on or
before such date, whether or not received. Any description of the terms and
provisions of the Mortgage Loans herein is a generalized description of the
terms and provisions of the Mortgage Loans in the aggregate. Many of the
individual Mortgage Loans have special terms and provisions that deviate from
the generalized, aggregated description.
Generally, each Mortgage Loan is evidenced by a separate promissory note
(collectively, the "Promissory Notes"), [while one Mortgage Loan is evidenced by
a Mortgage Consolidation, Modification and Extension Agreement (the
"Consolidation Agreement," and with the Promissory Notes, collectively the
"Notes" and individually a "Note")]. Each Mortgage Loan is secured by a
mortgage, deed of trust, deed to secure debt or other similar security
instrument (a "Mortgage") that creates a first lien on one or more of a fee
simple estate, an estate for years or a leasehold estate in a real property (a
"Mortgaged Property") improved for multifamily or commercial use. The Mortgaged
Properties consist of properties improved by (a) a congregate care facility (a
"Congregate Care Property," and any Mortgage Loan secured thereby, a "Congregate
Care Loan"); (b) a hotel (a "Hotel Property," and any Mortgage Loan secured
thereby, a "Hotel Loan"); (c) an industrial property (an "Industrial Property,"
and any Mortgage Loan secured thereby, an "Industrial Loan"); (d) a mini
warehouse facility (a "Mini Warehouse Property," and any Mortgage Loan secured
thereby, a "Mini Warehouse Loan"); (e) a mini warehouse office/warehouse
property (a "Mini Warehouse & Office/Warehouse Property," and any Mortgage Loan
secured thereby, a "Mini Warehouse & Office/Warehouse Loan"); (f) a mobile home
park (a "Mobile Home Park Property," and any Mortgage Loan secured thereby, a
"Mobile Home Park Loan"); (g) an apartment building or complex consisting of
five or more rental units or a complex of duplex units (a "Multifamily
Property," and any Mortgage Loan secured thereby, a "Multifamily Loan"); (h) a
nursing home (a "Nursing Home Property," and any Mortgage Loan secured thereby,
a "Nursing Home Loan"); (i) an office building (an "Office Property," and any
Mortgage Loan secured thereby, an "Office Loan"); (j) an office/retail property
(an "Office/Retail Property," and any Mortgage Loan secured thereby, an
"Office/Retail Loan"); (k) an anchored retail property (a "Retail, Anchored
Property," and any Mortgage Loan secured thereby, a "Retail, Anchored Loan");
(l) a single tenant retail property (a "Retail, Single Tenant Property," and any
Mortgage Loan secured thereby, a "Retail, Single Tenant Loan"); or (m) an
unanchored retail property (a "Retail, Unanchored Property," and any Mortgage
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Loan secured thereby, a "Retail, Unanchored Loan"). The percentage of the
Initial Pool Balance represented by each type of Mortgaged Property is as
follows:
Number
Percentage of of
Property Type Initial Pool Balance Loans
Congregate Care %
Hotel %
Industrial %
Mini Warehouse %
Mini Warehouse & Office/Warehouse %
Mobile Home Park %
Multifamily %
Nursing Home %
Office %
Office/Retail %
Retail, Anchored %
Retail, Single Tenant %
Retail, Unanchored %
Approximately _____% of the Initial Pool Balance represents the refinancing of
existing mortgage indebtedness.
None of the Mortgage Loans is insured or guaranteed by the United States of
America, any governmental agency or instrumentality, any private mortgage
insurer or by the Depositor, MCFC, _______________, Midland, the Master
Servicer, the Special Servicer, the Trustee or the Fiscal Agent or any of their
respective affiliates. __________ of the Mortgage Loans, representing
approximately _____% of the Initial Pool Balance, provide for full recourse
against the related borrower, while the remainder of the Mortgage Loans are
non-recourse loans. In the event of a borrower default under a non-recourse
Mortgage Loan, recourse generally may be had only against the specific Mortgaged
Property or Mortgaged Properties securing such Mortgage Loan and such limited
other assets as have been pledged to secure such Mortgage Loan, and not against
the borrower's other assets. However, generally, upon the occurrence of certain
circumstances as set forth in the Mortgage Loan documents, typically including,
without limitation, fraud, intentional misrepresentation, waste,
misappropriation of tenant security deposits or rent, and in some cases failure
to maintain any required insurance or misappropriation of any insurance proceeds
or condemnation awards, recourse generally may be had against the borrower for
damages sustained by the mortgagee. In connection with __________ of the
Mortgage Loans, representing approximately _____% of the Initial Pool Balance, a
guaranty of all or a portion of such Mortgage Loan was obtained by the separate
originators of such Mortgage Loans (herein collectively, the "Originators" and
individually an "Originator"). Such guaranties are intended to encourage the
performance by the related borrower or the guarantor of the obligations to which
the guaranty relates. However, the guarantors may have limited assets and there
can be no assurance that such guarantors will have sufficient assets to support
their respective obligations under such guaranties. In addition, any action to
enforce such guaranties will likely involve significant expense and delays to
the Trust Fund and may not be enforceable if the related guarantor should become
the subject of a bankruptcy, insolvency, reorganization, moratorium or other
similar proceedings. Furthermore, in some states, actions against guarantors may
be limited by anti-deficiency legislation. The Master Servicer or the Special
Servicer, as applicable, on behalf of the Trustee and the Certificateholders,
will be entitled to enforce the terms of such guaranties.
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__________ of the Mortgage Loans (the "Midland Mortgage Loans"),
representing approximately _____% of the Initial Pool Balance, were originated
either by (a) Midland Loan Services, L.P. ("Midland") generally in accordance
with Midland's customary underwriting criteria and practices, with such
exceptions thereto as are customarily acceptable to commercial mortgage lenders,
or (b) unaffiliated entities and subsequently acquired by Midland after
evaluating such Mortgage Loans according to Midland's customary underwriting
criteria and practices, with such exceptions thereto as are customarily
acceptable to commercial mortgage lenders. Midland's underwriting criteria and
practices are described under "--The Midland Mortgage Loan Program--General,"
"--Midland's Underwriting Standards" and "--Midland Underwriting and Closing
Procedures" herein.
__________ the Mortgage Loans (the "_______________ Mortgage Loans"),
representing approximately _____% of the Initial Pool Balance, (a) were
originated either by __________ ("_____") (an affiliate of __________________),
or by correspondents of, or other entities related to _________, generally in
accordance with _____'s customary underwriting criteria and practices, with such
exceptions thereto as are customarily acceptable to commercial mortgage lenders,
or (b) were acquired by _____ from various unaffiliated banks, savings
institutions or other entities in the secondary market after evaluating each
such _______________ Mortgage Loan using _____'s customary underwriting criteria
and practices, with such exceptions thereto as are customarily acceptable to
commercial mortgage lenders. ____________ underwriting criteria and practices
are described under "--______________ Underwriting and Closing Procedures"
herein.
The Depositor will purchase _____ the Midland Mortgage Loans, on or before
the Closing Date from MCFC pursuant to a Mortgage Loan Purchase and Sale
Agreement (the "MCFC Mortgage Loan Purchase Agreement") dated as of
_______________, 1996 (the "Loan Purchase Closing Date"), between MCFC and the
Depositor. The _______________ Mortgage Loans will be acquired by the Depositor
on or before the Closing Date from _______________ pursuant to a Mortgage Loan
Purchase and Sale Agreement (the "_______________ Mortgage Loan Purchase
Agreement") dated as of __________________, between the Depositor and
_______________. MCFC and ________________ are herein sometimes individually
referred to as a "Mortgage Loan Seller," and collectively as the "Mortgage Loan
Sellers." As described under "DESCRIPTION OF THE MORTGAGE POOL--Representations
and Warranties; Repurchase" herein, (a) MCFC and Midland will each be obligated
to repurchase a Midland Mortgage Loan in the event of a breach of a
representation or warranty made by MCFC or Midland in the MCFC Mortgage Loan
Purchase Agreement with respect to such Mortgage Loan and (b) ___________ will
be obligated to repurchase a _______________ Mortgage Loan in the event of a
breach of a representation or warranty made by _____ in the _______________
Mortgage Loan Purchase Agreement with respect to such Mortgage Loan. MCFC,
Midland and _________ each has only limited assets, and there can be no
assurance that either MCFC, Midland or _____ has or will have sufficient assets
with which to fulfill any repurchase obligations that may arise. The Depositor
will not have any obligation to fulfill any repurchase obligation upon the
failure of MCFC, Midland or _____ to do so. The Depositor will assign the
Mortgage Loans in the Mortgage Pool, together with the Depositor's rights and
remedies against MCFC, Midland and _____ in respect of breaches of
representations or warranties regarding the Mortgage Loans, to the Trustee
pursuant to the Pooling and Servicing Agreement. The Master Servicer and the
Special Servicer will each service the Mortgage Loans pursuant to the Pooling
and Servicing Agreement. See "THE POOLING AND SERVICING AGREEMENT--Servicing of
the Mortgage Loans; Collection of Payments."
Security for the Mortgage Loans
Each Mortgage Loan is secured by a Mortgage encumbering the related
borrower's interest in the related Mortgaged Property. Except with respect to
(a) _____ of the Mortgage Loans (Loan #_____), representing approximately _____%
of the Initial Pool Balance, which is secured by liens encumbering both the
borrower's leasehold interest and the fee simple interest of entities related to
such borrower in the related Mortgaged Property; (b) _____ of the Mortgage Loans
(Loan #_____), representing approximately _____%
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<PAGE>
of the Initial Pool Balance, which is secured by a lien encumbering the
borrower's leasehold interest in a portion of the related Mortgaged Property and
the borrower's fee simple interest in a portion of the related Mortgaged
Property; and (c) __________ of the Mortgage Loans (Loan #_____), representing
approximately _____% of the Initial Pool Balance, which is secured by a lien
encumbering the borrower's estate for years in the related Mortgaged Property;
all of the Mortgage Loans are secured by liens encumbering fee simple interests
in the related Mortgaged Property. _____ of the Mortgage Loans, representing
approximately ____% of the Initial Pool Balance, provide for full recourse
against the related borrower, while the remainder of the Mortgage Loans are
non-recourse loans. Each Mortgage Loan is also secured by an assignment of the
related borrower's interest in the leases, rents, issues and profits of the
related Mortgaged Property. In certain instances, additional collateral may
exist in the nature of letters of credit, a pledge of demand notes, the
establishment of one or more Reserve Accounts (for necessary repairs and
replacements, tenant improvements and leasing commissions, real estate taxes and
assessments, insurance premiums, deferred maintenance and/or scheduled capital
improvements or as reserves for the payment of Monthly Payments and other
payments due under the related Mortgage Loan), grants of security interests in
equipment, inventory, accounts receivable and other personal property,
assignments of licenses, trademarks and/or trade names, one or more guaranties
of all or part of the related Mortgage Loan, one or more guaranties with respect
to a tenant's performance of the terms and conditions of such tenant's lease,
the assignment of an option to obtain a ground lease with respect to the related
Mortgaged Property or the assignment of the proceeds of purchase options. Each
Mortgage Loan provides for the indemnification of the mortgagee by the related
borrower for the presence of any hazardous substances affecting the Mortgaged
Property, provided, however, that with respect to (a) _____ of the Mortgage
Loans (Loan #_____), which represents approximately _____% of the Initial Pool
Balance, such indemnification obligation was executed in favor of the Originator
of such Mortgage Loan, and does not appear to inure to the benefit of the Trust
Fund, (b) _____ of the Mortgage Loans (Loan #_____), which represents
approximately _____% of the Initial Pool Balance, no such indemnification
obligation was obtained from the borrower and the tenant under its triple net
lease does not specifically indemnify the mortgagee for damages related to the
presence of any hazardous substances affecting the Mortgaged Property, and (c)
_____ of the Mortgage Loans (Loan #_____ and Loan #_____), representing
approximately _____% of the Initial Pool Balance, each of the related borrower's
indemnification obligations is a non-recourse obligation to the extent the
mortgagee's damages exceed $250,000.00, unless such excess damages were caused
by such borrower or its general partner. However, borrowers generally have
limited assets and there can be no assurance that any borrower will have
sufficient assets to support any such indemnification obligations that may
arise. See "RISK FACTORS--The Mortgage Loans; Investment in Commercial and
Multifamily Mortgage Loans--Environmental Risks" herein. Each Mortgage
constitutes a first lien on a Mortgaged Property, subject generally only to (a)
liens for real estate and other taxes and special assessments, (b) covenants,
conditions, restrictions, rights of way, easements and other encumbrances
whether or not of public record as of the date of recording of such Mortgage,
and (c) such other exceptions and encumbrances on the Mortgaged Property as are
reflected in the related title insurance policies.
Ground Leases; Estates For Years. _____ Mortgage Loan, representing
approximately _____% of the Initial Pool Balance, is secured by a first lien
encumbering the related borrower's (a) leasehold interest in a portion of the
related Mortgaged Property, and (b) fee interest in the remainder of such
Mortgaged Property. The related ground lease expires on _______________________;
provided, however, that the borrower possesses an option to purchase fee title
to the property subject to such ground lease, and is currently escrowing amounts
with the mortgagee in order to fund the purchase price under such option. _____
Mort- gaged Loan, representing approximately _____% of the Initial Pool Balance,
is secured by a first lien encumbering both the related borrower's leasehold
interest in the related Mortgaged Property and the fee interest in such
Mortgaged Property possessed by entities affiliated with such borrower. The
related ground lease expires on _______________________. The execution of the
related Mortgage by such related entities may be subject to challenge as a
fraudulent conveyance. See "RISK FACTORS--Investment in Commercial and
Multifamily Mortgage Loans--Limitations on Enforceability of
Cross-Collateralization" herein. With respect to each such ground lease, the
related ground lessors have agreed to afford the mortgagee certain
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notices and rights, including without limitation, cure rights with respect to
breaches of the related ground lease by the related borrower. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Foreclosure--Leasehold Risks" in the Prospectus.
_____ Mortgage Loan (Loan #_____), representing approximately _____% of the
Initial Pool Balance, is secured by a first lien encumbering (a) an estate for
years possessed by the related borrower in the related real property pursuant to
a _______________________ deed creating such estate for years executed by
_______________, the former owner of the real property and the current tenant of
the improvements thereon, (b) such borrower's fee title to the improvements
located upon such real property. Contemporaneously with the above described
deed, the remainder interest in such real property was conveyed by
_______________ to an entity related to the borrower, and such related entity
granted the borrower an option (the "Option") to obtain a ground lease over such
real property as of _______________________ the termination date of such estate
for years. Although the borrower has previously collaterally assigned the Option
as security for this Mortgage Loan, it is unclear whether such collateral
assignment extends to the Depositor. This Mortgage Loan is to fully amortize as
of its maturity date (which maturity date is approximately _____ months prior to
the termination date of the estate for years).
Purchase Options; Rights of First Refusal. With respect to Loan #_____,
which represents approximately _____% of the Initial Pool Balance, the property
developer from whom the related borrower acquired the related Mortgaged Property
retained an option to reacquire such Mortgaged Property, at the market value for
such Mortgaged Property on the date of the exercise of such option, conditional
upon the borrower ceasing operations at such Mortgaged Property. The related
borrower has assigned to the mortgagee all of such borrower's rights to receive
any proceeds from the exercise of such option, and the related borrower is
obligated to obtain and deliver to the mortgagee a consent to such assignment
from the option holder in a form satisfactory to the mortgagee. With respect to
Loan #_____, which represents approximately _____% of the Initial Pool Balance,
the tenant/operator of the Mortgaged Property possesses an option to purchase
such Mortgaged Property upon certain specified terms and conditions, which
option has been specifically subordinated to the lien of the related Mortgage.
With respect to Loan #_____, which represents approximately _____% of the
Initial Pool Balance, a tenant possesses an option pursuant to its lease to
purchase such Mortgaged Property at its fair market value as of the exercise of
such option. The terms of such option indicate that unless the tenant assumes
the related Mortgage Loan and takes title subject to the lien of the related
Mortgage, such Mortgage Loan must be satisfied and the Mortgage released when
such Option is exercised. With respect to Loan #_____, which represents
approximately _____% of the Initial Pool Balance, the property developer from
whom the borrower acquired the Mortgaged Property retained a right of first
refusal with respect to any bona fide offers to purchase the Mortgaged Property
received by the borrower prior to _______________________. With respect to Loan
#_____, which represents approximately _____% of the Initial Pool Balance, a
tenant of a portion of the related Mortgaged Property possesses a right of first
refusal with respect to any bona fide offers to purchase its leased premises. No
assurance can be made that such rights of first refusal would not apply in the
context of a foreclosure of the related Mortgage, and consequently, there may be
additional risks, delays and costs associated with any such foreclosure. See
"RISK FACTORS--Prepayment and Yield Considerations" and "YIELD CONSIDERATIONS"
herein.
The Midland Mortgage Loan Program--General
The mortgage loan program under which Midland originated its Mortgage Loans
targeted the origination of multi-family and commercial real estate loans
(generally with principal balances ranging from $750,000 to $15,000,000). To
generate a sufficient volume of loan submissions of this size from a variety of
geographic areas, Midland has developed a network of mortgage bankers, mortgage
brokers and commercial bankers who are paid a fee, at closing, for referrals and
any other services they may provide in connection with the underwriting and
closing of such mortgage loans. See "MIDLAND LOAN SERVICES, L.P." herein.
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<PAGE>
PSI serves as financial advisor to Midland in connection with the
development and operation of the loan origination program. In this capacity, PSI
consults with Midland regarding loan pricing policy and periodically provides
Midland with information on current yields on those U.S. Treasury securities
that are used by Midland to establish the interest rates on mortgage loans. In
addition, PSI assists Midland in making presentations to the Rating Agencies
regarding the mortgage loans and the Master Servicer's servicing capabilities.
Prudential Securities Credit Corporation ("PSCC"), an affiliate of PSI,
provides warehouse financing to MCFC. In this connection PSCC reviewed the
underwriting of each Mortgage Loan originated by Midland before issuance of a
commitment by Midland to make the loan to the related applicant, and also
reviewed the underwriting conducted by Midland and/or MCFC in connection with
the acquisition of the remaining Midland Mortgage Loans. PSCC's review of
underwriting was independent of the review by Midland's own credit review
committee and was intended only to ensure that all loans funded using the
warehouse financing provided by PSCC met Midland's underwriting guidelines, with
such exceptions thereto as are customarily acceptable to commercial mortgage
lenders, in accordance with Midland's agreement with PSCC.
Midland's Underwriting Standards
Midland's customary underwriting policies and procedures require an
evaluation of both the prospective borrower and the proposed real estate
collateral. Factors typically analyzed in connection with a prospective borrower
include its credit history, capitalization and overall financial resources and
management skill and experience in the applicable property type. Factors
typically analyzed in connection with a Mortgaged Property include its
historical and anticipated future cash flow; age and condition; appraised value;
gross square footage; net rentable area; gross land area; number of units, rooms
or beds; size, identity and termination or purchase option rights of current
tenants; property interest to be mortgaged (fee or leasehold); term, expiration
and rental rates under current leases; projected future leasing commissions and
retaining costs; applicable market rentals for similar properties; historical
vacancy rate and credit loss rate; debt service coverage ratio; and loan to
value ratio.
Midland generally analyzed historical and current financial information
regarding a Mortgaged Property provided by a prospective borrower to determine
the initial maximum amount of a proposed Midland Mortgage Loan. This analysis
allowed Midland to calculate the initial debt service coverage ratio and
loan-to-value ratio for a proposed Midland Mortgage Loan, based upon the
revenues generally available from the related Mortgaged Property minus the
expenses incurred in operating and maintaining the related Mortgaged Property,
all as adjusted by the actual, historical and market factors applicable to the
property type and location of the related Mortgaged Property. Except as approved
by Midland's credit review committee in connection with a specific Mortgage
Loan, Midland applied its customary underwriting policies with respect to these
ratios and maximum amortization periods in connection with the Mortgage Loans in
the Mortgage Pool originated by it. Midland's customary underwriting policies
for these ratios and maximum amortization periods are as follows:
Maximum
Minimum Amortization
Property Type DSCR Maximum LTV Period
- ------------- ----- ----------- ------
Congregate Care 1.35 70% 25 years
Hotel 1.40 70% 20 years
Industrial 1.25 75% 25 years
Mini Warehouse 1.35 70% 20 years
Mobile Home Park 1.25 75% 20 years
Multifamily 1.20 75% 25 years
Nursing Home 1.35 70% 20 years
Office 1.25 75% 25 years
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<PAGE>
Office/Retail 1.25 75% 25 years
Retail, Anchored 1.25 75% 25 years
Retail, Single Tenant 1.25 75% 25 years
Retail, Unanchored 1.30 75% 25 years
With respect to Mortgage Loans secured by mixed use Mortgage Property, Midland's
customary underwriting policies require an analysis of the percentage of the net
operating income from each of the varied uses of the related Mortgaged Property
in order to determine the appropriate debt service coverage ratio, loan-to-value
ratio and amortization period.
Actual debt service coverage ratios, loan-to-value ratios and amortization
periods for the Mortgage Loans originated by Midland may and do vary from the
guidelines described above. See "--Certain Characteristics of the Mortgage Pool"
and "Annex A" herein.
Midland Underwriting and Closing Procedures
The information utilized by Midland to determine whether to issue a binding
loan commitment typically included two or more years of financial history for
the related Mortgaged Property, a site plan, a rent roll, recent photographs, a
fact sheet completed by the prospective borrower detailing requested loan terms,
ownership information, existing debt, zoning and property improvement
information, copies of specified leases, copies of rent deposits and utility
bills for the most recent 12 months, copies of the most recent property tax
bills and insurance premium statements and a listing of all other income
property owned by the principals of the prospective borrower detailing revenue,
expense, debt service, valuation and current encumbrances. Midland's analysis of
the foregoing included any adjustments deemed advisable by Midland to take into
account projected increases or decreases in terms of revenue and/or expense.
Midland also generally performed a site inspection of the subject Mortgaged
Property, investigated (when possible) four lease comparables and four sales
comparables, met the principals of the prospective borrower (when practicable),
and gathered market information through interviews with property managers,
leasing agents, real estate brokers and appraisers familiar with the subject
Mortgaged Property's market area. The prospective borrower also was typically
required to make a cash deposit equal to 1% of the requested loan balance with
Midland concurrently with the prospective borrower's submission of a formal loan
application.
To complete the underwriting of a proposed Mortgage Loan to be originated
by it, Midland derived an estimate of stabilized net cash flow available to pay
debt service. On the revenue side, Midland evaluated the proposed Mortgaged
Property's rental rates in relation to rental rates for similar properties in
the same market. If the proposed Mortgaged Property is leased to relatively few
tenants (e.g., retail, office, light industrial/industrial), Midland analyzed
the terms of each of the major leases. On the expense side, Midland collected
documentation for major operating expense items, such as taxes, insurance and
utilities (and, in the case of Hotel Properties, franchise and management fees),
to ensure that Midland's assumptions regarding property expenses were realistic
and in line with historical experience. Midland also substantiated the financial
performance of the proposed Mortgaged Property by reference to industry
standards and to the more specialized expertise of local real estate brokers and
appraisers. If the proposed Mortgaged Property was an office building, retail
center or industrial property, Midland analyzed potential roll-over risk for the
purpose of making appropriate assumptions regarding the average annual
investment in tenant improvements and leasing commissions likely to be required
to keep occupancy of the proposed Mortgaged Property at or above the occupancy
level assumed by Midland.
Midland evaluated underwriting information received with respect to a
proposed Mortgage Loan to be originated by it through the use of Midland's
mortgage loan analysis model, and a final underwriting memorandum with respect
to such proposed Mortgage Loan was prepared which summarized proposed loan
terms, described the prospective borrower, and discussed the major underwriting
assumptions, competitive
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status of the subject Mortgaged Property, market conditions in the locale of the
subject Mortgaged Property and the strengths, weaknesses and mitigating factors
with respect to such proposed Mortgage Loan. This information was then presented
to Midland's credit review committee for a determination as to whether a binding
commitment for the proposed Mortgage Loan should be issued. The information
provided to Midland's credit review committee regarding a proposed Mortgage Loan
to be originated by it was simultaneously provided to both MCFC and PSCC for
their consideration. Prior to the issuance of a loan commitment, both MCFC and
PSCC were also required to approve the terms of such proposed Mortgage Loan.
Generally, following acceptance of the commitment by the prospective
borrower, Midland ordered an appraisal, an architectural and engineering report
and a Phase I environmental site assessment. In certain instances, Midland may
have utilized a report prepared by a third party not selected by Midland but
only if the qualifications of such third party were approved by Midland and the
report met Midland's specifications for such a report.
It was a condition of closing in each of Midland's commitments to make a
proposed Mortgage Loan originated by it that Midland receive third-party reports
satisfactory to it. If the appraisal of a proposed Mortgaged Property did not
confirm the minimum debt service coverage ratio and the maximum loan-to-value
ratio specified in Midland's loan commitment, the loan commitment gave Midland
the flexibility to reduce the loan amount in order to maintain those ratios. If
the architectural and engineering report indicated that critical repairs (equal
to or exceeding $10,000 in the aggregate) needed to be made to the proposed
Mortgaged Property, the prospective borrower was required to make those repairs
prior to the closing or Midland held back an amount sufficient to complete those
repairs from the Mortgage Loan proceeds. All Phase I environmental site
assessments were reviewed by McRoberts & Associates, P.C. (the "Environmental
Consultant"), an independent third party environmental attorney retained by
Midland. If the Phase I environmental site assessment indicated the existence of
a potentially material and significant environmentally hazardous condition and
recommended further investigation, the Environmental Consultant prepared a scope
of work for a Phase II assessment and Midland engaged a consultant to perform
the additional work. If either the Phase I or Phase II environmental site
assessment indicated the presence of material and significant environmentally
hazardous condition at the proposed Mortgaged Property, the prospective borrower
was required to remediate those conditions, provide environmental insurance in
an amount acceptable to Midland, escrow an amount sufficient to pay the costs of
such remediation, provide an indemnity for such costs from a potentially
culpable party, or, if appropriate, implement an operations and maintenance plan
for the management of those conditions.
Generally, each completed underwriting file for a Midland Mortgage Loan
contains the following documents:
A Midland Loan Fact Sheet;
Financial statements for the preceding two or more years and the most
recent year-to-date interim statement for the proposed Mortgaged
Property, the prospective borrower, and any proposed guarantor,
co-borrower, general partner of the borrowing entity and/or limited
partner owning 10% or more of the borrowing entity;
Tax returns for the preceding three years for the prospective borrower
and any proposed guarantor, co-borrower, general partner of the
borrowing entity and/or limited partner owning 10% or more of the
borrowing entity;
A current rent roll, certified by the prospective
borrower;
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<PAGE>
For a proposed Mortgaged Property leased to relatively few tenants
(e.g., retail, office, light industrial/industrial), copies of all
leases;
A copy of any ground lease that may affect the
proposed Mortgaged Property;
A site plan of the proposed Mortgaged Property;
A map of the area in which the proposed Mortgaged
Property is located; and
Pictures of the proposed Mortgaged Property and the surrounding area.
Midland's closing of the Midland Mortgage Loans was managed by one staff
attorney supervising a team of closing coordinators with responsibility for
processing mortgage loans through closing. Each Midland Mortgage Loan was
documented on Midland's form of mortgage loan documents, which were conformed by
legal counsel to the requirements and customary loan documentation of the state
where the related Mortgaged Property is located.
_______________ Underwriting and Closing Procedures
[To be provided by additional Mortgage Loan Seller]
Certain Terms and Conditions of the Mortgage Loans
Due Dates. The Mortgage Loans provide for Monthly Payments to be due on the
first day of each month; provided, however, that (a) _____ of the Mortgage
Loans, representing approximately _____% of the Initial Pool Balance, provide
for Monthly Payments to be due on the _____ day of each month, and (b) _____ of
the Mortgage Loans, which represents approximately _____% of the Initial Pool
Balance, provides for regularly scheduled payments of principal and/or interest
to be due on a quarterly basis on the first day of each January, April, July and
October during the term of such Mortgage Loan.
Mortgage Rates; Calculations of Interest. Except with respect to Loan
#_____, which represents approximately _____% of the Initial Pool Balance, each
Mortgage Loan generally accrues interest at an annualized rate (a "Mortgage
Rate") that is fixed for the entire term of such Mortgage Loan and does not
permit any negative amortization or the deferral of interest. With respect to
Loan #_____, the related Mortgage Note provides that the initial fixed interest
rate is to be adjusted, ten years into the original 15 year term of such
Mortgage Loan, to a fixed interest rate equal to _____% above a specified base
rate, with an immediate corresponding adjustment in the Monthly Payments so that
such Mortgage Loan will fully amortize over its original term. _____ of the
Mortgage Loans, representing approximately _____% of the Initial Pool Balance,
accrue interest on the basis of actual days elapsed in a 365-day year, one
Mortgage Loan, representing approximately _____% of the Initial Pool Balance,
accrues interest on the basis of actual days elapsed in a 360-day year, and the
remainder of the Mortgage Loans accrue interest on the basis of a 360-day year
consisting of twelve 30-day months.
Amortization of Principal. _______________ of the Mortgage Loans (the
"Balloon Loans"), which represent approximately _____% of the Initial Pool
Balance, provide for monthly payments of principal based on amortization
schedules longer than their remaining terms, thereby leaving substantial
principal amounts due and payable on their respective maturity dates (each such
payment, together with interest on the related Balloon Loan for the one-month
period ending on the day preceding such Balloon Loan's maturity date, a "Balloon
Payment"), unless previously prepaid. _____ of the Mortgage Loans, which
represent approximately _____% of the Initial Pool Balance, have remaining
amortization terms that are the same as their respective remaining terms to
maturity. The weighted average Balloon LTV applicable to the Mortgage Pool is
_____%.
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<PAGE>
Prepayment Provisions. The imposition of a premium or fee (a "Prepayment
Premium") payable in connection with a voluntary prepayment of each of the
Mortgage Loans is designed primarily to deter a borrower from voluntarily
prepaying the principal amounts of its Mortgage Loan. Although certain of the
Mortgage Loans are subject to specified periods following the origination of
such Mortgage Loans wherein no voluntary prepayments are allowed (any such
period, a "Lockout Period"), the Mortgage Loans generally permit each borrower
to voluntarily prepay the entire principal balance of its Mortgage Loan provided
that any applicable Prepayment Premium is paid in connection therewith;
provided, however, that the applicable Prepayment Premium requirement expires
prior to the maturity date of all but _____ of the Mortgage Loans, representing
approximately _____% of the Initial Pool Balance. Voluntary prepayments of less
than the full outstanding principal of a Mortgage Loan are generally prohibited;
provided, however, that (a) in _____ of the Mortgage Loans, representing
approximately _____% of the Initial Pool Balance, the related borrower is
permitted to make partial voluntary prepayments of its Mortgage Loan subject to
certain specified conditions and limitations, including payment of the required
Prepayment Premium, and (b) in _____ of the Mortgagee Loans, representing
approximately _____% of the Initial Pool Balance, the related borrower is
permitted to prepay all or any part of its Mortgage Loan at any time without the
payment of a Prepayment Premium. Additionally, with respect to _____ of the
Balloon Loans, representing approximately _____% of the Initial Pool Balance,
the related borrower is permitted to make voluntary prepayments sufficient to
fully amortize the principal balance thereof over the remaining term thereof
without the payment of Prepayment Premiums. Neither of such borrowers have made
any such voluntary prepayments since the origination of such Balloon Loan.
The Prepayment Premium applicable with respect to the majority of the
Mortgage Loans is generally calculated (a) for a certain period (any such
period, a "Yield Maintenance Period") after the origination of such Mortgage
Loan or the expiration of the applicable Lockout Period, if any, on the basis of
a yield maintenance formula and/or a specified percentage of the amount prepaid,
and (b) after the expiration of the applicable Yield Maintenance Period, a
specified percentage (which percentage may either remain constant or decline
over time) of the amount prepaid. Annex A attached hereto contains more specific
information regarding the Prepayment Premiums applicable to each of the Mortgage
Loans.
The Mortgage Loans generally provide that so long as no event of default
then exists, no Prepayment Premium is payable in connection with any involuntary
prepayment resulting from a Casualty or Condemnation. The Mortgage Loans
generally also permit prepayment after an event of default (but prior to the
sale by the mortgagee thereunder of the Mortgaged Property through foreclosure
or otherwise) provided that the related borrower pays the applicable Prepayment
Premium. Certain of the Mortgage Loans may permit the related borrower to
transfer the related Mortgaged Property to a third party without prepaying the
related Mortgage Loan, provided that certain conditions are satisfied,
including, without limitation, an assumption by the transferee of all of such
borrower's obligations in respect of such Mortgage Loan. See
"--`Due-on-Encumbrance' and `Due-on-Sale' Provisions" herein.
The Depositor makes no representation as to the enforceability of the
provisions of any Mortgage Loan requiring the payment of a Prepayment Premium or
as to the collectability of any Prepayment Premium. See "RISK
FACTORS--Prepayment and Yield Considerations" herein and "CERTAIN LEGAL ASPECTS
OF THE MORTGAGE LOANS--Enforceability of Certain Provisions" in the Prospectus.
The following "Prepayment Lockout/Premium Analysis" table sets forth an
analysis of the percentage of the declining balance of the Mortgage Pool that,
on December 1, in each of the years indicated, will be within a Lockout Period
or in which Principal Prepayments must be accompanied by the indicated
Prepayment Premium or yield maintenance charge. This table was prepared
generally on the basis of the following assumptions:
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(1) That no defaults or prepayments, voluntary
or involuntary, occur with respect to any of the
Mortgage Loans;
[(2) That payments of principal and interest equal to $_______________
are made under the Quarterly Payment Loan on the first of each month during
its term];
(3) That the Monthly Payments under the _____ Mortgage Loans that
require Monthly Payments to be made on the _____ of each month are made on
the first of each month following the month in which such Monthly Payment
was actually due (i.e., the December 15, 1996 payment is made on January 1,
1997);
(4) [That with respect to Loan #_____: (A) the stated interest rate
remains fixed at _____% and does not adjust on its change date, and (B)
that the Monthly Payment applicable to such Mortgage Loan is
$_______________, rather than the $_______________ Monthly Payment set
forth in the related Note];
(5) That all of the Mortgage Loans accrue interest based upon a 360 day
year composed of twelve 30 day months;
(6) That all Mortgage Loans that have a maturity date other than the
first day of a month make their final payment on the first day of the month
following the month of maturity;
(7) That Loan #_____ has _____ scheduled payment dates, with the first
such payment consisting of interest only and the remaining _____ payments
consisting of principal and interest.
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<PAGE>
<TABLE>
<CAPTION>
Prepayment Lockout/Premium Analysis(1)
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prepayment
Restrictions
Lockout.....
Greater
of Yield
Maintenance
or
Percentage
Premium
of:
5.00%
or
greater.....
4.00%
to 4.99%....
3.00%
to 3.99%....
2.00%
to 2.99%....
1.00%
to 1.99%....
0.00%
to 0.99%....
Total
of
Yield
Maintenance.
Total
of
Yield
Maintenance
and
Lockout.....
Percentage
Premium:
5.00% or
greater.....
4.00 to
4.99%.......
3.00
to 3.99%....
2.00
to 2.99%....
1.00
to 1.99%....
Total
with
Percentage
Premium.....
Open........
Total.......
% of
Initial
Pool
Balance.....
- ------------------
<FN>
(1) Represents the approximate percentage of the Initial Pool Balance that will
remain outstanding at the indicated date based upon the assumptions used in
preparing this table.
</FN>
</TABLE>
S-47
<PAGE>
"Due-on-Encumbrance" and "Due-on-Sale" Provisions. The Mortgages generally
contain "due-on- encumbrance" clauses that permit the holder of the Mortgage to
accelerate the maturity of the related Mortgage Loan if the borrower encumbers
the related Mortgaged Property without the consent of the mortgagee. However, in
certain of the Mortgage Loans, the related borrower is allowed, under certain
circumstances, to encumber the related Mortgaged Property with additional liens.
See "RISK FACTORS-- Investment in Commercial and Multi-Family Mortgage
Loans--Other Financing" herein. The Master Servicer or the Special Servicer, as
applicable, will determine, in a manner consistent with the servicing standard
described herein under "THE POOLING AND SERVICING AGREEMENT--Servicing of the
Mortgage Loans; Collection of Payments" whether to exercise any right the
mortgagee may have under any such clause to accelerate payment of a Mortgage
Loan upon, or to withhold its consent to, any additional encumbrance of the
related Mortgaged Property.
The Mortgages for the Mortgage Loans generally prohibit, without the
mortgagee's prior consent, the borrower from transferring the Mortgaged Property
or allowing a change in ownership (generally defined as, among other things, (a)
a specified percentage (generally ranging from 10% to 49%) change in the
ownership of the borrower, a guarantor or, with respect to certain of such
Mortgage Loans, in the ownership of the general partner of the borrower or a
guarantor, (b) the removal, resignation or change in ownership of any general
partner or managing partner of a borrower, a guarantor or, with respect to
certain of such Mortgage Loans, any general partner of a borrower or a
guarantor, (c) with respect to certain of such Mortgage Loans, the removal,
resignation or change in ownership of the managing agent of the related
Mortgaged Property), or (d) the voluntary or involuntary transfer or dilution of
the controlling interest in the related borrower held by a specified person;
provided, however, that with respect to certain of such Mortgage Loans, the
borrower may be entitled to transfer the Mortgaged Property or allow a change in
ownership if certain conditions are satisfied, typically including one or more
of the following, (i) no event of default has occurred, (ii) the proposed
transferee meets the mortgagee's customary underwriting criteria, (iii) the
Mortgaged Property continues to meet the mortgagee's customary underwriting
criteria, (iv) an acceptable assumption agreement is executed, and (v) a
specified assumption fee (generally 1% or .5% of the then outstanding principal
balance of the applicable Note) has been received by the mortgagee. Certain of
the Mortgages may also allow transfers of interests in the related Mortgaged
Property in the nature of residential leases and easements and changes in
ownership between partners, family members, for estate planning purposes,
affiliated companies and certain specified individuals. In the event of any
transfer or change in ownership of the Mortgaged Property in violation of the
applicable provisions of the related Mortgage Loan documents, the related
Mortgage Loan documents generally provide that the mortgagee is permitted to
accelerate the maturity of the related Mortgage Loan. See "CERTAIN LEGAL ASPECTS
OF MORTGAGE LOANS--Enforceability of Certain Provisions--Due-on-Sale Provisions"
in the Prospectus. The Depositor makes no representation as to the
enforceability of any due-on-sale or due-on-encumbrance provision in any
Mortgage Loan which is the subject of a proceeding under the Bankruptcy Code.
Default Provisions. Except as described below, the related Mortgage Loan
documents generally provide that an event of default will exist if (a) any
regular installment of principal and/or interest is not paid when specified
(generally either (i) upon the date the same is due, (ii) within a specified
period (generally five days to 10 days) after the date upon which the same was
due, or (iii) within a specified period (generally five days to 10 days)
following written notice from the mortgagee of such failure), or (b) any
violation of the conditions described in "--`Due-on-Encumbrance' and
`Due-on-Sale' Provisions" above occurs. The Mortgage Loan documents for
__________ of the Mortgage Loans, representing approximately _____% of the
Initial Pool Balance, do not contain any specific description of events of
default, rather, they generally provide that a default will exist upon any
breach of any covenant or agreement of the borrower under the related Mortgage
Loan documents. Additionally, the related Mortgage Loan documents may contain
other specified events of default, including one or more of the following, the
borrower's failure to pay taxes or other charges when due, to keep all required
insurance policies in full force and effect, to cure any material violations of
laws or ordinances affecting the Mortgaged Property or to operate the related
Mortgaged
S-48
<PAGE>
Property according to certain criteria; the imposition of a mechanic's,
materialman's or other lien against the Mortgaged Property; the institution of a
bankruptcy, receivership or similar actions against the borrower or the
Mortgaged Property; unapproved conversion of the related Mortgaged Property to a
condominium or cooperative; defaults under certain other agreements; defaults
under or unapproved modifications to any related franchise agreement; material
changes to or defaults under any related management agreement; failure to
correct any deficiency that would justify termination of a Medicare or Medicaid
contract or a ban on new patients otherwise qualifying for Medicaid or Medicare
coverage or the assessment of fines or penalties in excess of specified amounts
by any state or any Medicare, Medicaid, health, reimbursement or licensing
agency.
Upon the occurrence of an event of default with respect to any Mortgage
Loan, the Master Servicer or the Special Servicer, as applicable, may take such
action as the Master Servicer or the Special Servicer deems advisable to protect
and enforce the rights of the Trustee, on behalf of the Certificateholders,
against the related borrower and in and to the related Mortgaged Property,
subject to the terms of the related Mortgage Loan, including, without
limitation, declaring the entire debt to be immediately due and payable and/or
instituting a proceeding, judicial or non-judicial, for the complete or partial
foreclosure of the Mortgage Loan.
Default Interest. All of the Mortgage Loans provide for imposition of a
rate of interest higher than the stated interest rate upon the occurrence of an
event of default by the related borrower ("Default Interest"); excepting,
however, Loan #_____, which represents approximately _____% of the Initial Pool
Balance. The Default Interest applicable to the Mortgage Loans is generally
calculated as either (a) a specified rate above the stated interest rate of such
Mortgage Loan, or (b) a rate equal to the greater of (i) a specified rate above
the stated interest rate of such Mortgage Loan, and (ii) a specified rate above
a specified base rate (typically either the prime rate reported in The Wall
Street Journal, or the base rate announced by Citibank N.A. in New York as its
base rate). No assurance can be given as to the enforceability of any provision
of any Mortgage Loan requiring the payment of any Default Interest or as to the
collectability of any Default Interest. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS--Enforceability of Certain Provisions" in the Prospectus.
Hazard, Liability and other Insurance. Generally, each Mortgage Loan
requires that the related Mortgaged Property be insured (in an amount not less
than the lesser of (a) the full replacement cost of the Mortgaged Property and
(b) the outstanding principal balance of the related Note, but in any event in
an amount sufficient to ensure that the insurer would not deem the borrower a
co-insurer) against loss or damage by fire or other risks and hazards covered by
a standard extended coverage insurance policy. Generally, each Mortgage Loan
also requires that the related borrower obtain and maintain during the entire
term of the Mortgage Loan (a) comprehensive public liability insurance,
typically with a minimum limit of $1,000,000 per occurrence, (b) if any part of
the Mortgaged Property upon which a material improvement is located lies in a
special flood hazard area and for which flood insurance has been made available,
a flood insurance policy in an amount equal to the lesser of the outstanding
principal balance of the related Note or the maximum limit of coverage available
from governmental sources, (c) if deemed advisable by the Originator, rent loss
and/or business interruption insurance in an amount equal to all rents or
estimated gross revenues from the operations of the Mortgaged Property for a
period as required by the Mortgage, (d) if applicable, insurance against loss or
damage from explosion of steam boilers, air conditioning equipment, high
pressure piping, machinery and equipment, pressure vessels or similar apparatus,
and (e) such other insurance as may from time to time reasonably be required by
the mortgagee. With respect to many of the Mortgage Loans, the related borrower
S-49
<PAGE>
has satisfied the applicable insurance requirements by obtaining blanket
insurance policies, subject to the review and approval of the same by the
mortgagee, including the amount of insurance and the number of properties
covered by such policies.
Casualty and Condemnation. The related Mortgage Loan documents typically
provide that in the event of damage to the related Mortgaged Property by reason
of fire or other casualty (a "Casualty"), all insurance proceeds will be paid to
the mortgagee and then it is such mortgagee's option as to whether to apply such
proceeds to the outstanding indebtedness of the related Mortgage Loan, or to
allow such proceeds to be applied to the restoration of the related Mortgaged
Property; provided, however, that if certain conditions are satisfied, the
mortgagee may be required to disburse such proceeds in connection with a
restoration of the related Mortgaged Property. These required conditions
typically include one or more of the following (a) if the insurance proceeds
payable are less than a specified amount, (b) if less than a specified
percentage of the related Mortgaged Property is destroyed or if the value of the
related Mortgaged Property following such Casualty remains greater than either a
specified amount or a specified percentage of the value of the related Mortgaged
Property immediately preceding such Casualty, (c) if the Casualty affects less
than a specified percentage of the net rentable area of the Mortgaged Property
or interrupts less than a specified percentage of the rentals from the Mortgaged
Property, (d) if such restoration will cost less than a specified amount and if
sufficient funds are available to complete such restoration, (e) if such
restoration can be accomplished within a specified time period, (f) if the
restored Mortgaged Property will adequately secure the related Mortgage Loan,
(g) if adequate income (including rentals and insurance) will be available
during the restoration period and (h) if no event of default then exists. In
certain of the Mortgage Loans, the lease between the related borrower and a
tenant of all or part of the related Mortgaged Property may require the borrower
or the tenant to rebuild the buildings located upon the related Mortgaged
Property in the event of a Casualty, and the related Mortgage Loan documents may
permit the application of insurance proceeds to satisfy such requirement,
regardless of the value of such Mortgaged Property following such Casualty.
Generally, the Mortgage Loans provide that all awards payable to the
borrower in connection with any taking or exercise of the power of eminent
domain with respect to the related Mortgaged Property (a "Condemnation") will be
paid directly to the mortgagee, and then it is such mortgagee's option as to
whether to apply such proceeds to the outstanding indebtedness of the related
Mortgage Loan, or to allow such proceeds to be applied to the restoration of the
related Mortgaged Property, provided, however, that if certain conditions are
satisfied, the mortgagee may be required to disburse such awards in connection
with a restoration of the related Mortgaged Property. These required conditions
typically include one or more of the following (a) if the award is less than a
specified amount, (b) if less than a specified percentage of the related
Mortgaged Property is taken, (c) if the Condemnation affects less than a
specified percentage of the net rentable area of the Mortgaged Property or
interrupts less than a specified percentage of the rentals from the Mortgaged
Property, (d) if such restoration will cost less than a specified amount and if
sufficient funds are available to complete such restoration, (e) if such
restoration can be accomplished within a specified time period, (f) if adequate
income (including the Condemnation award, rentals and insurance) will be
available during the restoration period, (h) if no event of default then exists,
and (i) if such restoration and repair is feasible and the related Mortgaged
Property will be commercially viable after such restoration. In certain of the
Mortgage Loans, the lease between the related borrower and a tenant of all or
part of the related Mortgaged Property may require the borrower or the tenant to
restore the related Mortgaged Property in the event of a Condemnation and the
related Mortgage Loan documents may permit the application of condemnation
proceeds to satisfy such requirement.
Delinquencies and Modifications. As of the Cut-off Date for each Mortgage
Loan, no Mortgage Loan was more than 30 days delinquent in respect of any
Monthly Payment, and no Mortgage Loan has been modified in any material manner
since its origination in connection with any default or threatened default on
the part of the related borrower; provided, however, that with respect to _____
Mortgage Loan, representing approximately _____% of the Initial Pool Balance, a
prior mortgagee has previously made a remedial advance
S-50
<PAGE>
in the amount of $_______________ in order to ensure that certain real property
taxes applicable to the related Mortgaged Property were paid, and the related
Mortgage Loan documents were subsequently modified to provide that the amount of
such advance bears interest approximately _____% over the stated interest rate
for such Mortgage Loan, and that such advance will be repaid over the remaining
term of such Mortgage Loan. Any future modifications would be subject to the
conditions and requirements contained in the Pooling and Servicing Agreement.
Borrower Escrows and Reserve Accounts. In a number of the Mortgage Loans,
the related borrower was required to establish one or more reserve or escrow
accounts (such accounts, "Reserve Accounts") for necessary repairs and
replacements, tenant improvements and leasing commissions, real estate taxes and
assessments, insurance premiums, deferred maintenance and/or scheduled capital
improvements, to fund the purchase price under an option agreement possessed by
the borrower or, under certain specified circumstances, as reserves for the
payment of regularly scheduled payments of principal and/or interest ("Monthly
Payments") and other payments due under the related Mortgage Loan. The following
table sets forth more detailed information, as of [November] ___, 1996,
regarding Mortgage Loans for which a Reserve Account existed on such date.
[TABLE TO BE PROVIDED]
Certain Characteristics of the Mortgage Pool
Concentration of Mortgage Loans and Borrowers. Several of the Mortgage
Loans have Cut-off Date Principal Balances that are substantially higher than
the average Cut-off Date Principal Balance. The largest single Mortgage Loan
(Loan #_____) has a Cut-off Date Principal Balance that represents approximately
_____% of the Initial Pool Balance provided, however, that _____ Mortgage Loans
which were made to affiliated entities, when considered together, represent
approximately _____% of the Initial Pool Balance. The _____ largest individual
Mortgage Loans have Cut-off Date Principal Balances that represent in the
aggregate approximately _____% of the Initial Pool Balance.
The Mortgage Pool consists of _____ Mortgage Loans to _____ separate
borrowers. _____ of the Mortgage Loans were made to a borrower which was also
the borrower in one or more of the other Mortgage Loans. _____ of the Mortgage
Loans were made to borrowers that are affiliated with the borrower of another
Mortgage Loan. However, no set of Mortgage Loans made to a single borrower or to
a single group of affiliated borrowers constitutes more than approximately
_____% of the Initial Pool Balance. _______________ Mortgage Loans (representing
approximately _____% of the Initial Pool Balance) are cross-collateralized and
cross-defaulted with other Mortgage Loans to the related borrower or to a
related affiliated borrower. See "--Limitations on Enforceability of
Cross-Collateralization" herein. The following table sets forth more detailed
information regarding Mortgage Loans made to a single borrower or to a single
group of affiliated borrowers. The column entitled "%" in such table sets forth
the approximate percentage of the Initial Pool Balance represented by each
identified group of Mortgage Loans.
================================================================
Relationship
Loan of Cross-Collateralized and
Numbers % Borrower(s) Cross-Defaulted
- ----------------------------------------------------------------
--%
- ----------------------------------------------------------------
--%
- ----------------------------------------------------------------
--%
================================================================
Geographic Concentration. The Mortgaged Properties
are located in ______ states and the District of
Columbia. _____ of the Mortgage Loans, which represent
approximately _____% of the Initial Pool
S-51
<PAGE>
Balance, are secured by liens on Mortgaged Properties located in
[_______________]; _____ of the Mortgage Loans, which represent approximately
_____% of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in [_______________]; _____ of the Mortgage Loans, which represent
approximately _____% of the Initial Pool Balance, are secured by liens on
Mortgaged Properties located in [_______________]; _____ of the Mortgage Loans,
which represent approximately _____% of the Initial Pool Balance, are secured by
liens on Mortgaged Properties located in [_______________]; _____ of the
Mortgage Loans, which represent approximately _____% of the Initial Pool
Balance, are secured by liens on Mortgaged Properties located in
[_______________]; and _____ of the Mortgage Loans, which represent
approximately _____% of the Initial Pool Balance, are secured by liens on
Mortgaged Properties located in [_______________]. The remaining Mortgaged
Properties are located throughout _____ other states and the District of
Columbia, with no more than _____% of the Initial Pool Balance being secured by
Mortgaged Properties located in any such individual jurisdiction.
Environmental Risks. Except as discussed below, (a) environmental site
assessments with respect to the Mortgaged Properties were obtained either by (i)
the Originator within seven months of the respective origination dates of the
Mortgage Loans, or (ii) __________ or MCFC within seven months of the respective
dates such Mortgaged Loans were acquired by _____ or MCFC, and (b) the Mortgaged
Properties have been subject to environmental site assessments within _____
months preceding the Cut-off Date. No environmental site assessments were
obtained with respect to three of the Mortgage Loans (representing approximately
_____% of the Initial Pool Balance), the environmental site assessment obtained
with respect to one of the Mortgage Loans (representing approximately _____% of
the Initial Pool Balance), did not include asbestos containing materials or
radon as reviewed categories, and the environmental site assessments obtained
with respect to __________ of the Mortgage Loans (representing approximately
_____% of the Initial Pool Balance), were obtained approximately _____ months
and _____ months, respectively, prior to the respective origination dates of
such Mortgage Loans, and approximately _____ months and _____ months,
respectively, prior to the Cut-off Date. All of the Mortgage Loans referenced in
the preceding sentence are Multifamily Loans. A search of available governmental
databases containing information regarding properties with known environmental
contamination has been conducted with respect to each of the Mortgaged
Properties in which the applicable environmental site assessment was dated more
than _____ months prior to the Cut-off Date.
Other than as described below, the environmental site assessments did not
reveal the existence of conditions or circumstances respecting the Mortgaged
Properties securing any Mortgage Loan that would constitute or result in a
material violation of applicable environmental law, impose a material constraint
on the operation of such Mortgaged Properties, require any material change in
the use thereof, require any material clean-up, remedial action or other
response with respect to hazardous materials on or affecting such Mortgaged
Properties under any applicable environmental law, with the exception of
conditions or circumstances (a) that such assessments indicated could be cleaned
up, remediated or brought into compliance with applicable environmental law by
the taking of certain actions and (b) either for which (i) a hold-back or other
escrow of funds in an amount not less than the cost of taking such clean-up,
remediation or compliance actions as estimated in such assessments has been
created, (ii) an environmental insurance policy in an amount satisfactory to the
Originator has been obtained by the related borrower or an indemnity for such
costs has been obtained from a potentially culpable party or (iii) such clean
up, remediation or compliance actions have been completed in compliance with
applicable environmental law prior to the closing of such Mortgage Loan.
Investors should understand that the results of the environmental site
assessments do not constitute an assurance or guaranty by the Depositor, the
Originators, MCFC, _____, Midland, the borrowers, any environmental consultants
or any other person as to the absence or extent of the existence of any
environmental condition on the Mortgaged Properties that could result in
environmental liability. Given the scope of the environmental site assessments,
an environmental condition that affects a Mortgaged Property may not be
discovered or its severity revealed during the course of the assessment.
Further, no assurance can
S-52
<PAGE>
be given that future changes in applicable environmental laws, the development
or discovery of presently unknown environmental conditions at the Mortgaged
Properties or the deterioration of existing conditions will not require material
expenses for remediation or other material liabilities.
Other Financing. The related Mortgage Loan documents generally prohibit
subordinate financing without the mortgagee's prior consent. With respect to
_____ of the Mortgage Loans, representing approximately _____% of the Initial
Pool Balance, the related Mortgage Loan documents allowed the borrower, under
certain specified circumstances, to either maintain an existing subordinate
mortgage encumbering the related Mortgaged Properties, or to grant such a
subordinate mortgage in the future. Generally, prior to any such subordinate
mortgage being allowed, certain conditions specified in the related Mortgage
Loan documents must be satisfied. Such conditions typically include one or more
of the following: (a) the purpose, amount, term and amortization period of the
proposed subordinate debt, together with the identity of the subordinate lender
and the terms of the subordinate loan documents, must be acceptable to the
senior mortgagee; (b) pursuant to either the specific terms of the subordinate
mortgage or a separate recorded agreement obtained from such subordinate lender,
the subordinate mortgage must be unconditionally subordinated to the related
Mortgage Loan documents, and the subordinate lender is also typically prohibited
from exercising any remedies against the borrower without the senior mortgagee's
consent and from receiving any payments on such subordinate debt if, for the
immediately prior 12 months, either (i) the aggregate debt service coverage
ratio for such Mortgage Loan and such subordinate debt is less than a specified
ratio (generally ranging from 1.20 to 1.30), or (ii) the aggregate loan to value
ratio for such Mortgage Loan and such subordinate debt is greater than a
specified ratio (generally ranging from 70% to 80%); (c) the subordinate debt
must be non-recourse; and (d) acceptable economic conditions regarding the
related Mortgaged Property must exist as of the effective date of such
subordinate financing, typically including (i) an aggregate debt service
coverage ratio for such Mortgage Loan and such subordinate debt equal to or
exceeding a specified ratio (generally 1.20), and/or (ii) an aggregate loan to
value ratio for such Mortgage Loan and such subordinate debt of less than a
specified ratio (generally ranging from 70% to 80%).
Zoning Compliance. The Originator generally received assurances that all of
the improvements located upon each respective Mortgaged Property complied with
all Zoning Laws in all respects material to the continued use of the related
Mortgaged Property, or that such improvements qualified as permitted non-
conforming uses.
Limitations on Enforceability of Cross-Collateralization. _______________
of the Mortgage Loans (the "Cross-Collateralized Loans"), each of which was made
to a borrower that is affiliated with the borrower under another Mortgage Loan
are cross-collateralized and cross-defaulted with one or more related Cross-
Collateralized Loans. This arrangement is designed to reduce the risk that the
inability of an individual Mortgaged Property securing a Cross-Collateralized
Loan to generate net operating income sufficient to pay debt service thereon
will result in defaults (and ultimately losses). The arrangement is based on the
belief that the risk of default is reduced by making the collateral pledged to
secure each related Cross-Collateralized Loan available to support debt service
on, and principal repayment of, the aggregate indebtedness evidenced by the
related Cross-Collateralized Loans. See "--Concentration of the Mortgage Loans
and Borrowers" herein for more information regarding the Cross-Collateralized
Loans.
Tenant Matters. Certain additional information regarding Major Tenants is
set forth in "Annex A" herein. Generally, Major Tenants do not have
investment-grade credit ratings. In connection with _____ of the Mortgage Loans,
representing approximately _____% of the Initial Pool Balance, a Major Tenant
occupies more than 60% of the net leasable area of the related Mortgaged
Property. Many of such Major Tenants occupy their respective leased premises
pursuant to leases which require them to pay all applicable real property taxes,
maintain insurance over the improvements thereon and maintain the physical
condition of such improvements. Additionally, in connection with Loan #_____,
the related Major Tenant has generally assumed, in addition to the foregoing,
all other responsibilities related to the entire Mortgage Property. With
S-53
<PAGE>
respect to Mortgage Loans secured by a retail, office or industrial property,
the related Originator generally obtained an estoppel from each Major Tenant as
it deemed advisable.
Other Information. The following tables and Annex A set forth certain
information with respect to the Mortgage Loans and the Mortgaged Properties,
which was primarily derived from financial statements supplied by each borrower
for its related Mortgaged Property. The financial statements supplied by the
borrowers in most cases are unaudited and were not prepared in accordance with
generally accepted accounting principles. "Net Operating Income" and "Cash Flow"
do not represent the net operating income and cash flow reflected on the
borrowers' financial statements. The differences between "Net Operating Income"
and "Cash Flow" determined by MCFC and _____ and net operating income and cash
flow reflected on the borrowers' financial statements represent the adjustments
made by MCFC and _____ described below, which adjustments generally were
intended to increase the level of consistency between the financial statements
provided by the borrowers. However, such adjustments were subjective in nature
and were not made in a uniform manner nor in accordance with generally accepted
accounting principles. "Underwritten NOI" and "Underwritten Cash Flow" are pro
forma numbers prepared by MCFC and _____ to reflect their assessment of the
market based performance of the related Mortgaged Property. Neither the
Depositor nor the Underwriters have made any attempt to verify the accuracy of
the financial statements supplied by the borrowers or the accuracy or
appropriateness of the adjustments discussed below that were made by MCFC and
_____ to determine "Net Operating Income," "Cash Flow," "Underwritten NOI," and
"Underwritten Cash Flow."
The numbers representing "Net Operating Income," "Cash Flow," "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 a 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," "Cash Flow," "Underwritten NOI" and "Underwritten Cash
Flow" set forth herein intended to represent such future net cash flow.
All of the Mortgaged Properties were appraised at the request of the
Originator of the related Mortgage Loan by a state certified appraiser or an
appraiser belonging to the Appraisal Institute. The purpose of each appraisal
was to provide an opinion of the fair market value of the related Mortgaged
Property. None of the Depositor, MCFC, _____, Midland, the Master Servicer, the
Special Servicer, the Trustee or the Fiscal Agent or any other entity has
prepared or obtained a separate independent appraisal or reappraisal. There can
be no assurance that another appraiser would have arrived at the same opinion of
value. No representation is made that any Appraised Value would approximate
either the value that would be determined in a current appraisal of the related
Mortgage Property or the amount that would be realized upon a sale. Accordingly,
investors should not place undue reliance on the Loan-to-Value Ratios set forth
herein.
Debt service coverage ratios are used by lenders of loans secured by income
producing property to measure the ratio of (a) cash currently generated by a
property that is available for debt service (that is, cash that remains after
payment of operating expenses) to (b) required debt service payments. However,
debt service coverage ratios only measure the current, or recent, ability of a
property to service mortgage debt. If a property is not expected to have a
stable operating cash flow (for instance, if it is subject to material leases
that are scheduled to expire during the loan term and that provide for
above-market rents, may be difficult to replace, or both) a debt service
coverage ratio may not be a reliable indicator of a property's ability to
service the mortgage debt over the entire remaining loan term. In addition, a
debt service coverage ratio may not adequately reflect the significant amounts
of cash that a property owner may be required to expend to pay for capital
improvements, and for tenant improvements and leasing commissions when expiring
leases are replaced. For the reasons discussed above, the Debt Service Coverage
Ratios presented herein are limited
S-54
<PAGE>
in their usefulness in predicting the future ability of a Mortgaged Property to
generate sufficient cash flow to repay the related Mortgage Loan. Accordingly,
no assurance can be given, and no representation is made, that the Debt Service
Coverage Ratios accurately reflect that ability.
For purposes of the tables and Annex A:
(1) "Net Operating Income" or "NOI" is revenue derived from the use and
operation of the Mortgaged Property (consisting primarily of rental income)
less operating expenses (such as utilities, general administrative
expenses, management fees, advertising, repairs and maintenance) and less
fixed expenses (such as insurance and real estate taxes). NOI generally
does not reflect capital expenditures, replacement reserves, interest
expense, income taxes and non-cash items such as depreciation or
amortization. MCFC and _____ adjusted items of revenue and expense shown on
the borrower financial statements in order to reflect the historical
operating results for a Mortgaged Property on a normalized basis (e.g.,
adjusting for the payment of two years of real estate taxes in a single
year). Revenue was generally adjusted to eliminate items not related to the
operation of the Mortgaged Property, to eliminate security deposits and to
eliminate non-recurring items. Expense was generally adjusted to eliminate
distributions to owners, items of expense not related to the operation of
the Mortgaged Property, non-recurring items, such as capital expenditures,
and refunds of security deposits. MCFC and _____ made the adjustments based
upon their review of the borrower financial statements, their experience in
originating loans and, in some cases, conversations with borrowers. The
adjustments were subjective in nature and were not uniform for each
Mortgaged Property.
(2) "Cash Flow" means, with respect to any Mortgage Loan, the NOI for
the related Mortgaged Property decreased by tenant improvements, leasing
commissions and other non-recurring expenditures, as appropriate.
(3) "Underwritten NOI" means, with respect to any Mortgage Loan, the
NOI for the related Mortgage Property as determined by MCFC or _____, as
applicable, in accordance with their underwriting guidelines for similar
properties. Although there are differences in the underwriting guidelines
of MCFC and _____, the nature and types of adjustments made by each of them
were generally the same. Revenue generally is calculated as follows. Rental
revenue is calculated using the lower of actual or market rental rates,
with a vacancy rate equal to the higher of the Mortgaged Property's
historical rate, the market rate or an assumed vacancy rate. Other
revenues, such as parking fees, are included only if sustainable. Certain
revenues, such as application fees and lease termination fees, are not
included. Operating and fixed expenses generally are adjusted to reflect
the higher of the Mortgaged Property's average expenses or a midrange
industry norm for expenses on similar properties in similar locations
(generally adjusted upward to account for inflation), a market rate
management fee and an annual reserve for replacement of capital items.
(4) "Underwritten Cash Flow" means, with respect to any Mortgage Loan,
the Underwritten NOI for such Mortgage Loan decreased by an amount that
MCFC or _____, as applicable, has determined to be an appropriate allowance
for average annual tenant improvements and leasing commissions based upon
their respective underwriting guidelines.
(5) "Appraised Value" means, for each of the Mortgaged Properties, the
appraised value of such property as determined by an appraisal thereof made
not more than nine months prior to the origination date of the related
Mortgage Loan and reviewed by the Originator of such Mortgage Loan.
(6) "Annual Debt Service" means, for any Mortgage Loan, the current
annual debt service (including interest allocable to payment of the
Servicing Fee and principal) payable with
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respect to such Mortgage Loan during the 12-month period commencing on the
Cut-off Date (assuming no principal prepayments occur).
(7) "Debt Service Coverage Ratio," "Underwritten DSCR" or "DSCR" means,
with respect to any Mortgage Loan, (a) the Underwritten Cash Flow for the
related Mortgaged Property divided by (b) the Annual Debt Service for such
Mortgage Loan.
(8) "Loan-to-Value Ratio," "Appraised LTV" or "LTV" means, with respect
to any Mortgage Loan, the principal balance of such Mortgage Loan as of the
Cut-off Date divided by the Appraised Value of the Mortgaged Property
securing such Mortgage Loan.
(9) "Balloon LTV" for any Mortgage Loan is calculated in the same
manner as LTV, except that the Balloon Amount is used instead of the
Cut-off Date principal balance.
(10) "Balloon Amount" or "Balloon Balance" for each Mortgage Loan is
equal to the principal amount, if any, due at maturity, taking into account
scheduled amortization, assuming no prepayments or defaults.
(11) "Occupancy Rate" means the percentage of gross leasable area,
rooms, units, beds, pads or sites of a Mortgaged Property that are leased
or occupied. Occupancy rates are calculated based upon the most recent rent
information received by MCFC or _____, as applicable.
(12) "Property Age" means, with respect to the related Mortgaged
Property (or Mortgaged Properties), the difference between the Cut-off Date
year (1996) and the year in which the oldest Mortgaged Property securing a
Mortgage Loan was initially constructed.
(13) "Effective Age" means, with respect to the related Mortgaged
Property (or Mortgaged Properties), the difference between the Cut-off Date
year (1996) and the more recent of the year in which the oldest Mortgaged
Property securing a Mortgage Loan was either initially constructed or
renovated.
(14) "Remaining Term to Maturity" generally means the number of months
remaining from the Cut-off Date until the maturity of a mortgage loan. The
method for calculating the "Remaining Term to Maturity" for any Mortgage
Loan (other than Loan #______ and Loan #______) is determined by
subtracting (a) the number of Due Dates from and including the first
payment date to and including the Cut-off Date from (b) the number of Due
Dates from and including the first payment date to and including the
original scheduled maturity date for such Mortgage Loan. The "Remaining
Term to Stated Maturity" for Loan #_____ was assumed to be _____ months
based upon an interest only payment date of _______________________, and
the _____ principal and interest payment dates set forth in the related
Note.
(15) "Remaining Amortization Term" for any Mortgage Loan (other than
Loan #____ and Loan #____) is calculated as the original amortization term
of the related Mortgaged Loan (based upon such Mortgage Loan's original
balance, interest rate and monthly payment) less the number of Due Dates
from and including the first payment date to and including the Cut-off
Date.
(16) The "Year Renovated" is based upon information contained in the
appraisal of the related Mortgaged Property; excepting, however, that the
"Year Renovated" with respect to Loan #_____, Loan #_____, Loan #_____ and
Loan #_____ was provided by
-----.
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(17) The "Occupancy Percentage" and "Occupancy Date" for each Mortgage
Loan are based upon rent information received by MCFC or _____, as
applicable, from the related borrower. The "Occupancy Percentage" and
"Occupancy Date" for each Hotel Property are based upon operating
information received by MCFC or _____, as applicable, from the related
borrower.
(18) All calculations of any applicable Lockout Period, Yield
Maintenance Period or Prepayment Premium for a Mortgage Loan are determined
based upon such Mortgage Loan's first scheduled
payment date.
(19) [Principal and interest payments with respect to Loan #_____ are
paid quarterly on the first of each January, April, July and October, and
are based on a preset schedule attached to the related Mortgage Note. Such
payments are scheduled to increase over the term of such Mortgage Loan in
relation to increases in the preset schedule of lease payments to be paid
by the Major Tenant of the Mortgaged Property. The current quarterly
payment as of the Cut-off Date is $____________, while the largest
quarterly loan payment, in the amount of $_____________, is scheduled to
occur on _______________________. The "Original Amortization Term" and
"Original Term to Maturity" for this Mortgage Loan reflect the number of
months from and including such Mortgage Loan's first payment date to and
including its scheduled maturity date. The "Remaining Term to Maturity" and
"Remaining Amortization Term" for this Mortgage Loan reflect the number of
months from the Cut-off Date to and including its scheduled maturity date.]
(20) Each of Loan #_____, Loan #_____ and Loan #_____ is secured by
_____ Multifamily Properties, while Loan #_____ is secured by _____
Congregate Care Properties. The "Number of Units," "Units/SF," "Appraised
Value," "Current Occupancy," "Underwritten NOI," "Underwritten Cash Flow,"
1994 NOI," "1994 Cash Flow," "1995 NOI" and "1995 Cash Flow" for each such
Mortgage Loan is the sum of the respective values for each Mortgaged
Property securing such Mortgaged Loan.
(21) The Monthly Payments for each of Loan #_____ and Loan #_____ are
to be paid on the _____ of each month during the respective terms of such
Mortgage Loans. The Cut-off Date Principal Balance for each such Mortgage
Loan is the outstanding principal balance of such Mortgage Loan after the
application of all Monthly Payments due on or before
-----------------------.
(22) With respect to Loan #_____, the "Lease Expiration Date" set forth
for the Major Tenant of the related Mortgaged Property is the earliest
expiration date of the two separate leases held by such Major Tenant. The
"SF" and "Percent of Property" set forth are the sum of such values for all
of the related Mortgaged Property leased by such Major Tenant pursuant to
both such leases.
(23) [The Mortgaged Property securing Loan #_____ was constructed in
two phases, with _____ of the _____ total units being constructed in _____,
with the remaining _____ units being constructed during the __________.]
(24) "Weighted Average Maturity" means the weighted average of the
Remaining Terms to Maturity of the Mortgage Loans.
(25) Due to rounding, percentages may not add to
100% and amounts may not add to the indicated total.
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Range of Cut-off Date Principal Balances
Range of Number Percent Aggregate Pct by Weighted Weighted
Cut-off of by Number Cut-off Aggregate Average Average
Balances Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Range of Mortgage Rates
Range of Number Percent Aggregate Pct by Weighted Weighted
Mortgage of by Number Cut-off Aggregate Average Average
Rates Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
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Range of Remaining Term of Amortization (in Months)
Range of Number of Percent Aggregate Pct by Weighted Weighted
Remaining Mortgage by Cut-off Aggregate Average Average
Amort (In Loans Number Date Cut-off Date Mortgage DSCR(x)
Months) Principal Principal Rate
Balance Balance
Wtd Avg Term:
Range of Maturity Years
Year of Number Percent Aggregate Pct by Weighted Weighted
Maturity of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
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Range of Loan Origination Years
Year of Number of Percent Aggregate Pct by Weighted Weighted
Origi- Mortgage by Number Cut-off Aggregate Average Average
nation Loans Date Cut-off Mortgage DSCR(x)
Principal Date Rate
Balance Principal
Balance
Range of LTVs
Range of Number Percent Aggregate Pct by Weighted Weighted
LTV of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Wtd Avg LTV: %
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Range of DSCRs
Range of Number Percent Aggregate Pct by Weighted Weighted
DSCR(x) of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Wtd Avg DSCR:
Range of Effective Age (in Years)
Range of Number Percent Aggregate Pct by Weighted Weighted
Effective of by Number Cut-off Aggregate Average Average
Age of Mortgage Date Cut-Off Date Mortgage DSCR(x)
Property Loans Principal Principal Rate
Balance Balance
Wtd Avg Age:
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Range of Property Age (in Years)
Range of Number Percent Aggregate Pct by Weighted Weighted
Property of by Number Cut-off Aggregate Average Average
Age Mortgage Date Cut-Off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Wtd Avg Age:
Types of Mortgaged Properties
Number Percent Aggregate Pct by Weighted Weighted
of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Property Balance Balance
Type
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Geographic Distribution of the Mortgaged Properties
Number Percent Aggregate Pct by Weighted Weighted
of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Property
Location
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Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for
scheduled principal payments due on the Mortgage Loans on or before the Cut-off
Date. Prior to the issuance of the Certificates, one or more Mortgage Loans may
be removed from the Mortgage Pool if the Depositor deems such removal necessary
or appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Certificates,
unless including such mortgage loans would materially alter the characteristics
of the Mortgage Pool as described herein. Accordingly, the range of Mortgage
Rates and maturities, as well as the other characteristics of the Mortgage Loans
constituting the Mortgage Pool at the time the Certificates are issued may vary
from those described herein.
A Current Report on Form 8-K (the "Form 8-K") will be filed, together with
the Pooling and Servicing Agreement, with the Securities and Exchange Commission
within 15 days after the initial issuance of the Certificates. The Form 8-K will
be available to the Certificateholders promptly after its filing. In the event
that Mortgage Loans are removed from or added to the Mortgage Pool as set forth
in the preceding paragraph, such removal or addition will be noted in the Form
8-K.
Representations and Warranties; Repurchase
In the Pooling and Servicing Agreement, the Depositor will assign to the
Trustee for the benefit of Certificateholders certain representations and
warranties made by each of MCFC and Midland in the MCFC Mortgage Loan Purchase
Agreement and by _____ in the _______________ Mortgage Loan Purchase Agreement.
In (a) the MCFC Mortgage Loan Purchase Agreement, MCFC and Midland will each
represent and warrant (with respect only to the Midland Mortgage Loans conveyed
thereby and subject to certain specified exceptions, including, without
limitation, those exceptions described below ), in favor of the Depositor as of
the Loan Purchase Closing Date or such other date specified in the related
representation or warranty, among other things, substantially as set forth
below; and (b) the _______________ Mortgage Loan Purchase Agreement,
____________ will represent and warrant (with respect only to the
_______________ Mortgage Loans and subject to certain specified exceptions,
including, without limitation, those exceptions described below) in favor of the
Depositor as of the Loan Purchase Closing Date (unless another date is
specified), among other things, substantially as set forth below:
(1) The information set forth in the Mortgage Loan Schedule attached hereto
is true, complete and correct in all material respects.
(2) No Mortgage Loan was, as of the Cut-off Date, delinquent with respect
to any required Monthly Payment (inclusive of any applicable grace or cure
period), and no such delinquency (in excess of 30 days beyond any applicable
grace or cure period) has occurred within the last twelve months.
(3) As of the date of its origination, each Mortgage Loan either complied
with, or was exempt from, applicable state or federal laws, regulations and
requirements pertaining to usury, and to the best of Mortgage Loan Seller's and
Midland's knowledge, the related Originator complied in all material respects
with all other federal, state or local laws applicable to its origination,
provided, however, that with respect to each of Loan #_____ and Loan #_____, no
representation or warranty is made regarding such Mortgage Loan's compliance
with applicable usury laws, other than with respect to the compliance of the
stated interest rate of the related Note with such usury laws.
(4) The proceeds of such Mortgage Loan have been fully disbursed, and there
is no requirement for future advances thereunder.
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(5) Each related Mortgage Loan document is the legal, valid and binding
obligation of the related borrower or other party executing such Mortgage Loan
document, enforceable in accordance with its terms, there is no valid offset,
defense or counterclaim to any Mortgage Loan, and to the Mortgage Loan Seller's
knowledge, no default, breach, violation or event of acceleration exists under
the related Mortgage or the related Note.
(6) The Mortgage Loan Seller is the sole owner and holder of such Mortgage
Loan, has full right and authority to sell and assign such Mortgage Loan, and
the Mortgage Loan Seller's execution and delivery an assignment of the related
Mortgage and endorsement and delivery of the related Note validly conveys all of
its right, title and interest in such Mortgage Loan free and clear of
encumbrances of any nature.
(7) The related Mortgage Loan documents create a valid first lien on the
related Mortgaged Property (not including personal property) and a valid first
priority assignment of all leases of the related Mortgaged Property, subject
only to (A) the lien of current real estate taxes and special assessments not
yet delinquent or accruing interest or penalties, (B) covenants, conditions and
restrictions, rights of way, easements and other matters of public record, (C)
senior leases and subleases pertaining to such Mortgaged Property, and (D) other
matters (excepting any mechanics' and materialmen's liens or liens in the nature
thereof) to which like properties are commonly subject (all of the foregoing
collectively the "Permitted Encumbrances"). Uniform Commercial Code financing
statements have been filed or recorded as necessary to perfect the Mortgage Loan
Seller's security interest in personal property constituting a part of the
Mortgaged Property and in which a security interest can be perfected by the
filing of such financing statements.
(8) To the Mortgage Loan Seller's and Midland's knowledge, except with
respect to Loan #_____, the related Mortgage and the related Note have not been
materially impaired, waived, modified, satisfied, canceled or subordinated, and
neither the related Mortgaged Property nor the related borrower has been
released from such Mortgage in any manner which would materially impair the
security provided by such Mortgage.
(9) The Mortgage Loan Seller has not, directly or indirectly, advanced
funds to, or, to the Mortgage Loan Seller's and Midland's knowledge, received
any payment of any amount required under the related Note or the related
Mortgage from a person other than the related borrower.
(10) To the Mortgage Loan Seller's and Midland's knowledge, there are no
condemnation proceedings pending or threatened with respect to any Mortgaged
Property which would materially and adversely affect the value of such Mortgaged
Property, and no Mortgaged Property has been materially damaged.
(11) The related Mortgage is insured by a title insurance policy or a
specimen policy or a "marked- up" title insurance commitment issued in
connection with the closing of such Mortgage Loan (a "Title Policy") in an
amount not less than the stated principal amount of such Mortgage Loan to be a
valid first lien on the related Mortgaged Property (not including personal
property or fixtures), subject only to Permitted Encumbrances. Such Title Policy
contains only those exceptions for encroachments, boundary and other survey
matters and for easements not shown by the public records as are customarily
accepted by prudent commercial mortgage lenders in the related jurisdiction.
Except with respect to Loan #_____, no material encroachments exist with respect
to the related Mortgaged Property. No claims have been made by the Mortgage Loan
Seller or Midland under such Title Policy, and to the Mortgage Loan Seller's and
Midland's knowledge, the coverage of such Title Policy has not been materially
impaired.
(12) Each Mortgaged Property is insured by a fire and extended perils
insurance policy, a business interruption or rental continuation insurance
policy (excepting, however, Loan #_____ and Loan #_____), a comprehensive
general liability policy and, if any material improvement on such Mortgaged
Property is located in a designated special flood hazard area, a flood insurance
policy; provided, however, with respect
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to (A) Loan _____, the Major Tenant is self insured for all such risks; and (B)
Loan #_____, Loan #_____, Loan #_____ and Loan #_____, no business interruption
or rental insurance was required.
(13) Based upon a survey, the Title Policy and other documents contained in
the related Mortgage File, at the time of origination of each Mortgage Loan, the
related borrower had sufficient rights with respect to amenities and ingress and
egress identified in an appraisal of the related Mortgaged Property as being
critical to the appraised value thereof, and adequate utility services were
available at such Mortgaged Property.
(14) With respect to each Mortgage Loan secured in whole or in part by a
leasehold interest in the related Mortgaged Property, other than a mortgage loan
also secured by a fee interest in the same Mortgaged Property:
(A) to the Mortgage Loan Seller's and Midland's knowledge, the lease
creating such leasehold interest is in full force and effect, without any
existing defaults and unmodified in any material manner except pursuant to
written instruments contained in the Mortgage File, such lease or a
memorandum thereof has been recorded, and except with respect to Loan
#_____, the effective term of such lease extends not less than 10 years
beyond the term of the related Mortgage Loan;
(B) the related borrower is permitted to mortgage and sublease its
leasehold interest, and except as may be indicated in the related Title
Policy, the related Mortgage is a first priority lien over such leasehold
interest;
(C) the mortgaged leasehold interest may be transferred in a
foreclosure of the related Mortgage or a conveyance in lieu thereof, and
thereafter may be transferred, upon notice to, but without the consent of,
the related lessor (or, if any such consent is required, either (1) it has
been previously obtained or (2) it is not to be unreasonably withheld)
provided that such lease has not been terminated and all amounts owed
thereunder have been paid;
(D) the related lessor has agreed, in writing: (1) to provide the
mortgagee with a notice of any default by the related borrower under such
lease, and a cure period equal to the time provided to such lessee under
such lease; and (2) except with respect to Loan #_____, that such Ground
Lease may not be modified or terminated without the mortgagee's consent;
and
(E) Except with respect to Loan #_____, the related Mortgage Loan
documents and such lease provide that any insurance or condemnation
proceeds with respect to a partial loss or taking of the related Mortgaged
Property will be applied to the restoration of the such Mortgaged Property
or to the related Mortgage Loan.
(15) With respect to each Mortgage Loan secured by both a leasehold and a
fee interest in all or a portion of the related Mortgaged Property, such related
fee interest is subordinate to the lien of the related Mortgage and, except as
approved by the related Originator or the Mortgage Loan Seller, any right of the
related fee owner to cure a default by the borrower under the related Mortgage
is limited to no more than a (A) 30 day period, after notice is given to such
fee owner, to cure monetary defaults, and (B) 60 day period, after such notice,
to cure other defaults or, alternatively, to commence proceedings to recover
possession of such Mortgaged Property plus a reasonable cure period after
recovery of possession if such proceedings are pursued in good faith and with
due diligence.
(16) The related Mortgaged Property is not collateral or security for
the payment or performance of any obligations owed to the Mortgage Loan Seller
other than one or more of the Mortgage Loans, and to the Mortgage Loan Seller's
knowledge, any obligations owed to any other person except for (a) security
interests in personal property and fixtures, (b) Loan #_____, Loan #_____ and
Loan #_____ (each
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of which permits subordinate financing under the limited circumstances set forth
in the related Mortgage Loan documents), and (c) Loan #_____ (which permits the
related borrower, under the circumstances set forth in the related Mortgage Loan
documents, to obtain additional financing from other lenders and provides that
such additional financing will also be secured by the lien of the related
Mortgage).
(17) Each Mortgage Loan is a "qualified mortgage" for purposes of Section
860G of the Code.
(18) A Phase I Environmental Report and, if recommended by the Phase I
Environmental Report, a Phase II Environmental Report were obtained with respect
to the related Mortgaged Property, and, such Environmental Report(s) did not
indicate the existence of conditions which would constitute a material violation
of applicable environmental law or require clean-up or other remedial action
with respect to hazardous materials with the exception of conditions which could
be brought into compliance with applicable environmental law or remediated by
the taking of certain actions for which a sufficient escrow of funds has been
established, an environmental insurance policy or an indemnity for costs has
been obtained or such compliance actions or remediation was completed prior to
origination of such Mortgage Loan. Other than with respect to any conditions
identified in such Environmental Report(s), the Mortgage Loan Seller is without
knowledge of any significant failure of the related Mortgaged Property to comply
with applicable environmental law or any actual or threatened significant
release of hazardous materials in respect of such Mortgaged Property in
violation of applicable environmental law.
(19) To the best of Mortgage Loan Seller's and Midland's knowledge, the
related Mortgaged Property complies, in all material respects, with all laws and
regulations pertaining to the zoning, use and occupancy thereof (excluding
applicable environmental laws which is addressed in (18) above) and all
applicable insurance requirements, except such non-compliance (A) which does not
materially and adversely affect the value or intended use of such Mortgaged
Property, (B) which was specifically included in the determination of such
Mortgaged Property's Appraised Value, or (C) for which a Reserve Account has
been established to pay the estimated costs to correct such non-compliance.
(20) The related Mortgage Loan documents provide for recourse against the
related borrower for damages sustained in connection with fraud, intentional
misrepresentations or misappropriation of tenant security deposits or rent. The
related Mortgage Loan documents contain an indemnity from the related borrower
for damages resulting from violations of applicable environmental laws;
provided, however, that with respect to (A) Loan #_____, such indemnity
obligation was executed only in favor of the Originator of such Mortgage Loan,
(B) Loan #_____ no such indemnification obligation was obtained, and (C) each of
Loan #_____ and Loan #_____, the related borrower's indemnity obligation is a
non-recourse obligation to the extent the mortgagee's damages exceed
$250,000.00, unless such excess damages were caused by such borrower or its
general partner.
(21) As of the Loan Purchase Closing Date, the Reserve Account, if any,
with respect to each Mortgage Loan contains all amounts required by the terms of
the Mortgage Loan documents to be on deposit therein as of such date, and all
such amounts are being transferred to the Depositor as of such date.
(22) For each Mortgage that is a deed of trust or trust deed, a duly
qualified trustee either (A) has been designated or (B) may be substituted for
the currently designated trustee in accordance with applicable law.
(23) Such Mortgage Loan is a whole loan, and the related Mortgage Loan
documents do not provide for any (A) equity participation by the Mortgage Loan
Seller, (B) negative amortization or (C) contingent interest based upon the cash
flow of the related Mortgaged Property. The Mortgage Loan Seller has no
ownership interest in such Mortgaged Property or the related borrower.
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(24) The Mortgage Loan Seller and Midland have employed servicing and
collection practices conforming in all material respects to those customarily
used by commercial mortgage loan servicers in securitization transactions.
(25) Based upon applicable laws, rules and regulations, no tax,
governmental assessment or any installment thereof affecting such Mortgaged
Property (excluding any related personal property) due and owing prior to the
Cut-off Date and which might give rise to a lien superior to the related
Mortgage, has become delinquent such that (A) such taxing authority may commence
proceedings to collect such tax, assessment or installment or (B) any interest
or penalties have commenced to accrue thereon.
(26) The related Mortgage Loan documents contain customary and enforceable
provisions adequate for the practical realization by the holder thereof of its
remedies against the related Mortgaged Property, including, as applicable,
judicial or non-judicial foreclosure.
(27) A tenant estoppel was obtained from all tenants whose leases covered
more than 10% (20% for any such Mortgage Loan with an original balance less than
or equal to $2,500,000) of the net leasable area of the related Mortgaged
Property, and based upon such estoppel, no defaults with respect to any such
lease existed as of the date of such estoppel; excepting, however, Loan #_____
to the Mortgage Loan Seller's and Midland's knowledge, no default or any
condition which, but for the passage of time or the giving of notice, or both,
would result in such a default, exists with respect to such lease .
(28) Except with respect to Loan #_____, the related Mortgage Loan
documents contain: (A) a representation, warranty or covenant that the related
borrower will not use, cause or permit to exist any violation of Environmental
Law with respect to the related Mortgaged Property; or (B) an indemnity with
respect to any such violation in favor of the mortgagee.
(29) The related Mortgaged Property has been inspected on behalf of the
related Originator or Mortgage Loan Seller within the last 15 months.
(30) The related Mortgage Loan documents prohibit the related borrower from
encumbering the related Mortgaged Property without the prior written consent of
the mortgagee thereunder; excepting, however: (A) Loan #_____, Loan #_____ and
Loan #_____, each of which permits subordinate financing under the limited
circumstances set forth in the related Mortgage; and (B) Loan #_____, which
permits the related borrower, under the circumstances set forth in the related
Mortgage Loan Documents, to obtain additional financing from other lenders and
provides that such additional financing will also be secured by the lien of the
related Mortgage.
(31) No Mortgage Loan or group of Mortgage Loans made to a borrower or to
affiliated borrowers accounted for more than 50% of the Initial Pool Balance;
excepting, however, Loan #_____ and Loan #_____, which Mortgage Loans were made
to affiliated borrowers and represent _____% of
the Initial Pool Balance.
(32) With respect to Loan #_____:
(A) The facility operated on the related Mortgaged Property (the
"Facility") has not received a "Level A" (or equivalent) violation, and no
statement of charges or deficiencies has been made or penalty enforcement
action has been undertaken against the related borrower or any officer,
director or stockholder of such borrower by any governmental agency during
the last three years which have threatened the Facility or such borrower's
certification for participation in Medicare or Medicaid or any other such
program;
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(B) The related operator of the Facility ("Operator"), such borrower
and the Facility complies with all applicable federal, state and local
laws, regulations, quality and safety standards, accreditation standards
and requirements of the applicable state department of health;
(C) All required governmental licenses, permits, regulatory agreements
or other approvals or agreements for the operation of the Facility as
intended are held by or on behalf of such borrower and are in full force
and effect; and
(D) There is no threatened or pending revocation, suspension,
termination, probation, restriction, limitation or nonrenewal affecting
such borrower, the Operator or the Facility or any participation or
provider agreement with any third-party payor.
Each of such representations and warranties, to the extent related to the
enforceability of any document or as to offsets, defenses, counterclaims or
rights of rescission, is qualified to the extent that: (1) enforcement may be
limited (A) by bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally, (B) by general
principles of equity (regardless of whether such enforcement is considered in a
proceeding in equity or at law) and (C) by any applicable anti-deficiency law or
statute; (2) such document may contain certain provisions which may be
unenforceable in accordance with their terms, in whole or in part; and (3) with
respect to each of Loan #_____ and Loan #_____, each representation and warranty
as it relates to a claim of usury is limited to a representation and warranty
that only the stated interest rate of the related Note is not usurious.
The Pooling and Servicing Agreement requires that the Custodian, the Master
Servicer, the Special Servicer or the Trustee notify MCFC, Midland and _____, as
applicable, upon its becoming aware of any breach of certain representations or
warranties made by (a) MCFC or Midland in the MCFC Mortgage Loan Purchase
Agreement and (b) _____ in the _______________ Mortgage Loan Purchase Agreement,
as applicable, or that any document required to be included in the Mortgage File
does not conform to the requirements of the Pooling and Servicing Agreement. The
MCFC Mortgage Loan Purchase Agreement and the _______________ Mortgage Loan
Purchase Agreement each provide that, within 85 days after notice of such breach
from the Custodian, the Master Servicer, the Special Servicer or the Trustee,
MCFC (but only with respect to those Mortgage Loans acquired by the Depositor
pursuant to the MCFC Mortgage Loan Purchase Agreement), Midland (but only with
respect to those Mortgage Loans acquired by the Depositor pursuant to the MCFC
Mortgage Loan Purchase Agreement) and _____ (but only with respect to those
Mortgage Loans acquired by the Depositor pursuant to the _______________
Mortgage Loan Purchase Agreement) will either (a) repurchase such Mortgage Loan
at its outstanding principal balance (less any Advances previously made on
account of principal), plus accrued interest from the Due Date as to which
interest was last paid or was advanced up to the Due Date in the month following
the month in which such repurchase occurs (less any Advances previously made on
account of interest), the amount of any unreimbursed Advances, together with
interest thereon at the Advance Rate, relating to such Mortgage Loan, the amount
of any unpaid servicing compensation and Trust Fund expenses allocable to such
Mortgage Loan and the amount of any expenses reasonably incurred by the Master
Servicer or the Trustee in respect of such repurchase obligation (such price,
the "Repurchase Price") or (b) promptly cure such breach in all material
respects, provided, however, if such defect or breach cannot be cured within
such 85 day period, so long as MCFC, Midland or _____, as applicable, has
commenced and is diligently proceeding with the cure of such breach, such 85 day
period will be extended for an additional 90 days; provided, further, that no
such extension will be applicable unless MCFC, Midland or _____, as applicable,
delivers to the Depositor (or its successor in interest) an officer's
certificate (i) describing the measures being taken to cure such breach and (ii)
stating that MCFC, Midland or _____, as applicable, believes such breach will be
cured within such 90 days. Without limiting the generality of the provisions
described above, if a Mortgage Loan fails to constitute a "qualified mortgage"
within the meaning of the REMIC provisions of the Code by reason of the breach
of a representation, warranty or covenant or by reason of missing or defective
documentation, then no extension
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of the 85 day period in the preceding sentence will apply. In the event MCFC
fails to cure or repurchase any Midland Mortgage Loan which MCFC is obligated to
cure or repurchase (x) based upon a breach of a representation or warranty with
regard to a Mortgage Loan in the MCFC Mortgage Loan Purchase Agreement, or (y)
because such Midland Mortgage Loan fails to constitute a "qualified mortgage"
within the meaning of the REMIC provisions of the Code by reason of a breach of
such representation or warranty within the applicable period described in the
preceding two sentences, Midland shall cure or repurchase such Mortgage Loan at
the Repurchase Price within two Business Days after the expiration of such
applicable period.
The obligations of MCFC, Midland or _____, as applicable, to repurchase or
cure constitute the sole remedies available to holders of Certificates or the
Trustee for a breach of a representation or warranty with regard to a Mortgage
Loan by MCFC, Midland or _____. Other than as specifically described in the
preceding paragraph, neither MCFC, Midland, _____, the Special Servicer, the
Master Servicer (unless Midland is the Master Servicer and is otherwise
obligated as described herein) nor the Depositor will be obligated to purchase a
Mortgage Loan if any of MCFC, Midland or _____ defaults on their respective
obligations to repurchase or cure, and no assurance can be given that MCFC,
Midland, or _____, as applicable, will fulfill their respective obligations. If
such obligations are not met, as to a Mortgage Loan that is not a "qualified
mortgage," REMIC I, REMIC II and REMIC III may be disqualified.
MIDLAND LOAN SERVICES, L.P.
Midland Loan Services, L.P. ("Midland") was organized under the laws of the
State of Missouri in 1992 as a limited partnership. Midland is a real estate
financial services company that provides loan servicing and asset management for
large pools of commercial and multifamily real estate assets and that originates
commercial real estate loans. Midland's address is 210 West 10th Street, 6th
Floor, Kansas City, Missouri 64105. Midland will serve as the Master Servicer
and the Special Servicer for the Trust Fund under the Pooling and Servicing
Agreement. In addition, Midland was the Originator with respect to _____ of the
Mortgage Loans.
As of October 30, 1996, Midland and its affiliates were responsible for the
servicing of approximately [11,500] commercial and multifamily loans with an
aggregate principal balance of approximately [$11.8] billion, the collateral for
which is located in all 50 states, Puerto Rico and the District of Columbia.
With respect to such loans, approximately [10,350] loans with an aggregate
principal balance of approximately [$8.8] billion pertain to commercial and
multifamily mortgage-backed securities. Property type concentrations within the
portfolio include multifamily, office, retail, hotel/motel and other types of
income producing properties. Midland and its affiliates also provide commercial
loan servicing for newly-originated loans and loans acquired in the secondary
market on behalf of issuers of commercial and multifamily mortgage-backed
securities, financial institutions and private investors.
Midland and its affiliates provide asset management and disposition
services for commercial and multifamily mortgage-backed securities transactions,
private investors and the Resolution Trust Corporation. As of October 30, 1996,
Midland and its affiliates have provided such services for a portfolio of
approximately [7,153] assets with book values of [$6.7] billion. Midland and its
affiliates have liquidated, disposed of or otherwise resolved approximately
[6,474] assets with book values of approximately [$5.2] billion.
Since 1994, Midland has been originating commercial and multifamily
mortgage loans for the purpose of disposing of such mortgage loans in
securitization transactions such as this offering. As of _____________, 1996,
Midland has originated [245] commercial and multifamily mortgage loans, with an
aggregate original principal balance of [$525] million, including [____] of the
Mortgage Loans, with an aggregate original
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principal balance of [$221] million, included in the Mortgage Pool. See
"DESCRIPTION OF THE MORTGAGE POOL--The Midland Mortgage Loan Program--General"
herein.
Midland has been approved as a master and special servicer for investment
grade commercial and multifamily mortgage-backed securities by Fitch and
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.
("S&P"). Midland is ranked "Above Average" as a commercial mortgage servicer and
asset manager by S&P, and "Acceptable" as a master servicer and "Above Average"
as a special servicer by Fitch. S&P rates commercial mortgage servicers and
special servicers in one of five rating categories: Strong, Above Average,
Average, Below Average and Weak. Fitch rates special servicers in one of five
categories: Superior, Above Average, Average, Below Average and Unacceptable.
Fitch rates master servicers as Acceptable or Unacceptable.
The information concerning Midland set forth above has been provided by
Midland and none of the Depositor, the Trustee or the Underwriters makes any
representation or warranty as to the accuracy thereof.
MORTGAGE LOAN SELLERS
Midland Commercial Financing Corp. ("MCFC") is a Missouri corporation and a
special purpose subsidiary of Midland, formed for the purpose of holding
mortgage loans such as the Mortgage Loans from the time of origination thereof
through the time of securitization or other disposition thereof. MCFC does not
currently have, nor is it expected in the future to have, any significant net
worth. However, as described in more detail in "DESCRIPTION OF THE MORTGAGE
POOL--General" and "--Representations and Warranties; Repurchase," Midland will
have a repurchase obligation with respect to the Midland Mortgage Loans in the
event MCFC fails to cure or repurchase any Midland Mortgage Loan that MCFC is
obligated to cure or repurchase pursuant to the MCFC Mortgage loan Purchase
Agreement.
The information concerning MCFC set forth above has been provided by MCFC,
and none of the Depositor, the Trustee or the Underwriters makes any
representation or warranty as to the accuracy thereof.
[Insert information regarding any other Mortgage Loan Sellers.]
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of 17 Classes to be designated as the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-EC Certificates, the Class B Certificates, the Class C Certificates, the Class
D Certificates, the Class E Certificates, the Class F Certificates, the Class G
Certificates, the Class H Certificates, the Class J Certificates, the Class K-1
Certificates, the Class K-2 Certificates, the Class R-I Certificates, the Class
R-II Certificates and the Class R-III Certificates. Only the Class A-1, Class
A-2, Class A-3, Class B, Class C, Class D, Class E and Class F Certificates are
offered hereby. The Pooling and Servicing Agreement will be included as part of
the Form 8-K to be filed with the Commission within 15 days after the Closing
Date. See "THE POOLING AND SERVICING AGREEMENT" herein and "DESCRIPTION OF THE
CERTIFICATES" and "SERVICING OF THE MORTGAGE LOANS" in the Prospectus for more
important additional information regarding the terms of the Pooling and
Servicing Agreement and the Certificates.
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The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting primarily of: (i) the Mortgage Loans, all
scheduled payments of interest and principal due after the Cut-off Date (whether
or not received) and all payments under and proceeds of the Mortgage Loans
received after the Cut-off Date (exclusive of payments of principal and interest
due on or before the Cut-off Date); (ii) any Mortgaged Property acquired on
behalf of the Trust Fund through foreclosure or deed-in-lieu of foreclosure
(upon acquisition, an "REO Property"); (iii) such funds or assets as from time
to time are deposited in the Collection Account, the Distribution Account and
any account established in connection with REO Properties (an "REO Account");
(iv) the rights of the mortgagee under all insurance policies with respect to
the Mortgage Loans; (v) the Depositor's rights and remedies under the MCFC
Mortgage Loan Purchase Agreement and the ____________________________ Mortgage
Loan Purchase Agreement; and (vi) all of the mortgagee's right, title and
interest in the Reserve Accounts.
The Certificate Balance of any Class of Certificates outstanding at any
time represents the maximum amount that the holders thereof are entitled to
receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the Trust Fund. The respective
Certificate Balance of each Class of Certificates will in each case be reduced
by amounts actually distributed on such Class that are allocable to principal
and by any Realized Losses allocated to such Class. The Class A-EC and Class K-2
Certificates are interest only Certificates, have no Certificate Balances and
are not entitled to distributions in respect of principal. The Class K-1
Certificates are principal only certificates and are not entitled to
distributions in respect of interest.
Distributions
Method, Timing and Amount. Distributions on the Regular Certificates will
be made on the 25th day of each month or, if such day is not a Business Day,
then on the next succeeding Business Day, commencing in January, 1997 (each, a
"Distribution Date"). All distributions (other than the final distribution on
any Certificate) will be made by the Trustee to the persons in whose names the
Certificates are registered at the close of business on the last Business Day of
the month preceding the month in which such Distribution Date occurs (the
"Record Date"). Such distributions will be made (i) by wire transfer of
immediately available funds to the account specified by the Certificateholder at
a bank or other entity having appropriate facilities therefor, if such
Certificateholder (a) is DTC or its nominee or (b) provides the Trustee with
wiring instructions no less than five Business Days prior to the related Record
Date and is the registered owner of Certificates the aggregate Certificate
Balance or Notional Balance of which is at least $5,000,000 or otherwise (ii) by
check mailed to such Certificateholder. The "Class A-EC Notional Balance" as of
any date is equal to the sum of the Class A-EC Notional Component A and the
Certificate Balances of the Class B, Class C, Class D and Class E Certificates.
The "Class K-2 Notional Balance" as of any date is equal to the Certificate
Balance of the Class K-1 Certificates. The Class A-EC and Class K-2 Notional
Balances are referred to herein generally as "Notional Balances." The final
distribution on any Certificate will be made in like manner, but only upon
presentment or surrender of such Certificate at the location specified in the
notice to the holder thereof of such final distribution. All distributions made
with respect to a Class of Certificates on each Distribution Date will be
allocated pro rata among the outstanding Certificates of such Class based on
their respective Percentage Interests. The "Percentage Interest" evidenced by
any Regular Certificate is equal to the initial denomination thereof as of the
Closing Date divided by the initial Certificate Balance (or, with respect to the
Class A-EC and Class K-2 Certificates, the initial Class A-EC Notional Balance
or initial Class K-2 Notional Balance) of the related Class.
The aggregate distribution to be made on the Regular Certificates on any
Distribution Date will equal the Available Funds. The "Available Funds" for a
Distribution Date will be the sum of all previously undistributed Monthly
Payments or other receipts on account of principal and interest on or in respect
of the Mortgage Loans (including Unscheduled Payments and Net REO Proceeds, if
any) received by the Master Servicer in the related Collection Period, including
all P&I Advances made by the Master Servicer, the
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Trustee or the Fiscal Agent, as applicable, in respect of such Distribution
Date, plus all other amounts required to be placed in the Collection Account by
the Master Servicer pursuant to the Pooling and Servicing Agreement allocable to
the Mortgage Loans, but excluding the following:
(a) amounts permitted to be used to reimburse the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, for previously unreimbursed Advances
and interest thereon as described herein under "THE POOLING AND SERVICING
AGREEMENT--Advances;"
(b) those portions of each payment of interest
which represent the applicable servicing compensation;
(c) all amounts in the nature of late fees, late charges and similar
fees, NSF check charges, loan modification fees, extension fees, loan service
transaction fees, demand fees, beneficiary statement charges, assumption fees
and similar fees, which the Master Servicer or the Special Servicer, as
applicable, is entitled to retain as additional servicing compensation;
(d) all amounts representing scheduled Monthly Payments due after the
Due Date in the related Collection Period (such amounts to be treated as
received on the Due Date when due);
(e) that portion of (i) amounts received in connection with the
liquidation of Specially Serviced Mortgage Loans, by foreclosure, trustee's sale
or otherwise, (ii) amounts received in connection with a sale of a Specially
Serviced Mortgage Loan or REO Property in accordance with the terms of the
Pooling and Servicing Agreement, (iii) amounts (other than Insurance Proceeds)
received in connection with the taking of a Mortgaged Property by exercise of
the power of eminent domain or condemnation ("Condemnation Proceeds"; clauses
(i), (ii) and (iii) are collectively referred to as "Liquidation Proceeds") or
(iv) proceeds of the insurance policies (to the extent such proceeds are not to
be applied to the restoration of the property or released to the borrower in
accordance with the normal servicing procedures of the Master Servicer or the
related sub-servicer, subject to the terms and conditions of the related
Mortgage and Note) ("Insurance Proceeds") with respect to a Mortgage Loan that
represents any unpaid servicing compensation to which the Master Servicer or
Special Servicer is entitled;
(f) all amounts representing certain expenses reimbursable to the
Master Servicer, the Special Servicer, the Trustee or the Fiscal Agent and other
amounts permitted to be retained by the Master Servicer or the Special Servicer
or withdrawn by the Master Servicer from the Collection Account pursuant to the
terms of the Pooling and Servicing Agreement;
(g) Prepayment Premiums received in the related
Collection Period;
(h) any interest or investment income on funds
on deposit in the Collection Account or in Permitted
Investments in which such funds may be invested; and
(i) Default Interest received in the related Collection Period with
respect to a Mortgage Loan that is in default with respect to its Balloon
Payment.
The "Monthly Payment" with respect to any Mortgage Loan for any
Distribution Date (other than any REO Mortgage Loan [or the Quarterly Payment
Loan]) is the scheduled monthly payment of principal and interest, excluding any
Balloon Payment, which is payable by the related borrower on the related Due
Date. The Monthly Payment with respect to an REO Mortgage Loan for any
Distribution Date is the monthly payment that would otherwise have been payable
on the related Due Date had the related Note not been discharged (after giving
effect to any extension or other modification), determined as set forth in the
Pooling and Servicing Agreement. [For purposes of the Pooling and Servicing
Agreement, quarterly payments
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of principal and interest due in respect of the Quarterly Payment Loan will be
deemed to consist of three Monthly Payments (one of which, consisting of the
principal portion of such quarterly payment and interest in respect of the
Quarterly Payment Loan at the related Mortgage Rate for the one-month period
commencing on the prior actual Due Date for such Quarterly Payment Loan will be
deemed due on the Due Date in the current month, and each of the other two of
which, consisting of substantially equal payments of interest only
(notwithstanding the related Mortgage Rate), will be deemed due on the same day
in the two subsequent months.]
"Unscheduled Payments" are all Liquidation Proceeds, Condemnation Proceeds
and Insurance Proceeds payable under the Mortgage Loans, the Repurchase Price of
any Mortgage Loans that are repurchased or purchased pursuant to the Pooling and
Servicing Agreement and any other payments under or with respect to the Mortgage
Loans not scheduled to be made, including Principal Prepayments, but excluding
Prepayment Premiums.
"Prepayment Premiums" are payments received on a Mortgage Loan as the
result of a Principal Prepayment thereon, not otherwise due thereon in respect
of principal or interest, which are intended to be a disincentive to prepayment.
"Net REO Proceeds" with respect to any REO Property and any related
Mortgage Loan are all revenues received by the Special Servicer with respect to
such REO Property or REO Mortgage Loan that do not constitute Liquidation
Proceeds, net of any insurance premiums, taxes, assessments and other costs and
expenses permitted to be paid from the related REO Account pursuant to the
Pooling and Servicing Agreement.
"Principal Prepayments" are payments of principal made by a borrower on a
Mortgage Loan which are received in advance of the scheduled Due Date for such
payments and which are not accompanied by an amount of interest representing the
full amount of scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment.
The "Collection Period" with respect to a Distribution Date is the period
beginning on the day following the Determination Date in the month preceding the
month in which such Distribution Date occurs (or, in the case of the
Distribution Date occurring in January, 1997 on the day after the Cut-off Date)
and ending on the Determination Date in the month in which such Distribution
Date occurs.
"Determination Date" means the 17th day of any month, or if such 17th day
is not a Business Day, the Business Day immediately preceding such 17th day,
commencing on January 17, 1996.
"Default Interest" with respect to any Mortgage Loan is interest accrued on
such Mortgage Loan at the excess of the Default Rate over the Mortgage Rate.
The "Default Rate" with respect to any Mortgage Loan is the annual rate at
which interest accrues on such Mortgage Loan following any event of default on
such Mortgage Loan including a default in the payment of a Monthly Payment or a
Balloon Payment.
Priorities. As used below in describing the priorities of distribution of
Available Funds for each Distribution Date, the terms set forth below will have
the following meanings.
"Class Interest Distribution Amount" with respect to any Distribution Date
and any of the P&I Certificates will equal interest for the related Interest
Accrual Period at the applicable Pass-Through Rate for such Class of
Certificates for such Interest Accrual Period on the Certificate Balance of such
Class. With respect to any Distribution Date and the Class A-EC Certificates,
the "Class Interest Distribution Amount"
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will equal for any Distribution Date, the Class A-EC Excess Interest. The Class
K-1 Certificates are principal only Certificates and have no Class Interest
Distribution Amount. With respect to any Distribution Date and the Class K-2
Certificates, the "Class Interest Distribution Amount" will equal the product of
the Class K-2 Pass-Through Rate and the Class K-2 Notional Balance. For purposes
of determining any Class Interest Distribution Amount, any distributions in
reduction of Certificate Balance (and any resulting reductions in Notional
Balance) as a result of allocations of Realized Losses on the Distribution Date
occurring in such Interest Accrual Period will be deemed to have been made as of
the first day of such Interest Accrual Period. Notwithstanding the foregoing,
the Class Interest Distribution Amount for each Class of Certificates otherwise
calculated as described above will be reduced by such Class's pro rata share of
any Prepayment Interest Shortfall not offset by Prepayment Interest Surplus, the
Servicing Fee and, if the Master Servicer and the Special Servicer are the same
person, the Special Servicing Fee with respect to such Distribution Date (pro
rata according to each respective Class's Class Interest Distribution Amount
determined without regard to this sentence).
"Class A-EC Excess Interest" with respect to any Distribution Date is an
amount equal to the Class A-EC Pass-Through Rate multiplied by the Class A-EC
Notional Balance.
"Class A-EC Notional Balance" means, as of any date of determination, an
amount equal to the sum of (i) the Class A-EC Notional Component A and (ii) the
Certificate Balances of the Class B, Class C, Class D and Class E Certificates.
"Class A-EC Notional Component A" means, as of any date of determination,
an amount equal to the sum of the Certificate Balances of the Class A-1, Class
A-2 and Class A-3 Certificates.
["Class A-EC Pass-Through Rate" with respect to any Interest Accrual Period
is a per annum rate equal to a fraction, the numerator of which is the sum of
(i) the excess of the Weighted Average Unmodified Net Mortgage Rate over the
weighted averages of the Pass-Through Rates of the Class A-1, Class A-2 and
Class A-3 Certificates (weighted in each case on the basis of a fraction equal
to the Certificate Balance of each such Class of Certificates divided by the
Class A-EC Notional Component A as of the first day of such Interest Accrual
Period) multiplied by the A-EC Notional Component A, (ii) the Class B Strip
multiplied by the Class B Certificate Balance as of the first day of such
Interest Accrual Period, (iii) the Class C Strip multiplied by the Class C
Certificate Balance as of the first day of such Interest Accrual Period, (iv)
the Class D Strip multiplied by the Class D Certificate Balance as of the first
day of such Interest Accrual Period, and (v) the Class E Strip multiplied by the
Class E Certificate Balance as of the first day of such Interest Accrual Period,
and the denominator of which is the Class A-EC Notional Balance as of the first
day of such Interest Accrual Period.]
"Prepayment Interest Shortfall" with respect to any Distribution Date and
any Mortgage Loan as to which a Principal Prepayment was made by the related
borrower during the related Collection Period is the amount by which (i) 30 full
days of interest at the related Net Mortgage Rate on the Scheduled Principal
Balance of such Mortgage Loan in respect of which interest would have been due
in the absence of such Principal Prepayment on the Due Date next succeeding the
date of such Principal Prepayment exceeds (ii) the amount of interest received
from the related borrower in respect of such Mortgage Loan during such
Collection Period. Such shortfall may result because interest on a Principal
Prepayment is paid by the related borrower only to the date of prepayment or
because no interest is paid on a Principal Prepayment, to the extent that such
Principal Prepayment is applied to reduce the principal balance of the related
Mortgage Loan as of the Due Date preceding the date of prepayment. Prepayment
Interest Shortfalls with respect to each Distribution Date (to the extent not
offset as provided in the following two sentences) will be allocated to each
Class of Certificates pro rata based on such Class's Class Interest Distribution
Amount (without taking into account the amount of Prepayment Interest Shortfalls
to such Class on such Distribution Date) for such Distribution Date. The amount
of any Prepayment Interest Shortfall with respect to any Distribution Date will
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be offset by the Master Servicer first by the amount of any Prepayment Interest
Surplus and then up to an amount equal to the aggregate Servicing Fees to which
the Master Servicer would otherwise be entitled on such Distribution Date. If
the Master Servicer and the Special Servicer are the same person, any remaining
Prepayment Interest Shortfall after the application of the prior sentence will
be offset by the aggregate Special Servicing Fees to which the Special Servicer
would otherwise be entitled to on such Distribution Date.
"Prepayment Interest Surplus" with respect to any Distribution Date and any
Mortgage Loan as to which a Principal Prepayment was made by the related
borrower during the related Collection Period is the amount by which (i) the
amount of interest received from the related borrower in respect of such
Mortgage Loan during such Collection Period exceeds (ii) 30 full days of
interest at the related Net Mortgage Rate on the Scheduled Principal Balance of
such Mortgage Loan in respect of which interest would have been due in the
absence of such Principal Prepayment on the Due Date next succeeding the date of
such Principal Prepayment. The Master Servicer will be entitled to retain any
Prepayment Interest Surplus as additional servicing compensation to the extent
not required to offset Prepayment Interest Shortfalls as described in the
preceding paragraph.
The "Pass-Through Rate" for any Class of Regular Certificates is the per
annum rate at which interest accrues on the Certificates of such Class during
any Interest Accrual Period. The Pass-Through Rate on the Class A-1, Class A-2
and Class A-3 Certificates during any Interest Accrual Period will be ______%,
_____% and _____%, respectively. The Pass-Through Rate on the Class A-EC
Certificates during any Interest Accrual Period will be the Class A-EC
Pass-Through Rate. [The Pass-Through Rate on the Class B Certificates during any
Interest Accrual Period will be equal to the Weighted Average Unmodified Net
Mortgage Rate less the Class B Strip. The Pass-Through Rate on the Class C
Certificates during any Interest Accrual Period will be equal to the Weighted
Average Unmodified Net Mortgage Rate less the Class C Strip. The Pass-Through
Rate on the Class D Certificates during any Interest Accrual Period will be
equal to the Weighted Average Unmodified Net Mortgage Rate less the Class D
Strip. The Pass-Through Rate on the Class E Certificates during any Interest
Accrual Period will be equal to the Weighted Average Unmodified Net Mortgage
Rate less the Class E Strip. The Pass-Through Rate on the Class F, Class G,
Class H, Class J and Class K-2 Certificates during any Interest Accrual Period
will be equal to the Weighted Average Unmodified Net Mortgage Rate.] The Class
K-1 Certificates are principal only certificates and are not entitled to
distributions in respect of interest.
[The "Class B Strip" is a rate per annum equal to -----%.]
[The "Class C Strip" is a rate per annum equal to -----%.]
[The "Class D Strip" is a rate per annum equal to -----%.]
[The "Class E Strip" is a rate per annum equal to -----%.]
The "Weighted Average Net Mortgage Rate" for any Interest Accrual Period is
a per annum rate equal to the weighted average of the Net Mortgage Rates as of
the first day of such Interest Accrual Period. The "Net Mortgage Rate" for each
Mortgage Loan, is the Mortgage Rate for such Mortgage Loan (in the absence of a
default) minus the Servicing Fee Rate.
The "Weighted Average Unmodified Net Mortgage Rate" for any Interest
Accrual Period is a per annum rate equal to the weighted average of the
Unmodified Net Mortgage Rates as of the first day of such Interest Accrual
Period. The "Unmodified Net Mortgage Rate" for each Mortgage Loan, is the Net
Mortgage Rate for such Mortgage Loan as of the Cut-off Date, [except that with
respect to Loan #____, the Unmodified Net Mortgage Rate for such Mortgage Loan
will be adjusted on the date such Mortgage Loan's interest rate resets under the
terms of the related Mortgage Loan documents to the Net Mortgage Rate for such
Mortgage Loan after giving effect to the interest rate reset.]
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The "Interest Accrual Period" with respect to any Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs.
Interest for each Interest Accrual Period is calculated based on a 360-day year
consisting of twelve 30-day months.
"Class Interest Shortfall" means on any Distribution Date for any Class of
Certificates, the excess, if any, of the amount of interest required to be
distributed to the holders of such Class of Certificates on such Distribution
Date over the amount of interest actually distributed to such holders. No
interest will accrue on unpaid Class Interest Shortfalls.
The "Pooled Principal Distribution Amount" for any Distribution Date will
be equal to the sum of (without duplication):
(i) the principal component of all scheduled Monthly Payments (other
than Balloon Payments) that become due (regardless of whether received) on the
Mortgage Loans during the related Collection Period;
(ii) the principal component of all Assumed Scheduled Payments, as
applicable, deemed to become due (regardless of whether received) during the
related Collection Period with respect to any Balloon Loan that is delinquent in
respect of its Balloon Payment;
(iii) the Scheduled Principal Balance of each Mortgage Loan that was,
during the related Collection Period, repurchased from the Trust Fund in
connection with the breach of a representation or warranty as described herein
under "DESCRIPTION OF THE MORTGAGE POOL--Representations and Warranties;
Repurchase" or purchased from the Trust Fund as described herein under
"DESCRIPTION OF THE MORTGAGE POOL--Early Termination" and "--Auction;"
(iv) the portion of Unscheduled Payments allocable to principal of any
Mortgage Loan that was liquidated during the related Collection Period;
(v) the principal component of all Balloon
Payments received during the related Collection Period;
(vi) all other Principal Prepayments received in
the related Collection Period; and
(vii) any other full or partial recoveries in respect of principal,
including Insurance Proceeds, Liquidation Proceeds, Condemnation Proceeds and
Net REO Proceeds.
The "Assumed Scheduled Payment" is an amount deemed due in respect of (i)
any Mortgage Loan that is delinquent in respect of its Balloon Payment and (ii)
any REO Mortgage Loan, which will be equal to the Monthly Payment that would
have been due on the Mortgage Loan in accordance with the terms of the related
Note if (a) the maturity date for such Mortgage Loan had not occurred, (b) the
related Mortgaged Property had not become an REO Property, such Mortgage Loan
was still outstanding and no acceleration of the Mortgage Loan had occurred, and
(c) in the case of any Mortgage Loan that provided for amortization of principal
prior to its maturity date, principal continued to amortize on the same
amortization schedule.
An "REO Mortgage Loan" is any Mortgage Loan as to which the related
Mortgaged Property has become an REO Property.
On each Distribution Date, holders of each Class of Certificates will
receive distributions, up to the amount of Available Funds, in the amounts and
in the order of priority (the "Available Funds Allocation") set forth below:
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(i) First, to the Class A-1 Certificates, Class A-2 Certificates, Class
A-3 Certificates and Class A-EC Certificates, pro rata in accordance with the
Class Interest Distribution Amount of each, up to an amount equal to the Class
Interest Distribution Amount of each such Class for such Distribution Date;
(ii) Second, to the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates and Class A-EC Certificates, pro rata in accordance with
the Class Interest Shortfall of each, up to an amount equal to the aggregate
unpaid Class Interest Shortfalls previously allocated to such Class on any
previous Distribution Dates and not paid;
(iii) Third, to the Class A-1 Certificates, in reduction of the
Certificate Balance thereof, the Pooled Principal Distribution Amount for such
Distribution Date, until the Certificate Balance thereof is reduced to zero;
(iv) Fourth, after the Certificate Balance of the Class A-1
Certificates has been reduced to zero, to the Class A-2 Certificates, in
reduction of the Certificate Balance thereof, the Pooled Principal Distribution
Amount for such Distribution Date, until the Certificate Balance
thereof is reduced to zero;
(v) Fifth, after the Certificate Balance of the Class A-2 Certificates
has been reduced to zero, to the Class A-3 Certificates, in reduction of the
Certificate Balance thereof, the Pooled Principal Distribution Amount for such
Distribution Date, until the Certificate Balance
thereof is reduced to zero;
(vi) Sixth, to the Class A-1 Certificates, Class A-2 Certificates and
Class A-3 Certificates, pro rata, for the unreimbursed amounts of Realized
Losses, if any, together with simple interest thereon at a rate equal to 10.00%
per annum from the date on which such unreimbursed Realized Loss was allocated
(or the date on which interest was last paid) to, but not including, the
Distribution Date on which distributions in respect of such unreimbursed
Realized Loss are made pursuant to this subparagraph, up to an amount equal to
the aggregate of such unreimbursed Realized Losses previously allocated to the
Class A-1 Certificates, Class A-2 Certificates and Class A-3 Certificates and
interest thereon, provided that any distribution pursuant to this subparagraph
shall be deemed to be distributed first in respect of any such interest and then
in respect of any such unreimbursed Realized Loss;
(vii) Seventh, to the Class B Certificates, up to an amount equal to
the Class Interest Distribution Amount of such Class for such Distribution Date;
(viii) Eighth, to the Class B Certificates, up to an amount equal to
the aggregate unpaid Class Interest Shortfalls previously allocated to such
Class on any previous Distribution Dates and not paid;
(ix) Ninth, after the Certificate Balance of the Class A-3 Certificates
has been reduced to zero, to the Class B Certificates, in reduction of the
Certificate Balance thereof, the Pooled Principal Distribution Amount for such
Distribution Date less the portion thereof distributed on such Distribution Date
pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(x) Tenth, to the Class B Certificates, for the unreimbursed amounts of
Realized Losses, if any, together with simple interest thereon at a rate equal
to 10.00% per annum from the date on which such unreimbursed Realized Loss was
allocated (or the date on which interest was last paid) to, but not including,
the Distribution Date on which distributions in respect of such unreimbursed
Realized Loss are made pursuant to this subparagraph, up to an amount equal to
the aggregate of such unreimbursed Realized Losses previously allocated to the
Class B Certificates and interest thereon, provided that any distribution
pursuant to this subparagraph shall be deemed to be distributed first in respect
of any such interest and then in respect of any such unreimbursed Realized Loss;
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(xi) Eleventh, to the Class C Certificates, up to an amount equal to
the Class Interest Distribution Amount of such Class for such Distribution Date;
(xii) Twelfth, to the Class C Certificates, up to an amount equal to
the aggregate unpaid Class Interest Shortfalls previously allocated to such
Class on any previous Distribution Dates and not paid;
(xiii) Thirteenth, after the Certificate Balance of the Class B
Certificates has been reduced to zero, to the Class C Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(xiv) Fourteenth, to the Class C Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to 10.00% per annum from the date on which such unreimbursed Realized
Loss was allocated (or the date on which interest was last paid) to, but not
including, the Distribution Date on which distributions in respect of such
unreimbursed Realized Loss are made pursuant to this subparagraph, up to an
amount equal to the aggregate of such unreimbursed Realized Losses previously
allocated to the Class C Certificates and interest thereon, provided that any
distribution pursuant to this subparagraph shall be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
(xv) Fifteenth, to the Class D Certificates, up to an amount equal to
the Class Interest Distribution Amount of such Class for such Distribution Date;
(xvi) Sixteenth, to the Class D Certificates, up to an amount equal to
the aggregate unpaid Class Interest Shortfalls previously allocated to such
Class on any previous Distribution Dates and not paid;
(xvii) Seventeenth, after the Certificate Balance of the Class C
Certificates has been reduced to zero, to the Class D Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(xviii) Eighteenth, to the Class D Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to 10.00% per annum from the date on which such unreimbursed Realized
Loss was allocated (or the date on which interest was last paid) to, but not
including, the Distribution Date on which distributions in respect of such
unreimbursed Realized Loss are made pursuant to this subparagraph, up to an
amount equal to the aggregate of such unreimbursed Realized Losses previously
allocated to the Class D Certificates and interest thereon, provided that any
distribution pursuant to this subparagraph shall be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
(xix) Nineteenth, to the Class E Certificates, up to an amount equal to
the Class Interest Distribution Amount of such Class for such Distribution Date;
(xx) Twentieth, to the Class E Certificates, up to an amount equal to
the aggregate unpaid Class Interest Shortfalls previously allocated to such
Class on any previous Distribution Dates and not paid;
(xxi) Twenty-First, after the Certificate Balance of the Class D
Certificates has been reduced to zero, to the Class E Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
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(xxii) Twenty-Second, to the Class E Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to 10.00% per annum from the date on which such unreimbursed Realized
Loss was allocated (or the date on which interest was last paid) to, but not
including, the Distribution Date on which distributions in respect of such
unreimbursed Realized Loss are made pursuant to this subparagraph, up to an
amount equal to the aggregate of such unreimbursed Realized Losses previously
allocated to the Class E Certificates and interest thereon, provided that any
distribution pursuant to this subparagraph shall be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
(xxiii) Twenty-Third, to the Class F Certificates, up to an amount
equal to the Class Interest Distribution Amount of such Class for such
Distribution Date;
(xxiv) Twenty-Fourth, to the Class F Certificates, up to an amount
equal to the aggregate unpaid Class Interest Shortfalls previously allocated to
such Class on any previous Distribution Dates and not paid;
(xxv) Twenty-Fifth, after the Certificate Balance of the Class E
Certificates has been reduced to zero, to the Class F Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(xxvi) Twenty-Sixth, to the Class F Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to 10.00% per annum from the date on which such unreimbursed Realized
Loss was allocated (or the date on which interest was last paid) to, but not
including, the Distribution Date on which distributions in respect of such
unreimbursed Realized Loss are made pursuant to this subparagraph, up to an
amount equal to the aggregate of such unreimbursed Realized Losses previously
allocated to the Class F Certificates and interest thereon, provided that any
distribution pursuant to this subparagraph shall be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
(xxvii) Twenty-Seventh, to the Class G Certificates, up to an amount
equal to the Class Interest Distribution Amount of such Class for such
Distribution Date;
(xxviii) Twenty-Eighth, to the Class G Certificates, up to an amount
equal to the aggregate unpaid Class Interest Shortfalls previously allocated to
such Class on any previous Distribution Dates and not paid;
(xxix) Twenty-Ninth, after the Certificate Balance of the Class F
Certificates has been reduced to zero, to the Class G Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(xxx) Thirtieth, to the Class G Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to 10.00% per annum from the date on which such unreimbursed Realized
Loss was allocated (or the date on which interest was last paid) to, but not
including, the Distribution Date on which distributions in respect of such
unreimbursed Realized Loss are made pursuant to this subparagraph, up to an
amount equal to the aggregate of such unreimbursed Realized Losses previously
allocated to the Class G Certificates and interest thereon, provided that any
distribution pursuant to this subparagraph shall be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
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(xxxi) Thirty-First, to the Class H Certificates, up to an amount equal
to the Class Interest Distribution Amount of such Class for such Distribution
Date;
(xxxii) Thirty-Second, to the Class H Certificates, up to an amount
equal to the aggregate unpaid Class Interest Shortfalls previously allocated to
such Class on any previous Distribution Dates and not paid;
(xxxiii) Thirty-Third, after the Certificate Balance of the Class G
Certificates has been reduced to zero, to the Class H Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(xxxiv) Thirty-Fourth, to the Class H Certificates, for the
unreimbursed amounts of Realized Losses, if any, together with simple interest
thereon at a rate equal to 10.00% per annum from the date on which such
unreimbursed Realized Loss was allocated (or the date on which interest was last
paid) to, but not including, the Distribution Date on which distributions in
respect of such unreimbursed Realized Loss are made pursuant to this
subparagraph, up to an amount equal to the aggregate of such unreimbursed
Realized Losses previously allocated to the Class H Certificates and interest
thereon, provided that any distribution pursuant to this subparagraph shall be
deemed to be distributed first in respect of any such interest and then in
respect of any such unreimbursed Realized Loss;
(xxxv) Thirty-Fifth, to the Class J Certificates, up to an amount equal
to the Class Interest Distribution Amount of such Class for such Distribution
Date;
(xxxvi) Thirty-Sixth, to the Class J Certificates, up to an amount
equal to the aggregate unpaid Class Interest Shortfalls previously allocated to
such Class on any previous Distribution Dates and not paid;
(xxxvii) Thirty-Seventh, after the Certificate Balance of the Class H
Certificates has been reduced to zero, to the Class J Certificates, in reduction
of the Certificate Balance thereof, the Pooled Principal Distribution Amount for
such Distribution Date less the portion thereof distributed on such Distribution
Date pursuant to any preceding clause, until the Certificate Balance thereof is
reduced to zero;
(xxxviii) Thirty-Eighth, to the Class J Certificates, for the
unreimbursed amounts of Realized Losses, if any, together with simple interest
thereon at a rate equal to 10.00% per annum from the date on which such
unreimbursed Realized Loss was allocated (or the date on which interest was last
paid) to, but not including, the Distribution Date on which distributions in
respect of such unreimbursed Realized Loss are made pursuant to this
subparagraph, up to an amount equal to the aggregate of such unreimbursed
Realized Losses previously allocated to the Class J Certificates and interest
thereon, provided that any distribution pursuant to this subparagraph shall be
deemed to be distributed first in respect of any such interest and then in
respect of any such unreimbursed Realized Loss;
(xxxix) Thirty-Ninth, to the Class K-2 Certificates, up to an amount
equal to the Class Interest Distribution Amount of such Class for such
Distribution Date;
(xl) Fortieth, to the Class K-2 Certificates, up to an amount equal to
the aggregate unpaid Class Interest Shortfalls previously allocated to such
Class on any previous Distribution Dates and not paid;
(xli) Forty-First, after the Certificate Balance of the Class J
Certificates has been reduced to zero, to the Class K-1 Certificates, in
reduction of the Certificate Balance thereof, the Pooled Principal Distribution
Amount for such Distribution Date less the portion thereof distributed on such
Distribution Date pursuant to any preceding clause, until the Certificate
Balance thereof is reduced to zero;
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(xlii) Forty-Second, to the Class K-1 Certificates, for the
unreimbursed amounts of Realized Losses, if any, together with simple interest
thereon at a rate equal to 10.00% per annum from the date on which such
unreimbursed Realized Loss was allocated (or the date on which interest was last
paid) to, but not including, the Distribution Date on which distributions in
respect of such unreimbursed Realized Loss are made pursuant to this
subparagraph, up to an amount equal to the aggregate of such unreimbursed
Realized Losses previously allocated to the Class K-1 Certificates and interest
thereon, provided that any distribution pursuant to this subparagraph shall be
deemed to be distributed first in respect of any such interest and then in
respect of any such unreimbursed Realized Loss; and
(xliii) Forty-Third, any remaining funds shall
be distributed to the Residual Certificates.
All references to pro rata in the preceding clauses shall mean pro rata
based on the amount distributable pursuant to such clause.
Additional Master Servicer or Special Servicer compensation, interest on
Advances, extraordinary expenses of the Trust Fund and other similar items will
create a shortfall in Available Funds, which generally will result in a Class
Interest Shortfall for the most subordinate Class then outstanding.
Distributions of Principal on the Class A-1, Class A-2 and Class A-3
Certificates. Notwithstanding anything to the contrary herein or in the Pooling
and Servicing Agreement, on each Distribution Date prior to the earlier of (i)
the Senior Principal Distribution Cross-Over Date and (ii) the final
Distribution Date in connection with the termination of the Trust Fund, all
distributions of principal to the Class A-1 Certificates, the Class A-2
Certificates and the Class A-3 Certificates will be paid, first, to holders of
the Class A-1 Certificates until the Certificate Balance of such Certificates is
reduced to zero, second, to holders of the Class A-2 Certificates until the
Certificate Balance of such Certificates is reduced to zero, and thereafter, to
holders of the Class A-3 Certificates, until the Certificate Balance of such
Certificates is reduced to zero. On each Distribution Date on and after the
Senior Principal Distribution Cross-Over Date, and in any event on the final
Distribution Date in connection with the termination of the Trust Fund,
distributions of principal on the Class A-1 Certificates, the Class A-2
Certificates and the Class A-3 Certificates will be paid to holders of such
three Classes of Certificates, pro rata in accordance with their respective
Certificate Balances outstanding immediately prior to such Distribution Date,
until the Certificate Balance of each such Class of Certificates is reduced to
zero.
The "Senior Principal Distribution Cross-Over Date" will be the first
Distribution Date as of which the aggregate Certificate Balance of the Class A-1
Certificates, Class A-2 Certificates and Class A-3 Certificates outstanding
immediately prior thereto exceeds the sum of (i) the aggregate Scheduled
Principal Balance of the Mortgage Loans that will be outstanding immediately
following such Distribution Date and (ii) the portion of the Available
Distribution Amount for such Distribution Date that will remain after the
distribution of interest to be made on the Class A-1, Class A-2 and Class A-3
Certificates on such Distribution Date has been made.
Prepayment Premiums. All but _________ of the Mortgage Loans generally
provide that a prepayment be accompanied by the payment of a Prepayment Premium
for all or a portion of the period during which such prepayments are permitted.
Any Prepayment Premiums calculated with reference to a yield maintenance
formula ("Yield Maintenance Charges") received in the related Collection Period
will be distributed as follows:
(a) First, until the later to occur of (i) [December 2007] and (ii) the
date on which the Class A- EC Notional Balance is reduced to zero, the Yield
Maintenance Charges will be distributed to the holders of the Offered
Certificates outstanding on such Distribution Date, in the following amounts and
order of priority:
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(i) to each of the Class A-1, Class A-2, Class A-3, Class B, Class C,
Class D, Class E and Class F Certificates, an amount equal to the product of (A)
a fraction, the numerator of which is the amount distributed as principal to
such Class on such Distribution Date, and the denominator of which is the total
amount distributed as principal to all Classes of Certificates on such
Distribution Date, (B) the Base Interest Fraction for the related principal
payment and such Class of Offered Certificates and (C) the aggregate amount of
Yield Maintenance Charges collected on such principal prepayment during the
related Collection Period; and
(ii) any remaining Prepayment Premiums
following the distribution in clause (i) immediately
above, to the Class A-EC Certificates; and
(b) Second, after the last to occur of (i) [December 2007] and (ii) the
date on which the Class A-EC Notional Balance is zero, and for so long as the
Class F Certificates are still outstanding, the Yield Maintenance Charges will
be distributed as follows:
(i) to the Class F Certificates, an amount equal to the product of (A)
the Base Interest Fraction for the related principal payment and the Class F
Certificates and (B) the aggregate amount of Yield Maintenance Charges collected
on such principal prepayment during the related Collection Period; and
(ii) any remaining Prepayment Premiums following the distribution in
clause (i) immediately above, shall be retained by the Master Servicer as
additional servicing compensation.
(c) Thereafter, Yield Maintenance Charges shall be retained by the Master
Servicer as additional servicing compensation.
Any Prepayment Premiums that are not Yield Maintenance Charges received in
the related Collection Period will be distributed as follows:
(a) First, until the last to occur of (i) [December 2007] and (ii) the date
on which the A-EC Notional Balance is reduced to zero, the Prepayment Premiums
that are not Yield Maintenance Charges will be distributed to the holders of the
Class A-EC Certificates; and
(b) thereafter, the Prepayment Premiums that are not Yield Maintenance
Charges will be retained by the Master Servicer as additional servicing
compensation.
The "Base Interest Fraction" with respect to any principal prepayment on
any Mortgage Loan and with respect to any Class of Offered Certificates is a
fraction (A) the numerator of which is the greater of (x) zero and (y) the
difference between the Pass-Through Rate on such Class of Offered Certificates
and the discount rate used in calculating the Yield Maintenance Charge with
respect to such Principal Prepayment and (B) the denominator of which is the
difference between the Mortgage Rate on the related Mortgage Loan and the
discount rate used in calculating the Yield Maintenance Charge with respect to
such Principal Prepayment; provided, however, that under no circumstances shall
the Base Interest Fraction be greater than one. If the discount rate used in
calculating the Yield Maintenance Charge with respect to any Principal
Prepayment is greater than the Mortgage Rate on the related Mortgage Loan, then
the Base Interest Fraction shall equal zero.
Notwithstanding the foregoing, Prepayment Premiums will be distributed on
any Distribution Date only to the extent they are received in respect of the
Mortgage Loans in the related Collection Period.
Default Interest with Respect to Balloon Payments. Default Interest
received with respect to a Mortgage Loan that is in default with respect to its
Balloon Payment will be distributed on such Distribution Date to the holders of
the Class of Certificates that is entitled to distributions in respect of
principal on such
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Distribution Date; provided that if more than one Class of Certificates is
entitled to distributions in respect of principal on such Distribution Date, the
amount of such Default Interest will be allocated among such Classes pro rata in
accordance with their respective Certificate Balances immediately prior to said
Distribution Date.
Realized Losses. The Certificate Balance of the Regular Certificates (other
than the Class A-EC and Class K-2 Certificates) will be reduced without
distribution on any Distribution Date as a write-off to the extent of any
Realized Loss with respect to such Distribution Date. As referred to herein, the
"Realized Loss" with respect to any Distribution Date will mean the amount, if
any, by which (i) the aggregate Certificate Balance after giving effect to
distributions made on such Distribution Date exceeds (ii) the aggregate
Scheduled Principal Balance of the Mortgage Loans as of the Due Date in the
month in which such Distribution Date occurs. Any such write-offs will be
applied to the Classes of Certificates in the following order, until each is
reduced to zero: first, to the Class K-1 Certificates, second, to the Class J
Certificates, third, to the Class H Certificates, fourth, to the Class G
Certificates, fifth, to the Class F Certificates, sixth, to the Class E
Certificates, seventh, to the Class D Certificates, eighth, to the Class C
Certificates, ninth, to the Class B Certificates and finally to the Class A-1,
Class A-2 and Class A-3 Certificates, pro rata in accordance with their
respective Certificate Balances immediately prior to said Distribution Date. Any
amounts recovered in respect of any amounts previously written off as Realized
Losses will be distributed to the Classes of Certificates in reverse order of
allocation of Realized Losses thereto. Realized Losses allocated to the Class
K-1 Certificates will reduce the Class K-2 Notional Balance. Realized Losses
allocated to the Class A-1, Class A-2, Class A-3, Class B, Class C, Class D or
Class E Certificates will reduce the Class A-EC Notional Balance.
Notwithstanding anything to the contrary contained herein or in the Pooling
and Servicing Agreement, the aggregate amount distributable to each Class will
be reduced by the aggregate amount paid of any indemnification payments made to
any person under the Pooling and Servicing Agreement, such reduction to be
allocated among such Classes pro rata, based upon the respective amounts so
distributable without taking into account the provision of this paragraph. Such
reduction amounts otherwise distributable to a Class shall be allocated first in
respect of interest and second in respect of principal. For purposes of
determining Class Interest Shortfalls and Certificate Balances, the amount of
any such reduction so allocated to a Class shall be deemed to have been
distributed to such Class. See "SERVICING OF THE MORTGAGE LOANS--Certain Matters
With Respect to the Master Servicer, the Special Servicer, the Trustee and the
Depositor" in the Prospectus.
The "Scheduled Principal Balance" of any Mortgage Loan as of any Due Date
will be the principal balance of such Mortgage Loan as of such Due Date, after
giving effect to (i) any Principal Prepayments, non- premium prepayments or
other unscheduled recoveries of principal and any Balloon Payments received
during the related Collection Period and (ii) any payment in respect of
principal, if any, due on or before such Due Date (other than a Balloon Payment,
but including the principal portion of any Assumed Scheduled Payment, if
applicable), irrespective of any delinquency in payment by the borrower. The
Scheduled Principal Balance of any REO Mortgage Loan is equal to the principal
balance thereof outstanding on the date that the related Mortgaged Property
became an REO Property minus any Net REO Proceeds allocated to principal on such
REO Mortgage Loan and reduced by the principal component of Monthly Payments due
thereon on or before such Due Date. With respect to any Mortgage Loan, from and
after the date on which the Master Servicer makes a determination that it has
recovered all amounts that it reasonably expects to be finally recoverable (a
"Final Recovery Determination"), the Scheduled Principal Balance thereof will be
zero.
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Scheduled Final Distribution Date
The "Scheduled Final Distribution Date" with respect to any Class of
Certificates is the Distribution Date on which the aggregate Certificate Balance
or aggregate Notional Balance, as the case may be, of such Class of Certificates
would be reduced to zero based on the assumptions set forth below. Such
Distribution Date shall in each case be as follows:
Scheduled
Class Designation Final Distribution Date
Class A-1..................... _______________
Class A-2..................... _______________
Class A-3..................... _______________
Class A-EC.................... _______________
Class B....................... _______________
Class C....................... _______________
Class D....................... _______________
Class E....................... _______________
Class F....................... _______________
Class G....................... _______________
Class H....................... _______________
Class J....................... _______________
Class K-1..................... _______________
Class K-2..................... _______________
The Scheduled Final Distribution Dates set forth above (the "Scheduled
Final Distribution Dates") were calculated without regard to any delays in the
collection of Balloon Payments and without regard to a reasonable liquidation
time with respect to any Mortgage Loans that may be delinquent. Accordingly, in
the event of defaults on the Mortgage Loans, the actual final Distribution Date
for one or more Classes of the Certificates may be later, and could be
substantially later, than the related Scheduled Final Distribution Date(s).
In addition, the Scheduled Final Distribution Dates set forth above were
calculated assuming no prepayments (involuntary or voluntary), no Auction, no
Early Termination, no defaults, no modifications and no extensions. Since the
rate of payment (including prepayments) of the Mortgage Loans can be expected to
exceed the scheduled rate of payments, and could exceed such scheduled rate by a
substantial amount, the actual final Distribution Date for one or more Classes
of the Certificates may be earlier, and could be substantially earlier, than the
related scheduled Final Distribution Date(s). The rate of payments (including
prepayments) on the Mortgage Loans will depend on the characteristics of the
Mortgage Loans, as well as on the prevailing level of interest rates and other
economic factors, and no assurance can be given as to actual payment experience.
Subordination
As a means of providing a certain amount of protection to the holders of
the Senior Certificates against losses associated with delinquent and defaulted
Mortgage Loans, the rights of the holders of the Subordinate Certificates to
receive distributions of interest and principal, as applicable, will be
subordinated to such rights of the holders of the Senior Certificates. Each
Class of the Regular Certificates with a lower class designation will likewise
be protected by the subordination of all Classes of Certificates with yet lower
Class designations. This subordination will be effected in two ways: (i) by the
preferential right of the holders of a Class of Certificates to receive on any
Distribution Date the amounts of interest and principal, as
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applicable, distributable in respect of such Certificates on such date prior to
any distribution being made on such Distribution Date in respect of any Classes
of Certificates subordinate thereto and (ii) by the allocation of Realized
Losses, first, to the Class K-1 Certificates, second, to the Class J
Certificates, third, to the Class H certificates, fourth, to the Class G
Certificates, fifth, to the Class F Certificates, sixth, to the Class E
Certificates, seventh, to the Class D Certificates, eighth, to the Class C
Certificates, ninth, to the Class B Certificates, and, finally, to the Class
A-1, Class A-2 and Class A-3 Certificates, pro rata, in each case in reduction
of the Certificate Balance of such Class until the Certificate Balance thereof
is reduced to zero. In addition, each Class of Regular Certificates will have
the benefit of subordination of the Residual Certificates to the extent of any
distributions to which the Residual Certificates would otherwise be entitled. No
other form of credit enhancement will be available for the benefit of the
holders of the Offered Certificates.
Additional Rights of the Residual Certificates
The Residual Certificates will remain outstanding for as long as the Trust
Fund exists. Holders of the Residual Certificates are not entitled to
distributions in respect of principal, interest or Prepayment Premiums. Holders
of the Residual Certificates are not expected to receive any distributions until
after the Certificate Balances of all other Classes of Certificates have been
reduced to zero and only to the extent of any Available Funds remaining on any
Distribution Date and any remaining assets of the REMICs, if any, on the final
Distribution Date for the Certificates, after distributions in respect of any
accrued but unpaid interest on the Certificates and after distributions in
reduction of principal balance have reduced the principal balances of the
Certificates to zero.
A holder of a greater than 50% Percentage Interest of the Class R-III
Certificates may, under certain circumstances, purchase the remaining assets of
the Trust Fund, thereby effecting the termination of the Trust REMICs. See
"--Early Termination" herein.
Early Termination
The holder of the Class R-I Certificates representing greater than a 50%
Percentage Interest of the Class R-I Certificates, and, if such holder does not
exercise its option, the Master Servicer and the Depositor, will have the option
to purchase all of the Mortgage Loans and all property acquired in respect of
any Mortgage Loan remaining in the Trust Fund, and thereby effect termination of
the Trust Fund and early retirement of the then outstanding Certificates, on any
Distribution Date on which the aggregate Scheduled Principal Balance of the
Mortgage Loans remaining in the Trust Fund is less than 10% of the aggregate
principal balance of such Mortgage Loans as of the Cut-off Date. The purchase
price payable upon the exercise of such option on such a Distribution Date will
be an amount equal to not less than the greater of (i) the sum of (A) 100% of
the outstanding principal balance of each Mortgage Loan included in the Trust
Fund as of the last day of the month preceding such Distribution Date (less any
Advances previously made on account of principal); (B) the fair market value of
all other property included in the Trust Fund as of the last day of the month
preceding such Distribution Date, as determined by an independent appraiser as
of a date not more than 30 days prior to the last day of the month preceding
such Distribution Date; (C) all unpaid interest accrued on such principal
balance of each such Mortgage Loan (including any Mortgage Loan as to which
title to the related Mortgaged Property has been acquired) at the Mortgage Rate
to the last day of the month preceding such Distribution Date (less any Advances
previously made on account of interest); and (D) unreimbursed Advances with
interest thereon at the Advance Rate, unpaid servicing compensation and unpaid
Trust Fund expenses; or (ii) the aggregate fair market value of the Mortgage
Loans, and all other property acquired in respect of any Mortgage Loan in the
Trust Fund, on the last day of the month preceding such Distribution Date, as
determined by an independent appraiser as of a date not more than 30 days prior
to the last day of the month preceding such Distribution Date, together with one
month's interest thereon at the related Mortgage Rate plus disposition expenses.
See "--Additional Rights of the Residual Certificates" herein.
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Auction
On each of (i) the Distribution Date occurring in [September] of each year
from and including 2007 and (ii) any date after the Distribution Date occurring
in [September] 2007 on which the Trustee receives an unsolicited bona fide offer
to purchase all (but not less than all) of the Mortgage Loans (each, an "Auction
Valuation Date"), the Trustee will request that four independent financial
advisory or investment banking or investment brokerage firms nationally
recognized in the field of real estate analysis and reasonably acceptable to the
Master Servicer provide the Trustee with an estimated value at which the
Mortgage Loans and all other property acquired in respect of any Mortgage Loan
in the Trust Fund could be sold pursuant to an auction. If the average of the
three highest such estimates received equals or exceeds the aggregate amount of
the Certificate Balances of all Certificates outstanding on the Auction
Valuation Date, plus unpaid interest thereon, the anticipated Auction Fees,
unpaid servicing compensation, unreimbursed Advances (together with interest
thereon at the Advance Rate) and unpaid Trust Fund expenses, the Trustee will
conduct an auction of the Mortgage Loans. The Trustee will, in such case,
appoint an auction agent to solicit offers from prospective purchasers, who must
meet certain requirements described in the Pooling and Servicing Agreement, to
purchase all (but not less than all) of the Mortgage Loans and such property,
for a price not less than an amount equal to the aggregate amount of the
Certificate Balances of all Certificates outstanding as of the close of business
on the closing date (the "Auction Closing Date"), plus unpaid interest thereon,
the Auction Fees, unpaid servicing compensation, unreimbursed Advances (together
with interest thereon at the Advance Rate) and unpaid Trust Fund expenses (the
"Minimum Auction Price"). The Auction Closing Date shall be no earlier than the
Distribution Date in [December] 2007. In determining the aggregate Certificate
Balances of all Certificates, all Certificates owned by or on behalf of the
Depositor, a property manager, the Master Servicer, the Special Servicer, the
Trustee, a borrower or any affiliate thereof will be included.
If the Trustee receives no bids that are qualified pursuant to the terms of
the Pooling and Servicing Agreement, the Trust Fund will not be terminated
pursuant to these auction procedures. If the Trustee receives qualified bids,
the Trustee will accept the highest of such bids, notify the Depositor, the
Master Servicer and the Special Servicer of the adoption of a plan of complete
liquidation and will sell the Mortgage Loans and such property to the successful
bidder on or before the Remittance Date immediately preceding the third
Distribution Date following the Auction Valuation Date (or such later
Distribution Date determined by the auction agent appointed in accordance with
the immediately preceding paragraph), but, in either event, no later than the
Distribution Date which immediately precedes the date which is 90 days following
the date of adoption of a plan of complete liquidation by the Trustee. Such sale
will effect a termination of the Trust Fund and an early retirement of the then
outstanding Certificates. The Trustee will be entitled to be reimbursed from the
Collection Account for expenses that it or any auction agent incurs in
connection with an auction, including all fees and reasonable expenses of legal
counsel and other professionals ("Auction Fees").
Any auction will be conducted in accordance with auction procedures to be
developed by the auction agent in connection with such auction, provided that
such procedures will include at a minimum provisions substantially to the effect
that: (i) no due diligence of the Master Servicer's, the Special Servicer's or
the Trustee's records with respect to the Mortgage Loans may be conducted by any
bidder prior to being notified that it has submitted the highest bid; (ii) the
auction agent is entitled to require that the highest bidder provide a
non-refundable good faith deposit sufficient to reimburse the Trustee and the
auction agent for all expenses in connection with the evaluation of such bid and
in connection with such highest bidder's due diligence; (iii) each bidder may be
required to enter into a confidentiality agreement with the Master Servicer, the
Special Servicer, the auction agent and the Trustee prior to being permitted to
conduct due diligence; (iv) borrowers on any of the Mortgage Loans will be
prohibited from submitting bids; and (v) in the event that the highest bidder
withdraws, the next highest bidder will be permitted to conduct due diligence of
the Master Servicer's, the Special Servicer's or the Trustee's records with
respect to the Mortgage Loans as if it were the highest bidder.
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Delivery, Form and Denomination
Book-Entry Certificates. No Person acquiring a Class A-1, Class A-2, Class
A-3, Class B, Class C, Class D, Class E and Class F Certificate (each such
Certificate, a "Book-Entry Certificate") will be entitled to receive a physical
certificate representing such Certificate, except under the limited
circumstances described below. Absent such circumstances, the Book-Entry
Certificates will be registered in the name of a nominee of DTC and beneficial
interests therein will be held by investors ("Beneficial Owners") through the
book-entry facilities of DTC, as described herein, in denominations of $100,000
initial Certificate Balance or Notional Balance and integral multiples of $1,000
in excess thereof, except one certificate of each such Class may be issued that
represents a different initial Certificate Balance or Notional Balance to
accommodate the remainder of the initial Certificate Balance or Notional Balance
of such Class. The Depositor has been informed by DTC that its nominee will be
Cede & Co. Accordingly, Cede & Co. is expected to be the holder of record of the
Book-Entry Certificates.
No Beneficial Owner of a Book-Entry Certificate will be entitled to receive
a definitive Certificate (a "Definitive Certificate") representing such person's
interest in the Book-Entry Certificates, except as set forth below. Unless and
until Definitive Certificates are issued to Beneficial Owners in respect of the
Book- Entry Certificates under the limited circumstances described herein, all
references to actions taken by Certificateholders or holders will, in the case
of the Book-Entry Certificates, refer to actions taken by DTC upon instructions
from its participants, and all references herein to distributions, notices,
reports and statements to Certificateholders or holders will, in the case of the
Book-Entry Certificates, refer to distributions, notices, reports and statements
to DTC or Cede & Co., as the case may be, for distribution to Beneficial Owners
in accordance with DTC procedures. DTC may discontinue providing its services as
securities depository with respect to the Book-Entry Certificates at any time by
giving reasonable notice to the Trustee. Under such circumstances, in the event
that a successor securities depository is not obtained, certificates are
required to be printed and delivered. The Trustee, the Master Servicer, the
Special Servicer, the Fiscal Agent and the Certificate Registrar may for all
purposes, including the making of payments due on the Book-Entry Certificates,
deal with DTC as the authorized representative of the Beneficial Owners with
respect to such Certificates for the purposes of exercising the rights of
Certificateholders under the Pooling and Servicing Agreement.
The Depository Trust Company. 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 New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions among
Participants through electronic computerized book-entry charges in Participants'
accounts, thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers (including the
Underwriters), banks, trust companies and clearing corporations and certain
other organizations. The Rules applicable to DTC and its participants are on
file with the Securities and Exchange Commission. Indirect access to the DTC
system also is available to banks, brokers, dealers, trust companies and other
institutions that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through Direct Participants, which will receive a credit for the Book-Entry
Certificates on DTC's records. The ownership interest of each Beneficial Owner
is in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic
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statements of their holdings, from the Direct or Indirect Participant through
which the Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Book-Entry Certificates are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests in
the Certificates except in the event that use of the book-entry system for the
Book-Entry Certificates is discontinued. Neither the Certificate Registrar nor
the Trustee will have any responsibility to monitor or restrict the transfer of
ownership interests in Book-Entry Certificates through the book-entry facilities
of DTC.
To facilitate subsequent transfers, all Book-Entry Certificates deposited
by Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Book-Entry Certificates with DTC and their
registration in the name of Cede & Co. effect no change in beneficial ownership.
DTC has no knowledge of the actual Beneficial Owners of the Book-Entry
Certificates; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Book-Entry Certificates are credited, which may or may
not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers. Beneficial
Owners will not be recognized as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, by the Trustee or any paying agent (each, a
"Paying Agent") appointed by the Trustee. Beneficial Owners will be permitted to
exercise the rights of Certificate- holders only indirectly through DTC and its
Participants.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to lack of a definitive Certificate
for such Book-Entry Certificates. In addition, under a book-entry format,
Beneficial Owners may experience delays in their receipt of payments, since
distributions will be made by the Trustee or a Paying Agent on behalf of the
Trustee to Cede & Co., as nominee for DTC.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Book-Entry Certificates. Under its usual procedures, DTC mails an Omnibus Proxy
to the Trustee as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Securities are credited on that record date (identified in a
listing attached to the Omnibus Proxy). DTC may take conflicting actions with
respect to Percentage Interests or Voting Rights to the extent that Participants
whose holdings of Book-Entry Certificates evidence such Percentage Interests or
Voting Rights authorize divergent action.
Neither the Depositor, the Trustee, the Master Servicer, the Special
Servicer, the Fiscal Agent, nor any Paying Agent will have any responsibility
for any aspect of the records relating to, or payments made on account of,
beneficial ownership interests of the Book-Entry Certificates registered in the
name of Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests. In the
event of the insolvency of DTC, a Participant or an Indirect Participant in
whose name Book-Entry Certificates are registered, the ability of the Beneficial
Owners of such Book-Entry Certificates to obtain timely payment may be impaired.
In addition, in such event, if the limits of applicable insurance coverage by
the Securities Investor Protection Corporation are exceeded or if such coverage
is otherwise unavailable, ultimate payment of amounts distributable with respect
to such Book-Entry Certificates may be impaired.
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The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Depositor believes to be reliable, but
the Depositor takes no responsibility for the accuracy thereof.
Physical Certificates. The Class A-EC, Class G, Class H, Class J, Class
K-1, Class K-2, Class R-I, Class R-II and Class R-III Certificates will be
issued in fully registered certificated form only. The Class A- EC, Class G,
Class H, Class J, Class K-1 and Class K-2 Certificates will be issued in
denominations of $100,000 initial Certificate Balance or Notional Balance, as
applicable, and integral multiples of $1 in excess thereof, except one
Certificate of each such Class may be issued that represents a different initial
Certificate Balance or Notional Balance to accommodate the remainder of the
initial Certificate Balance or Notional Balance. The Residual Certificates will
be issued in definitive, physical, registered form in Percentage Interests of 5%
and integral multiples of a 1% Percentage Interest in excess thereof.
Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i)(A) the Depositor advises the Certificate Registrar in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to any Class of the Book-Entry
Certificates and (B) the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, advises the Trustee and Certificate Registrar
that it elects to terminate the book-entry system through DTC with respect to
any Class of the Book-Entry Certificates.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Certificate Registrar will be required to notify all affected
Beneficial Owners through DTC of the availability of Definitive Certificates.
Upon surrender by DTC of the physical certificates representing the affected
Book- Entry Certificates and receipt of instructions for re-registration, the
Certificate Registrar will reissue the Book- Entry Certificates as Definitive
Certificates to the Beneficial Owners. Upon the issuance of Definitive
Certificates for purposes of evidencing ownership of the Class A-1, Class A-2,
Class A-3, Class B, Class C, Class D, Class E or Class F Certificates, the
registered holders of such Definitive Certificates will be recognized as
Certificateholders under the Pooling and Servicing Agreement and, accordingly,
will be entitled directly to receive payments on, and exercise Voting Rights
with respect to, and to transfer and exchange such Definitive Certificates.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the Certificate Registrar in accordance with the terms
of the Pooling and Servicing Agreement.
Registration and Transfer
Subject to the restrictions on transfer and exchange set forth in the
Pooling and Servicing Agreement, the holder of any Definitive Certificate may
transfer or exchange the same in whole or part (in a principal amount equal to
the minimum authorized denomination or any integral multiple thereof) by
surrendering such Definitive Certificate at the corporate trust office of the
certificate registrar appointed pursuant to the Pooling and Servicing Agreement
(the "Certificate Registrar") or at the office of any transfer agent, together
with an executed instrument of assignment and transfer in the case of transfer
and a written request for exchange in the case of exchange. In exchange for any
Definitive Certificate properly presented for transfer or exchange with all
necessary accompanying documentation, the Certificate Registrar will, within
five Business Days of such request if made at the corporate trust office of the
Certificate Registrar, or within ten Business Days if made at the office of a
transfer agent (other than the Certificate Registrar), execute and deliver at
such corporate trust office or the office of the transfer agent, as the case may
be, to the transferee (in the case of transfer) or holder (in the case of
exchange) or send by first class mail at the risk of the transferee (in the case
of transfer) or holder (in the case of exchange) to such address as the
transferee or holder, as applicable, may request, a Definitive Certificate or
Definitive Certificates, as the case may require, for a like aggregate
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Certificate Balance or Notional Balance, as applicable, and in such authorized
denomination or denominations as may be requested. The presentation for transfer
or exchange of any Definitive Certificate will not be valid unless made at the
corporate trust office of the Certificate Registrar or at the office of a
transfer agent by the registered holder in person, or by a duly authorized
attorney-in-fact. The Certificate Registrar may decline to accept any request
for an exchange or registration of transfer of any Definitive Certificate during
the period of 15 days preceding any Distribution Date.
No fee or service charge will be imposed by the Certificate Registrar for
its services in respect of any registration of transfer or exchange referred to
herein; provided, however, that in connection with the transfer of Private
Certificates to certain institutional accredited investors, the Certificate
Registrar will be entitled to be reimbursed by the transferor for any costs
incurred in connection with such transfer. The Certificate Registrar may require
payment by each transferor of a sum sufficient to pay any tax, expense or other
governmental charge payable in connection with any such transfer.
For a discussion of certain transfer restrictions, see "ERISA
CONSIDERATIONS" herein.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Regular Certificate will depend on (a) the price
at which such Certificate is purchased by an investor and (b) the rate, timing
and amount of distributions on such Certificate. The rate, timing and amount of
distributions on any Regular Certificate will in turn depend on, among other
things, (i) the rate and timing of principal payments (including voluntary
prepayments, involuntary prepayments resulting from defaults and liquidations or
other dispositions of the Mortgage Loans and Mortgaged Properties or the
application of insurance or condemnation proceeds and/or the purchase of the
Mortgage Loans as described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase" and "DESCRIPTION OF THE
CERTIFICATES--Early Termination" and "--Auction") and the extent to which such
amounts are to be applied in reduction of the Certificate Balance (or Notional
Balance) of the Class of Certificates to which such Certificate belongs, (ii)
the rate, timing and severity of Realized Losses on the Mortgage Loans and the
extent to which such losses are allocable in reduction of the Certificate
Balance (or Notional Balance) of the Class of Certificates to which such
Certificate belongs and [(iii) with respect to the Class A-EC, Class F, Class G,
Class H, Class J and Class K-2 Certificates, the Weighted Average Unmodified Net
Mortgage Rate as in effect from time to time.] Disproportionate principal
payments (whether resulting from differences in amortization schedules,
prepayments or otherwise) on Mortgage Loans having Unmodified Net Mortgage Rates
that are higher or lower than the current Weighted Average Unmodified Net
Mortgage Rate will affect the yield on the Class A-EC Certificates. Such
disproportionate principal payments will also affect the Pass-Through Rates of
the [Class F, Class G, Class H, Class J and Class K-2] Certificates and
therefore the yield on each such Class.
Rate and Timing of Principal Payments. The yield to holders of the Regular
Certificates purchased at a discount or premium will be affected by the rate and
timing of principal payments made in reduction of the Certificate Balance of
such Certificates. As described herein, the Pooled Principal Distribution Amount
for each Distribution Date generally will be distributable in its entirety in
respect of the Class A-1 Certificates until the Certificate Balance thereof is
reduced to zero, and will thereafter be distributable in its entirety to each
remaining Class of Regular Certificates, sequentially in order of Class
designation, in each case until the Certificate Balance of each such Class of
Certificates is, in turn, reduced to zero. Consequently, the rate and timing of
principal payments made in reduction of the Certificate Balance of the Regular
Certificates will be directly related to the rate and timing of principal
payments on or in respect of the Mortgage Loans, which will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments are
due
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and the rate and timing of Principal Prepayments and other unscheduled
collections thereon (including, for this purpose, collections made in connection
with liquidations of Mortgage Loans due to defaults, Casualties or Condemnations
affecting the Mortgaged Properties or purchases of Mortgage Loans out of the
Trust Fund in the manner described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warran- ties; Repurchase" and "DESCRIPTION OF THE
CERTIFICATES--Early Termination" and "--Auction" herein). Prepayments and,
assuming the respective stated maturity dates therefor have not occurred,
liquidations and purchases of the Mortgage Loans will result in distributions on
the Regular Certificates (other than the Class A-EC and Class K-2 Certificates)
of amounts that would otherwise have been distributed over the remaining terms
of the Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near
their stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans and, accordingly, on the Regular Certificates
while work-outs are negotiated, foreclosures are completed or bankruptcy
proceedings are resolved. The yield to investors in the Subordinate Certificates
will be very sensitive to the timing and magnitude of losses on the Mortgage
Loans due to liquidations following a default, and will also be very sensitive
to delinquencies in payment. In addition, the Special Servicer has the option,
subject to certain limitations, to extend the maturity of Mortgage Loans
following a default in the payment of a Balloon Payment. See "THE POOLING AND
SERVICING AGREEMENT--Servicing of the Mortgage Loans; Collection of Payments"
and "--Realization Upon Mortgage Loans" herein and "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Foreclosure" in the Prospectus.
The rate and timing of principal payments and defaults and the severity of
losses on the Mortgage Loans may be affected by a number of factors, including,
without limitation, the terms of the Mortgage Loans (for example, the provisions
requiring the payment of Prepayment Premiums and amortization terms that require
Balloon Payments), prevailing interest rates, the market value of the Mortgaged
Properties, the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located, the general supply and demand for
such facilities (and their uses) in such areas, the quality of management of
Mortgaged Properties, the servicing of the Mortgage Loans, federal and state tax
laws (which are subject to change) and other opportunities for investment.
The rate of prepayment on the Mortgage Pool is likely to be affected by the
amount of any required Prepayment Premiums and the borrowers' ability to
refinance their related Mortgaged Loans. If prevailing market interest rates for
mortgage loans of a comparable type, term and risk level have decreased enough
to offset any required Prepayment Premium, a borrower may have an increased
incentive to refinance its Mortgage Loan for purposes of either (i) converting
to another fixed rate loan with a lower interest rate and thereby "locking in"
such rate or (ii) taking advantage of an initial "teaser rate" on an adjustable
rate mortgage loan (that is, a mortgage interest rate below that which would
otherwise apply if the applicable index and gross margin were applied). However,
the ability of a borrower to refinance its Mortgage Loan will be affected not
only by prevailing market rates, but also by the current market value of the
Mortgage Property. See "RISK FACTORS--Prepayment and Yield Considerations"
herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Enforceability of
Certain Provisions" in the Prospectus.
In addition, some borrowers may sell Mortgaged Properties in order to
realize their equity therein, to meet cash flow needs or to make other
investments.
If the markets for commercial and multifamily real estate should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans exceed the value of the respective Mortgaged Properties, a
borrower under a non-recourse loan may have a decreased incentive to fund
operating cash flow deficits and, as a result, actual losses may be higher than
those originally anticipated by investors.
Neither the Depositor, the Mortgage Loan Sellers nor _____ makes any
representation as to the particular factors that will affect the rate and timing
of prepayments and defaults on the Mortgage Loans, as to the relative importance
of such factors, as to the percentage of the principal balance of the Mortgage
Loans
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that will be prepaid or as to which a default will have occurred as of any date
or as to the overall rate of prepayment, default or principal payment on the
Mortgage Loans.
The extent to which the yield to maturity of any Class of Regular
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed in reduction
of the Certificate Balance of such Certificates. An investor should consider, in
the case of any Regular Certificate purchased at a discount, especially the
Class K-1 Certificates, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Regular Certificate purchased at a premium (or the Class A-EC and Class K-2
Certificates, which have no Certificate Balances), the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. In general, the earlier a
payment of principal on the Mortgage Loans is distributed in reduction of the
Certificate Balance of any Regular Certificate purchased at a discount or
premium (or, in the case of the Class A-EC and Class K-2 Certificates, applied
in reduction of the Notional Balance), the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal payments on the Mortgage Loans occurring at a rate higher (or lower)
than the rate anticipated by the investor during any particular period would not
be fully offset by a subsequent like reduction (or increase) in the rate of such
principal payments. Because the rate of principal payments on the Mortgage Loans
will depend on future events and a variety of factors (as described more fully
below), no assurance can be given as to such rate or the rate of Principal
Prepayments in particular. The Depositor is not aware of any relevant publicly
available or authoritative statistics with respect to the historical prepayment
experience of a large group of commercial and/or multifamily loans comparable to
the Mortgage Loans. See "RISK FACTORS--Prepayment and Yield Considerations"
herein.
The amounts payable with respect to the Class K-1 Certificates derive only
from principal payments on the Mortgage Loans. As a result, the yield on the
Class K-1 Certificates will be adversely affected by slower than expected
payments of principal (including prepayments, defaults and liquidations) on the
Mortgage Loans.
Balloon Payments. Most of the Mortgage Loans are Balloon Loans that will
have substantial payments (that is, Balloon Payments) due at their stated
maturities, unless previously prepaid. The ability of the borrowers to pay the
Balloon Payment at the maturity of the Balloon Loans will depend on their
ability to sell or refinance the Mortgaged Properties, which, in turn, depends
on a number of factors, many of which are beyond the control of such borrowers.
Such factors include the level of interest rates and general economic conditions
at the time of sale or refinancing and changes in federal, state or local laws,
including tax laws, environmental laws and safety standards. The Certificates
are subject to the risk of default by the borrowers in making the required
Balloon Payments. If any borrower with respect to any of such Balloon Loans is
unable to make the applicable Balloon Payment when due, the average life of the
Certificates will be longer than expected. See the Range of Maturity Years Table
in "DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage
Pool--Other Information" herein for additional information regarding maturity
dates of the Mortgage Loans.
Losses and Shortfalls. The yield to holders of the Regular Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Shortfalls in
Available Funds resulting from shortfalls in collections of amounts payable on
the Mortgage Loans (to the extent not advanced) or additional Master Servicer or
Special Servicer compensation, interest on Advances, extraordinary Trust Fund
expenses or other similar items will generally be borne: first, by the holders
of the Class K-1 Certificates, to the extent of amounts otherwise distributable
thereto; second, by the holders of the Class J Certificates, to the extent of
amounts otherwise distributable thereto; third, by the holders of the Class H
Certificates, to the extent of amounts otherwise distributable thereto; fourth,
by the
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holders of the Class G Certificates, to the extent of amounts otherwise
distributable thereto; fifth, by the holders of the Class F Certificates, to the
extent of amounts otherwise distributable thereto; sixth, by the holders of the
Class E Certificates, to the extent of amounts otherwise distributable thereto;
seventh, by the holders of the Class D Certificates to the extent of amounts
otherwise distributable thereto; eighth, by the holders of the Class C
Certificates, to the extent of amounts otherwise distributable thereto; ninth,
by the holders of the Class B Certificates, to the extent of amounts otherwise
distributable thereto; and, last, by the holders of the Class A-1, Class A-2 and
Class A-3 Certificates on a pro-rata basis. The amount of any such shortfall
generally will be distributable to holders of such Class on subsequent
Distribution Dates, to the extent of Available Funds on such Distribution Dates.
Any such shortfall will not bear interest, however, and will therefore
negatively affect the yield to maturity of such Class of Certificates for so
long as it is outstanding.
Realized Losses will be allocated, as and to the extent described herein,
to the Classes of Certificates (in reduction of the Certificate Balance of each
such Class) in reverse order of their Class designation. As a result, a loss on
any one of the Mortgage Loans could result in a significant loss, or in some
cases a complete loss, of an investors's investment in any Class of the
Subordinate Certificates. Consequently prospective investors should perform
their own analysis of the expected timing and severity of Realized Losses prior
to investing in any Subordinate Certificate. Even if losses on the Mortgage
Loans are not borne by an investor in any Class, such losses may affect the
weighted average life and yield to maturity of such investor's Certificates.
Pass-Through Rate. [The Pass-Through Rates on the Class B, Class C, Class D
and Class E Certificates are related to the Weighted Average Unmodified Net
Mortgage Rate, the Pass-Through Rate on the Class F, Class G, Class H, Class J
and Class K-2 Certificates is equal to the Weighted Average Unmodified Net
Mortgage Rate and the Class A-EC Pass-Through Rate, used to calculate interest
distributable on the Class A-EC Certificates, is derived with reference to the
Weighted Average Unmodified Net Mortgage Rate.
The Weighted Average Unmodified Net Mortgage Rate will fluctuate over the
lives of the Certificates as a result of scheduled amortization, voluntary
prepayments and liquidations of Mortgage Loans. If principal payments, including
voluntary and involuntary Principal Prepayments, are made on a Mortgage Loan
with a relatively high Unmodified Net Mortgage Rate at a rate faster than the
rate of principal payments on the Mortgage Pool as a whole, the Pass-Through
Rates applicable to the Certificates (other than the Class A-1, Class A-2 and
Class A-3 Certificates) will be adversely affected. Accordingly, the yield on
each such Class of Certificates will be sensitive to changes in the outstanding
principal balances of the Mortgage Loans as a result of scheduled amortization,
voluntary prepayments and liquidations of Mortgage Loans.
The Pass-Through Rate on each of the Class B, Class C, Class D and Class E
Certificates is equal to the Weighted Average Unmodified Net Mortgage Rate less
the related Class strip and the Pass- Through Rate on each of the Class F, Class
G, Class H, Class J and Class K-2 Certificates is equal to the Weighted Average
Unmodified Net Mortgage Rate. Since the Pass-Through Rates for the Certificates
(other than the Class A-1, Class A-2 and Class A-3 Certificates) are related to
the Weighted Average Unmodified Net Mortgage Rate, a decrease in the Net
Mortgage Rate for any Mortgage Loan as a result of a modification will result in
the Certificates accruing interest at a rate higher than the Net Mortgage Rate
for the Mortgage Pool and there will not be sufficient cash flow to make all
interest payments due on each of such Classes. Any such interest shortfall would
affect such Certificates in reverse sequential order commencing with the Class
K-2 Certificates. See "DESCRIPTION OF THE CERTIFICATES--Distributions" herein.
For a description of the interest rates applicable to the Mortgage Loans see
"DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage
Pool--Range of Mortgage Rates" herein.]
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<PAGE>
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until, at the earliest, the 25th day of the month
following the month in which interest accrued on the Certificates, the effective
yield to the holders of the Regular Certificates will be lower than the yield
that would otherwise be produced by the applicable Pass-Through Rate and
purchase prices (assuming such prices did not account for such delay).
Weighted Average Life
Weighted average life refers to the average amount of time that will elapse
from the date of determination to the date of distribution to the investor of
each dollar distributed in reduction of principal balance or notional balance of
such security. The weighted average life of the Regular Certificates will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans is paid, which may be in the form of scheduled amortization, Balloon
Payments, prepayments or liquidations.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the "Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant rate of
prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. CPR of "0%" assumes that no Mortgage Loan is prepaid by a
borrower before maturity, while CPRs "2%" and "4%" assume that prepayments on
the Mortgage Loans are made by borrowers at those CPRs. CPR does not purport to
be either an 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, including the Mortgage Loans to be included in the Trust Fund.
The tables set forth below have been prepared on the basis of certain
assumptions as described below regarding the characteristics of the Mortgage
Loans that are expected to be included in the Mortgage Pool as described under
"DESCRIPTION OF THE MORTGAGE POOL" herein and the performance thereof. The
tables assume, among other things, that: (i) as of the date of issuance of the
Regular Certificates, the Mortgage Loans (except as set forth herein) provide
for a Monthly Payment of principal and interest that would fully amortize the
remaining principal balance of such Mortgage Loan using the Monthly Payments in
the amounts set forth in Annex A hereto, commencing on the first day of the
month immediately following the month in which such issuance occurs, with, if
such Mortgage Loan is a Balloon Loan, the Monthly Payments in the amounts set
forth in Annex A hereto and a principal payment in the amount that would reduce
the principal balance of such Balloon Loan to zero on the maturity date set
forth in Annex A; (ii) neither MCFC nor _____ will repurchase any Mortgage Loan
and none of the Master Servicer, the Special Servicer, the Depositor or the
holders of the Class R-I Certificates exercises its option to purchase Mortgage
Loans and thereby cause a termination of the Trust Fund; (iii) there are no
delinquencies or Realized Losses on the Mortgage Loans; (iv) no Prepayment
Premiums are paid with respect to any Mortgage Loan; (v) payments on the
Certificates will be made on the 25th day of each month, commencing on January
25, 1997 (notwithstanding that any such day is not a Business Day); (vi) there
are no additional ongoing Trust Fund expenses payable out of the Trust Fund
other than the Servicing Fee; (vii) the Regular Certificates will be purchased
on December ___, 1996; (viii) that no defaults occur with respect to any of the
Mortgage Loans; [(ix) that payments of principal and interest equal to
$_______________ are made under the Quarterly Payment Loan on the first of each
month during its term]; (x) that the Monthly Payments under the two Mortgage
Loans that require Monthly Payments to be made on the _______ of each month are
made on the first of each month following the month in which such Monthly
Payment was actually due (i.e., the December , 1996 payment is made on January
1, 1997); (xi) that all of the Mortgage Loans accrue interest based upon a 360
day year composed of twelve 30 day months; (xii) that all Mortgage Loans that
have a maturity date other than the first day of a month make their final
payment on the first day of the month following the month of maturity; and
[(xiii) that Loan #_____ has _____ scheduled payment dates, with the first such
payment consisting of interest only and the remaining ______ payments consisting
of principal and interest.]
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<PAGE>
The actual performance of the Mortgage Loans will differ from the
assumptions used in calculating the tables set forth below, which are
hypothetical in nature and are provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. Any
difference between such assumptions and the actual performance of the Mortgage
Loans, or actual prepayment or loss experience, will affect the percentages of
initial Certificate Balance outstanding over time and the weighted average lives
of the Classes of Regular Certificates.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each Class of Regular Certificates, and
set forth the percentages of the initial Certificate Balance or Notional Balance
of each such Class of Regular Certificates that would be outstanding after each
of the Distribution Dates shown based on the assumptions described above and the
following additional assumptions for each of the designated scenarios (the
"Scenarios"). In the case of Scenario 1, it was assumed that none of the
Mortgage Loans prepay prior to their maturity date and that there are no
defaults. In the case of Scenario 2, the prepayment assumptions set forth in
Scenario 1 were assumed and it was further assumed that the Trust Fund will be
terminated pursuant to an auction on the Distribution Date occurring in
[December] 2007. In the case of Scenario 3 and Scenario 4, it was assumed that
the Mortgage Loans prepay prior to their maturity date at a rate equal to 2% CPR
and 4% CPR, respectively, and that there are no defaults and that it was further
assumed that the Trust Fund will be terminated pursuant to an auction on the
Distribution Date occurring in December 2007. See "DESCRIPTION OF THE
CERTIFICATES--Auction" herein.
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<PAGE>
Percentage of Initial Certificate Balance
(or Notional Balance)
Outstanding for
Each Designated Scenario
CLASS A-1 CLASS A-2 CLASS A-3
SCENARIO SCENARIO SCENARIO
DISTRIBUTION 1 2 3 4 1 2 3 4 1 2 3 4
- ------------- - - - - - - - - - - - -
DATE
Initial
Percentage
Initial
Balance
December 1997
December 1998
December 1999
December 2000
December 2001
December 2002
December 2003
December 2004
December 2005
December 2006
December 2007
December 2008
December 2009
December 2010
December 2011
Weighted
Average Life
1
- -----------------------
1The weighted average life of each Class is determined by (i) multiplying the
amount of each distribution in reduction of the Certificate Balance or Notional
Balance of such Class by the number of years from the date of purchase to the
related Distribution Date, (ii) adding the results and (iii) dividing the sum by
the aggregate distributions in reduction of Certificate Balance or Notional
Balance referred to in clause (i).
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<PAGE>
Percentage of Initial Certificate Balance
(or Notional Balance)
Outstanding for
Each Designated Scenario
CLASS B CLASS C CLASS D
SCENARIO SCENARIO SCENARIO
DISTRIBUTION 1 2 3 4 1 2 3 4 1 2 3 4
- ------------- - - - - - - - - - - - -
DATE
Initial
Percentage
Initial
Balance
December 1997
December 1998
December 1999
December 2000
December 2001
December 2002
December 2003
December 2004
December 2005
December 2006
December 2007
December 2008
December 2009
December 2010
December 2011
Weighted
Average Life
1
- -----------------------
1The weighted average life of each Class is determined by (i) multiplying the
amount of each distribution in reduction of the Certificate Balance or Notional
Balance of such Class by the number of years from the date of purchase to the
related Distribution Date, (ii) adding the results and (iii) dividing the sum by
the aggregate distributions in reduction of Certificate Balance or Notional
Balance referred to in clause (i).
S-98
<PAGE>
CLASS E CLASS F CLASS G
SCENARIO SCENARIO SCENARIO
DISTRIBUTION 1 2 3 4 1 2 3 4 1 2 3 4
- ------------- - - - - - - - - - - - -
DATE
Initial
Percentage
Initial
Balance
December 1997
December 1998
December 1999
December 2000
December 2001
December 2002
December 2003
December 2004
December 2005
December 2006
December 2007
December 2008
December 2009
December 2010
December 2011
Weighted
Average Life
1
- -----------------------
1The weighted average life of each Class is determined by (i) multiplying the
amount of each distribution in reduction of the Certificate Balance or Notional
Balance of such Class by the number of years from the date of purchase to the
related Distribution Date, (ii) adding the results and (iii) dividing the sum by
the aggregate distributions in reduction of Certificate Balance or Notional
Balance referred to in clause (i).
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<PAGE>
CLASS H CLASS J CLASS K-1 AND
SCENARIO SCENARIO CLASS K-2
SCENARIO
DISTRIBUTION 1 2 3 4 1 2 3 4 1 2 3 4
- ------------- - - - - - - - - - - - -
DATE
Initial
Percentage
Initial
Balance
December 1997
December 1998
December 1999
December 2000
December 2001
December 2002
December 2003
December 2004
December 2005
December 2006
December 2007
December 2008
December 2009
December 2010
December 2011
Weighted
Average Life
1
- -----------------------
1The weighted average life of each Class is determined by (i) multiplying the
amount of each distribution in reduction of the Certificate Balance or Notional
Balance of such Class by the number of years from the date of purchase to the
related Distribution Date, (ii) adding the results and (iii) dividing the sum by
the aggregate distributions in reduction of Certificate Balance or Notional
Balance referred to in clause (i).
S-100
<PAGE>
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of December 1, 1996 (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer, the Special
Servicer, the Trustee and the Fiscal Agent.
The Depositor will provide to a prospective or actual
holder of a Certificate without charge, upon written
request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to
Midland Realty Acceptance Corp., 210 West 10th Street, 6th
Floor, Kansas City, Missouri 64105, attention: E. J. Burke
at telephone number (816) 843-6272.
Assignment of the Mortgage Loans
On or before the Closing Date, the Depositor will assign or cause the
assignment of the Mortgage Loans without recourse, to the Trustee for the
benefit of the holders of Certificates. On or prior to the Closing Date, the
Depositor will deliver to the Trustee, with a copy to the Master Servicer, with
respect to each Mortgage Loan the following set of documents (the "Trustee
Mortgage File"):
(i) the original of the related Note, endorsed
by the applicable Mortgage Loan Seller in
blank in the following form: "Pay to the
order of ________________, without recourse"
which the Trustee or its designee is
authorized to complete and which Note and
all endorsements thereof shall show a
complete chain of endorsement from the
Originator to the applicable Mortgage Loan
Seller;
(ii) the related original recorded Mortgage
or a copy thereof certified by the
related title insurance company, public
recording office or closing agent to be
in the form in which executed or
submitted for recording, the related
original recorded Assignment of Mortgage
to the applicable Mortgage Loan Seller
or a copy thereof certified by the
related title insurance company, public
recording office or closing agent to be
in the form in which executed or
submitted for recording and the related
original Assignment of Mortgage executed
by the applicable Mortgage Loan Seller
in blank which the Trustee or its
designee is authorized to complete (and
but for the insertion of the name of the
assignee and any related recording
information which is not yet available
to the applicable Mortgage Loan Seller,
is in suitable form for recordation in
the jurisdiction in which the related
Mortgaged Property is located);
(iii) if the related security agreement is
separate from the Mortgage, the original
security agreement or a counterpart
thereof, and if the security agreement
is not assigned under the Assignments
of Mortgage described in clause (ii)
above, the related original assignment
of such security agreement to the
applicable Mortgage Loan Seller or a
counterpart thereof and the related
original assignment of such security
agreement executed by the applicable
Mortgage Loan Seller in blank which the
Trustee or its designee is authorized to
complete;
(iv) a copy of each Form UCC-1 financing statement, if any, filed with
respect to personal property constituting a part of the related
Mortgaged Property, together with a copy of each Form UCC-2 or
UCC-3 assignment, if any, of such financing statement to the
applicable Mortgage Loan Seller and a copy of each Form UCC-2 or
UCC-3 assignment, if any, of such financing statement executed by
the applicable
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<PAGE>
Mortgage Loan Seller in blank which the Trustee or its designee is
authorized to complete (and but for the insertion of the name of
the assignee and any related filing information which is not yet
available to the applicable Mortgage Loan Seller, is in suitable
form for filing in the filing office in which such financing
statement was filed);
(v) the related original of the Loan Agreement,
if any, relating to such Mortgage Loan or a
counterpart thereof;
(vi) the related original lender's title insurance policy (or the
original pro forma title insurance policy), together with any
endorsements thereto;
(vii) if any related Assignment of Leases,
Rents and Profits is separate from the
Mortgage, the original recorded
Assignment of Leases, Rents and Profits
or a copy thereof certified by the
related title insurance company, public
recording office, or closing agent to be
in the form in which executed or
submitted for recording, the related
original recorded reassignment of such
instrument, if any, to the applicable
Mortgage Loan Seller or a copy thereof
certified by the related title insurance
company or closing agent to be in the
form in which executed or submitted for
recording and the related original
reassignment of such instrument, if any,
executed by the applicable Mortgage Loan
Seller in blank which the Trustee or
its designee is authorized to complete
(and but for the insertion of the name
of the assignee and any related
recording information which is not yet
available to the applicable Mortgage
Loan Seller, is in suitable form for
recordation in the jurisdiction in which
the related Mortgaged Property is
located) (any of which reassignments,
however, may be included in a related
Assignment of Mortgage and need not be a
separate instrument);
(viii) copies of the original Environmental Reports with respect to
the Mortgaged Property made in connection with the origination
of such Mortgage Loan;
(ix) if any related assignment of contracts is separate from the
Mortgage, the original assignment of contracts or a counterpart
thereof, and if the assignment of contracts is not assigned under
the Assignments of Mortgage described in clause (ii) above, the
related original reassignment of such instrument to the applicable
Mortgage Loan Seller or a counterpart thereof and the related
original reassignment of such instrument executed by the
applicable Mortgage Loan Seller in blank which the Trustee or its
designee is authorized to complete;
(x) with respect to the related Reserve Accounts, if any, a copy of
the original of any separate agreement with respect thereto
between the related borrower and the Originator;
(xi) the original of any other written agreement, instrument or
document securing such Mortgage Loan, including, without
limitation, originals of any guaranties with respect to such
Mortgage Loan or the original letter of credit, if any, with
respect thereto, together with any and all amendments thereto,
including, without limitation, any amendment which entitles the
Master Servicer to draw upon such letter of credit on behalf of
the Trustee for the benefit of the Certificateholders, and the
original of each instrument or other item of personal property
given as security for a Mortgage Loan possession of which by a
secured party is necessary to a secured party's valid,
S-102
<PAGE>
perfected, first priority security interest therein, together with
all assignments or endorsements thereof necessary to entitle the
Master Servicer to enforce a valid, perfected, first priority
security interest therein on behalf of the Trustee for the benefit
of the Certificateholders;
(xii) with respect to the related Reserve
Accounts, if any, a copy of the UCC-1
financing statements, if any, submitted
for filing with respect to the
applicable Originator's security
interest in such Reserve Accounts and
all funds contained therein, together
with a copy of each Form UCC-2 or UCC-3
assignment, if any, of such financing
statement to the applicable Mortgage
Loan Seller and a copy of each Form
UCC-2 or UCC-3 assignment, if any, of
such financing statement executed by
the applicable Mortgage Loan Seller in
blank which the Trustee or its
designee is authorized to complete (and
but for the insertion of the name of
the assignee and any related filing
information which is not yet available
to the applicable Mortgage Loan Seller,
is in suitable form for filing in the
filing office in which such financing
statement was filed); and
(xiii) copies of any and all amendments,
modifications and supplements to, and
waivers related to, any of the foregoing.
If the Depositor cannot deliver any original or certified recorded document
described above on the Closing Date, the Depositor will use its best efforts to
deliver (or cause to be delivered) such original or certified recorded documents
within 45 days from the Closing Date (subject to delays attributable to the
failure of the appropriate recording office to return such documents, in which
case the Depositor will deliver such documents promptly upon receipt thereof).
The Trustee is obligated to review the Trustee Mortgage File for each Mortgage
Loan within 45 days after the later of delivery or the Closing Date and report
any missing documents or certain types of defects therein to the Depositor.
The Master Servicer will hold all remaining Mortgage Loan Documents and all
other documents related to each Mortgage Loan, including copies of any
management agreements, ground leases, appraisals, surveys, environmental reports
and similar documents and any other written agreements relating to each Mortgage
Loan (collectively, the "Master Servicer Mortgage File" and together with the
Trustee Mortgage File, the "Mortgage File") in trust for the benefit of the
Trustee on behalf of Certificateholders. The legal ownership of all records and
documents with respect to each Mortgage Loan prepared by or that come into the
possession of the Master Servicer will immediately vest in the Trustee, in trust
for the benefit of Certificateholders.
Servicing of the Mortgage Loans; Collection of Payments
The Pooling and Servicing Agreement requires the Master Servicer and the
Special Servicer to service and administer the Mortgage Loans (or in the case of
the Special Servicer, the Specially Serviced Mortgage Loans and REO Mortgage
Loans) on behalf of the Trust Fund solely in the best interests of and for the
benefit of all of the Certificateholders and the Trustee in accordance with the
terms of the Pooling and Servicing Agreement and the Mortgage Loans. In
furtherance of and to the extent consistent with the foregoing, except to the
extent that the Pooling and Servicing Agreement provides for a contrary specific
course of action, each of the Master Servicer and the Special Servicer are
required to service and administer the Mortgage Loans (x) in the same manner in
which, and with the same care, skill, prudence and diligence with which it
services and administers similar mortgage loans for other third-party
portfolios, giving due consideration to customary and usual standards of
practice of prudent institutional commercial mortgage loan servicers used with
respect to loans comparable to the Mortgage Loans or (y) in the same manner in
which, and with the same care, skill, prudence and diligence with which, it
services and administers similar mortgage loans which it owns,
S-103
<PAGE>
whichever standard of care is higher, and taking into account its other
obligations under the Pooling and Servicing Agreement, but without regard to (i)
any other relationship that the Master Servicer, the Special Servicer, any
sub-servicer or any affiliate of the Master Servicer, the Special Servicer or
any sub-servicer may have with the borrowers or any affiliate of such borrowers;
(ii) the ownership of any Certificate by the Master Servicer, the Special
Servicer or any affiliate of either; (iii) the Master Servicer's, the Trustee's
or the Fiscal Agent's obligations, as applicable, to make Advances or to incur
servicing expenses with respect to the Mortgage Loans; (iv) the Master
Servicer's, the Special Servicer's or any sub-servicer's right to receive
compensation for its services under the Pooling and Servicing Agreement or with
respect to any particular transaction; or (v) the ownership, servicing or
management for others, by the Master Servicer, the Special Servicer or any
sub-servicer of any other mortgage loans or property. Each of the Master
Servicer and the Special Servicer is permitted, at its own expense, to employ
sub-servicers, agents or attorneys in performing any of its obligations under
the Pooling and Servicing Agreement, but will not thereby be relieved of any
such obligation, and will be responsible for the acts and omissions of any such
sub-servicers, agents or attorneys. The Pooling and Servicing Agreement
provides, however, that neither the Master Servicer (or its general partner) nor
the Special Servicer (or its general partner), nor any of their directors,
officers, employees or agents, will have any liability to the Trust Fund or the
Certificateholders for taking any action or refraining from taking an action in
good faith or for errors in judgment. The foregoing provision would not protect
the Master Servicer, the Special Servicer or such person for the breach of any
of the Master Servicer's or Special Servicer's respective representations or
warranties in the Pooling and Servicing Agreement, or against any specific
liability imposed on the Master Servicer or the Special Servicer for a breach of
the servicing standards set forth in the Pooling and Servicing Agreement, any
liability by reason of willful misfeasance, bad faith, fraud or negligence in
the performance of its duties or by reason of its reckless disregard of
obligations or duties under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement requires the Master Servicer and the
Special Servicer to make reasonable efforts to collect all payments called for
under the terms and provisions of the Mortgage Loans, and to follow collection
procedures as are consistent with the servicing standard under the Pooling and
Servicing Agreement. Consistent with the above, the Master Servicer or the
Special Servicer, as applicable, may, in its discretion, waive any late payment
charge or penalty fee in connection with any delinquent Monthly Payment or
Balloon Payment with respect to any Mortgage Loan.
Advances
Subject to the limitations described below, the Master Servicer will be
obligated to advance (each such amount, a "P&I Advance"), on the Business Day
preceding each Distribution Date (the "Remittance Date"), an amount equal to the
total or any portion of the Monthly Payment on a Mortgage Loan that was
delinquent as of the close of business on the Business Day preceding such
Remittance Date or, in the event of a default in the payment of a Balloon
Payment, the Assumed Scheduled Payment with respect to the related Balloon Loan,
unless the Master Servicer determines that any such advance would be a
nonrecoverable Advance and delivers to the Trustee an officer's certificate and
accompanying documentation related to a determination of nonrecoverability as
required by the Pooling and Servicing Agreement. In the event any Mortgage Loan
becomes a Seriously Delinquent Loan, the Special Servicer will order an Updated
Appraisal of the related Mortgaged Property and upon receipt of such Updated
Appraisal the Master Servicer will determine the amount (the "Anticipated Loss")
equal to the excess, if any, of (i) the sum of (w) the Scheduled Principal
Balance of such Mortgage Loan as of the immediately preceding Determination
Date, (x) to the extent not previously advanced by the Master Servicer, the
Trustee or the Fiscal Agent, all accrued and unpaid interest on such Mortgage
Loan at a per annum rate equal to the related Mortgage Rate, (y) all
unreimbursed Advances with respect to such Mortgage Loan with interest thereon
at the Advance Rate, and (z) to the extent not previously advanced by the Master
Servicer, the Trustee or the Fiscal Agent, all currently due but unpaid real
estate taxes and assessments, insurance premiums, and, if applicable, ground
rents and a good faith estimate of any expenses relating to uncontested
foreclosure, realization and liquidation of such Mortgaged
S-104
<PAGE>
Property, over (ii) an amount equal to 90% of the appraised value of the related
Mortgaged Property as reflected in the Updated Appraisal thereof; provided,
however, that in the event the Updated Appraisal has not been received within 60
days after the Special Servicer has ordered such appraisal, the Anticipated Loss
shall be equal to 30% of the Scheduled Principal Balance of the Seriously
Delinquent Loan; provided, however, that in the event the Updated Appraisal has
not been received within 60 days after the Special Servicer has ordered such
appraisal, the Anticipated Loss shall be equal to 30% of the Scheduled Principal
Balance of the Seriously Delinquent Loan; provided, further that promptly upon
its receipt of such appraisal, the Servicer shall recalculate the Anticipated
Loss. Upon determination of the Anticipated Loss with respect to any Seriously
Delinquent Loan, the amount of any P&I Advance required to be made with respect
to such Seriously Delinquent Loan on any Distribution Date will be an amount
equal to the product of (A) the amount of the P&I Advance that would be required
to be made in respect of such Seriously Delinquent Loan without regard to the
application of this sentence, multiplied by (B) a fraction, the numerator of
which is equal to the Scheduled Principal Balance of such Mortgage Loan as of
the immediately preceding Determination Date less the Anticipated Loss and the
denominator of which is such Scheduled Principal Balance. A "Seriously
Delinquent Loan" is any Mortgage Loan as to which an Updated Appraisal has been
ordered with respect to the related Mortgaged Property. See "--Realization Upon
Mortgage Loans--Appraisals for Specially Serviced Mortgage Loans" herein. A
Mortgage Loan shall cease to be a Seriously Delinquent Loan in the event such
Mortgage Loan is no longer a Specially Serviced Mortgage Loan pursuant to the
terms of the Pooling and Servicing Agreement and as to which the related
Mortgagor has made 24 consecutive Monthly Payments since the date on which such
Mortgage Loan became a Seriously Delinquent Loan.
In addition to P&I Advances, the Master Servicer will also be obligated
(subject to the limitations described herein) to make cash advances ("Property
Advances," and together with P&I Advances, "Advances") to pay (i) certain costs
and expenses incurred in connection with defaulted Mortgage Loans, acquiring
title to, or management of, REO Property or the sale of defaulted Mortgage Loans
or REO Properties, (ii) delinquent real estate taxes, assessments and hazard
insurance premiums and (iii) to cover other similar costs and expenses necessary
to protect and preserve the security of the related Mortgage. The Master
Servicer will not, however, be obligated to advance from its own funds any
amounts required to cure any failure of any Mortgaged Property to comply with
the Americans with Disabilities Act of 1990, and all rules and regulations
promulgated pursuant thereto, or any applicable environmental law or to contain,
clean up or remedy any environmental condition present at any Mortgaged
Property.
If the Master Servicer fails to fulfill its obligation to make any required
Advance, the Trustee, acting in accordance with the servicing standard, will be
required to make the Advance subject to its determination of recoverability. If
the Trustee fails to make any such required Advance, the Fiscal Agent will be
required to make the Advance, subject to its determination of recoverability.
Both the Trustee and the Fiscal Agent will be entitled to rely conclusively on
any non-recoverability determination of the Master Servicer. See "--The Trustee"
and "--The Fiscal Agent" below.
The obligation of the Master Servicer, the Trustee or the Fiscal Agent, as
applicable, to make Advances with respect to any Mortgage Loan pursuant to the
Pooling and Servicing Agreement continues through the foreclosure of such
Mortgage Loan and until the liquidation of the Mortgage Loan or related
Mortgaged Properties. Advances are intended to provide a limited amount of
liquidity, not to guarantee or insure against losses. None of the Master
Servicer, the Trustee or the Fiscal Agent will be required to make any Advance
that it determines (based on, among other things, an updated Appraisal) in its
good faith business judgment will not be recoverable by the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, out of related late payments,
Insurance Proceeds, Liquidation Proceeds and certain other collections with
respect to the Mortgage Loan as to which such Advances were made. To the extent
that any borrower is not obligated under its Mortgage Loan documents to pay or
reimburse any portion of any Advances that are outstanding with respect to the
related Mortgage Loan as a result of a modification of such Mortgage Loan by the
Special Servicer that forgives loan payments or other amounts that the Master
Servicer, the Trustee or the Fiscal
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Agent previously advanced, and the Master Servicer, the Trustee or the Fiscal
Agent determines that no other source of payment or reimbursement for such
Advances is available to it, such Advances will be deemed to be nonrecoverable;
provided, however, in connection with the foregoing, the Master Servicer, the
Trustee or the Fiscal Agent will provide an officer's certificate as described
below. In addition, if the Master Servicer, the Trustee or the Fiscal Agent, as
applicable, determines that any Advance previously made will not be recoverable
from the foregoing sources, then the Master Servicer, the Trustee or the Fiscal
Agent, as applicable, will be entitled to reimburse itself for such Advance,
plus interest thereon, out of amounts on deposit in the Collection Account prior
to distributions on the Certificates. Any such judgment or determination must be
evidenced by an officer's certificate delivered to the Trustee (or, in the case
of the Trustee or the Fiscal Agent, the Depositor) setting forth such judgment
or determination of nonrecoverability and the procedure and considerations of
the Master Servicer, the Trustee or the Fiscal Agent, as applicable, forming the
basis of such determination, which will include a copy of the Updated Appraisal
and any other information or reports obtained by the Master Servicer, the
Trustee or the Fiscal Agent, such as property operating statements, rent rolls,
property inspection reports, engineering reports and other documentation which
may support such determinations.
The Master Servicer, the Trustee or the Fiscal Agent, as applicable, will
be entitled to reimbursement for any Advance equal to the amount of such Advance
from (i) any collections on or in respect of the particular Mortgage Loan or REO
Property with respect to which each such Advance was made or (ii) upon
determining that such Advance is not recoverable in the manner described in the
preceding paragraph, from any other amounts from time to time on deposit in the
Collection Account.
The Master Servicer, the Trustee or the Fiscal Agent, as applicable, will
be entitled to receive interest at a rate equal to the Prime Rate (as published
in The Wall Street Journal, or if The Wall Street Journal is no longer
published, The New York Times, from time to time), (the "Advance Rate") on its
outstanding Advances and will be authorized to pay itself such interest from
general collections with respect to all of the Mortgage Loans prior to any
payment to holders of Certificates. If the interest on such Advance is not
offset by Default Interest a shortfall will result which generally will result
in a Class Interest Shortfall for the most Subordinate Class then outstanding.
Accounts
Collection Account. The Master Servicer will, pursuant to the Pooling and
Servicing Agreement, establish and maintain a segregated account or accounts
(the "Collection Account") into which it will be required to deposit, within one
Business Day of receipt the following payments and collections received or made
by it on or with respect to the Mortgage Loans: (i) all payments on account of
principal on the Mortgage Loans, including the principal component of
Unscheduled Payments on the Mortgage Loans; (ii) all payments on account of
interest and Default Interest on the Mortgage Loans and the interest portion of
all Unscheduled Payments and all Prepayment Premiums; (iii) any amounts required
to be deposited by the Master Servicer in connection with losses realized on
Permitted Investments with respect to funds held in the Collection Account and
in connection with Prepayment Interest Shortfalls; (iv) (x) all Net REO Proceeds
transferred from an REO Account and (y) all Condemnation Proceeds, Insurance
Proceeds and Net Liquidation Proceeds not required to be applied to the
restoration or repair of the related Mortgaged Property; (v) any amounts
received from borrowers that represent recoveries of Property Advances; and (vi)
any other amounts required by the provisions of the Pooling and Servicing
Agreement to be deposited into the Collection Account by the Master Servicer or
the Special Servicer, including, without limitation, proceeds of any purchase or
repurchase of a Mortgage Loan as described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase," "THE POOLING AND SERVICING
AGREEMENT--Realization Upon Mortgage Loans" and "DESCRIPTION OF THE
CERTIFICATES--Early Termination" and "--Auction" herein.
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The foregoing requirements for deposits in the Collection Account will be
exclusive, and any payments in the nature of late payment charges, late fees,
NSF check charges, assumption fees, loan modification fees, loan service
transaction fees, extension fees, demand fees, beneficiary statement charges and
similar fees need not be deposited in the Collection Account by the Master
Servicer and, to the extent permitted by applicable law, the Master Servicer or
the Special Servicer, as applicable, will be entitled to retain any such charges
and fees received with respect to the Mortgage Loans. In the event that the
Master Servicer deposits into the Collection Account any amount not required to
be deposited therein, the Master Servicer may at any time withdraw such amount
from the Collection Account.
Distribution Account. The Trustee will, pursuant to the Pooling and
Servicing Agreement, establish and maintain a segregated account or accounts
(the "Distribution Account") in the name of the Trustee for the benefit of the
holders of Certificates. With respect to each Distribution Date, the Master
Servicer will deposit in the Distribution Account, to the extent of funds on
deposit in the Collection Account, on or before the Remittance Date an aggregate
amount of immediately available funds equal to the Available Funds plus (i)
(prior to the EC-Maturity Date) any Prepayment Premiums received by the Master
Servicer during the related Collection Period and (ii) Default Interest received
with respect to a Mortgage Loan that is in default with respect to its Balloon
Payment. To the extent not included in Available Funds, the Master Servicer will
remit to the Trustee all P&I Advances for deposit into the Distribution Account
on the related Remittance Date. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein.
The Collection Account and the Distribution Account will be held in the
name of the Trustee (or, in the case of the Collection Account, the Master
Servicer on behalf of the Trustee) on behalf of the holders of Certificates and
the Trustee (and, in the case of the Collection Account, the Master Servicer)
will be authorized to make withdrawals therefrom. Each of the Collection Account
and the Distribution Account will be either (i) a segregated account or accounts
maintained with either a federally or state-chartered depository institution or
trust company the short term unsecured debt obligations of which are rated
"A-1+" by S&P and the long term unsecured debt obligations of which (or of such
institution's parent holding company) are rated by each of the Rating Agencies
in the rating category equal to or greater than the highest then-current rating
assigned to a Class of Certificates then outstanding at the time of any deposit
therein, but in no event less than "A" or (ii) a segregated trust account or
accounts maintained with a federally or state chartered depository institution
or trust company acting in its fiduciary capacity, having, in either case, a
combined capital and surplus of at least $50,000,000 and subject to supervision
or examination by federal or state authority, or otherwise confirmed in writing
by each of the Rating Agencies that the maintenance of such account and subject
to regulations regarding fiduciary funds on deposit substantially similar to 12
CFR 9.10(b), will not, in and of itself, result in a downgrading, withdrawal or
qualification of the rating then assigned by such Rating Agency to any Class of
Certificates (an "Eligible Bank"). Amounts on deposit in such accounts may be
invested in certain United States government securities and other investments
specified in the Pooling and Servicing Agreement ("Permitted Investments"). See
"DESCRIPTION OF THE CERTIFICATES--Accounts" in the Prospectus for a listing of
Permitted Investments.
Withdrawals from the Collection Account
The Master Servicer may make withdrawals from the Collection Account for
the following purposes: (i) to remit on or before each Remittance Date to the
Distribution Account an amount equal to Available Funds and any Prepayment
Premiums for such Distribution Date; (ii) to pay or reimburse the Master
Servicer, the Trustee or the Fiscal Agent, as applicable, for Advances made by
it and interest on Advances, the Master Servicer's right to reimburse itself for
items described in this clause (ii) being limited as described herein under
"--Advances"; (iii) to pay on or before each Remittance Date to the Master
Servicer and Special Servicer the fee portion of the servicing compensation in
respect of the related Distribution Date to be paid, in the case of the
Servicing Fee, from interest received on the related Mortgage Loan, and to pay
from time to time, to the Master Servicer, any interest or investment income
earned on funds deposited in the Collection
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Account, and pay the Master Servicer as additional servicing compensation any
Prepayment Interest Surplus received in the preceding Collection Period and to
pay the Master Servicer or the Special Servicer, as applicable, any other
amounts constituting additional servicing compensation; (iv) to pay on or before
each Distribution Date to the Depositor, MCFC, _____ or other purchaser with
respect to each Mortgage Loan or REO Property that has previously been purchased
or repurchased by it pursuant to the Pooling and Servicing Agreement, all
amounts received thereon during the related Collection Period and subsequent to
the date as of which the amount required to effect such purchase or repurchase
was determined; (v) to the extent not reimbursed or paid pursuant to any of the
above clauses, to reimburse or pay the Master Servicer, the Special Servicer,
the Trustee, the Depositor and/or the Fiscal Agent, as applicable, for certain
other unreimbursed expenses incurred by or on behalf of such person pursuant to
and to the extent reimbursable under the Pooling and Servicing Agreement and to
satisfy any indemnification obligations of the Trust Fund under the Pooling and
Servicing Agreement; (vi) to pay to the Trustee amounts requested by it to pay
taxes on certain net income with respect to REO Properties; (vii) to withdraw
any amount deposited into the Collection Account that was not required to be
deposited therein; and (viii) to clear and terminate the Collection Account
pursuant to a plan for termination and liquidation of the Trust Fund.
Enforcement of "Due-on-Sale" and "Due-on-Encumbrance"
Clauses
The Master Servicer or the Special Servicer, as applicable, will be
obligated to enforce the Trustee's rights under the "due-on-sale" clause in the
related Mortgage Loan documents to accelerate the maturity of the related
Mortgage Loan, unless such provision is not enforceable under applicable law or
such enforcement is reasonably likely to result in meritorious legal action by
the related borrower or to the extent the Master Servicer or the Special
Servicer, as applicable, acting in accordance with the servicing standard
described herein, determines that such enforcement is not in the best interests
of the Trust Fund. A "due-on-sale" or "due-on-encumbrance" clause may, under
certain circumstances, be unenforceable against a borrower that is a debtor in a
case under the Bankruptcy Code.
If applicable law prohibits the enforcement of a "due-on-sale" clause or
the Master Servicer or Special Servicer is (i) otherwise prohibited from taking
such action as described in the preceding paragraph or (ii) determines that such
enforcement is not in the best interests of the Trust Fund and, as a
consequence, a Mortgage Loan is assumed, (x) the original borrower may be
released from liability for the unpaid principal balance of the related Mortgage
Loan and interest thereon at the applicable Mortgage Rate during the remaining
term of such Mortgage Loan, (y) the Master Servicer may accept payments in
respect of the Mortgage Loan from the new owner of the Mortgaged Property and
(z) the Master Servicer or the Special Servicer, as applicable, may enter into
an assumption agreement with a new purchaser whereby the new owner of the
Mortgaged Property will be substituted as the borrower and the original borrower
released, so long as (to the extent permitted by law) the new owner satisfies
the underwriting requirements customarily imposed by the Master Servicer or the
Special Servicer, as applicable, as a condition to its approval of a borrower on
a new mortgage loan substantially similar to such Mortgage Loan. In the event a
Mortgage Loan is assumed as described in the preceding sentences, the Trustee,
the Master Servicer and the Special Servicer, will not permit any modification
of such Mortgage Loan other than as described below under "--Amendments,
Modifications and Waivers." The Master Servicer or Special Servicer, as
applicable, will be entitled to retain as additional servicing compensation any
assumption fees paid by the original borrower or the new owner in connection
with such assumption. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Enforceability of Certain Provisions--Due-on-Sale Provisions" in the
Prospectus. A new owner of the Mortgaged Property may be substituted or a junior
or senior lien allowed on the Mortgaged Property, without the consent of the
Master Servicer, the Special Servicer or the Trustee in a bankruptcy proceeding
involving the Mortgaged Property.
If any Mortgage Loan contains a provision in the nature of a
"due-on-encumbrance" clause, which by its terms (i) provides that such Mortgage
Loan will (or may at the related mortgagee's option) become due
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and payable upon the creation of any lien or other encumbrance on such Mortgaged
Property or (ii) requires the consent of the related mortgagee to the creation
of any such lien or other encumbrance on such Mortgaged Property, then, for so
long as such Mortgage Loan is included in the Trust Fund, the Master Servicer or
the Special Servicer, as applicable, on behalf of the Trust Fund, will enforce
such provision and in connection therewith will (x) accelerate the payments due
on such Mortgage Loan or (y) withhold its consent to the creation of any such
lien or other encumbrance, as applicable, except, in each case, to the extent
that the Master Servicer or the Special Servicer, as applicable, acting in
accordance with the applicable servicing standard, determines that such
enforcement would not be in the best interests of the Trust Fund and receives
written confirmation from S&P that forbearance to enforce such provision shall
not result, in and of itself, in a downgrading, withdrawal or qualification of
the rating then assigned by S&P to any Class of Certificates. Notwithstanding
the foregoing, the Master Servicer or the Special Servicer, as applicable, may
forbear from enforcing any "due-on-encumbrance" provision in connection with any
junior or senior lien on the Mortgaged Property imposed in connection with any
bankruptcy proceeding involving the Mortgaged Property.
Inspections; Appraisals
The Master Servicer (or the Special Servicer with respect to Specially
Serviced Mortgage Loans or REO Property) is required (at its own expense) to
inspect each Mortgaged Property at such times and in such manner as are
consistent with the servicing standards described herein, but will in any event
(i) inspect each Mortgaged Property at least once every 12 months with the first
such inspection being completed on or prior to _______________________ unless
each of the Rating Agencies has confirmed in writing that a longer period
between inspections (which may not exceed 24 months) will not result, in and of
itself, in a downgrading, withdrawal or qualification of the rating then
assigned by such Rating Agency to any Class of the Certificates, (ii) if the
Master Servicer or the Special Servicer, as applicable, retains any Financial
and Lease Reporting Fees pursuant to the related Mortgage Loan, inspect the
related Mortgaged Property as soon as practicable thereafter (except to the
extent such property has been inspected by the Master Servicer or the Special
Servicer within the preceding 120 days) and (iii) if any Monthly Payment becomes
more than 60 days delinquent (without giving effect to any grace period
permitted under the related Note or Mortgage) each related Mortgaged Property
shall be inspected by the Special Servicer (at its own expense) as soon as
practicable thereafter.
Realization Upon Mortgage Loans
Appraisals for Specially Serviced Mortgage Loans. Contemporaneously with
the earliest to occur of (i) the effective date of any modification of the
stated maturity, Mortgage Rate, principal balance or amortization terms of any
Specially Serviced Mortgage Loan or other "significant" modification (as defined
in Section 1001 of the Code) of any Mortgage Loan, as to which a default has
occurred or is reasonably foreseeable, (ii) the date 90 days after the
occurrence of any uncured payment delinquency, (iii) the date 180 days after a
receiver is appointed in respect of a Mortgaged Property or (iv) the date a
Mortgaged Property becomes an REO Property, the Special Servicer will promptly
order an Updated Appraisal of the Mortgaged Property or REO Property, as the
case may be, except to the extent such appraisal had been previously obtained
within the prior twelve months. In addition, the Special Servicer will promptly
order a new Updated Appraisal or an update from the prior Updated Appraisal in
the event any Mortgage Loan is a Seriously Delinquent Loan and such prior
Updated Appraisal is more than twelve months old. An "Updated Appraisal" is (i)
an appraisal of the related Mortgaged Property conducted in accordance with MAI
standards from an independent appraiser who is a member of the Appraisal
Institute with respect to any Mortgage Loan with an outstanding principal
balance in excess of $3,000,000 and (ii) an internal property valuation
performed by the Special Servicer in accordance with the servicing standard set
forth in the Pooling and Servicing Agreement or an appraisal performed by an
independent appraiser with respect to any Mortgage Loan with an outstanding
principal balance equal to or less than $3,000,000.
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Following a default in the payment of a Balloon Payment, the Special
Servicer may grant any number of successive extensions of up to 12 months (or
the period since the beginning of the first such extension, if shorter) with
respect to the defaulted Mortgage Loan; provided that the Special Servicer may
not grant any such successive extensions if, during the previous 12-month
period, such borrower was 60 days delinquent in payment of any principal or
interest; and provided further that if any extension is granted after the third
successive extension has been granted, such further extension will only be
granted with the approval of the person appointed to advise upon extensions (the
"Extension Advisor"). The Special Servicer may not grant any extension (i) that
permits such borrower to make payments of interest only for a period, in the
aggregate, of greater than 12 months or (ii) extends the maturity date of any
mortgage loan beyond the date occurring on or after _______________________.
Notwithstanding anything to the contrary described herein, the Special Servicer
will not have any right or obligation to consult with or seek and/or obtain the
approval or direction from an Extension Advisor prior to acting, and the
provisions of the Pooling and Servicing Agreement relating thereto or requiring
such will be of no effect during any period that no person is acting in such
capacity.
The holders of 662/3% of the aggregate Voting Rights of all Classes of
Regular Certificates, other than the most subordinate such Class of Regular
Certificates, will be entitled to appoint an initial Extension Advisor or remove
and replace the current Extension Advisor by providing written notice thereof to
the Trustee and Special Servicer. The Trustee will notify Certificateholders and
the Rating Agencies in the event the Trustee receives written notice from the
holders of 662/3% of the aggregate Voting Rights of all Classes of Regular
Certificates, other than the most subordinate such Class of Regular
Certificates, or, in the case of resignation, from the Extension Advisor which
notices provides that an initial Extension Advisor has been appointed or that
the current Extension Advisor has been removed or has been reassigned.
The Extension Advisor will be paid a fee of 0.04% of the Scheduled
Principal Balance of any Mortgage Loan as to which an extension is requested
that requires the Extension Advisor's approval. Such fee is payable first from
loan modification fees from the borrower under the related Mortgage Loan and, to
the extent such amounts are insufficient, from fees otherwise payable to the
Master Servicer and the Special Servicer. The Extension Advisor generally will
be entitled to indemnification from the Trust Fund to the same extent that the
Master Servicer is entitled to indemnification. See "SERVICING OF THE MORTGAGE
LOANS--Certain Matters with Respect to the Master Servicer, the Special
Servicer, the Trustee and the Depositor" in the Prospectus.
Standards for Conduct Generally in Effecting Foreclosure or the Sale of
Defaulted Loans. In connection with any foreclosure or other acquisition, any
costs and expenses incurred in any such proceedings will be advanced by the
Master Servicer as a Property Advance, unless the Master Servicer determines
that such Advance would constitute a nonrecoverable Advance.
If the Special Servicer elects to proceed with a non-judicial foreclosure
in accordance with the laws of the state in which the Mortgaged Property is
located, the Special Servicer will not be required to pursue a deficiency
judgment against the related borrower, or any other liable party if the laws of
the state do not permit such a deficiency judgment after a non-judicial
foreclosure or if the Special Servicer determines, in its best judgment, that
the likely recovery if a deficiency judgment is obtained will not be sufficient
to warrant the cost, time, expense and/or exposure of pursuing the deficiency
judgment and such determination is evidenced by an officer's certificate
delivered to the Trustee.
Notwithstanding any provision to the contrary, the Special Servicer will
not, on behalf of the Trust Fund, obtain title to a Mortgaged Property as a
result of or in lieu of foreclosure or otherwise, and will not otherwise acquire
possession of, or take any other action with respect to, any Mortgaged Property
if, as a result of any such action, the Trustee, for the Trust Fund or the
holders of Certificates, would be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or "operator" of, such
Mortgaged
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Property within the meaning of CERCLA or any comparable law, unless the Special
Servicer has previously determined, based on an updated environmental assessment
report prepared by an independent person who regularly conducts environmental
audits, that: (i) such Mortgaged Property is in compliance with applicable
environmental laws or, if not, after consultation with an environmental
consultant, that it would be in the best economic interest of the Trust Fund to
take such actions as are necessary to bring such Mortgaged Property in
compliance therewith and (ii) there are no circumstances present at such
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 currently effective federal, state or
local law or regulation, or that, if any such hazardous materials are present
for which such action could be required, after consultation with an
environmental consultant, it would be in the best economic interest of the Trust
Fund to take such actions with respect to the affected Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed-in-lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee, or to its nominee (which shall not include the
Master Servicer or the Special Servicer) or a separate trustee or co-trustee on
behalf of the Trustee as the holder of the REMIC I Certificates and the holders
of Certificates. Notwithstanding any such acquisition of title and cancellation
of the related Mortgage Loan, such Mortgage Loan will be considered to be a
Mortgage Loan held in the Trust Fund until such time as the related REO Property
is sold by the Trust Fund and will be reduced by Net REO Proceeds allocated to
principal.
If the Trust Fund acquires a Mortgaged Property by foreclosure or
deed-in-lieu of foreclosure upon a default of a Mortgage Loan, the Pooling and
Servicing Agreement provides that the Special Servicer must administer such
Mortgaged Property so that it qualifies at all times as "foreclosure property"
within the meaning of Code Section 860G(a)(8). The Pooling and Servicing
Agreement also requires that any such Mortgaged Property be managed and operated
by an "independent contractor," within the meaning of applicable Treasury
regulations, who furnishes or renders services to the tenants of such Mortgaged
Property, unless the Special Servicer provides the Trustee with an opinion of
counsel that the operation and management of the Mortgaged Property other than
through an independent contractor will not cause such Mortgaged Property to fail
to qualify as "foreclosure property" (which opinion will be an expense of the
Trust Fund). Generally, REMIC-I will not be taxable on income received with
respect to the Mortgaged Property to the extent that it constitutes "rents from
real property," within the meaning of Code Section 856(c)(3)(A) and Treasury
regulations thereunder. "Rents from real property" do not include the portion of
any rental based on the net income or gain of any tenant or sub-tenant. No
determination has been made whether rent on any of the Mortgaged Properties
meets this requirement. "Rents from real property" include charges for services
customarily furnished or rendered in connection with the rental of real
property, whether the charges are separately stated. Services furnished to the
tenants of a particular building will be considered as customary if, in the
geographic market in which the building is located, tenants in buildings that
are of a similar class are customarily provided with the service. No
determination has been made whether the services furnished to the tenants of the
Mortgaged Properties are "customary" within the meaning of applicable
regulations. It is therefore possible that a portion of the rental income with
respect to a Mortgaged Property owned by the Trust Fund, presumably allocated
based on the value of any non-qualifying services, would not constitute "rents
from real property." In addition to the foregoing, any net income from a trade
or business operated or managed by an independent contractor on a Mortgaged
Property owned by REMIC-I, including but not limited to a skilled nursing care
business, will not constitute "rents from real property." Any of the foregoing
types of income may instead constitute "net income from foreclosure property,"
which would be taxable to REMIC-I at the highest marginal federal corporate rate
(currently 35%) and may also be subject to state or local taxes. Any such taxes
would be chargeable against the related income for purposes of determining the
Net REO Proceeds available for distribution to holders of Certificates. See
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of the REMIC and its
Holders," "--Taxation of Regular Interests," "--Taxation of the REMIC" and
"--Taxation of Holders of Residual Certificates" in the Prospectus.
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The Special Servicer may offer to sell to any person any Specially Serviced
Mortgage Loan or any REO Property, if and when the Special Servicer determines,
consistent with the servicing standards set forth in the Pooling and Servicing
Agreement, that no satisfactory arrangements can be made for collection of
delinquent payments thereon and such a sale would be in the best economic
interests of the Trust Fund, but will, in any event, so offer to sell any REO
Property no later than the time determined by the Special Servicer to be
sufficient to result in the sale of such REO Property within the period
specified in the Pooling and Servicing Agreement, including extensions thereof.
The Special Servicer will give the Trustee not less than 10 Business Days' prior
written notice of its intention to sell any Specially Serviced Mortgage Loan or
REO Property, in which case the Special Servicer will accept any offer received
from any person that is determined by the Special Servicer to be a fair price
for such Specially Serviced Mortgage Loan or REO Property, if the highest
offeror is an Interested Person, or is determined to be such a price by the
Trustee (which may be based upon updated independent appraisals received by the
Trustee or the Special Servicer, as applicable), if the highest offeror is an
Interested Person; provided, however, that any offer by an Interested Person in
the amount of the Repurchase Price shall be deemed to be a fair price.
"Interested Person" means the Depositor, the Master Servicer, the Special
Servicer, the Trustee, any borrower or property manager of a Mortgaged Property,
an independent contractor engaged by the Special Servicer to manage or operate
an REO Property or any affiliate of any of the foregoing. Notwithstanding
anything to the contrary herein, neither the Trustee, in its individual
capacity, nor any of its affiliates may offer for or purchase any Specially
Serviced Mortgage Loan or any REO Property. In addition, the Special Servicer
may accept an offer that is not the highest offer if it determines, in
accordance with the servicing standard stated in the Pooling and Servicing
Agreement, that acceptance of such offer would be in the best interests of the
holders of Certificates (for example, if the prospective buyer making the lower
offer is more likely to perform its obligations, or the terms offered by the
prospective buyer making the lower offer are more favorable).
Amendments, Modifications and Waivers
Neither the Master Servicer nor the Special Servicer may modify, amend,
waive or otherwise consent to the change of the stated maturity date of any
Mortgage Loan, the payment of principal of, or interest or Default Interest on,
any Mortgage Loan, or any other term of a Mortgage Loan, unless (i) such
modification, amendment, waiver or consent is not a "significant modification"
under Section 1001 of the Code, (ii) to the extent such modification, amendment,
waiver or consent would constitute a "significant modification" under Section
1001 of the Code, such Mortgage Loan is in default or a default with respect
thereto is reasonably foreseeable or (iii) such modification, amendment, waiver
or consent is permitted under "--Realization Upon Mortgage Loans--Appraisals for
Specially Serviced Mortgage Loans" herein. Neither Master Servicer nor the
Special Servicer may agree to any retroactive modification, amendment, waiver or
consent.
The Trustee
LaSalle National Bank, a nationally chartered bank with its principal
offices in Chicago, Illinois, will act as Trustee pursuant to the Pooling and
Servicing Agreement. The Trustee's corporate trust office is located at 135
South LaSalle Street, Suite 1740, Chicago, Illinois 60603.
The Trustee may resign at any time by giving written notice to the
Depositor, the Master Servicer, the Special Servicer and the Rating Agencies.
Upon such notice of the Trustee's resignation, the Fiscal Agent will also be
deemed removed and, accordingly, the Master Servicer will appoint a successor
trustee, which appointment of successor trustee will not result, in and of
itself, in a downgrading, withdrawal or qualification of the rating then
assigned by the Rating Agencies to any Class of the Certificates as confirmed in
writing by each of the Rating Agencies, and a successor fiscal agent, which, if
the successor trustee is not rated by each Rating Agency in one of its two
highest long-term debt rating categories, will be confirmed in writing by each
of the Rating Agencies that such appointment of such successor fiscal agent will
not result, in and of itself, in a downgrading, withdrawal or qualification of
the rating then assigned by such Rating Agency to any Class
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of the Certificates. If no successor trustee and successor fiscal agent is
appointed within 30 days after the giving of such notice of resignation, the
resigning Trustee and departing Fiscal Agent may petition any court of competent
jurisdiction for appointment of a successor trustee and successor fiscal agent.
The Depositor or the Master Servicer may remove the Trustee and the Fiscal
Agent if, among other things, the Trustee ceases to be eligible to continue as
such under the Pooling and Servicing Agreement or if at any time the Trustee or
the Fiscal Agent becomes incapable of acting, or is adjudged bankrupt or
insolvent, or a receiver of the Trustee or the Fiscal Agent or its property is
appointed or any public officer takes charge or control of the Trustee or the
Fiscal Agent or of its property. The holders of Certificates evidencing a
majority of the aggregate Voting Rights may remove the Trustee and the Fiscal
Agent upon written notice to the Master Servicer, the Special Servicer, the
Depositor, the Trustee and the Fiscal Agent. Any resignation or removal of the
Trustee and the Fiscal Agent and appointment of a successor trustee and, if such
trustee is not rated by each Rating Agency in one of its two highest long-term
debt rating categories, fiscal agent will not become effective until acceptance
of the appointment by the successor trustee and, if necessary, fiscal agent.
The "Voting Rights" assigned to each Class shall be (i) 0% in the case of
the Residual Certificates, (ii) in the case of any other Class of P&I
Certificates, a percentage equal to the product of (x) [95%] so long as the
Class A-EC Notional Balance is greater than zero and [97%] thereafter and (y) a
fraction, the numerator of which is equal to the aggregate outstanding
Certificate Balance of such Class and the denominator of which is equal to the
aggregate outstanding Certificate Balances of all such Classes of Certificates;
(iii) in the case of the Class A-EC Certificates, [2%] so long as the Class A-EC
Notional Balance is greater than zero, and 0% thereafter; (iv) [0.1%] in the
Case of Class K-1 Certificates; and (v) [2.9%] in the case of Class K-2
Certificates. The Voting Rights of any Class of Certificates shall be allocated
among holders of Certificates of such Class in proportion to their respective
Percentage Interests; provided, however that, any Certificate held or
beneficially owned by the Depositor, the Master Servicer, the Special Servicer,
the Trustee, a property manager or a borrower or any affiliate thereof will be
deemed not to be outstanding and the Voting Rights to which it is entitled shall
not be taken into account in determining whether the requisite percentage of
Voting Rights necessary to effect any consent, approval or waiver that
specifically relates to any such person has been obtained (unless such consent,
approval or waiver is to an action that would materially and adversely affect
the interests of the holders of any Class of Certificates while any such person
is the holder of Certificates aggregating not less than 662/3% of the Percentage
Interest of any such Class).
Pursuant to the Pooling and Servicing Agreement, the Trustee will be
entitled to receive a monthly fee from the Master Servicer.
The Trust Fund will indemnify the Trustee, the Fiscal Agent and their
respective directors, officers, employees, agents and affiliates against any and
all losses, liabilities, damages, claims or expenses (including reasonable
attorneys' fees) arising in respect of the Pooling and Servicing Agreement or
the Certificates (but only to the extent that they are expressly reimbursable
under the Pooling and Servicing Agreement or are unanticipated expenses incurred
by the REMIC) other than those resulting from the negligence, fraud, bad faith
or willful misconduct of the Trustee and those for which such indemnified
persons are indemnified pursuant to the last sentence of this paragraph. The
Trustee will not be required to expend or risk its own funds or otherwise incur
financial liability in the performance of any of its duties under the Pooling
and Servicing Agreement, or in the exercise of any of its rights or powers, if
in the Trustee's opinion the repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured to it. Each of the
Master Servicer and the Special Servicer will indemnify the Trustee, the Fiscal
Agent and their respective directors, officers, employees, agents and affiliates
for similar losses incurred related to the willful misconduct, fraud, bad faith
and/or negligence in the performance of the Master Servicer's or the Special
Servicer's respective duties under the Pooling and Servicing Agreement or by
reason of reckless disregard of
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the Master Servicer's or the Special Servicer's respective obligations and
duties under the Pooling and Servicing Agreement.
Duties of the Trustee
The Trustee, the Fiscal Agent, the Special Servicer and Master Servicer
will make no representation as to the validity or sufficiency of the Pooling and
Servicing Agreement, the Certificates, this Prospectus Supplement or the
validity, enforceability or sufficiency of the Mortgage Loans or related
documents. The Trustee and the Fiscal Agent will not be accountable for the use
or application by the Depositor of any Certificates or of the proceeds of such
Certificates, or for the use of or application of any funds paid to the
Depositor, the Master Servicer or the Special Servicer in respect of the
Mortgage Loans, or any funds deposited in or withdrawn from the Collection
Account or the Distribution Account by the Depositor, the Master Servicer or the
Special Servicer, other than with respect to any funds held by the Trustee.
If no Event of Default has occurred of which the Trustee has actual
knowledge and after the curing of all Events of Default that may have occurred,
the Trustee is required to perform only those duties specifically required under
the Pooling and Servicing Agreement. 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 on
their face to the requirements of the Pooling and Servicing Agreement.
If the Master Servicer fails to make any required Advance, the Trustee, as
acting or successor Master Servicer, will be required to make such Advance to
the extent that such Advance is not deemed to be nonrecoverable. The Trustee
will be entitled to rely conclusively on any determination by the Master
Servicer that an Advance, if made, would be nonrecoverable. The Trustee will be
entitled to reimbursement for each Advance made by it in the same manner and to
the same extent as the Master Servicer. See "--Advances" herein.
The Fiscal Agent
ABN AMRO Bank N.V., a Netherlands banking corporation and the corporate
parent of the Trustee, will act as Fiscal Agent for the Trustee and will be
obligated to make any Advance required to be made, and not made, by the Trustee
under the Pooling and Servicing Agreement, provided that the Fiscal Agent will
not be obligated to make any Advance that it deems to be nonrecoverable. The
Fiscal Agent will be entitled to rely conclusively on any determination by the
Master Servicer that an Advance, if made, would not be recoverable. The Fiscal
Agent will be entitled to reimbursement for each Advance made by it in the same
manner and to the same extent as the Trustee and the Master Servicer. See
"--Advances" herein.
In the event of the resignation or removal of the Trustee, the Fiscal Agent
shall be entitled to resign, it being understood that the initial Fiscal Agent
shall not be obligated to act in such capacity hereunder at any time that
LaSalle National Bank is not the Trustee. No resignation or removal of the
Fiscal Agent will become effective until a successor fiscal agent has assumed
the Fiscal Agent's obligations and duties under the Pooling and Servicing
Agreement and it is confirmed in writing by each of the Rating Agencies that the
appointment of such successor fiscal agent will not result, in and of itself, in
a downgrading, withdrawal or qualification of the rating then assigned by such
Rating Agency to any Class of the Certificates.
Servicing Compensation and Payment of Expenses
Pursuant to the Pooling and Servicing Agreement, the Master Servicer will
be entitled to receive a monthly servicing fee (the "Servicing Fee") for each
Midland Mortgage Loan equal to a per annum rate of _______% and for each _____
Mortgage Loan equal to a per annum rate of _____% (the "Servicing Fee
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Rate") on the then outstanding principal balance of such Mortgage Loan
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Servicing Fee relating to each Mortgage Loan will be retained by the Master
Servicer from payments and collections (including Insurance Proceeds and
Liquidation Proceeds) in respect of such Mortgage Loan. The Master Servicer will
also be entitled to retain as additional servicing compensation (i) all
investment income earned on amounts on deposit in the Reserve Accounts (to the
extent consistent with applicable law and the related Mortgage Loan documents),
the Collection Account and the Distribution Account, (ii) all amounts collected
with respect to the Mortgage Loans (that are not Specially Serviced Mortgage
Loans) in the nature of late payment charges, late fees, NSF check charges
(including with respect to Specially Serviced Mortgage Loans), loan service
transaction fees, extension fees, demand fees, modification fees, assumption
fees, beneficiary statement charges and similar fees and charges (but not
including any Prepayment Premiums so long as the A-EC Notional Balance is
greater than zero or Default Interest), (iii) Financial and Lease Reporting Fees
(with respect to any Mortgage Loan that is not a Specially Serviced Mortgage
Loan and to the extent permitted under the related Mortgage Loan) and (iv) any
Prepayment Interest Surplus (to the extent not offset against any Prepayment
Interest Shortfall in accordance with the provisions of the Pooling and
Servicing Agreement).
The Master Servicer will pay all expenses incurred in connection with its
responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described herein), including all fees of any sub-servicers
retained by it, all fees payable to the Trustee and the various expenses of the
Master Servicer specifically described herein.
Special Servicing
Midland Loan Services, L.P. will be the initial Special Servicer. [The
Special Servicer may be removed without cause and a successor Special Servicer
appointed (i) first, by the holders of the majority of the aggregate Voting
Rights of the Class H and Class J Certificates at such time as Realized Losses
allocated to the Class K-1 Certificates equal or exceed 75% of the initial
Certificate Balance of such Class, but only until such time as Realized Losses
allocated to the Class H and the Class J Certificates equal or exceed 50% of the
aggregate initial Certificate Balances of such Classes; (ii) second, by the
holders of the majority of the aggregate Voting Rights of the Class G
Certificates, but only until such time as Realized Losses allocated to the Class
G Certificates equal or exceed 50% of the initial Certificate Balance of such
Class; and (iii) thereafter, by the holders of the majority of the aggregate
Voting Rights of the second most subordinate Class of Certificates then
outstanding, but only until such time as Realized Losses allocated to the most
subordinate Class equals or exceeds 50% of the initial Certificate Balance of
such Class.]
Notwithstanding the foregoing, the removal of the Special Servicer and the
appointment of a successor Special Servicer shall not be effective until (i) the
successor Special Servicer has assumed in writing all of the responsibilities,
duties and liabilities of the Special Servicer hereunder pursuant to an
agreement satisfactory to the Trustee, and (ii) each of the Rating Agencies
confirms to the Trustee in writing that such appointment and assumption shall
not result, in and of itself, in a downgrading, withdrawal or qualification of
the rating then assigned by such Rating Agency to any Class of Certificates.
The duties of the Special Servicer relate primarily to Specially Serviced
Mortgage Loans and to any REO Property. The Pooling and Servicing Agreement will
define a "Specially Serviced Mortgage Loan" to include any Mortgage Loan with
respect to which: (i) the related borrower is 60 or more days delinquent in the
payment of principal and interest (regardless of whether in respect thereof P&I
Advances have been reimbursed); (ii) the borrower under which has expressed to
the Master Servicer an inability to pay or a hardship in paying the Mortgage
Loan in accordance with its terms; (iii) the Master Servicer has received notice
that the borrower has become the subject of any bankruptcy, insolvency or
similar proceeding, admitted in writing the inability to pay its debts as they
come due or made an assignment for the benefit of creditors;
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(iv) the Master Servicer has received notice of a foreclosure or threatened
foreclosure of any lien on the Mortgaged Property securing the Mortgage Loan;
(v) a default of which the Master Servicer has notice (other than a failure by
the borrower to pay principal or interest) and which materially and adversely
affects the interests of the Certificateholders has occurred and remained
unremedied for the applicable grace period specified in the Mortgage Loan (or,
if no grace period is specified, 60 days); provided, that a default requiring a
Property Advance will be deemed to materially and adversely affect the interests
of Certificateholders; (vi) the borrower has failed to make a Balloon Payment
(except in the case where the Master Servicer and the Special Servicer agree in
writing that such Mortgage Loan is likely to be paid in full within 30 days
after such default); or (vii) the Master Servicer proposes to commence
foreclosure or other workout arrangements; provided, however, that a Mortgage
Loan will cease to be a Specially Serviced Mortgage Loan (a) with respect to the
circumstances described in clauses (i) and (vi) above, when the borrower
thereunder has brought the Mortgage Loan current (with respect to the
circumstances described in clause (vi), pursuant to any workout recommended by
the Special Servicer) and thereafter made three consecutive full and timely
Monthly Payments, (b) with respect to the circumstances described in clauses
(ii) and (iv) above, when such circumstances cease to exist in the good faith
judgment of the Special Servicer and with respect to the circum- stances
described in clauses (iii) and (vii), when such circumstances cease to exist or
(c) with respect to the circumstances described in clause (v) above, when such
default is cured; provided, in any such case, that at that time no circumstance
exists (as described above) that would cause the Mortgage Loan to continue to be
characterized as a Specially Serviced Mortgage Loan.
Pursuant to the Pooling and Servicing Agreement, the Special Servicer will
be entitled to certain fees, including a special servicing fee (the "Special
Servicing Fee") equal to 1/12th of [0.35%] on a monthly basis of the Scheduled
Principal Balance of each related Specially Serviced Mortgage Loan. The Special
Servicer will also receive with respect to any Specially Serviced Mortgage Loan
or REO Property that is sold or transferred or otherwise liquidated (except in
connection with the repurchase of a Mortgage Loan as described under
"DESCRIPTION OF THE MORTGAGE POOL--Representations and Warranties; Repurchase"),
in addition to the Special Servicing Fee, a disposition fee (the "Disposition
Fee") equal to the product of (A) the excess, if any, of (x) the proceeds of the
sale or liquidation of any Specially Serviced Mortgage Loan or REO Property over
(y) any broker's commission and related brokerage referral fees and (B) (x)
[1.5%], if such sale or liquidation occurs prior to 12 months following the date
on which the Mortgage Loan initially became a Specially Serviced Mortgage Loan
or (y) [1.0%], if such sale or liquidation occurs upon or after the expiration
of such 12-month period. Furthermore, the Special Servicer shall be entitled to
receive, as additional servicing compensation, a workout fee (the "Workout Fee")
equal to the product of 1.0% and the amount of Net Collections received by the
Master Servicer or the Special Servicer with respect to each Corrected Mortgage
Loan. If any Corrected Mortgage Loan again becomes a Specially Serviced Mortgage
Loan, any right to the Workout Fee with respect to such Mortgage Loan earned in
connection with the initial modification, restructuring or workout thereof shall
terminate, and the Special Servicer shall be entitled to a new Workout Fee for
such Mortgage Loan upon resolution or workout of the subsequent event of default
under such Mortgage Loan. If the Special Servicer is terminated for any reason
it will retain the right to receive any Workout Fees payable in respect of any
Mortgage Loans that become Corrected Mortgage Loans during the period that it
acted as Special Servicer (and the successor Special Servicer will not be
entitled to any portion of such Workout Fees), in each case until the Workout
Fees for any Mortgage Loan cease to be payable in accordance with this
paragraph. Each of the foregoing fees, along with certain expenses related to
special servicing of a Mortgage Loan, will be payable out of funds otherwise
available to pay principal and interest on the Certificates. The Special
Servicer will also be entitled to retain as additional servicing compensation
(i) all investment income earned on amounts on deposit in any REO Account and
(ii) to the extent permitted under the related Mortgage Loan, all amounts
collected with respect to the Specially Serviced Mortgage Loans in the nature of
late payment charges, late fees, assumption fees, loan modification fees,
extension fees, Financial and Lease Reporting Fees (to the extent such fees are
not required to be remitted to the related borrower pursuant to the related
Note), loan service transaction fees, beneficiary statement charges or similar
items (but not including any Default Interest or Prepayment Premiums), in each
case to the
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extent received with respect to any Specially Serviced Mortgage Loan and not
required to be deposited or retained in the Collection Account pursuant to the
Pooling and Servicing Agreement.
"Corrected Mortgage Loan" means any Mortgage Loan that is no longer a
Specially Serviced Mortgage Loan pursuant to the first proviso to the definition
of the term "Specially Serviced Mortgage Loan" as a result of the curing of any
event of default under such Specially Serviced Mortgage Loan through a
modification, restructuring or workout entered into by the Special Servicer.
"Net Collections" means, with respect to any Corrected Mortgage Loan, an
amount equal to all payments on account of interest and principal on such
Mortgage Loan and all Prepayment Premiums.
The Special Servicer shall make its Servicing Officers available to
representatives of a Consulting Certificateholder during normal business hours
upon reasonable notice in order to discuss matters relating to any Specially
Serviced Mortgage Loan and REO Property, except to the extent doing so is
prohibited by applicable law or by any Mortgage Loan Documents. The Special
Servicer may, in its sole discretion, require that an agreement governing the
availability, use and disclosure of any information derived pursuant to such
discussions, and which may provide indemnification to the Special Servicer for
any liability or damage that may arise therefrom, be executed by the Consulting
Certificateholder.
The "Consulting Certificateholder" shall be any holder of Certificates of
the most subordinate Class or the next most subordinate Class then outstanding,
which Classes have an aggregate Certificate Balance of at least $3,000,000.
Reports to Certificateholders; Available Information
Monthly Reports. On each Distribution Date, the Trustee will forward by
mail to each Certificateholder, with copies to the Depositor, the Paying Agent,
the Underwriter, the Master Servicer and each Rating Agency, a statement as to
such distribution setting forth for each class:
(i) the Pooled Principal Distribution Amount and
the amount allocable to principal, included
in Available Funds;
(ii) The Class Interest Distribution Amount distributable to such
Class and the amount of Available Funds allocable thereto,
together with any Class Interest Shortfall allocable to such
Class;
(iii) The amount of any P&I Advances by the Master Servicer, the
Trustee or the Fiscal Agent included in the amounts
distributed to the Certificateholders;
(iv) The Certificate Balance of each Class of Certificates after giving
effect to the distribution of amounts in respect of the Pooled
Principal Distribution Amount on such
Distribution Date;
(v) Realized Losses and their allocation to the
Certificate Balance of any Class of
Certificates;
(vi) The Scheduled Principal Balance of the
Mortgage Loans as of the Due Date preceding
such Distribution Date;
(vii) The number and aggregate principal balance of Mortgage Loans
(A) delinquent one month, (B) delinquent two months, (C)
delinquent three or more months, (D) as to
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which foreclosure proceedings have been commenced and (E) that
otherwise constitute Specially Serviced Mortgage Loans, and, with
respect to each Specially Serviced Mortgage Loan, the amount of
Property Advances made during the related Collection Period, the
amount of the P&I Advances made on such Distribution Date, the
aggregate amount of Property Advances theretofore made that remain
unreimbursed and the aggregate amount of P&I Advances theretofore
made that remain unreimbursed;
(viii) With respect to any Mortgage Loan that became an REO Mortgage
Loan during the preceding calendar month, the principal
balance of such Mortgage Loan as of the date it became an REO
Mortgage Loan;
(ix) As of the Due Date preceding such Distribution Date, as to any REO
Property sold during the related Collection Period, the date on
which the Special Servicer made a Final Recovery Determination and
the amount of the proceeds of such sale deposited into the
Collection Account, and the aggregate amount of REO Proceeds and
Net REO Proceeds (in each case other than Liquidation Proceeds)
and other revenues collected by the Special Servicer with respect
to each REO Property during the related Collection Period and
credited to the Collection Account, in each case identifying such
REO Property by name;
(x) The outstanding principal balance of each REO Mortgage Loan as of
the close of business on the immediately preceding Due Date and
the appraised value of the related REO Property per the most
recent appraisal obtained;
(xi) The amount of the servicing compensation paid to the Master
Servicer with respect to such Distribution Date, and the amount of
the additional servicing compensation that was paid to the Master
Servicer with respect to such Distribution Date;
(xii) The amount of any Special Servicing Fee, Disposition Fee or
Workout Fee paid to the Special Servicer with respect to such
Distribution Date; and
(xiii) (A) The amount of Prepayment Premiums, if any, received during
the related Collection Period, and (B) the amount of Default
Interest received during the related Collection Period.
In the case of information furnished pursuant to subclauses (i), (ii),
(iii) and (xiii)(A) above, the amounts will be expressed as a dollar amount in
the aggregate for all Certificates of each applicable Class and for each Class
of Certificates for a denomination of $1,000 initial Certificate Balance or
Notional Balance.
Within a reasonable period of time after the end of each calendar year, the
Trustee will furnish to each person who at any time during the calendar year was
a holder of a Certificate (except for a Residual Certificate) a statement
containing the information set forth in subclauses (i) and (ii) above,
aggregated for such calendar year or applicable portion thereof during which
such person was a Certificateholder. Such obligation of the Trustee will be
deemed to have been satisfied to the extent that it provided substantially
comparable information pursuant to any requirements of the Code as from time to
time in force.
On each Distribution Date, the Trustee will forward to each holder of a
Residual Certificate a copy of the reports forwarded to the other
Certificateholders on such Distribution Date and a statement setting forth the
amounts, if any, actually distributed with respect to the Residual Certificates
on such Distribution Date.
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Within a reasonable period of time after the end of each calendar year, the
Trustee will furnish to each person who at any time during the calendar year was
a holder of a Residual Certificate a statement setting forth the amounts
actually distributed with respect to such Certificate aggregated for such
calendar year or applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Trustee will be deemed to have been
satisfied to the extent that it provided substantially comparable information
pursuant to any requirements of the Code as from time to time in force.
In addition, the Trustee will forward to each Certificateholder any
additional information, if any, regarding the Mortgage Loans that the Master
Servicer or the Special Servicer, in its sole discretion, delivers to the
Trustee for distribution to the Certificateholders.
Certain information made available in the Distribution Date statements
referred to above may be obtained by calling LaSalle National Bank's ASAP System
at (312) 904-2200 and requesting statement number 199 or such other mechanism as
the Trustee may have in place from time to time.
Loan Portfolio Analysis System. The Master Servicer will collect and
maintain information regarding the Mortgage Loans in a computerized database,
which the Master Servicer currently commonly refers to as the "Loan Portfolio
Analysis System" or "LPAS." The Master Servicer currently intends to provide
access to LPAS via on-line telephonic communication to Certificateholders,
persons identified by a Certificateholder as a prospective transferee and such
other persons deemed appropriate by the Master Servicer. Information contained
in LPAS regarding the composition of the Mortgage Pool and certain other
information about the Mortgage Pool deemed appropriate by the Master Servicer
will be updated periodically. Certificateholders should contact Brad Hauger, at
telephone number (816) 435-5175, for access to LPAS.
Other Available Information. The Master Servicer or the Special Servicer,
if applicable, will promptly give notice to the Trustee, who will provide a copy
to each Certificateholder, each Rating Agency, the Depositor, the Underwriters,
Midland, MCFC and _____, of (a) any notice from a borrower or insurance company
regarding an upcoming voluntary or involuntary prepayment (including that
resulting from a Casualty or Condemnation) of all or part of the related
Mortgage Loan (provided that a request by a borrower or other party for a
quotation of the amount necessary to satisfy all obligations with respect to a
Mortgage Loan will not, in and of itself, be deemed to be such notice); and (b)
of any other occurrence known to it with respect to a Mortgage Loan or REO
Property that the Master Servicer or the Special Servicer determines would have
a material effect on such Mortgage Loan or REO Property, which notice will
include an explanation as to the reason for such material effect (provided that
any extension of the term of any Mortgage Loan will be deemed to have a material
effect).
In addition to the other reports and information made available and
distributed to the Depositor, the Underwriters, the Trustee or the
Certificateholders pursuant to other provisions of the Pooling and Servicing
Agreement, the Master Servicer and the Special Servicer will, in accordance with
such reasonable rules and procedures as it may adopt (which may include the
requirement that an agreement governing the availability, use and disclosure of
such information, and which may provide indemnification to the Master Servicer
or the Special Servicer, as applicable, for any liability or damage that may
arise therefrom, be executed to the extent the Master Servicer or the Special
Servicer, as applicable, deems such action to be necessary or appropriate), also
make available any information relating to the Mortgage Loans, the Mortgaged
Properties or the borrower for review by the Depositor, the Underwriters, the
Trustee, the Certificateholders and any other persons to whom the Master
Servicer or the Special Servicer, as the case may be, believes such disclosure
is appropriate, in each case except to the extent doing so is prohibited by
applicable law or by any documents related to a Mortgage Loan.
The Trustee will also make available during normal business hours, for
review by the Depositor, the Rating Agencies, any Certificateholder, the
Underwriters, any
person identified to the Trustee by a
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Certificateholder as a prospective transferee of a Certificate and any other
persons to whom the Trustee believes such disclosure is appropriate, the
following items: (i) the Pooling and Servicing Agreement, (ii) all monthly
statements to Certificateholders delivered since the closing date, (iii) all
annual statements as to compliance delivered to the Trustee and the Depositor
and (iv) all annual independent accountants' reports delivered to the Trustee
and the Depositor. The Master Servicer or the Special Servicer, as appropriate,
will make available at its offices during normal business hours, for review by
the Depositor, the Underwriters, the Trustee, the Rating Agencies, any
Certificateholder, any person identified to the Master Servicer or the Special
Servicer, as applicable, by a Certificateholder as a prospective transferee of a
Certificate any other persons to whom the Master Servicer or the Special
Servicer, as applicable, believes such disclosure is appropriate, the following
items: (i) the inspection reports prepared by or on behalf of the Master
Servicer or the Special Servicer, as applicable, in connection with the property
inspections conducted by the Master Servicer or the Special Servicer, as
applicable, (ii) any and all modifications, waivers and amendments of the terms
of a Mortgage Loan entered into by the Master Servicer or the Special Servicer
and (iii) any and all officer's certificates and other evidence delivered to the
Trustee and the Depositor to support the Master Servicer's determination that
any Advance was, or if made would be, a Nonrecoverable Advance, in each case
except to the extent doing so is prohibited by applicable laws or by any
documents related to a Mortgage Loan. The Master Servicer, the Special Servicer
and the Trustee will be permitted to require payment (other than from any Rating
Agency) of a sum sufficient to cover the reasonable costs and expenses incurred
by it in providing copies of or access to any of the above information.
The Master Servicer will, on behalf of the Trust Fund, prepare, sign and
file with the Commission any and all reports, statements and information
respecting the Trust Fund that the Master Servicer or the Trustee determines are
required to be filed with the Commission pursuant to Sections 13(a) or 15(d) of
the 1934 Act, each such report, statement and information to be filed on or
prior to the required filing date for such report, statement or information.
Notwithstanding the foregoing, the Depositor will file with the Commission,
within 15 days of the closing date, a Form 8-K together with the Pooling and
Servicing Agreement.
None of the Trustee, the Fiscal Agent, the Master Servicer and the Special
Servicer will be responsible for the accuracy or completeness of any information
supplied to it by a borrower or other third party for inclusion in any notice or
in any other report or information furnished or provided by the Master Servicer,
the Special Servicer or the Trustee hereunder, and the Master Servicer, the
Special Servicer, the Trustee and the Fiscal Agent 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 any statement or omission or
alleged statement or omission therein, including any liability related to the
inclusion of such information in any report filed with the Commission.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, three separate "real estate mortgage
investment conduit" ("REMIC") elections will be made with respect to the Trust
Fund, creating three REMICs. Upon the issuance of the Offered Certificates,
Morrison & Hecker L.L.P. will deliver its opinion, generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
(i) each pool of assets with respect to which a REMIC election is made will
qualify as a REMIC under the Internal Revenue Code of 1986 (the "Code") and (ii)
(a) the Class A-1, Class A-2, Class A-3, Class A-EC, Class B, Class C, Class D,
Class E, Class F, Class G, Class H, Class J, Class K-1 and Class K-2
Certificates will be, or will represent ownership of, REMIC "regular interests"
and (b) each residual interest will be the sole "residual interest" in the
related REMIC. Holders of the Offered Certificates will be required to include
in income all interest on such Certificates in accordance with the accrual
method of accounting regardless of such Certificateholders' usual methods of
accounting.
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Because they represent regular interests, the Regular Certificates
generally will be treated as newly originated debt instruments for federal
income tax purposes. Holders of such Classes of Certificates will be required to
include in income all interest on such Certificates in accordance with the
accrual method of accounting, regardless of a Certificateholder's usual method
of accounting. Except as discussed with respect to the [Class A-EC, Class G,
Class H, Class J, Class K-1 and Class K-2] Certificates, the Certificates are
not expected to be treated for federal income tax reporting purposes as having
been issued with original issue discount. The Class A-EC and Class K-2
Certificates constitute interest only Classes and the Class K-1 Certificates
constitute a principal only Class. These Certificates, together with the [Class
G, Class H and Class J Certificates], will be deemed to have been issued with
original issue discount ("OID"). The Trustee intends to treat the Class A-EC and
Class K-2 Certificates as having no "qualified stated interest." Accordingly,
the Class A-EC and Class K-2 Certificates will be considered to be issued with
OID in an amount equal to the excess of all distributions of interest expected
to be received thereon over their respective issue prices (including accrued
interest, if any, unless the holder elects on its federal income tax return to
exclude such amount from the issue price and to recover it on the first
Distribution Date). In addition, the Class K-1 Certificates will be issued with
OID in an amount equal to the excess of the initial principal balance thereof
over their issue price. Any "negative" amounts of OID on the Class A-EC or Class
K-2 Certificates attributable to rapid prepayments with respect to the Mortgage
Loans will not be deductible currently, but may be offset against future
positive accruals of OID, if any. However, the holder of a Class A-EC or Class
K-2 Certificate may be entitled to a loss deduction to the extent it becomes
certain that such holder will not recover a portion of its basis in such
Certificate. No representation is made as to the timing, amount or character of
such loss, if any. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Regular Interests--Interest and Acquisition Discount." For the purposes of
determining the rate of accrual of market discount, original issue discount and
premium for federal income tax purposes, it has been assumed that the Mortgage
Loans will prepay at the rate of % CPR and that the Trust Fund will be
terminated on the Distribution Date occurring in [December] 2007 pursuant to the
auction termination procedure described herein. No representation is made as to
whether the Mortgage Loans will prepay at that rate or any other rate or whether
the Trust Fund will be terminated on such date. If it were ultimately determined
that market discount, original issue discount and premium should be amortized
over the longer term of the Mortgage Loans disregarding the assumed termination
of the Trust Fund in [December] 2007, the [Class G, Class H, Class J, Class K-1
and Class K-2] Certificates would recognize less original issue discount in the
years prior to and including [December] 2007 and the Class R-I, R-II and R-III
Certificateholders would realize greater excess inclusion income in such years.
Although it is unclear whether the [Class A-EC, Class G, Class H, Class J and
Class K-2 Certificates] will qualify as "variable rate instruments" under the
OID Regulations, it will be assumed for purposes of determining the original
issue discount thereon that such Certificates so qualify. See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES--Taxation of Regular Interests--Interest and Acquisition
Discount" in the Prospectus.
Certain Classes of 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.
Holders of such Classes of Certificates should consult their own tax advisors
regarding the possibility of making an election to amortize any such premium.
See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of Regular Interests" in
the Prospectus.
Offered Certificates held by a mutual savings bank or domestic building and
loan association will represent interests in "qualifying real property loans"
within the meaning of Section 593(d) of the Code. Offered Certificates held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Section 856(c)(6)(B) of the Code, and income with respect to Offered
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in property" within the meaning of Section
856(c)(3)(B) of the Code. Offered Certificates held by a domestic building and
loan association will generally constitute "a regular or a residual interest in
a REMIC" with the meaning of Section
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7701(a)(19)(C)(xi) of the Code only in the proportion that the Mortgage Loans
are secured by multifamily apartment buildings. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC and its Holders" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC" in the Prospectus.
DUE TO THE COMPLEXITY OF THESE RULES AND THE CURRENT UNCERTAINTY AS TO THE
MANNER OF THEIR APPLICATION TO THE TRUST FUND AND CERTIFICATEHOLDERS, IT IS
PARTICULARLY IMPORTANT THAT POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX TREATMENT OF THEIR ACQUISITION, OWNERSHIP AND DISPOSITION OF
THE CERTIFICATES.
ERISA CONSIDERATIONS
General
The Subordinate Certificates may not be purchased by or transferred to (A)
an employee benefit plan or other retirement arrangement, including an
individual retirement account or a Keogh plan, which is subject to the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or Section 4975 of the Code, or a governmental plan
subject to any federal, state or local law ("Similar Law") that is, to a
material extent, similar to the foregoing provisions of ERISA or the Code
("Plans"), (B) a collective investment fund in which such Plans are invested,
(C) other persons acting on behalf of any such Plan or using the assets of any
such Plan or any entity whose underlying assets include plan assets by reason of
a Plan's investment in the entity (within the meaning of Department of Labor
Regulations Section 2510.3-101) or (D) an insurance company that is using assets
of any insurance company separate account or general account in which the assets
of such Plans are invested (or which are deemed pursuant to ERISA or any Similar
Law to include assets of such Plans) other than an insurance company using the
assets of its general account under circumstances whereby such purchase and the
subsequent holding of such Certificates would not constitute or result in a
prohibited transaction within the meaning of Section 406 or 407 of ERISA,
Section 4975 of the Code or a materially similar characterization under any
Similar Law. Each prospective transferee of a Certificate will be required to
deliver to the Depositor, the Certificate Registrar and the Trustee, (i) a
transferee representation letter, substantially in the form of Exhibit D-2 to
the Pooling and Servicing Agreement, stating that such prospective transferee is
not a person referred to in clause (A), (B), (C) or (D) above, or (ii) an
opinion of counsel which establishes to the satisfaction of the Depositor, the
Trustee and the Certificate Registrar that the purchase or holding of such
Certificate will not result in the assets of the Trust Fund being deemed to be
"plan assets" and subject to the fiduciary responsibility or prohibited
transaction provision of ERISA, the Code or any Similar Law, and will not
constitute or result in a prohibited transaction within the meaning of Section
406 or 407 of ERISA, Section 4975 of the Code or any Similar Law, and will not
subject the Master Servicer, the Special Servicer, the Depositor, the Trustee or
the Certificate Registrar to any obligation of liability (including obligations
or liabilities under ERISA or Section 4975 of the Code), which opinion of
counsel will not be an expense of the Trustee, the Trust Fund, the Master
Servicer, the Special Servicer, the Certificate Registrar or the Depositor.
To the extent any Offered Certificate is in book-entry form, the holder of
the beneficial interest in such Certificate and any transferee thereof shall be
deemed to have represented that it is not a person referred to in Clauses (A),
(B), (C) or (D) above.
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None of the Residual Certificates may be purchased by or transferred to a
Plan. Accordingly, the following discussion does not purport to discuss the
considerations under ERISA or Code Section 4975 with respect to the purchase,
holding or disposition of the Subordinate Certificates and the Residual
Certificates.
ERISA and the Code impose certain duties and restrictions on Plans and
certain persons who perform services for Plans. For example, unless exempted,
investment by a Plan in the Certificates may constitute or give rise to a
prohibited transaction under ERISA or the Code. There are certain exemptions
issued by the United States Department of Labor (the "Department") that may be
applicable to an investment by a Plan in the Offered Certificates, including the
individual administrative exemption described below.
Before purchasing any Offered Certificates, a Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to such
purchase under the requirements of ERISA, whether the individual administrative
exemption (as described below) applies, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable.
Certain Requirements Under ERISA
General. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. A Plan fiduciary should especially consider the ERISA
requirement of investment prudence and the sensitivity of the return on the
Certificates to the rate of principal repayments (including voluntary
prepayments by the borrowers and involuntary liquidations) on the Mortgage
Loans, as discussed in "YIELD AND MATURITY CONSIDERATIONS" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Underwriters, the Master Servicer, the Special Servicer or the Trustee or
certain affiliates thereof might be considered or might become "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition or holding of Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless an administrative exemption described below or some
other exemption is available. Special caution should be exercised before the
assets of a Plan are used to purchase a Certificate if, with respect to such
assets, the Depositor, the Underwriters, the Master Servicer, the Special
Servicer or the Trustee or an affiliate thereof either: (i) has discretionary
authority or control with respect to the investment or management of such assets
of such Plan, or (ii) has authority or responsibility to give, or regularly
gives, investment advice with respect to such assets pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets and that such advice will be based on the
particular needs of the Plan.
Delegation of Fiduciary Duty. Further, if the assets included in the Trust
Fund were deemed to constitute Plan assets, it is possible that a Plan's
investment in the Certificates might be deemed to constitute a delegation under
ERISA of the duty to manage Plan assets by the fiduciary deciding to invest in
the Certificates, and certain transactions involved in the operation of the
Trust Fund might be deemed to constitute prohibited transactions under ERISA and
the Code. Neither ERISA nor the Code define the term "plan assets."
The Department has published final regulations (the "Regulations")
concerning whether a Plan's assets would be deemed to include an interest in the
underlying assets of an entity (such as the Trust Fund) for
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purposes of the reporting and disclosure and general fiduciary responsibility
provisions of ERISA, as well as for the prohibited transaction provisions of
ERISA and the Code, if the Plan acquires an "equity interest" (such as a
Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be considered merely to include its interest in the
Certificates instead of being deemed to include an interest in the underlying
assets of a Trust Fund. However, the Depositor cannot predict in advance, nor
can there be any continuing assurance whether such exceptions may be met,
because of the factual nature of certain of the rules set forth in the
Regulations. For example, one of the exceptions in the Regulations states that
the underlying assets of an entity will not be considered "plan assets" if less
than 25% of the value of any class of equity interests is held by "benefit plan
investors," which are defined as Plans, individual retirement accounts and
employee benefit plans not subject to ERISA (for example, governmental plans),
but this exception is tested immediately after each acquisition of an equity
interest in the entity whether upon initial issuance or in the secondary market.
Administrative Exemptions
Individual Administrative Exemptions. The Department has granted to
Prudential Securities Incorporated an individual administrative exemption
(Prohibited Transaction Exemption 90-32, 55 Fed. Reg. 23147 (June 6, 1990))
referred to herein as the "Exemption," for certain mortgage-backed and asset
backed certificates underwritten in whole or in part by Prudential Securities
Incorporated. The Exemption might be applicable to the initial purchase, the
holding and the subsequent resale by a Plan of certain certificates, such as the
Senior Certificates, underwritten by the Underwriters, representing interests in
pass-through trusts that consist of certain receivables, loans and other
obligations, provided that the conditions and requirements of the Exemption are
satisfied. The loans described in the Exemption include mortgage loans such as
the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) The rights and interests evidenced by 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 one of the three highest
generic rating categories from any of the
following: S&P, Moody's, Duff & Phelps or Fitch;
(4) The trustee must not be an affiliate of any of the following:
the Depositor, the Underwriters, the Master Servicer, the Special
Servicer (if any), any obligor with respect to the Mortgage Loans
included in the Trust Fund constituting more than 5% of the aggregate
unamortized balance of the assets in the Trust Fund, or any affiliate
of such parties (the "Restricted Group");
(5) The sum of all payments made to and retained by the
Underwriters in connection with the distribution of certificates
represents not more than reasonable compensation for underwriting the
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
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represents not more than the fair market value of such mortgage loans. The sum
of all payments made to and retained by the master servicer and any other
servicer represents not more than reasonable compensation for such person's
services under the pooling and servicing agreement and reimbursement of such
person'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
Commission under the 1933 Act.
The trust fund must also meet the following requirements:
(a) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(b) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's,
Fitch or Duff & Phelps for at least one year prior to the Plan's
acquisition of the certificates pursuant to the Exemption; and
(c) 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
pursuant to the Exemption.
If the conditions of the Exemption are met, the acquisition, holding and
resale of the Senior Certificates by Plans would be exempt from the prohibited
transaction provisions of ERISA and the Code (regardless of whether a Plan's
assets would be considered to include an ownership interest in the Mortgage
Loans in the Mortgage Pool).
Moreover, the Exemption can provide relief from certain
self-dealing/conflict-of-interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables, loans or
obligations held in the trust provided that, among other requirements, (i) in
the case of an acquisition in connection with the initial issuance of
certificates, at least 50% of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group and at least
50% of the aggregate interest in the trust is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5% or less of the fair market value of the obligations contained in
the trust; (iii) the Plan's investment in certificates of any class does not
exceed 25% of all of the certificates of that class outstanding at the time of
the acquisitions; and (iv) immediately after the acquisition no more than 25% of
the assets of the Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or served by the same entity.
The Exemption does not apply to the purchasing or holding of Senior
Certificates by Plans sponsored by the Depositor, the Underwriters, the Trustee,
the Master Servicer, the Special Servicer, any obligor with respect to Mortgage
Loans included in the Trust Fund constituting more than 5% of the aggregate
unamortized principal balance of the assets in the Trust Fund or any affiliate
of such parties (the "Restricted Group").
THE CHARACTERISTICS OF THE SUBORDINATE CERTIFICATES AND THE RESIDUAL
CERTIFICATES DO NOT MEET THE REQUIREMENTS OF THE EXEMPTION. ACCORDINGLY, THE
SUBORDINATE CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN OR
PERSON ACTING ON BEHALF OF ANY PLAN OR USING THE ASSETS OF ANY SUCH PLAN, OTHER
THAN AN INSURANCE COMPANY USING ASSETS OF ITS GENERAL ACCOUNT UNDER
CIRCUMSTANCES IN WHICH SUCH PURCHASE OR TRANSFER WOULD NOT CONSTITUTE OR
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<PAGE>
RESULT IN A PROHIBITED TRANSACTION. THE RESIDUAL
CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO A
PLAN.
Before purchasing a Senior Certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided by
the Exemption or the availability of any other prohibited transaction
exemptions, and whether the conditions of any such exemption will be applicable
to the Senior Certificates.
Any fiduciary of a Plan (including an entity that is deemed to hold Plan
assets for purposes of ERISA and the Code) considering whether to purchase a
Senior Certificate should also carefully review with its own legal advisors the
applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment.
Exempt Plan
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA or Code Section 4975. However, such a governmental plan may be subject to
a Similar Law. A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under any Similar Law.
The sale of Senior Certificates to a Plan is in no respect a representation
by the Depositor, the Underwriters or any other member of the Restricted Group
that this investment meets all relevant legal requirements with respect to
investments by Plans generally or any particular Plan or that this investment is
appropriate for Plans generally or any particular Plan.
Unrelated Business Taxable Income; Residual Certificates
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 including certain governmental plans, as
discussed above under the caption "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in
the Prospectus.
LEGAL INVESTMENT
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). The
appropriate characterization of the Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase the Certificates, may be subject to significant interpretive
uncertainties.
The Depositor makes no representations as to the proper characterization of
the Certificates for legal investment purposes, financial institution regulatory
purposes or other purposes or as to the ability of particular investors to
purchase the Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the 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
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what extent the Certificates constitute a legal investment or are subject to
investment, capital or other restrictions.
PLAN OF DISTRIBUTION
Prudential Securities Incorporated and ____________________ (the
"Underwriters") have agreed, severally and not jointly, pursuant to an
Underwriting Agreement dated December ___, 1996 (the "Underwriting Agreement")
to purchase from the Depositor the respective principal or notional amounts of
Certificates set forth opposite their names below.
Underwriter Principal or Notional
Amount
Prudential Securities Incorporated ..... $
_______________......................... _____________________
Total ........................... $
The Offered Certificates will be offered by the Underwriters at fixed
prices as stated on this cover page of this Prospectus Supplement. The
Underwriters may effect such transactions by selling such Certificates to or
through dealers,and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriters or
purchasers of the Certificates for whom they may act as agent. Any dealers that
participate with the Underwriters in the distribution of the Certificates
purchased by the Underwriters may be deemed to be underwriters, and any
discounts or commissions received by them or the Underwriters and any profit on
the resale of Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the 1933 Act.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and the Underwriters
will be obligated to purchase all of the Certificates if any are purchased. The
Depositor has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the 1933 Act, or contribute to payments that the
Underwriters may be required to make in respect thereof.
The Depositor also has been advised by the Underwriters that they currently
expect to make a market in the Certificates, however, they have 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 Certificates will develop. For
further information regarding any offer or sale of the Certificates pursuant to
this Prospectus Supplement and the Prospectus, see "PLAN OF DISTRIBUTION" in the
Prospectus.
PSCC, an affiliate of PSI, has provided a warehouse line of credit (most of
which is non-recourse) to MCFC for the purpose of financing the Mortgage Loans
originated by Midland prior to their sale to the Depositor. In exchange for
providing the warehouse line of credit and agreeing to be responsible for a
portion of any losses realized by MCFC in connection with the sale of such
Mortgage Loans to the Depositor, PSCC receives interest on amounts borrowed
under the warehouse line of credit and will share in any profits realized by
MCFC in connection with the sale of such Mortgage Loans to the Depositor. PSI
provides advice to Midland Loan Services, L.P. in connection with the
disposition of mortgage loans.
USE OF PROCEEDS
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The net proceeds from the sale of Certificates will be used by the
Depositor to pay the purchase price of the Mortgage Loans, to repay indebtedness
that has been incurred to obtain funds to acquire the Mortgage Loans and to pay
costs of structuring, issuing and underwriting the Certificates.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Morrison &
Hecker L.L.P. and for the Underwriters by O'Melveny & Myers LLP.
RATINGS
It is a condition to the issuance of the Certificates that the Class A-1,
Class A-2, Class A-3 and Class A-EC Certificates each be rated "AAA" by Fitch
and "________" by Moody's; each of the Class B Certificates be rated "AA" by
Fitch and "_________" by Moody's; the Class C Certificates be rated "A" by Fitch
and "_________" by Moody's; the Class D Certificates be rated "BBB+" by Fitch
and "_______" by Moody's; the Class E Certificates be rated "BBB" by Fitch and
"_______" by Moody's"; the Class F Certifi- cates be rated "BBB-" by Fitch and
"_______" by Moody's; the Class G Certificates be rated "BB" by Fitch and
"_______" by Moody's; the Class H Certificates be rated "BB-" by Fitch and
"_______" by Moody's; and the Class J Certificates be rated "B" by Fitch and
"_______" by Moody's. The Class K-1, Class K-2, Class R-I, Class R-II and Class
R-III Certificates are unrated.
The Rating Agencies' ratings on mortgage pass-through certificates address
the likelihood of the receipt by holders of payments to which they are entitled
by the Rated Final Distribution Date. The Rating Agencies' ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Ratings on mortgage pass-through certificates do not, however,
represent an assessment of the likelihood, timing or frequency of principal
prepayments by borrowers or the degree to which such prepayments (both voluntary
and involuntary) might differ from those originally anticipated. The security
ratings do not address the possibility that Certificateholders might suffer a
lower than anticipated yield. In addition, ratings on mortgage pass-through
certificates do not address the likelihood of receipt of Prepayment Premiums or
the timing of the receipt thereof or the likelihood of collection by the Master
Servicer of Default Interest. In general, the ratings thus address credit risk
and not prepayment risk. As described herein, the amounts payable with respect
to the Class A-EC Certificates consist only of interest. If the entire pool of
Mortgage Loans were to prepay in the initial month, with the result that the
Class A-EC Certificateholders receive only a single month's interest and thus
suffer a nearly complete loss of their investment, all amounts "due" to such
holders will nevertheless have been paid, and such result is consistent with the
"AAA" and "_____" ratings received on the Class A-EC Certificates. The Class
A-EC Certificate Notional Balance upon which interest is calculated is reduced
by the allocation of Realized Losses and Prepayments, whether voluntary or
involuntary. The Rating does not address the timing or magnitude of reductions
of such Notional Balance, but only the obligation to pay interest timely on the
Notional Balance as so reduced from time to time. Accordingly, the ratings of
the Class A-EC Certificates should be evaluated independently from similar
ratings on other types of securities.
There can be no assurance as to whether any rating agency not requested to
rate the Certificates will nonetheless issue a rating and, if so, what such
rating would be. A rating assigned to the Certificates by a rating agency that
has not been requested by the Depositor to do so may be lower than the rating
assigned by the Rating Agencies pursuant to the Depositor's request.
The rating of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
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INDEX OF SIGNIFICANT DEFINITIONS
Definitions Page
1933 Act................................................S-4
Advance Rate..........................................S-106
Advances..............................................S-105
Annual Debt Service....................................S-55
Anticipated Loss......................................S-104
Appraised LTV..........................................S-56
Appraised Value........................................S-55
Assumed Maturity Date...................................S-1
Assumed Scheduled Payment..............................S-77
Auction Fees...........................................S-87
Auction Valuation Date...........................S-21, S-87
Available Funds........................................S-72
Available Funds Allocation.............................S-77
Balloon Amount.........................................S-56
Balloon Balance........................................S-56
Balloon Loans..........................................S-44
Balloon LTV............................................S-56
Balloon Payment........................................S-44
Beneficial Owners......................................S-88
Book-Entry Certificate.................................S-88
Business Day...........................................S-16
Cash Flow........................................S-54, S-55
Casualty...............................................S-50
Certificate Balance....................................S-15
Certificate Registrar..................................S-90
Certificates......................................S-1, S-15
Class A-EC Pass-Through Rate...........................S-75
Class A-EC Excess Interest........................S-2, S-75
Class A-EC Notional Balance......................S-72, S-75
Class A-EC Notional Component A........................S-75
Class H-2 Notional Balance.............................S-72
Class Interest Distribution Amount.........S-18, S-74, S-75
Class Interest Shortfall...............................S-77
Closing Date......................................S-8, S-16
Code..................................................S-120
Collection Account....................................S-106
Collection Period................................S-17, S-74
Commission..............................................S-4
Condemnation...........................................S-50
Condemnation Proceeds..................................S-73
Congregate Care Loan...................................S-36
Congregate Care Property...............................S-36
Consolidation Agreement................................S-36
Constant Prepayment Rate...............................S-95
Corrected Mortgage Loan...............................S-117
CPR....................................................S-95
Cross-Collateralized Loans.......................S-32, S-53
Cut-off Date...........................................S-16
Cut-off Date Principal Balance....................S-9, S-36
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Debt Service Coverage Ratio............................S-56
Default Interest.................................S-49, S-74
Default Rate...........................................S-74
Definitive Certificate.................................S-88
Delivery Date...........................................S-1
Department............................................S-123
Depositor.........................................S-2, S-16
Depository.............................................S-17
Determination Date...............................S-17, S-74
Disposition Fee.......................................S-116
Disqualified Organization.............................S-126
Distribution Account..................................S-107
Distribution Date...........................S-2, S-16, S-72
DSCR.............................................S-10, S-56
DTC..........................................S-1, S-8, S-17
Due Date...............................................S-17
Eligible Bank.........................................S-107
Environmental Consultant...............................S-43
ERISA...........................................S-23, S-122
Exemption.............................................S-124
Extension Advisor.....................................S-110
Final Recovery Determination...........................S-84
Fiscal Agent.................................S-3, S-8, S-16
Fitch...................................................S-3
Form 8-K...............................................S-64
Hotel Loan.............................................S-36
Hotel Property.........................................S-36
Indirect Participants..................................S-88
Industrial Loan........................................S-36
Industrial Property....................................S-36
Initial Pool Balance...................................S-36
Insurance Proceeds.....................................S-73
Interest Accrual Period..........................S-17, S-77
Interested Person.....................................S-112
Liquidation Proceeds...................................S-73
Loan Portfolio Analysis System........................S-119
Loan Purchase Closing Date.............................S-38
Loan-to-Value Ratio....................................S-56
Lockout Period.........................................S-45
LPAS..................................................S-119
LTV....................................................S-56
Major Tenant...........................................S-33
Master Servicer..............................S-3, S-7, S-16
Master Servicer Mortgage File.........................S-103
MCFC..............................................S-2, S-71
Midland.....................................S-2, S-38, S-70
Midland Mortgage Loan Purchase Agreement...............S-38
Midland Mortgage Loans.................................S-38
Mini Warehouse & Office/Warehouse Loan.................S-36
Mini Warehouse & Office/Warehouse Property.............S-36
Mini Warehouse Loan....................................S-36
S-130
<PAGE>
Mini Warehouse Property................................S-36
Minimum Auction Price..................................S-87
Mobile Home Park Loan..................................S-36
Mobile Home Park Property..............................S-36
Monthly Payment..................................S-51, S-73
Moody's.................................................S-3
Mortgage...............................................S-36
Mortgage File.........................................S-103
Mortgage Loan Seller...................................S-38
Mortgage Loans.........................................S-36
Mortgage Pool...........................................S-2
Mortgage Rate..........................................S-44
Mortgaged Property................................S-2, S-36
Multifamily Loan.......................................S-36
Multifamily Property...................................S-36
Net Collections.......................................S-117
Net Mortgage Rate......................................S-76
Net Operating Income.............................S-54, S-55
Net REO Proceeds.......................................S-74
NOI....................................................S-55
Notional Balances......................................S-72
Nursing Home Loan......................................S-36
Nursing Home Property..................................S-36
Occupancy Rate.........................................S-56
Offered Certificates....................................S-1
Office Loan............................................S-36
Office Property........................................S-36
Office/Retail Loan.....................................S-36
Office/Retail Property.................................S-36
OID...................................................S-121
Option.................................................S-40
Originator.............................................S-37
P&I Advance................................S-9, S-20, S-104
P&I Certificates........................................S-2
Participants...........................................S-88
Pass-Through Rate......................................S-76
Paying Agent...........................................S-89
Percentage Interest....................................S-72
Permitted Encumbrances.................................S-65
Permitted Investments.................................S-107
Plans...........................................S-23, S-122
Pooled Principal Distribution Amount.............S-19, S-77
Pooling and Servicing Agreement............S-3, S-16, S-101
Prepayment Interest Shortfall..........................S-75
Prepayment Interest Surplus............................S-76
Prepayment Premium...............................S-45, S-74
Principal Prepayments..................................S-74
Private Certificates...................................S-16
Property Advances.....................................S-105
PSCC...................................................S-41
Quarterly Payment Loan.................................S-17
S-131
<PAGE>
Rated Final Distribution Date......................S-1, S-7
Rating Agencies.........................................S-3
Realized Loss..........................................S-84
Record Date......................................S-17, S-72
Regular Certificates..............................S-1, S-22
Regulations...........................................S-123
REMIC.................................S-4, S-8, S-22, S-120
REMIC I................................................S-22
REMIC II...............................................S-22
REMIC III..............................................S-22
Remittance Date.......................................S-104
REO Account............................................S-72
REO Mortgage Loan......................................S-77
REO Property...........................................S-72
Repurchase Price.......................................S-69
Reserve Accounts.......................................S-51
Residual Certificates...................................S-1
Restricted Group...............................S-124, S-125
Retail, Anchored Property.............................S-36
Retail, Anchored Loan..................................S-36
Retail, Single Tenant Loan.............................S-36
Retail, Single Tenant Property.........................S-36
Retail, Unanchored Loan................................S-37
Retail, Unanchored Property............................S-36
Scenarios..............................................S-96
Scheduled Final Distribution Date.......................S-7
Scheduled Principal Balance............................S-84
Senior Certificates.....................................S-2
Senior Principal Distribution Cross-Over Date..........S-82
Seriously Delinquent Loan.............................S-105
Servicing Fee.........................................S-114
Servicing Fee Rate....................................S-114
Similar Law...........................................S-122
SMMEA.................................................S-126
Special Servicer.............................S-3, S-7, S-16
Special Servicing Fee.................................S-116
Specially Serviced Mortgage Loan......................S-115
Subordinate Certificates................................S-2
Title Policy...........................................S-65
Trust Fund..............................................S-2
Trustee......................................S-3, S-8, S-16
Trustee Mortgage File.................................S-101
Underwriters.....................................S-1, S-127
Underwriting Agreement................................S-127
Underwritten Cash Flow...........................S-54, S-55
Underwritten DSCR......................................S-56
Underwritten NOI.................................S-54, S-55
Unscheduled Payments...................................S-74
Updated Appraisal.....................................S-109
Voting Rights.........................................S-113
Weighted Average Net Mortgage Rate.....................S-76
S-132
<PAGE>
Weighted Average Unmodified Net Mortgage Rate..........S-76
Workout Fee...........................................S-116
Yield Maintenance Charges..............................S-82
Yield Maintenance Period...............................S-45
Zoning Laws............................................S-32
S-133
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or the Underwriters. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
Available Information...................................S-4
Executive Summary.......................................S-5
Summary of Terms.......................................S-15
Risk Factors...........................................S-26
Description of the Mortgage Pool.......................S-36
Midland Loan Services, L.P.............................S-70
Mortgage Loan Sellers..................................S-71
Description of the Certificates........................S-71
Yield and Maturity Considerations......................S-91
The Pooling and Servicing Agreement...................S-101
Material Federal Income Tax Consequences..............S-120
ERISA Considerations..................................S-122
Legal Investment......................................S-126
Plan of Distribution..................................S-127
Use of Proceeds.......................................S-127
Legal Matters.........................................S-128
Ratings...............................................S-128
Index of Significant Definitions......................S-129
PROSPECTUS
Prospectus Supplement................................... 2
Additional Information.................................. 2
Incorporation of Certain Information by Reference....... 2
Reports................................................. 3
Summary of Prospectus................................... 4
Risk Factors............................................ 8
The Depositor........................................... 14
Use of Proceeds......................................... 15
Description of the Certificates......................... 15
The Mortgage Pools...................................... 20
Servicing of the Mortgage Loans......................... 24
Credit Enhancement...................................... 31
Certain Legal Aspects of the Mortgage Loans............. 34
Material Federal Income Tax Consequences................ 49
State Tax Considerations................................ 66
ERISA Considerations.................................... 66
Legal Investment........................................ 68
Plan of Distribution.................................... 68
Legal Matters........................................... 69
Financial Information................................... 69
Rating.................................................. 69
Index of Significant Definitions........................ 70
$---------------
Midland Realty Acceptance Corp.
Depositor
Midland Loan Services, L.P.
Master Servicer and Special Servicer
Class A-1, Class A-2, Class A-3,
Class B, Class C, Class D, Class E
and Class F Certificates
Commercial Mortgage
Pass-Through Certificates
Series 1996-C2
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
Prudential Securities Incorporated
---------------
December ___, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the SEC
registration and filing fees, are estimated:
SEC Registration Fee.............................$ 192,096.26
NASD Filing Fee................................... N/A
Legal Fees and Expenses..........................$ 260,000.00
Accounting Fees and Expenses.....................$ 70,000.00
Trustee's Fees and Expenses (including counsel fees)$ 60,000.00
Blue Sky Qualification Fees and Expenses.........$ 5,000.00
Printing and Engraving Fees.......... . . . . . $ 90,000.00
Rating Agency Fees...............................$ 650,000.00
Miscellaneous....................................$ 100,000.00
Total............................................$1,427,096.26
*All amounts are estimates of expenses incurred or to be incurred in
connection with the issuance and distribution of a series of Certificates.
Item 15. Indemnification of Directors and Officers
Section 355 of the General and Business Corporation Law of Missouri
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses, costs and fees (including attorney's fees), judgements, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. If the person indemnified is not wholly successful in such action,
suit or proceeding, but is successful, on the merits or otherwise, in one or
more but less than all claims, issues or matters in such proceeding, he or she
may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 355 provides that to the extent a director, officer, employee or agent
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorney's
fees) actually and reasonably incurred by him or her in connection therewith.
II-1
<PAGE>
Section 355 of the General and Business Corporation Law of Missouri further
provides that a corporation may give any further indemnity, in addition to the
indemnity set forth above to any person who is or was a director, officer,
employee or agent, or to any person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, provided such further
indemnity is either (i) authorized, directed, or provided for in the articles of
incorporation of the corporation or any duly adopted amendment thereof or (ii)
is authorized, directed, or provided for in any bylaw or agreement of the
corporation which has been adopted by a vote of the shareholders of the
corporation, and provided further that no such indemnity shall indemnify any
person from or on account of such person's conduct which was finally adjudged to
have been knowingly fraudulent, deliberately dishonest or willful misconduct.
The Articles of Incorporation of the Registrant contain a provision requiring
the Registrant to indemnify each such person to the extent his or her conduct is
not adjudged to have been knowingly fraudulent, deliberately dishonest or
willful misconduct.
Reference is made to the form of Underwriting Agreement filed as
Exhibit 1.1 hereto for provisions relating to the indemnification of directors,
officers and controlling persons against certain liabilities including
liabilities under the Securities Act of 1933, as amended. Pursuant to the
Underwriting Agreement, the Underwriter will indemnify and hold harmless the
Registrant and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20
of the Securities Act of 1934, as amended, against any and all losses, claims,
damages or liabilities, joint or several, to which they may become liable under
the Securities Act of 1933, as amended, the Securities Act of 1934, as amended,
or other federal or state law or regulation, at common law or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the prospectus or prospectus supplement or in
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
light of the circumstances under which they were made, but only with reference
to written information furnished to the Registrant by or on behalf of the
Underwriter (including in electronic media) specifically for use in connection
with the preparation of the documents referred to in the foregoing indemnity.
Unless otherwise specified, the Agreement relating to each Series will
provide that neither the Registrant nor any partner, director, officer, employee
or agent of the Registrant will be liable to the Trust Fund or the
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement, or for errors in judgment,
provided, however, that neither the Registrant nor any such person will be
protected against liability for a breach of its representations and warranties
under the Agreement or that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of its duties or by
reason of reckless disregard of its obligations and duties thereunder. The
Agreement relating to each Series will further provide that the Registrant and
any director, officer, employee or agent of the Registrant will be entitled to
indemnification by the Trust Fund for any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than loss, liability or expense (i) incurred by reason of its respective
willful misfeasance, bad faith, fraud or negligence in the performance of duties
thereunder or by reason of reckless disregard of its respective obligations and
duties thereunder or (ii) imposed by any taxing authority which loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
Agreement or which results from a breach (other than a breach with respect to
which the Master Servicer or Special Servicer, as applicable, would have no
liability under the standard set forth in the first sentence of this paragraph)
by the Master Servicer, the Special Servicer or its agents of its respective
obligations under the Agreement.
Item 16. Exhibits and Financial Statements
(a) Exhibit
1.1* Form of Underwriting Agreement.
II-2
<PAGE>
4.1* Form of Pooling and Servicing Agreement.
5.1 Opinion of Morrison & Hecker L.L.P. as to certain tax matters
(including consent of such firm).
8.1 Opinion of Morrison & Hecker L.L.P. as to legality (including
consent of such firm).
23.1 Consent of Morrison & Hecker L.L.P. (included in Exhibits 5.1
and 8.1).
24.1 Power of Attorney (included at page II-5).
- ----------------
*Incorporated by reference from Registration No. 333-3885
(b) Financial Statements
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
Item 17. Undertakings
A. Undertaking pursuant to rule 415.
The undersigned 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
Securities Act of 1933;
(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. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this Registration Statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the Securities Act
of 1933 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.
B. Undertaking Concerning Filings Incorporating
Subsequent Exchange Act Documents by Reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities 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.
C. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, 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 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 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 (including that the security rating
requirement will be met by the time of sale of any securities registered
hereunder) and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri, on the 8th day of November, 1996.
MIDLAND REALTY ACCEPTANCE CORP.
By: /s/ Leon E. Bergman
Leon E. Bergman, Executive Vice President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and
appoints Alan L. Atterbury, Clarence A. Krantz and Leon E. Bergman his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement and any and all other documents in connection
therewith, and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as might or could be done in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Position Date
/s/ Alan L. Atterbury Director and President November 8, 1996
Alan L. Atterbury (Principal Executive Officer)
/s/ Leon E. Bergman Chief Financial Officer November 8, 1996
Leon E. Bergman (Principal Financial and Accounting Officer)
/s/ Clarence A. Krantz Director November 8, 1996
Clarence A. Krantz
/s/ William V. Morgan Director November 8, 1996
William V. Morgan
II-5
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. 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 SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Preliminary Prospectus Dated November ___, 1996
Subject to Completion
Midland Realty Acceptance Corp.
Depositor
Commercial/Multifamily Mortgage Pass-Through Certificates
(Issuable in Series)
Midland Realty Acceptance Corp. (the "Depositor") from time to time will offer
Commercial/Multifamily Mortgage Pass-Through Certificates (the "Offered
Certificates") in "Series" by means of this Prospectus and a separate Prospectus
Supplement for each Series. The Offered Certificates, together with any other
Commercial/Multifamily Mortgage Pass-Through Certificates of such Series, are
collectively referred to herein as the "Certificates." The Certificates of each
Series will evidence beneficial ownership interests in a trust fund (the "Trust
Fund") to be established by the Depositor. The Certificates of a Series may be
divided into two or more "Classes," which may have different interest rates and
which may receive principal payments in differing proportions and at different
times. In addition, rights of the holders of certain Classes to receive
principal and interest may be subordinated to those of other Classes. Each Trust
Fund will consist of a pool (the "Mortgage Pool") of one or more mortgage loans
secured by first or junior liens on fee simple or leasehold interests in
commercial real estate properties, multifamily residential properties and/or
mixed residential/commercial properties and related property and interests,
conveyed to such Trust Fund by the Depositor, and other assets, including any
Credit Enhancement described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, the Mortgage Pool may also
include participation interests in such types of mortgage loans, installment
contracts for the sale of such types of properties and/or mortgage pass-through
certificates (including private mortgage-pass-through certificates, certificates
issued or guaranteed by FHLMC, Fannie Mae or GNMA or mortgage pass-through
certificates previously created by the Depositor). Such mortgage loans,
participation interests, installment contracts and mortgage pass-through
certificates are hereinafter referred to as the "Mortgage Loans." The Mortgage
Loans will have fixed or adjustable interest rates. Some Mortgage Loans will
fully amortize over their remaining terms to maturity and others will provide
for balloon payments at maturity. The Mortgage Loans will provide for recourse
against only the Mortgaged Properties or provide for recourse against the other
assets of the obligors thereunder. The Mortgage Loans will be newly originated
or seasoned, and will be acquired by the Depositor either directly or through
one or more affiliates. Information regarding each Series of Certificates,
including interest and principal payment provisions for each Class, as well as
information regarding the size, composition and other characteristics of the
Mortgage Pool relating to such Series, will be furnished in the related
Prospectus Supplement. The Mortgage Loans will be serviced by a Master Servicer
identified in the related Prospectus Supplement.
The Certificates do not represent an obligation of or an interest in the
Depositor or any affiliate thereof. Unless so specified in the related
Prospectus Supplement, neither the Certificates nor the Mortgage Loans are
insured or guaranteed by any governmental agency or instrumentality or by any
other person or entity.
Prospective Investors should consider the factors discussed herein under "RISK
FACTORS" at page 8 and such information as may be set forth under the caption
"RISK FACTORS" in the related Prospectus Supplement before purchasing any of the
Offered Certificates.
The Depositor, as specified in the related Prospectus Supplement, may elect to
treat all or a specified portion of the collateral securing any Series of
Certificates as a "real estate mortgage investment conduit" (a "REMIC"), or an
election may be made to treat the arrangement by which a Series of Certificates
is issued as a REMIC. If such election is made, each Class of Certificates of a
Series will be either Regular Certificates or Residual Certificates, as
specified in the related Prospectus Supplement. If no such election is made, the
Trust Fund, as specified in the related Prospectus Supplement, will be
classified as a grantor trust for federal income tax purposes. See "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES" herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as more fully described under "PLAN OF
DISTRIBUTION" herein and in the related Prospectus Supplement. Certain offerings
of the Certificates, as specified in the related Prospectus Supplement, may be
made in one or more transactions exempt from the registration requirements of
the Securities Act of 1933, as amended. Such offerings are not being made
pursuant to the Registration Statement of which this Prospectus forms a part.
With respect to each Series, all of the Offered Certificates will be rated in
one of the four highest ratings categories by one or more nationally recognized
statistical rating organizations. There will have been no public market for the
Certificates of any Series prior to the offering thereof. No assurance can be
given that such a secondary market will develop as a result of such offering or,
if it does develop, that it will continue.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of the Certificates offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is November ___, 1996.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to each Series of Certificates will, among
other things, set forth with respect to such Series of Certificates: (i) the
identity of each Class within such Series; (ii) the initial aggregate principal
amount, the interest rate (the "Pass-Through Rate") (or the method for
determining it) and the authorized denominations of each Class of Certificates
of such Series; (iii) certain information concerning the Mortgage Loans relating
to such Series, including the principal amount, type and characteristics of such
Mortgage Loans on the date of issue of such Series of Certificates; (iv) the
circumstances, if any, under which the Certificates of such Series are subject
to redemption prior to maturity; (v) the final scheduled distribution date of
each Class of Certificates of such Series; (vi) the method used to calculate the
aggregate amount of principal available and required to be applied to the
Certificates of such Series on each Distribution Date; (vii) the order of the
application of principal and interest payments to each Class of Certificates of
such Series and the allocation of principal to be so applied; (viii) the extent
of subordination of any Subordinate Certificates; (ix) the principal amount of
each Class of Certificates of such Series that would be outstanding on specified
Distribution Dates, if the Mortgage Loans relating to such Series were prepaid
at various assumed rates; (x) the Distribution Dates for each Class of
Certificates of such Series; (xi) relevant financial information with respect to
the Mortgagor(s) and the Mortgaged Properties underlying the Mortgage Loans
relating to such Series, if applicable; (xii) information with respect to the
terms of the Subordinate Certificates or Residual Certificates, if any, of such
Series; (xiii) additional information with respect to the Credit Enhancement, if
any, relating to such Series; (xiv) additional information with respect to the
plan of distribution of such Series; and (xv) whether the Certificates of such
Series will be registered in the name of the nominee of The Depository Trust
Company or another depository.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of the
information set forth in the Registration Statement (the "Registration
Statement") of which this Prospectus and the related Prospectus Supplement is a
part. For further information, reference is made to such Registration Statement
and the exhibits thereto which the Depositor has filed with the Securities and
Exchange Commission (the "Commission"), under the Securities Act of 1933, as
amended (the "1933 Act"). Statements contained in this Prospectus and any
Prospectus Supplement as to the contents of any contract or other document
referred to are summaries and in each instance reference is made to the copy of
the contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement may be obtained from the
Commission, upon payment of the prescribed charges, or may be examined free of
charge at the Commission's offices. Reports and other information filed with the
Commission can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at Seven
World Trade Center, 13th Floor, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of the Agreement pursuant to which a Series of Certificates is issued
will be provided to each person to whom a Prospectus and the related Prospectus
Supplement are delivered, upon written or oral request directed to: Midland
Realty Acceptance Corp., 201 West 10th Street, 6th Floor, Kansas City, Missouri
64105, Attention: E. J.
Burke, telephone number (816) 843-6272.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to the Trust Fund for each Series, there are incorporated herein
by reference all documents and reports filed or caused to be filed by the
Depositor with respect to such Trust Fund pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, after the date of
this Prospectus and prior to the termination of the offering of the Offered
Certificates evidencing an interest in such Trust Fund. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, upon request, a copy of any or all such documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such Classes of such Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). The Depositor has determined that
its financial statements are not material to the offering of any of the Offered
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Certificates. See "FINANCIAL INFORMATION." Requests to
the Depositor should be directed to: Midland Realty
Acceptance Corp., 210 West 10th Street, 6th Floor, Kansas
City, Missouri 64105, Attention: E. J. Burke, telephone
number (816) 843-6272.
REPORTS
In connection with each distribution and annually, Certificateholders will be
furnished with statements containing information with respect to principal and
interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series. Any financial information
contained in such reports most likely will not have been examined or reported
upon by an independent public accountant. See "DESCRIPTION OF THE
CERTIFICATES--Reports to Certificateholders." The Master Servicer for each
Series will furnish periodic statements setting forth certain specified
information relating to the Mortgage Loans to the related Trustee, and, in
addition, annually will furnish such Trustee with a statement from a firm of
independent public accountants with respect to the examination of certain
documents and records relating to the servicing of the Mortgage Loans in the
related Trust Fund. See "SERVICING OF THE MORTGAGE LOANS--Evidence of
Compliance." Copies of the monthly and annual statements provided by the Master
Servicer to the Trustee will be furnished to Certificateholders of each Series
upon request addressed to the Trustee for the related Trust Fund.
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each Series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such Series. An Index of
Significant Definitions is included at the end of this Prospectus.
Title of Certificates Commercial/Multifamily
Mortgage Pass-Through
Certificates, issuable in
Series (the "Certificates").
Depositor......... Midland Realty Acceptance Corp., an
indirect wholly-owned subsidiary of
Midland Loan Services, L.P. See "THE
DEPOSITOR."
Master Servicer... Midland Loan Services, L.P., a
Missouri limited partnership (the
"Master Servicer"). See "SERVICING OF
THE MORTGAGE LOANS--General."
Special Servicer.. The special servicer (the "Special
Servicer"), if any, for each Series
of Certificates, which may be an
affiliate of the Depositor, will be
named, or the circumstances in
accordance with which a Special
Servicer will be appointed, will be
described in the related Prospectus
Supplement. See "SERVICING OF THE
MORTGAGE LOANS--General."
Trustee........... The trustee (the "Trustee") for each
Series of Certificates will be named
in the related Prospectus
Supplement. See "DESCRIPTION OF THE
CERTIFICATES--The Trustee."
The Trust Fund.... Each Series of Certificates will
represent in the aggregate the entire
beneficial ownership interest in a
Trust Fund consisting primarily of
the following:
A. Mortgage Pool The primary assets of each Trust Fund will
consist of a pool of mortgage loans (the "Mortgage Pool")
secured by first or junior mortgages, deeds of trust or
similar security instruments (each, a "Mortgage") on, or
installment contracts ("Installment Contracts") for the sale
of, fee simple or leasehold interests in commercial real
estate property, multifamily residential property, and/or
mixed residential/commercial property, and related property
and interests (each such interest or property, as the case
may be, a "Mortgaged Property"). A Mortgage Pool may also
include any or all of the participation interests in such
types of mortgage loans, private mortgage pass-through
certificates, certificates issued or guaranteed by FHLMC,
Fannie Mae or GNMA and mortgage pass- through certificates
previously created by the Depositor. Each such mortgage
loan, Installment Contract, participation interest or
certificate is herein referred to as a "Mortgage Loan." The
Mortgage Loans will not be guaranteed or insured by the
Depositor or any of its affiliates. The Prospectus
Supplement will indicate whether the Mortgage Loans will be
guaranteed or insured by any governmental agency or
instrumentality or other person. The Mortgage Loans will
have the additional characteristics described under "THE
MORTGAGE POOLS" herein and "DESCRIPTION OF THE MORTGAGE
POOL" in the related Prospectus Supplement. All Mortgage
Loans 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. All
Mortgage Loans will be of one or more of the following
types: Mortgage Loans with fixed interest rates; Mortgage
Loans with adjustable interest rates;
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............. Mortgage Loans whose principal
balances fully amortize over their
remaining terms to maturity; Mortgage
Loans whose principal balances do not
fully amortize, but instead provide
for a substantial principal payment
at the stated maturity of the loan;
Mortgage Loans that provide for
recourse against only the Mortgaged
Properties; Mortgage Loans that
provide for recourse against the
other assets of the related
mortgagors; and any other types of
Mortgages described in the related
Prospectus Supplement.
............. Certain Mortgage Loans may provide
that scheduled interest and principal
payments thereon are applied first to
interest accrued from the last date
to which interest has been paid to
the date such payment is received and
the balance thereof is applied to
principal, and other Mortgage Loans
may provide for payment of interest
in advance rather than in arrears.
Each Mortgage Loan may contain
prohibitions on prepayment or require
payment of a premium or a yield
maintenance penalty in connection
with a prepayment, in each case as
described in the related Prospectus
Supplement. The Mortgage Loans may
provide for payments of principal,
interest or both, on due dates that
occur monthly, quarterly,
semi-annually or at such other
interval as is specified in the
related Prospectus Supplement. See
"DESCRIPTION OF THE MORTGAGE POOL" in
the related Prospectus Supplement.
B. Accounts.... A Collection Account and a
Distribution Account. The Master
Servicer generally will be required
to establish and maintain an account
(the "Collection Account") in the
name of the Trustee on behalf of the
Certificateholders into which the
Master Servicer will, to the extent
described herein and in the related
Prospectus Supplement, deposit all
payments and collections received or
advanced with respect to the Mortgage
Loans. The Trustee generally will be
required to establish an account (the
"Distribution Account") into which
the Master Servicer will deposit
amounts held in the Collection
Account from which distributions of
principal and interest will be made.
Such distributions will be made to
the Certificateholders in the manner
described in the related Prospectus
Supplement. Funds held in the
Collection Account and Distribution
Account may be invested in certain
short-term, investment grade
obligations. See "DESCRIPTION OF THE
CERTIFICATES--Accounts."
C. Credit Enhancement If so provided in the related
Prospectus Supplement, credit
enhancement with respect to
one or more Classes of
Certificates of a Series or
the related Mortgage Loans
("Credit Enhancement"). Credit
Enhancement may be in the form
of a letter of credit, the
subordination of one or more
Classes of the Certificates of
such Series, the establishment
of one or more reserve funds,
surety bonds, certificate
guarantee insurance, limited
guarantees, or another type of
credit support, or a
combination thereof. It is
unlikely that Credit
Enhancement will protect
against all risks of loss or
guarantee repayment of the
entire principal balance of
the Certificates and interest
thereon. 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
Enhancement, if any, will be
described in the applicable
Prospectus Supplement for a
Series of Certificates. See
"RISK FACTORS--Credit
Enhancement Limitations" and
"CREDIT ENHANCEMENT--General."
Description of Certificates
The Certificates of each
Series will be issued pursuant
to a Pooling and Servicing
Agreement (the "Agreement").
If so specified in the
applicable Prospectus
Supplement, Certificates of a
given Series
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............. may be issued in several Classes,
which may pay interest at different
rates, may represent different
allocations of the right to receive
principal and interest payments, and
certain of which may be subordinated
to other Classes in the event of
shortfalls in available cash flow
from the underlying mortgage loans.
Alternatively, or in addition,
Classes may be structured to receive
principal payments in sequence. Each
Class in a group of sequential pay
Classes would be entitled to be paid
in full before the next Class in the
group is entitled to receive any
principal payments. A Class of
Certificates may also provide for
payments of principal only or
interest only or for disproportionate
payments of principal and interest.
Each Series of Certificates
(including any Class or Classes of
Certificates of such Series not
offered hereby) will represent in the
aggregate the entire beneficial
ownership interest in the Trust
Fund. See "PROSPECTUS SUPPLEMENT"
for a listing of additional
characteristics of the Certificates
that will be included in the
Prospectus Supplement for each Series.
............. The Certificates will not be
guaranteed or insured by the
Depositor or any of its affiliates.
Unless so specified in the related
Prospectus Supplement, neither the
Certificates nor the Mortgage Loans
are insured or guaranteed by any
governmental agency or
instrumentality or by any other
person or entity. See "RISK
FACTORS--Limited Assets" and
"DESCRIPTION OF THE CERTIFICATES."
Distributions on
Certificates.... Distributions of principal and
interest on the Certificates of each
Series will be made to the registered
holders thereof on the day (the
"Distribution Date") specified in the
related Prospectus Supplement,
beginning in the period specified in
the related Prospectus Supplement
following the establishment of the
related Trust Fund.
............. With respect to each Series of
Certificates on each Distribution
Date, the Trustee (or such other
paying agent as may be identified in
the applicable Prospectus Supplement)
will distribute to the
Certificateholders the amounts
described in the related Prospectus
Supplement that are due to be paid on
such Distribution Date. In general,
such amounts will include previously
undistributed payments of principal
(including principal prepayments, if
any) and interest on the Mortgage
Loans received by the Master Servicer
or the Special Servicer, if any,
after a date specified in the related
Prospectus Supplement (the "Cut-off
Date") and prior to the day preceding
each Distribution Date specified in
the related Prospectus Supplement.
Advances.......... The related Prospectus Supplement
will set forth the obligations, if
any, of the Master Servicer and the
Special Servicer, if any, as part of
their servicing responsibilities, to
make certain advances with respect to
delinquent payments on the Mortgage
Loans, payments of taxes,
assessments, insurance premiums and
other required payments. See
"DESCRIPTION OF THE CERTIFICATES--
Advances."
Termination....... The obligations of the parties to the
Agreement for each Series will
terminate upon: (i) the purchase of
all of the assets of the related
Trust Fund, as described in the
related Prospectus Supplement; (ii)
the later of (a) the distribution to
Certificateholders of that Series of
final payment with respect to the
last outstanding Mortgage Loan or (b)
the disposition of all property
acquired upon foreclosure or
deed-in-lieu of foreclosure with
respect to the last outstanding
Mortgage Loan and the remittance to
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............. the Certificateholders of all funds
due under the Agreement; (iii) the
sale of the assets of the related
Trust Fund after the principal
amounts of all Certificates have been
reduced to zero under circumstances
set forth in the Agreement; or (iv)
mutual consent of the parties and all
Certificateholders. With respect to
each Series, the Trustee will give or
cause to be given written notice of
termination of the Agreement to each
Certificateholder and, unless
otherwise specified in the applicable
Prospectus Supplement, the final
distribution under the Agreement will
be made only upon surrender and
cancellation of the related
Certificates at an office or agency
specified in the notice of
termination. See "DESCRIPTION OF
THE CERTIFICATES--Termination."
Tax Status of the Certificates The Certificates of
each Series will
constitute either (i)
"Regular Interests"
("Regular
Certificates") and
"Residual Interests"
("Residual
Certificates") in a
Trust Fund treated as
a REMIC under
Sections 860A through
860G of the Internal
Revenue Code of 1986
(the "Code"), or (ii)
interests in a Trust
Fund treated as a
grantor trust under
applicable provisions
of the Code. For the
treatment of Regular
Certificates,
Residual Certificates
or grantor trust
certificates under
the Code, see
"MATERIAL FEDERAL
INCOME TAX
CONSEQUENCES" herein
and in the related
Prospectus Supplement.
ERISA Considerations A fiduciary of an employee
benefit plan and certain other
retirement plans and
arrangements 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
Certificates may give rise to
a transaction that is
prohibited or is not otherwise
permissible either under ERISA
or Section 4975 of the Code.
See "ERISA CONSIDERATIONS"
herein and in the related
Prospectus Supplement.
Legal Investment.. The related Prospectus Supplement
will indicate whether the Offered
Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984.
Accordingly, investors whose
investment authority is subject to
legal restrictions should consult
their own legal advisors to determine
whether and to what extent the
Certificates constitute legal
investments for them. See "LEGAL
INVESTMENT" herein and in the related
Prospectus Supplement.
Rating. . . . . . . . . . . . . . . . . . At the date
of issuance,
as to each
Series, each
Class of
Offered
Certificates
will be
rated not
lower than
investment
grade by one
or more
nationally
recognized
statistical
rating
agencies
(each, a
"Rating
Agency").
See "RATING"
herein and
"RATINGS" in
the related
Prospectus
Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in "RISK FACTORS" in the related Prospectus
Supplement.
Limited Liquidity
There can be no assurance that a secondary market for the Certificates of any
Series will develop or, if it does develop, that it will provide holders with
liquidity of investment or will continue while Certificates of such Series
remain outstanding. The market value of Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, any sale of Certificates by a
holder in any secondary market that may develop may be at a discount from 100%
of their original principal balance or from their purchase price. Furthermore,
secondary market purchasers may look only hereto, to the related Prospectus
Supplement and to the reports to Certificateholders delivered pursuant to the
Agreement as described herein under the heading "DESCRIPTION OF THE
CERTIFICATES--Reports to Certificateholders" and "SERVICING OF THE MORTGAGE
LOANS--Evidence of Compliance" for information concerning the Certificates.
Certificateholders will have only those redemption rights and the Certificates
will be subject to early retirement only under the circumstances described
herein or in the related Prospectus Supplement. See "DESCRIPTION OF THE
CERTIFICATES--Termination."
Limited Assets
A Series of Certificates will have a claim against or security interest in the
Trust Funds for another Series only if so specified in the related Prospectus
Supplement. If the related Prospectus Supplement does not specify that a Series
of Certificates will have a claim against or security interest in the Trust
Funds for another Series and the related Trust Fund is insufficient to make
payments on such Certificates, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Distribution Account, the Collection Account and any
accounts maintained as Credit Enhancement, may be withdrawn under certain
conditions, as described in the related Prospectus Supplement. In the event of
such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Certificates. If so provided in the Prospectus
Supplement for a Series of Certificates consisting of one or more Classes of
Subordinate Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgaged Properties have been realized, 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 such Prospectus Supplement.
Average Life of Certificates; Prepayments; Yields
Prepayments on the Mortgage Loans 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 Loans were made as scheduled.
Thus, the prepayment experience on the Mortgage Loans may affect the average
life of each Class of related Certificates. The rate of principal payments on
pools of mortgage loans varies between pools and from time to time is influenced
by a variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Mortgage
Loans in any Trust Fund or that the rate of payments will conform to any model
described in any Prospectus Supplement. If prevailing interest rates fall
significantly below the applicable rates borne by the Mortgage Loans included in
a Trust Fund, principal prepayments are likely to be higher than if prevailing
rates remain at or above the rates borne by those Mortgage Loans. As a result,
the actual maturity of any Class of Certificates could occur significantly
earlier than expected. Alternatively, the actual maturity of any Class of
Certificates could occur significantly later than expected as a result of
prepayment premiums or the existence of defaults on the Mortgage Loans,
particularly at or near their maturity dates. In addition, the Master Servicer
or the Special Servicer, if any, may have the option under the Agreement for
such Series to extend the maturity of the Mortgage Loans following a default in
the payment of a balloon payment, which would also have the effect of extending
the average life of each Class of related Certificates. A Series of Certificates
may include one or more Classes of Certificates with priorities of payment and,
as a result, yields
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<PAGE>
on other Classes of Certificates, including Classes of Offered Certificates, of
such Series may be more sensitive to prepayments on Mortgage Loans. 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 Loans. With respect to
interest only or disproportionately interest weighted Classes purchased at a
premium, such Classes may not return their purchase prices under rapid repayment
scenarios. See "YIELD AND MATURITY CONSIDERATIONS" in the related Prospectus
Supplement.
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a Class of Certificates will reflect
such Rating Agency's assessment solely of the likelihood that holders of
Certificates of such Class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the Series of Certificates. Such rating will not
address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a Certificate at a significant
premium, or a Certificate that is entitled to disproportionately low, nominal or
no principal distributions, might fail to recoup its initial investment under
certain prepayment scenarios. Each Prospectus Supplement will identify any
payment to which holders of Offered Certificates of the related Series are
entitled that is not covered by the applicable rating.
See "--Credit Enhancement Limitations."
Risks Associated with Lending on Income Producing
Properties
Mortgage loans made with respect to multifamily or commercial property may
entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with single-family
property. For example, the ability of a mortgagor to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than any independent income or assets of the
mortgagor; thus, the value of an income-producing property is directly related
to the net operating income derived from such property. In contrast, the ability
of a mortgagor to repay a single-family loan typically is dependent primarily
upon the mortgagor's household income, rather than the capacity of the property
to produce income; thus, other than in geographical areas where employment is
dependent upon a particular employer or an industry, the mortgagor's income
tends not to reflect directly the value of such property. A decline in the net
operating income of an income-producing property will likely affect both the
performance of the related loan as well as the liquidation value of such
property, whereas a decline in the income of a mortgagor on a single-family
property will likely affect the performance of the related loan but may not
affect the liquidation value of such property.
Further, the concentration of default, foreclosure and loss risks for Mortgage
Loans in a particular Trust Fund or the related Mortgaged Properties will
generally be greater than for pools of single-family loans both because the
Mortgage Loans in a Trust Fund will generally consist of a smaller number of
loans than would a single-family pool of comparable aggregate unpaid principal
balance and because of the higher principal balance of individual Mortgage
Loans.
The performance of a mortgage loan secured by an income-producing property
leased by the mortgagor to tenants as well as the liquidation value of such
property may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both; the
risks associated with such loans may be offset by the number of tenants or, if
applicable, a diversity of types of business operated by such tenants. A number
of the Mortgage Loans may be secured by liens on owner- occupied Mortgaged
Properties or on Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the borrower or single tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
mortgaged property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in
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<PAGE>
governmental rules, regulations and fiscal policies, including environmental
legislation; natural disasters; and other factors beyond the control of the
Master Servicer or the Special Servicer, if any.
Additional risk may be presented by the type and use of a particular mortgaged
property. For instance, mortgaged properties that operate as hospitals, nursing
homes or convalescent homes may present special risks to mortgagees due to the
significant governmental regulation of the ownership, operation, maintenance,
control and financing of health care institutions. Mortgages encumbering
mortgaged properties that 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. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements that may be
terminable by the franchiser or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
In addition, mortgaged properties that are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control laws,
which could impact the future cash flows of such properties. Any such risks will
be more fully described in the related Prospectus Supplement under the captions
"RISK FACTORS" and "DESCRIPTION OF THE MORTGAGE POOL."
If applicable, certain legal aspects of the Mortgage
Loans for a Series of Certificates may be described in
the related Prospectus Supplement. See also "CERTAIN
LEGAL ASPECTS OF THE MORTGAGE LOANS."
Certain Tax Considerations of Variable Rate Certificates
There are certain tax matters as to which counsel to the Depositor is unable
to opine at the time of the issuance of the Prospectus due to uncertainty in the
law. Specifically, the treatment of Interest Weighted Certificates and Variable
Rate Regular Interests are subject to unsettled law which creates uncertainty as
to the exact method of income accrual which should control. The REMIC will
accrue income using a method which is consistent with certain regulations;
however, there can be no assurance that such method will be controlling.
Nonrecourse Mortgage Loans
It is anticipated that a substantial portion of the Mortgage Loans included in
any Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to such Mortgage Loans, in the event of
mortgagor default, recourse may be had only against the specific multifamily or
commercial property and such other assets, if any, as have been pledged to
secure the Mortgage Loan. With respect to those Mortgage Loans that provide for
recourse against the mortgagor and its assets generally, there can be no
assurance that such recourse will ensure a recovery in respect of a defaulted
Mortgage Loan greater than the liquidation value of the related Mortgaged
Property.
Delinquent and Non-Performing Mortgage Loans
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular Series of Certificates may include Mortgage Loans that are past due
or are non-performing. If so specified in the related Prospectus Supplement, the
servicing of such Mortgage Loans will be performed by a Special Servicer. Credit
Enhancement, if provided with respect to a particular Series of Certificates,
may not cover all losses related to such delinquent or non-performing Mortgage
Loans, and investors should consider the risk that the inclusion of such
Mortgage Loans in the Trust Fund may adversely affect the rate of defaults and
prepayments on Mortgaged Properties and the yield on the Certificates of such
Series.
Junior Mortgage Loans
Certain of the Mortgage Loans may be junior mortgage loans. The primary risk
to holders of mortgage loans secured by junior liens is the possibility that a
foreclosure of a related senior lien would extinguish the junior lien and that
adequate funds will not be received in connection with such foreclosure to pay
the debt held by the holder of such junior mortgage loan after satisfaction of
all related senior liens. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Junior Mortgages; Rights of Senior Mortgagees or
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Beneficiaries" and "--Foreclosure" for a discussion of additional risks to
holders of mortgage loans secured by junior liens.
Balloon Payments
Certain of the Mortgage Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Mortgage
loans with balloon payments involve a greater degree of risk because the ability
of a mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related mortgaged property in a
timely manner. The ability of a mortgagor to accomplish either of these goals
will be affected by a number of factors, including the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, the financial condition and operating history of the
mortgagor and the related mortgaged property, tax laws, rent control laws (with
respect to certain multifamily properties and mobile home parks), reimbursement
rates (with respect to certain hospitals, nursing homes and congregate care
facilities), renewability of operating licenses, prevailing general economic
conditions and the availability of credit for commercial or multifamily, as the
case may be, real properties generally.
Extensions and Modifications of Defaulted Mortgage Loans;
Additional Servicing Fees
In order to maximize recoveries on defaulted Mortgage Loans, a Master Servicer
or Special Servicer, if any, will be permitted (within the parameters specified
in the related Prospectus Supplement) to extend and modify Mortgage Loans that
are in default or as to which a payment default is reasonably foreseeable,
including in particular with respect to balloon payments. In addition, a Master
Servicer or a Special Servicer, if any, may receive workout fees, management
fees, liquidation fees or other similar fees based on receipts from or proceeds
of such Mortgage Loans. Although a Master Servicer or Special Servicer, if any,
generally will be required to determine that any such extension or modification
is reasonably likely to produce a greater recovery amount than liquidation,
there can be no assurance that such flexibility with respect to extensions or
modifications or payment of a workout fee will increase the amount of receipts
from or proceeds of Mortgage Loans that are in default or as to which a payment
default is reasonably foreseeable.
Risks Related to the Mortgagor's Form of Entity and
Sophistication
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. For example, an entity, as opposed to an
individual, may be more inclined to seek legal protection from its creditors,
such as a mortgagee, under the bankruptcy laws. Unlike individuals involved in
bankruptcies, various types of entities generally do not have personal assets
and creditworthiness at stake. The bankruptcy of a mortgagor may impair the
ability of the mortgagee to enforce its rights and remedies under the related
mortgage. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Foreclosure-Bankruptcy Law." The mortgagor's sophistication may increase
the likelihood of protracted litigation or bankruptcy in default situations. The
more sophisticated a mortgagor is, the more likely it will be aware of its
rights, remedies and defenses against its mortgagee and the more likely it will
have the resources to make effective use of all of its rights, remedies and
defenses.
Credit Enhancement Limitations
The Prospectus Supplement for a Series of Certificates will describe any
Credit Enhancement in the related Trust Fund, which may include letters of
credit, insurance policies, surety bonds, limited guarantees, reserve funds or
other types of credit support, or combinations thereof. Use of Credit
Enhancement will be subject to the conditions and limitations described herein
and in the related Prospectus Supplement and is not expected to cover all
potential losses or risks or guarantee repayment of the entire principal balance
of the Certificates and interest thereon.
A Series of Certificates may include one or more Classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount
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of subordination will be limited and may decline or be reduced to zero 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
Enhancement 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 Mortgaged Properties may fall primarily
upon those Classes of Certificates having a lower priority of payment. Moreover,
if a form of Credit Enhancement covers more than one Series of Certificates,
holders of Certificates of one Series will be subject to the risk that such
Credit Enhancement will be exhausted by the claims of the holders of
Certificates of one or more other Series.
The amount, type and nature of Credit Enhancement, 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 the Certificates 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 Enhancement
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 Loans. No assurance can be given
with respect to any Mortgage Loan that the appraised value of the related
Mortgaged Property has remained or will remain at its level as of the
origination date of such Mortgage Loan. Moreover, there is no assurance that
appreciation of real estate values generally will limit loss experiences on
commercial or multifamily 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 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 for similar
mortgage loans. 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 Credit
Enhancement, such losses will be borne, at least in part, by the holders of one
or more Classes of the Certificates of the related Series. See "Limited Nature
of Ratings," "DESCRIPTION OF THE CERTIFICATES" and "CREDIT ENHANCEMENT."
Risks to Subordinated Certificateholders
If so provided in the related Prospectus Supplement, a Series of Certificates
may include one or more Classes of Subordinate Certificates (which may include
Offered Certificates). If losses or shortfalls in collections on Mortgaged
Properties are realized, the amount of such losses or shortfalls will be borne
first by one or more Classes of the Subordinate Certificates. The remaining
amount of such losses or shortfalls, if any, will be borne by the remaining
Classes of Certificates in the priority and subject to the limitations specified
in such Prospectus Supplement. In addition to the foregoing, any Credit
Enhancement, if applicable, may be used by the Certificates of a higher priority
of payment before the principal of the lower priority Classes of Certificates of
such Series has been repaid. Therefore, the impact of significant losses and
shortfalls on the mortgaged properties may fall primarily upon those Classes of
Certificates with a lower payment priority.
Taxable Income in Excess of Distributions Received
A holder of a certificate in a Class of Subordinate Certificates could be
allocated taxable income attributable to accruals of interest and original issue
discount in excess of cash distributed to such holder if mortgage loans were in
default giving rise to delays in distributions. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Regular Interests--Treatment of Subordinate
Certificates" herein.
Due-on-Sale Clauses and Assignments of Leases and Rents
Mortgages may contain a due-on-sale clause, which permits the mortgagee to
accelerate the maturity of the mortgage loan if the mortgagor sells, transfers
or conveys the related mortgaged property or its interest
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in the mortgaged property. Mortgages may also include a debt-acceleration
clause, which permits the mortgagee 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.
The related Prospectus Supplement will describe whether and to what extent 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 mortgagee 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 mortgagee is
entitled to collect rents. Such assignments are typically not perfected as
security interests prior to the mortgagee's taking possession of the related
mortgaged property and/or appointment of a receiver. Some state laws may require
that the mortgagee 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 mortgagee's ability to collect the rents may be
adversely affected, See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Leases and
Rents."
Environmental Risks
Real property pledged as security for a mortgage loan may be subject to
certain environmental risks. Under the laws of certain states, contamination of
a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), a mortgagee may be liable as an "owner" or
"operator" for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
mortgagee have become sufficiently involved in the operations of the mortgagor,
regardless of whether the environmental damage or threat was caused by a prior
owner. A mortgagee also risks such liability on foreclosure of the mortgage.
Each Agreement will generally provide that the Master Servicer or the Special
Servicer, if any, acting on behalf of the Trust Fund, may not acquire title to a
Mortgaged Property securing a Mortgage Loan or take over its operation unless
the Master Servicer or Special Servicer, as applicable, has previously
determined, based upon a report prepared by a person who regularly conducts
environmental audits, that: (i) the Mortgaged Property is in compliance with
applicable environmental laws, 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 (ii) if the
Mortgaged Property is not so in compliance or such circumstances are so present,
then it would be in the best economic interest of the Trust Fund to acquire
title to the Mortgaged Property and further to take such actions as would be
necessary and appropriate to effect such compliance and/or respond to such
circumstances, which may include obtaining an environmental insurance policy.
The related Prospectus Supplement may impose additional restrictions on the
ability of the Master Servicer or the Special Servicer, if any, to take any of
the foregoing actions. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Environmental Risks."
ERISA Considerations
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
Series. See "ERISA CONSIDERATIONS."
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Certain Federal Tax Considerations Regarding Residual
Certificates
Holders of Residual Certificates will be required to report on their federal
income tax returns as ordinary income their pro rata share of the taxable income
of the REMIC, regardless of the amount or timing of their receipt of cash
payments, as described in "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Holders of Residual Certificates." Accordingly, under certain circumstances,
holders of Offered Certificates that constitute Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of Residual Certificates report their pro rata share of the taxable
income and net loss of the REMIC will continue until the Certificate Balances of
all Classes of Certificates of the related Series have been reduced to zero,
even though holders of Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
such Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder that (i) generally, will not be subject
to offset by losses from other activities, (ii) for a tax-exempt holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Individual holders of
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, Residual Certificates are subject
to certain restrictions on transfer. In particular, the transfer of a Residual
Interest to certain "Disqualified Organizations" is prohibited. If transfer
occurs in violation of such prohibition, a tax is imposed on the transfer. In
addition, the transfer of a "noneconomic residuary interest" by a Residual
Certificateholder will be disregarded under certain circumstances with the
transferor remaining liable for any taxable income derived from the Residual
Interest by the transferee Residual Certificateholder. See "MATERIAL FEDERAL
INCOME TAX CONSE- QUENCES--Restrictions on Ownership and Transfer of Residual
Certificates." Because of the special tax treatment of Residual Certificates,
the taxable income arising in a given year on Residual Certificates will not be
equal to the taxable income associated with investment in a corporate bond or
stripped instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Certificates may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics.
Control
Under certain circumstances, the consent or approval of the holders of a
specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a Series or a similar means of allocating decision-making under
the related Agreement, which will be specified in the related Prospectus
Supplement ("Voting Rights"), will be required to direct, and will be sufficient
to bind all Certificateholders of such Series to, certain actions, including
amending the related Agreement in certain circumstances. See "SERVICING OF THE
MORTGAGE LOANS--Events of Default," "--Rights Upon Event of Default" and
"DESCRIPTION OF THE CERTIFICATES--Amendment."
Book-Entry Registration
The related Prospectus Supplement may provide that one or more Classes of the
Certificates initially will be represented by one or more certificates
registered in the name of the nominee for The Depository Trust Company, and will
not be registered in the names of the Certificateholders or their nominees.
Because of this, unless and until definitive certificates are issued, beneficial
owners of the Certificates of such Class or Classes will not be recognized by
the Trustee as "Certificateholders" (as that term is to be used in the related
Agreement). Hence, until such time as definitive certificates are issued, the
beneficial owners will be able to exercise the rights of Certificateholders only
indirectly through The Depository Trust Company and its participating
organizations. See "DESCRIPTION OF THE CERTIFICATES--General."
THE DEPOSITOR
Midland Realty Acceptance Corp. was incorporated in the State of Missouri on
May 14, 1996 as a wholly owned, limited purpose finance subsidiary of Midland
Loan Services, L.P. The principal executive offices of the Depositor are located
at 210 West 10th Street, 6th Floor, Kansas City, Missouri 64105. Its telephone
number is (816) 843-6272.
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The Depositor will have no servicing obligations or responsibilities with
respect to any Series of Certificates, Mortgage Pool or Trust Fund. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. Neither the Depositor, its parent nor
any of the Depositor's affiliates will insure or guarantee distributions on the
Certificates of any Series.
The assets of the Trust Funds will be acquired by the Depositor directly or
through one or more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from the
sale of each Series of Offered Certificates to purchase the Mortgage Loans
relating to such Series, to repay indebtedness that has been incurred to obtain
funds to acquire Mortgage Loans, to obtain Credit Enhancement, if any, for the
Series and to pay costs of structuring, issuing and underwriting the
Certificates. If so specified in the related Prospectus Supplement, Certificates
may be exchanged by the Depositor for Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES*
The Certificates of each Series will be issued pursuant to a separate Pooling
and Servicing Agreement (the "Agreement") to be entered into among the
Depositor, the Master Servicer, the Special Servicer, if any, and the Trustee
for that Series and any other parties described in the applicable Prospectus
Supplement, substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus is a part or in such other form as may be
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Series and the
Agreement with respect to the underlying Trust Fund. However, the Prospectus
Supplement for each Series will describe more fully the Certificates and the
provisions of the related Agreement, which may be different from the summaries
set forth below.
At the time of issuance, the Offered Certificates of each Series will be rated
"investment grade," typically one of the four highest generic rating categories,
by at least one nationally recognized statistical rating organization. Each of
such rating organizations specified in the applicable Prospectus Supplement as
rating the Offered Certificates of the related Series is hereinafter referred to
as a "Rating Agency." A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency.
General
The Certificates of each Series will be issued in registered or book-entry
form and will represent beneficial ownership interests in the trust fund (the
"Trust Fund") created pursuant to the Agreement for such Series. The Trust Fund
for each Series will primarily comprise, to the extent provided in the
Agreement: (i) the Mortgage Loans conveyed to the Trustee pursuant to the
Agreement; (ii) all payments on or collections in respect of the Mortgage Loans
due after the Cut-off Date; (iii) any REO property; (iv) all revenue received in
respect of REO Property; (v) insurance policies with respect to such Mortgage
Loans; (vi) any assignments of leases, rents and profits and security
agreements; (vii) any indemnities or guaranties given as additional security for
such Mortgage Loans; (viii) the Trustee's right, title and interest in and to
any reserve or escrow accounts established pursuant to any of the Mortgage Loan
documents (each, a "Reserve Account"); (ix) the Collection Account; (x) the
Distribution Account and the REO Account; (xi) any environmental indemnity
agreements relating to such Mortgaged Properties; (xii) the rights and remedies
under the Mortgage Loan Purchase and Sale Agreement; (xiii) the proceeds of any
of the foregoing (excluding interest earned on deposits in any Reserve Account,
to the extent such interest belongs to the related mortgagor); and (xiv) such
- --------
*Whenever in this Prospectus the terms "Certificates," "Trust Fund" and
"Mortgage Pool" are used, such terms will be deemed to apply, unless the context
indicates otherwise, to a specific Series of Certificates, the Trust Fund
underlying the related Series and the related Mortgage Pool.
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other assets or rights as are described in the related Prospectus Supplement. In
addition, the Trust Fund for a Series may include private mortgage pass-through
certificates, certificates issued or guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("Fannie Mae") or the Governmental National Mortgage Association ("GNMA") or
mortgage pass-through certificates previously created by the Depositor, as well
as various forms of Credit Enhancement. See "CREDIT ENHANCEMENT." Such other
assets will be described more fully in the related Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, Certificates of a
given Series may be issued in several Classes, which may pay interest at
different rates, may represent different allocations of the right to receive
principal and interest payments, and certain of which may be subordinated to
other Classes in the event of shortfalls in available cash flow from the
underlying Mortgage Loans. Alternatively, or in addition, Classes may be
structured to receive principal payments in sequence. Each Class in a group of
sequential pay Classes would be entitled to be paid in full before the next
Class in the group is entitled to receive any principal payments. A Class of
Certificates may also provide for payments of principal only or interest only or
for disproportionate payments of principal and interest. Subordinate
Certificates of a given Series of Certificates may be offered in the same
Prospectus Supplement as the Senior Certificates of such Series or may be
offered in a separate offering document. Each Class of Certificates of a Series
will be issued in the minimum denominations specified in the related Prospectus
Supplement.
The Prospectus Supplement for any Series including Classes similar to any of
those described above will contain a complete description of their
characteristics and risk factors, including, as applicable, (i) mortgage
principal prepayment effects on the weighted average lives of Classes; (ii) the
risk that interest only, or disproportionately interest weighted, Classes
purchased at a premium may not return their purchase prices under rapid
prepayment scenarios; and (iii) the degree to which an investor's yield is
sensitive to principal prepayments.
The Offered Certificates of each Series will be freely transferable and
exchangeable at the office specified in the related Agreement and Prospectus
Supplement, provided, however, that certain Classes of Certificates may be
subject to transfer restrictions described in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, the Certificates may be
transferable only on the books of The Depository Trust Company or another
depository identified in such Prospectus Supplement.
Distributions on Certificates
Distributions of principal and interest on the Certificates of each Series
will be made to the registered holders thereof ("Certificateholders") by the
Trustee (or such other paying agent as may be identified in the related
Prospectus Supplement) on the day (the "Distribution Date") specified in the
related Prospectus Supplement, beginning in the period specified in the related
Prospectus Supplement following the establishment of the related Trust Fund.
Distributions for each Series will be made by check mailed to the address of the
person entitled thereto as it appears on the certificate register for such
Series maintained by the Trustee or by wire transfer if so specified in the
related Prospectus Supplement. The final distribution in retirement of the
Certificates of each Series will be made only upon presentation and surrender of
the Certificates at the office or agency specified in the notice to the
Certificateholders of such final distribution. In addition, the Prospectus
Supplement relating to each Series will set forth the applicable due period,
prepayment period, record date, Cut-off Date and determination date in respect
of each Series of Certificates.
With respect to each Series of Certificates on each Distribution Date, the
Trustee (or such other paying agent as may be identified in the applicable
Prospectus Supplement) will distribute to the Certificateholders the amounts
described in the related Prospectus Supplement that are due to be paid on such
Distribution Date. In general, such amounts will include previously
undistributed payments of principal (including principal prepayments, if any)
and interest on the Mortgage Loans received by the Master Servicer or the
Special Servicer, if any, after a date specified in the related Prospectus
Supplement (the "Cut-off Date") and prior to the day preceding each Distribution
Date specified in the related Prospectus Supplement.
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Accounts
It is expected that the Agreement for each Series of Certificates will provide
that the Trustee establish an account (the "Distribution Account") into which
the Master Servicer will deposit amounts held in the Collection Account from
which Certificateholder distributions will be made with respect to a given
Distribution Date. On each Distribution Date, the Trustee will apply amounts on
deposit in the Distribution Account generally to make distributions of interest
and principal to the Certificateholders in the manner described in the related
Prospectus Supplement.
It is also expected that the Agreement for each Series of Certificates will
provide that the Master Servicer establish and maintain an account (the
"Collection Account") in the name of the Trustee for the benefit of
Certificateholders. The Master Servicer will generally be required to deposit
into the Collection Account all amounts received on or in respect of the
Mortgage Loans. The Master Servicer will be entitled to make certain withdrawals
from the Collection Account to, among other things: (i) remit certain amounts
for the related Distribution Date into the Distribution Account; (ii) pay
Property Protection Expenses, taxes, assessments and insurance premiums and
certain third-party expenses in accordance with the Agreement; (iii) pay accrued
and unpaid servicing fees and other servicing compensation to the Master
Servicer and the Special Servicer, if any; and (iv) reimburse the Master
Servicer, the Special Servicer, if any, the Trustee and the Depositor for
certain expenses and provide indemnification to the Depositor, the Master
Servicer and the Special Servicer, if any, as described in the Agreement.
"Property Protection Expenses" comprise certain costs and expenses incurred in
connection with defaulted Mortgage Loans, acquiring title to, or management of,
REO Property or the sale of defaulted Mortgage Loans or REO Properties, as more
fully described in the related Agreement. The applicable Prospectus Supplement
may provide for additional circumstances in which the Master Servicer will be
entitled to make withdrawals from the Collection Account.
The amount at any time credited to the Collection Account or the Distribution
Account may be invested in Permitted Investments that are payable on demand or
in general mature or are subject to withdrawal or redemption on or before the
business day preceding the next succeeding Master Servicer Remittance Date, in
the case of the Collection Account, or the business day preceding the next
succeeding Distribution Date, in the case of the Distribution Account. The
Master Servicer will be required to remit amounts on deposit in the Collection
Account that are required for distribution to Certificateholders to the
Distribution Account on or before the business day preceding the related
Distribution Date (the "Master Servicer Remittance Date"). The income from the
investment of funds in the Collection Account and the Distribution Account in
Permitted Investments will constitute additional servicing compensation for the
Master Servicer, and the risk of loss of funds in the Collection Account and the
Distribution Account resulting from such investments will be borne by the Master
Servicer. The amount of each such loss will be required to be deposited by the
Master Servicer in the Collection Account or the Distribution Account, as the
case may be, promptly as realized.
It is expected that the Agreement for each Series of Certificates will provide
that an account (the "REO Account") will be established and maintained in order
to be used in connection with REO Properties and, if specified in the related
Prospectus Supplement, certain other Mortgaged Properties. To the extent set
forth in the Agreement, certain withdrawals from the REO Account will be made
to, among other things, (i) make remittances to the Collection Account as
required by the Agreement; (ii) pay taxes, assessments, insurance premiums,
other amounts necessary for the proper operation, management and maintenance of
the REO Properties and such Mortgaged Properties and certain third-party
expenses in accordance with the Agreement; and (iii) provide for the
reimbursement of certain expenses in respect of the REO Properties and such
Mortgaged Properties.
The amount at any time credited to the REO Account may be invested in
Permitted Investments that are payable on demand or mature, or are subject to
withdrawal or redemption, on or before the business day preceding the day on
which such amounts are required to be remitted to the Master Servicer for
deposit in the Collection Account. The income from the investment of funds in
the REO Account in Permitted Investments will be for the benefit of the Master
Servicer, or the Special Servicer, if applicable, and the risk of loss of funds
in the REO Account resulting from such investments will be borne by the Master
Servicer, or the Special Servicer, if applicable.
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"Permitted Investments" will generally consist of one or more of the
following, unless the Rating Agencies rating Certificates of a Series require
other or additional investments:
(i) direct obligations of, or guarantees as to timely payment of principal
and interest by, the United States or any agency or instrumentality thereof,
provided that such obligations are backed by the full faith and credit of the
United States of America;
(ii) direct obligations of the FHLMC (debt obligations only), Fannie Mae
(debt obligations only), the Federal Farm Credit System (consolidated
systemwide bonds and notes only), the Federal Home Loan Banks (consolidated
debt obligations only), the Student Loan Marketing Association (debt
obligations only), the Financing Corp. (consolidated debt obligations only)
and the Resolution Funding Corp. (debt obligations only);
(iii) federal funds time deposits in, or certificates of deposit of, or
bankers' acceptances, or repurchase obligations, all having maturities of not
more than 365 days, issued by any bank or trust company, savings and loan
association or savings bank, depositing institution or trust company having a
short term debt obligation rating from Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") of "A-1+" and the highest
short-term rating available from each of the other Rating Agencies, or such
lower rating as will not result in the downgrade or withdrawal of the rating
or ratings then assigned to the Certificates by any Rating Agency;
(iv) commercial paper having a maturity of 365 days or less (including both
non-interest-bearing discount obligations and interest-bearing obligations
payable on demand or on a specified date not more than one year after the date
of issuance thereof and demand notes that constitute vehicles for investment
in commercial paper) that is rated by each Rating Agency in its highest
short-term unsecured rating category;
(v) units of taxable money market funds rated "AAAm" or "AAAg" by S&P's or
mutual funds, which funds seek to maintain a constant asset value and have
been rated by each Rating Agency as Permitted Investments with respect to this
definition;
(vi) if previously confirmed in writing to the Trustee, any other demand,
money market or time deposit, or any other obligation, security or investment,
as may be acceptable to each Rating Agency as a permitted investment of funds
backing securities having ratings equivalent to each Rating Agency's highest
initial rating of the Certificates; and
(vii) such other obligations as are acceptable as
Permitted Investments to each Rating Agency;
provided, however, that (a) none of such obligations or securities listed above
may have an "r" highlighter affixed to its rating if rated by S&P; (b) except
with respect to units of money market funds pursuant to clause (vi) above, each
such obligation or security will have a fixed dollar amount of principal due at
maturity which cannot vary or change; (c) except with respect to units of money
market funds pursuant to clause (vi) above, if any such obligation or security
provides for a variable rate of interest, interest will be tied to a single
interest rate index plus a single fixed spread (if any) and move proportionately
with that index; and (d) if any of the obligations or securities listed in
paragraphs (iii) - (vi) above are not rated by each Rating Agency, such
investment will nonetheless qualify as a Permitted Investment if it is rated by
S&P and one other nationally recognized statistical rating organization; and
provided, further, that such instrument continues to qualify as a "cash flow
investment" pursuant to Code Section 860G(a)(6) earning a passive return in the
nature of interest and that no instrument or security will be a Permitted
Investment if (i) such instrument or security evidences a right to receive only
interest payments or (ii) the right to receive principal and interest payments
derived from the underlying investment provides a yield to maturity in excess of
120% of the yield to maturity at par of such underlying investment as of the
date of its acquisition.
Amendment
Generally, the Agreement for each Series will provide that it may be amended
from time to time by the parties thereto, without the consent of any of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct
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or supplement any provisions therein that may be inconsistent with any other
provisions therein, (iii) to amend any provision thereof to the extent necessary
or desirable to maintain the rating or ratings assigned to each of the Classes
of Certificates by each Rating Agency or (iv) to make any other provisions with
respect to matters or questions arising under the Agreement that will not (a) be
inconsistent with the provisions of the Agreement, (b) result in the
downgrading, withdrawal or qualification of the rating or ratings then assigned
to any outstanding Class of Certificates and (c) adversely affect in any
material respect the interests of any Certificateholder, as evidenced by an
opinion of counsel.
Each Agreement will also provide that it may be amended from time to time by
the parties thereto with the consent of the holders of each of the Classes of
Regular Certificates representing not less than a percentage specified in the
related Agreement of each Class of Certificates affected by the amendment for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Agreement or of modifying in any manner the rights
of the Certificateholders; provided, however, that no such amendment shall: (i)
reduce in any manner the amount of, or delay the timing of, payments received on
Mortgage Loans that are required to be distributed on any Certificate without
the consent of each affected Certificateholder; (ii) change the percentage of
Certificates the holders of which are required to consent to any action or
inaction under the Agreement, without the consent of the holders of all
Certificates then outstanding; or (iii) alter the obligations of the Master
Servicer or the Trustee to make an advance without the consent of the holders of
all Certificates representing all of the Voting Rights of the Class or Classes
affected thereby.
Further, the Agreement for each Series may provide that the parties thereto,
at any time and from time to time, without the consent of the
Certificateholders, may amend the Agreement to modify, eliminate or add to any
of its provisions to such extent as shall be necessary to maintain the
qualification of any REMIC related to such Series or to prevent the imposition
of any additional material state or local taxes, at all times that any of the
Certificates are outstanding, provided, however, that such action, as evidenced
by an opinion of counsel, is necessary or helpful to maintain such qualification
or to prevent the imposition of any such taxes, and would not adversely affect
in any material respect the interest of any Certificateholder.
The related Prospectus Supplement will specify the method for allocating
Voting Rights among holders of Certificates of a Class. Any Certificate
beneficially owned by the Depositor, the Master Servicer, the Special Servicer
(if any), any mortgagor, the Trustee, a manager or any of their respective
affiliates will be deemed not to be outstanding; provided, however that,
Certificates beneficially owned by the Master Servicer, the Special Servicer (if
any), or any affiliate thereof will be deemed to be outstanding in connection
with any required consent to an amendment of the Agreement that relates to an
action that would materially adversely affect in any material respect the
interests of the Certificateholders of any Class while the Master Servicer, the
Special Servicer (if any), or any such affiliate owns not less than a percentage
specified in the related Agreement of such Class.
The Agreement relating to each Series may provide that no amendment to such
Agreement will be made unless there has been delivered in accordance with such
Agreement an opinion of counsel to the effect that such amendment will not cause
such Series to fail to qualify as a REMIC at any time that any of the
Certificates are outstanding.
The Prospectus Supplement for a Series may describe other or different
provisions concerning the amendment of the related Agreement required by the
Rating Agencies rating Certificates of such Series.
Termination
The obligations of the parties to the Agreement for each Series will terminate
upon: (i) the purchase of all of the assets of the related Trust Fund, as
described in the related Prospectus Supplement; (ii) the later of (a) the
distribution to Certificateholders of that Series of final payment with respect
to the last outstanding Mortgage Loan or (b) the disposition of all property
acquired upon foreclosure or deed-in-lieu of foreclosure with respect to the
last outstanding Mortgage Loan and the remittance to the Certificateholders of
all funds due under the Agreement; (iii) the sale of the assets of the related
Trust Fund after the principal amounts of all Certificates have been reduced to
zero under circumstances set forth in the Agreement; or (iv) mutual consent of
the parties and all Certificateholders. With respect to each Series, the Trustee
will give or cause to be given written notice of termination of the Agreement to
each Certificateholder and the final distribution
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under the Agreement will be made only upon surrender and cancellation of the
related Certificates at an office or agency specified in the notice of
termination.
Reports to Certificateholders
Concurrently with each distribution for each Series, the Trustee (or such
other paying agent as may be identified in the applicable Prospectus Supplement)
will forward to each Certificateholder a statement setting forth such
information relating to such distribution as is specified in the Agreement and
described in the applicable Prospectus Supplement.
The Trustee
The Depositor will select a bank or trust company to act as trustee (the
"Trustee") under the Agreement for each Series and the Trustee will be
identified, and its obligations under that Agreement will be described, in the
applicable Prospectus Supplement. The Rating Agencies rating Certificates of a
Series may require the appointment of a Fiscal Agent to guarantee certain
obligations of the Trustee. Such Fiscal Agent will be a party to the Agreement.
In such event, the Fiscal Agent will be identified, and its obligations under
the Agreement will be described, in the applicable Prospectus Supplement. See
"SERVICING OF THE MORTGAGE LOANS--Certain Matters with Respect to the Master
Servicer, the Special Servicer, the Trustee and the Depositor."
THE MORTGAGE POOLS
General
Each Mortgage Pool will consist of mortgage loans secured by first or junior
mortgages, deeds of trust or similar security instruments (each, a "Mortgage")
on, or installment contracts ("Installment Contracts") for the sale of, fee
simple or leasehold interests in commercial real estate property, multifamily
residential property, and/or mixed residential/commercial property, and related
property and interests (each such interest or property, as the case may be, a
"Mortgaged Property"). A Mortgage Pool may also include any or all of the
participation interests in such types of mortgage loans, private mortgage
pass-through certificates, certificates issued or guaranteed by FHLMC, Fannie
Mae or GNMA and mortgage pass-through certificates previously created by the
Depositor. Each such mortgage loan, Installment Contract, participation interest
or certificate is herein referred to as a "Mortgage Loan."
All Mortgage Loans will be of one or more of the following types:
1. Mortgage Loans with fixed interest rates;
2. Mortgage Loans with adjustable interest rates;
3. Mortgage Loans whose principal balances fully
amortize over their remaining terms to maturity;
4. Mortgage Loans whose principal balances do not
fully amortize, but instead provide for a
substantial principal payment at the stated
maturity of the loan;
5. Mortgage Loans that provide for recourse against
only the Mortgaged Properties;
6. Mortgage Loans that provide for recourse against
the other assets of the related mortgagors; and
7. any other types of Mortgage Loans described in
the applicable Prospectus Supplement.
Certain Mortgage Loans ("Simple Interest Loans") may provide that scheduled
interest and principal payments thereon are applied first to interest accrued
from the last date to which interest has been paid to the
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date such payment is received and the balance thereof is applied to principal,
and other Mortgage Loans may provide for payment of interest in advance rather
than in arrears.
Mortgage Loans may also be secured by one or more assignments of leases and
rents, management agreements or operating agreements relating to the Mortgaged
Property and in some cases by certain letters of credit, personal guarantees or
both. Pursuant to an assignment of leases and rents, the obligor on the related
promissory note (the "Note") assigns its right, title and interest as landlord
under each lease and the income derived therefrom to the related mortgagee,
while retaining a license to collect the rents for so long as there is no
default. If the obligor defaults, the license terminates and the related
mortgagee is entitled to collect the rents from tenants to be applied to the
monetary obligations of the obligor. State law may limit or restrict the
enforcement of the assignment of leases and rents by a mortgagee until the
mortgagee takes possession of the related mortgaged property and/or a receiver
is appointed. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Leases and
Rents."
If so specified in the related Prospectus Supplement, a Trust Fund may include
a number of Mortgage Loans with a single obligor or related obligors thereunder;
provided, however, that the principal balance of the mortgage loans to a single
obligor or group of related obligors will not exceed 45% of the initial
principal amount of the Certificates for a Series. In addition, in the event
that the Mortgage Pool securing Certificates for any Series includes a Mortgage
Loan or mortgage-backed security or a group of Mortgage Loans or mortgage-backed
securities of a single obligor or group of affiliated obligors representing 10%
or more, but less than 45%, of the principal amount of such Certificates, the
Prospectus Supplement will contain information, including financial information,
regarding the credit quality of the obligors. The Mortgage Loans will be newly
originated or seasoned, and will be acquired by the Depositor either directly or
through one or more affiliates.
Unless otherwise specified in the Prospectus Supplement for a Series, the
Mortgage Loans will not be insured or guaranteed by the United States, any
governmental agency, any private mortgage insurer or any other person or entity.
The Prospectus Supplement relating to each Series will specify the originator
or originators relating to the Mortgage Loans, which may include, among others,
commercial banks, savings and loan associations, other financial institutions,
mortgage banks, credit companies, insurance companies, real estate developers or
other HUD approved lenders, and the underwriting criteria to the extent
available in connection with originating the Mortgage Loans. The criteria
applied by the Depositor in selecting the Mortgage Loans to be included in a
Mortgage Pool will vary from Series to Series. The Prospectus Supplement
relating to each Series also will provide specific information regarding the
characteristics of the Mortgage Loans, as of the Cut-off Date, including, among
other things: (i) the aggregate principal balance of the Mortgage Loans; (ii)
the types of properties securing the Mortgage Loans and the aggregate principal
balance of the Mortgage Loans secured by each type of property; (iii) the
interest rate or range of interest rates of the Mortgage Loans; (iv) the
origination dates and the original and, with respect to seasoned Mortgage Loans,
remaining terms to stated maturity of the Mortgage Loans; (v) the loan-to-value
ratios at origination and, with respect to seasoned Mortgage Loans, current loan
balance-to-original value ratios of the Mortgage Loans; (vi) the geographic
distribution of the Mortgaged Properties underlying the Mortgage Loans; (vii)
the minimum interest rates, margins, adjustment caps, adjustment frequencies,
indices and other similar information applicable to adjustable rate Mortgage
Loans; (viii) the debt service coverage ratios relating to the Mortgage Loans;
and (ix) payment delinquencies, if any, relating to the Mortgage Loans. The
applicable Prospectus Supplement will also specify any materially inadequate,
incomplete or obsolete documentation relating to the Mortgage Loans and other
characteristics of the Mortgage Loans relating to each Series. If specified in
the applicable Prospectus Supplement, the Depositor may segregate the Mortgage
Loans in a Mortgage Pool into separate "Mortgage Loan Groups" (as described in
the related Prospectus Supplement) as part of the structure of the payments of
principal and interest on the Certificates of a Series. In such case, the
Depositor will disclose the above-specified information by Mortgage Loan Group.
The Depositor will file a current report on Form 8-K (the "Form 8-K") with the
Commission within 15 days after the initial issuance of each Series of
Certificates (each, a "Closing Date"), as specified in the related Prospectus
Supplement, which will set forth information with respect to the Mortgage Loans
included in the
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Trust Fund for a Series as of the related Closing Date. The Form 8-K will be
available to the Certificateholders of the related Series promptly after its
filing.
Assignment of Mortgage Loans
At the time of issuance of the Certificates of each Series, the Depositor will
cause the Mortgage Loans to be assigned to the Trustee, together with all
scheduled payments of interest and principal due after the Cut-off Date (whether
received) and all payments of interest and principal received by the Depositor
or the Master Servicer on or with respect to the Mortgage Loans after the
Cut-off Date. The Trustee, concurrently with such assignment, will execute and
deliver Certificates evidencing the beneficial ownership interests in the
related Trust Fund to the Depositor in exchange for the Mortgage Loans. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Agreement for the related Series (the "Mortgage Loan Schedule"). The Mortgage
Loan Schedule will include, among other things, as to each Mortgage Loan,
information as to its outstanding principal balance as of the close of business
on the Cut-off Date, as well as information respecting the interest rate, the
scheduled monthly (or other periodic) payment of principal and interest as of
the Cut-off Date, the maturity date of each Note and the address of the property
securing the Note.
In addition, the Depositor will, as to each Mortgage Loan, deliver to the
Trustee: (i) the Note, endorsed to the order of the Trustee without recourse;
(ii) the Mortgage and an executed assignment thereof in favor of the Trustee or
otherwise as required by the Agreement; (iii) any assumption, modification or
substitution agreements relating to the Mortgage Loan; (iv) a mortgagee's title
insurance policy (or owner's policy in the case of an Installment Contract),
together with its endorsements, or an attorney's opinion of title issued as of
the date of origination of the Mortgage Loan; (v) if the security agreement
and/or assignment of leases, rents and profits is separate from the Mortgage, an
executed assignment of such security agreement and/or reassignment of such
assignment of leases, rents and profits to the Trustee; and (vi) such other
documents as may be described in the Agreement (such documents collectively, the
"Mortgage Loan File"). Unless otherwise expressly permitted by the Agreement,
all documents included in the Mortgage Loan File are to be original executed
documents, provided, however, that in instances in which the original recorded
Mortgage, mortgage assignment or any document necessary to assign the
Depositor's interest in Installment Contracts to the Trustee, as described in
the Agreement, has been retained by the applicable jurisdiction or has not yet
been returned from recordation, the Depositor may deliver a photocopy thereof
certified to be the true and complete copy of the original thereof submitted for
recording.
The Trustee will hold the Mortgage Loan File for each Mortgage Loan in trust
for the benefit of all Certificateholders. Pursuant to the Agreement, the
Trustee is obligated to review the Mortgage Loan File for each Mortgage Loan
within a specified number of days after the execution and delivery of the
Agreement. If any document in the Mortgage Loan File is found to be defective in
any material respect, the Trustee will promptly notify the Depositor, the Master
Servicer and the Mortgage Loan Seller.
Mortgage Underwriting Standards and Procedures
The underwriting procedures and standards for Mortgage Loans included in a
Mortgage Pool will be specified in the related Prospectus Supplement to the
extent such procedures and standards are known or available. Such Mortgage Loans
may be originated by an affiliate of the Depositor or third parties in
contemplation of the transactions contemplated by this Prospectus and the
related Prospectus Supplement or may have been originated by third-parties and
acquired by the Depositor directly or through its affiliates in negotiated
transactions.
The originator of a Mortgage Loan generally will have applied underwriting
procedures intended to evaluate, among other things, the income derived from the
Mortgaged Property, the capabilities of the management of the project, including
a review of management's past performance record, its management reporting and
control procedures (to determine its ability to recognize and respond to
problems) and its accounting procedures to determine cash management ability,
the obligor's credit standing and repayment ability and the value and adequacy
of the Mortgaged Property as collateral. However, with respect to certain
Mortgage Loans, the Depositor may be unable to verify the underwriting standards
and procedures used by a particular originator, in which such case, such fact
will be disclosed in the related Prospectus Supplement.
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Mortgage Loans insured by the Federal Housing Administration ("FHA"), a division
of the United States Department of Housing and Urban Development ("HUD"), will
have been originated by mortgage lenders that were at the time origination
approved by HUD as FHA mortgagees in the ordinary course of their real estate
lending activities and will comply with the underwriting policies of FHA.
If so specified in the related Prospectus Supplement, the adequacy of a
Mortgaged Property as security for repayment will generally have been determined
by appraisal by appraisers selected in accordance with preestablished guidelines
established by or acceptable to the loan originator for appraisers. If so
specified in the related Prospectus Supplement, the appraiser must have
personally inspected the property and verified that it was in good condition and
that construction, if new, has been completed. Generally, the appraisal will
have been based upon a cash flow analysis and/or a market data analysis of
recent sales of comparable properties and, when deemed applicable, a replacement
cost analysis based on the current cost of constructing or purchasing a similar
property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. Further, there is no assurance that appreciation of real
estate values generally will limit loss experiences on commercial properties or
multifamily residential properties. If the commercial real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any additional financing on the Mortgaged
Properties in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. To the extent that such losses are not covered by
the methods of Credit Enhancement or the insurance policies described herein
and/or in the related Prospectus Supplement, the ability of the Trust Fund to
pay principal of and interest on the Certificates may be adversely affected.
Even if credit support covers all losses resulting from defaults and
foreclosure, the effect of defaults and foreclosures may be to increase
prepayment experience on the Mortgage Loans, thus shortening weighted average
life and affecting yield to maturity.
Representations and Warranties
The seller of a Mortgage Loan to the Depositor (the "Mortgage Loan Seller"),
which may be an affiliate of the Depositor, will have made representations and
warranties in respect of the Mortgage Loans sold by such Mortgage Loan Seller to
the Depositor. Such representations and warranties will generally include, among
other things: (i) with respect to each Mortgaged Property, that title insurance
(or in the case of Mortgaged Properties located in areas where such policies are
generally not available, an attorney's opinion of title) and any required hazard
insurance was effective at the origination of each Mortgage Loan, and that each
policy (or opinion of title) remained in effect on the date of purchase of the
Mortgage Loan from the Mortgage Loan Seller; (ii) that the Mortgage Loan Seller
had good and marketable (or indefeasible, in the case of real property located
in Texas) title to each such Mortgage Loan; (iii) with respect to each Mortgaged
Property, that each mortgage constituted a valid first lien on the Mortgaged
Property (subject only to permissible title insurance exceptions); (iv) that
there were no delinquent tax or assessment liens against the Mortgaged Property;
and (v) that each Mortgage Loan was current as to all required payments. The
Prospectus Supplement for a Series will specify the representations and
warranties being made by the Mortgage Loan Seller.
All of the representations and warranties of a Mortgage Loan Seller in respect
of a Mortgage Loan generally will have been made as of the date on which such
Mortgage Loan Seller sold the Mortgage Loan to the Depositor. The related
Prospectus Supplement will indicate if a different date is applicable. A
substantial period of time may have elapsed between such date and the date of
the initial issuance of the Series of Certificates evidencing an interest in
such Mortgage Loan. Since the representations and warranties of the Mortgage
Loan Seller do not address events that may occur following the sale of a
Mortgage Loan by the Mortgage Loan Seller, the repurchase obligation of the
Mortgage Loan Seller described below will not arise if, on or after the date of
the sale of a Mortgage Loan by the Mortgage Loan Seller to the Depositor, the
relevant event occurs that would have given rise to such an obligation. However,
the Depositor will not include any Mortgage Loan in the Trust Fund for any
Series of Certificates if anything has come to the Depositor's attention that
would cause it to believe that the representations and warranties of the
Mortgage Loan Seller will not be accurate and complete in all material respects
in respect of such Mortgage Loan as
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of the related Cut-off Date. If so specified in the related Prospectus
Supplement, the Depositor will make certain representations and warranties for
the benefit of Certificateholder of a Series in respect of a Mortgage Loan that
relate to the period commencing on the date of sale of such Mortgage Loan to the
Depositor.
Upon the discovery of the breach of any representation or warranty made by the
Mortgage Loan Seller in respect of a Mortgage Loan that materially and adversely
affects the interests of the Certificateholders of the related Series, such
Mortgage Loan Seller generally will be obligated to repurchase such Mortgage
Loan at a purchase price equal to 100% of the unpaid principal balance thereof
at the date of repurchase or, in the case of a Series of Certificates as to
which the Depositor has elected to treat the related Trust Fund as a REMIC, as
defined in the Code, at such other price as may be necessary to avoid a tax on a
prohibited transaction, as described in Section 860F(a) of the Code, in each
case together with accrued interest at the interest rate for such Mortgage Loan,
to the first day of the month following such repurchase and the amount of any
unreimbursed advances made by the Master Servicer in respect of such Mortgage
Loan, together with interest thereon at the reimbursement rate. The Master
Servicer will be required to enforce such obligation of the Mortgage Loan Seller
for the benefit of the Trustee and the Certificateholders, following the
practices it would employ in its good faith business judgment were it the owner
of such Mortgage Loan. This repurchase obligation will generally constitute the
sole remedy available to the Certificateholders of such Series for a breach of a
representation or warranty by a Mortgage Loan Seller and the Depositor and the
Master Servicer will have no liability to the Trust Fund for any such breach.
The applicable Prospectus Supplement will indicate whether any additional
remedies will be available to the Certificateholders. No assurance can be given
that a Mortgage Loan Seller will carry out its repurchase obligation with
respect to the Mortgage Loans.
If specified in the related Prospectus Supplement, the Mortgage Loan Seller
may deliver to the Trustee within a specified number of days following the
issuance of a Series of Certificates Mortgage Loans in substitution for any one
or more of the Mortgage Loans initially included in the Trust Fund but which do
not conform in one or more respects to the description thereof contained in the
related Prospectus Supplement, as to which a breach of a representation or
warranty is discovered, which breach materially and adversely affects the
interests of the Certificateholders, or as to which a document in the related
Mortgage Loan File is defective in any material respect. The related Prospectus
Supplement will describe any required characteristics of any such substituted
Mortgage Loans.
SERVICING OF THE MORTGAGE LOANS
General
The servicer of the Mortgage Loans (the "Master Servicer") will be Midland
Loan Services, L.P., the parent of the Depositor. The Prospectus Supplement for
the related Series will set forth certain information concerning the Master
Servicer. The Master Servicer will be responsible for servicing the Mortgage
Loans pursuant to the Agreement for the related Series. To the extent so
specified in the related Prospectus Supplement, one or more Special Servicers
may be a party to the related Agreement or may be appointed by holders of
certain Classes of Regular Certificates representing a certain percentage
specified in the related Agreement of such Class or Classes of Certificates or
by another specified party. Certain information with respect to the Special
Servicer will be set forth in such Prospectus Supplement. A Special Servicer for
any Series of Certificates may be an affiliate of the Depositor or the Master
Servicer and may hold, or be affiliated with the holder of, Subordinate
Certificates of such Series. A Special Servicer may be entitled to any of the
rights, and subject to any of the obligations, described herein in respect of a
Master Servicer. In general, a Special Servicer's duties will relate to
defaulted Mortgage Loans or those Mortgage Loans that otherwise require special
servicing ("Specially Serviced Mortgage Loans"), including instituting
foreclosures and negotiating work-outs and will also include asset management
activities with respect to any REO Property. The related Prospectus Supplement
will describe the rights, obligations and compensation of any Special Servicer
for a particular Series of Certificates. The Master Servicer or Special Servicer
generally may subcontract the servicing of all or a portion of the Mortgage
Loans to one or more sub-servicers provided certain conditions are met. Such
sub-servicer may be an affiliate of the Depositor and may have other business
relationships with Depositor and its affiliates.
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Collections and Other Servicing Procedures
The Master Servicer and the Special Servicer, if any, will make reasonable
efforts to collect all payments called for under the Mortgage Loans and will,
consistent with the related Agreement, follow such collection procedures as it
deems necessary or desirable. Consistent with the above and unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or the
Special Servicer, if applicable, may, in its discretion, waive any late payment
charge or penalty fees in connection with a late payment of a Mortgage Loan and,
if so specified in the related Prospectus Supplement, may extend the due dates
for payments due on a Note.
It is expected that the Agreement for each Series will provide that the Master
Servicer establish and maintain an escrow account (the "Escrow Account") in
which the Master Servicer will be required to deposit amounts received from each
mortgagor, if required by the terms of the related Mortgage Loan documents, for
the payment of taxes, assessments, certain mortgage and hazard insurance
premiums and other comparable items ("Escrow Payments"). The Special Servicer,
if any, will be required to remit amounts received for such purposes on Mortgage
Loans serviced by it to the Master Servicer for deposit into the Escrow Account,
and will be entitled to direct the Master Servicer to make withdrawals from the
Escrow Account as may be required for servicing of such Mortgage Loans.
Withdrawals from the Escrow Account generally may be made to (i) effect timely
payment of taxes, assessments, mortgage and hazard insurance premiums and other
comparable items, (ii) to transfer funds to the Collection Account to reimburse
the Master Servicer or the Trustee, as applicable, for any advance with interest
thereon relating to Escrow Payments, (iii) to restore or repair the Mortgaged
Properties, (iv) to clear and terminate such account, (v) to pay interest to
mortgagors on balances in the Escrow Account, if required by the terms of the
related Mortgage Loan documents or by applicable law, (vi) to remit to the
related borrower the Financial Lease and Reporting Fee as and when required by
the related Mortgage, and (vii) to remove amounts not required to be deposited
therein. The related Prospectus Supplement may provide for other permitted
withdrawals from the Escrow Account. The Master Servicer will be entitled to all
income on the funds in the Escrow Account invested in Permitted Investments not
required to be paid to mortgagors by the terms of the related Mortgage Loan
documents or by applicable law. The Master Servicer will be responsible for the
administration of the Escrow Account.
Insurance
The Agreement for each Series will require that the Master Servicer use its
reasonable efforts to or require each mortgagor to maintain insurance in
accordance with the related Mortgage Loan documents, which generally will
include a standard fire and hazard insurance policy with extended coverage. To
the extent required by the related Mortgage Loan, the coverage of each such
standard hazard insurance policy will be in an amount that is at least equal to
the lesser of (i) the full replacement cost of the improvements and equipment
securing such Mortgage Loan or (ii) the outstanding principal balance owing on
such Mortgage Loan or such amount as is necessary to prevent any reduction in
such policy by reason of the application of co-insurance and to prevent the
Trustee thereunder from being deemed to be a co-insurer, in each case with a
replacement cost rider. The Master Servicer will also use its reasonable efforts
to require each mortgagor to maintain (i) insurance providing coverage against
12 months of rent interruptions and (ii) such other insurance as provided in the
related Mortgage Loan. Subject to the requirements for modification, waiver or
amendment of a Mortgage Loan (See "--Modifications, Waivers and Amendments"),
the Master Servicer may in its reasonable discretion consistent with the
servicing standard set forth in the related Agreement waive the requirement of a
Mortgage Loan that the related mortgagor maintain earthquake insurance on the
related Mortgaged Property. If a Mortgaged Property is located at the time of
origination of the related Mortgage Loan in a federally designated special flood
hazard area, the Master Servicer will also use its reasonable efforts to require
the related mortgagor to maintain flood insurance in an amount equal to the
lesser of the unpaid principal balance of the related Mortgage Loan and the
maximum amount obtainable with respect to the Mortgage Loan. The related
Agreement will provide that the Master Servicer will be required to maintain the
foregoing insurance if the related mortgagor fails to maintain such insurance to
the extent such insurance is available at commercially reasonable rates and to
the extent the Trustee, as mortgagee, has an insurable interest. The cost of any
such insurance maintained by the Master Servicer will be advanced by the Master
Servicer. The Master Servicer or the Special Servicer, if any, will cause to be
maintained fire and hazard insurance with extended coverage on each REO Property
in an amount that is at least equal to the full replacement cost of the
improvements and equipment. The cost of any such insurance with respect to an
REO
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Property will be payable out of amounts on deposit in the related REO Account or
will be advanced by the Master Servicer. The Master Servicer or the Special
Servicer, if any, will maintain flood insurance providing substantially the same
coverage as described above on any REO Property that was located in a federally
designated special flood hazard area at the time the related mortgage loan was
originated. The Master Servicer or the Special Servicer, if any, will maintain
with respect to each REO Property (i) public liability insurance, (ii) loss of
rent endorsements and (iii) such other insurance as provided in the related
Mortgage Loan. Any such insurance that is required to be maintained with respect
to any REO Property will only be so required to the extent such insurance is
available at commercially reasonable rates. The related Agreement will provide
that the Master Servicer or Special Servicer, if any, may satisfy its obligation
to cause hazard insurance policies to be maintained by maintaining a master
force placed insurance policy insuring against losses on the Mortgage Loans or
REO Properties, as the case may be. The incremental cost of such insurance
allocable to any particular Mortgage Loan or REO Property, if not borne by the
related mortgagor, will be an expense of the Trust Fund. Alternatively, the
Master Servicer or Special Servicer, if any, may satisfy its obligation by
maintaining, at its expense, a blanket policy (i.e., not a master force placed
policy) insuring against losses on the Mortgage Loans or REO Properties, as the
case may be. If such a blanket or master force placed policy contains a
deductible clause, the Master Servicer or the Special Servicer, if any, will be
obligated to deposit in the Collection Account all sums that would have been
deposited therein but for such clause to the extent any such deductible exceeds
the deductible limitation that pertained to the related Mortgage Loan, or in the
absence of any such deductible limitation, the deductible limitation that is
consistent with the servicing standard under the related Agreement.
In general, the standard form of fire and hazard extended coverage insurance
policy will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Since the standard hazard insurance policies
relating to the Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The most significant terms thereof,
however, generally will be determined by state law and conditions. Most such
policies typically will not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reaction, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in certain
cases, vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all-inclusive. Any losses incurred
with respect to Mortgage Loans due to uninsured risks (including earthquakes,
mudflows and floods) or insufficient hazard insurance proceeds could affect
distributions to the Certificateholders.
The standard hazard insurance policies covering Mortgaged Properties securing
Mortgage Loans typically will contain a "coinsurance" clause which, in effect,
will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
structures and other improvements damaged or destroyed and (ii) such proportion
of the loss, without deduction for depreciation, as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
dwellings, structures and other improvements.
The Prospectus Supplement may describe other provisions concerning the
insurance policies required to be maintained under the related Agreement.
Unless otherwise specified in the applicable Prospectus Supplement, no pool
insurance policy, special hazard insurance policy, bankruptcy bond, repurchase
bond or guarantee insurance will be maintained with respect to the Mortgage
Loans nor will any Mortgage Loan be subject to FHA insurance.
The FHA is responsible for administering various federal programs, including
mortgage insurance, authorized under the National Housing Act of 1934, as
amended, and the United States Housing Act of 1937, as amended. To the extent
specified in the related Prospectus Supplement, all or a portion of the Mortgage
Loans may be insured by the FHA. The Master Servicer will be required to take
such steps as are reasonably necessary to keep such insurance in full force and
effect.
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Fidelity Bonds and Errors and Omissions Insurance
The Agreement for each Series will generally require that the Master Servicer
and the Special Servicer, if applicable, 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
Master Servicer and the Special Servicer, if applicable. The related Agreement
will allow the Master Servicer and the Special Servicer, if applicable, to
self-insure against loss occasioned by the errors and omissions of the officers
and employees of the Master Servicer and the Special Servicer, if applicable, so
long as certain criteria set forth in the Agreement are met.
Servicing Compensation and Payment of Expenses
The Master Servicer's principal compensation for its activities under the
Agreement for each Series will come from the payment to it or retention by it,
with respect to each Mortgage Loan, of a "Servicing Fee" (as defined in the
related Prospectus Supplement). The exact amount and calculation of such
Servicing Fee will be established in the Prospectus Supplement and Agreement for
the related Series. Since the aggregate unpaid principal balance of the Mortgage
Loans will generally decline over time, the Master Servicer's servicing
compensation will ordinarily decrease as the Mortgage Loans amortize.
In addition, the Agreement for a Series may provide that the Master Servicer
be entitled to receive, as additional compensation, (i) Prepayment Premiums,
late fees and certain other fees collected from mortgagors and (ii) any interest
or other income earned on funds deposited in the Collection Account and
Distribution Account (as described under "DESCRIPTION OF THE
CERTIFICATES--Accounts") and, except to the extent such income is required to be
paid to the related mortgagors, the Escrow Account.
The Master Servicer will generally pay the fees and expenses of the Trustee.
The amount and calculation of the fee for the servicing of Specially Serviced
Mortgage Loans (the "Special Servicing Fee") will be described in the Prospectus
Supplement and Agreement for the related Services.
In addition to the compensation described above, the Master Servicer and the
Special Servicer, if applicable, (or any other party specified in the applicable
Prospectus Supplement) may retain, or be entitled to the reimbursement of, such
other amounts and expenses as are described in the applicable Prospectus
Supplement.
Advances
The applicable Prospectus Supplement will set forth the obligations, if any,
of the Master Servicer and the Special Servicer, if applicable, to make any
advances with respect to delinquent payments on Mortgage Loans, payments of
taxes, assessments, insurance premiums and Property Protection Expenses or
otherwise. Any such advances will be made in the form and manner described in
the Prospectus Supplement and Agreement for the related Series.
Modifications, Waivers and Amendments
The Agreement for each Series will provide the Master Servicer or the Special
Servicer, if any, with the discretion to modify, waive or amend certain of the
terms of any Mortgage Loan without the consent of the Trustee or any
Certificateholder subject to certain conditions set forth therein, including the
condition that such modification, waiver or amendment will not result in such
Mortgage Loan ceasing to be a "qualified mortgage" under the REMIC Regulations.
Evidence of Compliance
The Agreement for each Series will generally provide that on or before a
specified date in each year, beginning the first such date that is at least a
specified number of months after the Cut-off Date, there will be furnished to
the related Trustee a report of a firm of independent certified public
accountants stating that (i) it has obtained a letter of representation
regarding certain matters from the management of the Master
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Servicer or Special Servicer, if any, which includes an assertion that the
Master Servicer or Special Servicer, if any, has complied with certain minimum
mortgage loan servicing standards (to the extent applicable to commercial and
multifamily mortgage loans), identified in the Uniform Single Attestation
Program for Mortgage Bankers established by the Mortgage Bankers Association of
America, with respect to the Master Servicer's or, if applicable, the Special
Servicer's servicing of commercial and multifamily mortgage loans during the
most recently completed calendar year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that, in the opinion of such firm, such standards require it to report. In
rendering its report such firm may rely, as to the matters relating to the
direct servicing of commercial and multifamily mortgage loans by sub- services,
upon comparable reports of firms of independent public accountants rendered on
the basis of examination conducted in accordance with the same standards
(rendered within one year of such report) with respect to those sub-servicers.
The Prospectus Supplement may provide that additional reports of independent
certified public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
In addition, the Agreement for each Series will generally provide that the
Master Servicer and the Special Servicer, if any, will each deliver to the
Trustee, the Depositor and each Rating Agency, annually on or before a date
specified in the Agreement, a statement signed by an officer of the Master
Servicer or the Special Servicer, as applicable, to the effect that, based on a
review of its activities during the preceding calendar year, to the best of such
officer's knowledge, the Master Servicer or the Special Servicer, as applicable,
has fulfilled in all material respects its obligations under the Agreement
throughout such year or, if there has been a default in the fulfillment of any
such obligation, specifying each default known to such officer.
Certain Matters With Respect to the Master Servicer, the
Special Servicer, the Trustee and the Depositor
The Agreement for each Series will also provide that none of the Depositor,
the Master Servicer, the Special Servicer, if any, or any partner, director,
officer, employee or agent of the Depositor, the Master Servicer or the Special
Servicer, if any (or any general partner thereof), will be under any liability
to the Trust Fund or the Certificateholders for any action taken, or for
refraining from the taking of any action, in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the
Depositor, the Master Servicer, the Special Servicer, if any, nor any such
person will be protected against any liability for a breach of any
representations or warranties under the Agreement or that would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence (or, in the
case of the Master Servicer or Special Servicer, if any, a breach of the
servicing standards set forth in the Agreement) in the performance of its duties
or by reason of negligent disregard of its obligations and duties thereunder.
The Agreement will further provide that the Depositor, the Master Servicer, the
Special Servicer, if any, and any director, officer, employee or agent of the
Depositor, the Master Servicer, the Special Servicer, if any (and any general
partner thereof), will be entitled to indemnification by the Trust Fund for any
loss, liability or expense incurred in connection with any legal action relating
to the Agreement or the Certificates, other than any loss, liability or expense
incurred by reason of its respective willful misfeasance, bad faith, fraud or
negligence (or, in the case of the Master Servicer or the Special Servicer, if
any, a breach of the servicing standard set forth in the Agreement) in the
performance of duties thereunder or by reason of negligent disregard of its
respective obligations and duties thereunder. Any loss resulting from such
indemnification will reduce amounts distributable to Certificateholders. The
Prospectus Supplement will specify any variations to the foregoing required by
the Rating Agencies rating Certificates of a Series.
In addition, the Agreement will generally provide that none of the Depositor,
the Special Servicer or the Master Servicer, if any, will be under any
obligation to appear in, prosecute or defend any legal action unless such action
is related to its duties under the Agreement and which in its opinion does not
involve it in any expense or liability. The Master Servicer or the Special
Servicer, if any, may, however, in its discretion undertake any such action that
is related to its respective obligations under the related Agreement and that 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 holders of Certificates
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom (except any liability related to the Master
Servicer's or the Special Servicer's, if any, obligations to service the
Mortgage Loans in accordance with the servicing standard under
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the Agreement) will be expenses, costs and liabilities of the Trust Fund, and
the Master Servicer or Special Servicer, if applicable, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Special Servicer, if any, may
be merged or consolidated, or any person resulting from any merger or
consolidation to which the Master Servicer or the Special Servicer, if any, is a
party, or any person succeeding to the business of the Master Servicer or the
Special Servicer, if any, will be the successor of the Master Servicer or the
Special Servicer, as applicable, under the Agreement, and will be deemed to have
assumed all of the liabilities and obligations of the Master Servicer or the
Special Servicer, as applicable, under the Agreement, if each of the Rating
Agencies has confirmed in writing that such merger or consolidation and
succession will not result in a downgrading, withdrawal or qualification of the
rating then assigned by such Rating Agency to any Class of the Certificates. The
related Prospectus Supplement will describe any additional restrictions on such
a merger or consolidation.
Generally, the Master Servicer or the Special Servicer, if any, may assign its
rights and delegate its duties and obligations under the Agreement in connection
with the sale or transfer of a substantial portion of its mortgage servicing or
asset management portfolio; provided that certain conditions are met, including
the written consent of the Trustee and written confirmation by each of the
Rating Agencies that such assignment and delegation by the Master Servicer or
the Special Servicer, as applicable, will not, in and of itself, result in a
downgrading, withdrawal or qualification of the rating then assigned by such
Rating Agency to any Class of Certificates. The related Prospectus will describe
any additional restrictions on such assignment.
The Agreement will also provide that the Master Servicer or the Special
Servicer, if any, may not otherwise resign from its obligations and duties as
Master Servicer or Special Servicer thereunder, except upon the determination
that performance of its duties is no longer permissible under applicable law and
provided that such determination is evidenced by an opinion of counsel delivered
to the Trustee. No such resignation or removal may become effective until the
Trustee or a successor Master Servicer or Special Servicer, as the case may be,
has assumed the obligations of the Master Servicer or the Special Servicer, as
applicable, under the Agreement.
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer, the
Special Servicer, if any, and/or any of their respective affiliates.
The Trustee may resign from its obligations under the Agreement at any time,
in which event a successor Trustee will be appointed. In addition, the Depositor
may remove the Trustee if the Trustee ceases to be eligible to act as Trustee
under the Agreement or if the Trustee becomes insolvent, at which time the
Depositor will become obligated to appoint a successor Trustee. The Trustee may
also be removed at any time by the holders of Certificates evidencing the
percentage of Voting Rights specified in the applicable Prospectus Supplement.
Any resignation and removal of the Trustee, and the appointment of a successor
Trustee, will not become effective until acceptance of such appointment by the
successor Trustee.
The Depositor is not obligated to monitor or supervise the performance of the
Master Servicer, Special Servicer, if any, or the Trustee under the Agreement.
Events of Default
Events of default with respect to the Master Servicer or the Special Servicer,
if any, as applicable (each, an "Event of Default") under the Agreement for each
Series will consist of, in summary form, (i) any failure by the Master Servicer
or the Special Servicer, if any, to remit to the Collection Account or any
failure by the Master Servicer to remit to the Trustee for deposit into the
Distribution Account any amount required to be so remitted pursuant to the
Agreement; (ii) any failure by the Master Servicer or Special Servicer, as
applicable, duly to observe or perform in any material respect any of its other
covenants or agreements or the breach of its representations or warranties
(which breach materially and adversely affects the interests of the
Certificateholders, the Trustee, the Master Servicer or the Special Servicer, if
any, with respect to any Mortgage Loan) under the Agreement, which in each case
continues unremedied for 30 days after the giving of written notice of such
failure to the Master Servicer or the Special Servicer, as applicable, by the
Depositor or the Trustee, or to the Master Servicer or Special Servicer, if any,
the Depositor and the Trustee by the
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holders of Certificates evidencing Voting Rights of at least 25% of any affected
Class; (iii) confirmation in writing by any of the Rating Agencies that the then
current rating assigned to any Class of Certificates would be withdrawn,
downgraded or qualified unless the Master Servicer or Special Servicer, as
applicable, is removed; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by, on behalf of or against the Master Servicer or Special Servicer, as
applicable, indicating its insolvency or inability to pay its obligations; or
(v) any failure by the Master Servicer to make a required advance. The related
Prospectus Supplement may provide for other Events of Default to the extent
required by the Rating Agencies rating Certificates of a Series.
Rights Upon Event of Default
As long as an Event of Default remains unremedied, the Trustee may, and at the
written direction of the holders of Certificates entitled to 25% of the
aggregate Voting Rights of all Certificates will, terminate all of the rights
and obligations of the Master Servicer or Special Servicer, as the case may be.
Notwithstanding the foregoing, upon any termination of the Master Servicer or
the Special Servicer, as applicable, under the Agreement the Master Servicer or
the Special Servicer, as applicable, will continue to be entitled to receive all
accrued and unpaid servicing compensation through the date of termination plus,
in the case of the Master Servicer, all advances and interest thereon as
provided in the Agreement.
The holders of Certificates evidencing not less than 66-2/3% of the aggregate
Voting Rights of the Certificates may, on behalf of all holders of Certificates,
waive any default by the Master Servicer or Special Servicer, if any, in the
performance of its obligations under the Agreement and its consequences, except
a default in making any required deposits to (including advances) or payments
from the Collection Account or the Distribution Account or in remitting payments
as received, in each case in accordance with the Agreement. Upon any such waiver
of a past default, such default will cease to exist, and any Event of Default
arising therefrom will be deemed to have been remedied for every purpose of the
Agreement. No such waiver will extend to any subsequent or other default or
impair any right consequent thereon.
On and after the date of termination, the Trustee will succeed to all
authority and power of the Master Servicer or the Special Servicer, as
applicable, under the Agreement and will be entitled to similar compensation
arrangements to which the Master Servicer or the Special Servicer, as
applicable, would have been entitled. If the Trustee is unwilling or unable so
to act, or if the holders of Certificates evidencing a majority of the aggregate
Voting Rights so request or if the Trustee is not rated in one of its two
highest long- term debt rating categories by each of the Rating Agencies or if
the Trustee is not listed on S&Ps list of approved servicers, the Trustee must
appoint, or petition a court of competent jurisdiction for the appointment of,
an established mortgage loan servicing institution with a net worth of at least
$10,000,000 and which is either Fannie Mae or FHLMC approved, the appointment of
which will not result in the downgrading, withdrawal or qualification of the
rating or ratings then assigned to any Class of Certificates as evidenced in
writing by each Rating Agency, to act as successor to the Master Servicer or the
Special Servicer, as applicable, under the Agreement. Pending such appointment,
the Trustee will be 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 or the
Special Servicer, as the case may be, under the Agreement.
No Certificateholder will have any right under the Agreement to institute any
proceeding with respect to the Agreement or the Mortgage Loans, unless, with
respect to the Agreement, such holder previously shall have given to the Trustee
a written notice of a default under the Agreement and of the continuance
thereof, and unless also the holders of Certificates representing a majority of
the aggregate Voting Rights allocated to each affected Class have made written
request of the Trustee to institute such proceeding in its own name as Trustee
under the Agreement and have offered to the Trustee such reasonable indemnity as
it may require against the costs, expenses and liabilities to be incurred
therein or thereby, and the Trustee, for 30 days after its receipt of such
notice, request and offer of indemnity, has neglected or refused to institute
such proceeding.
The Trustee will have no obligation to institute, conduct or defend any
litigation under the Agreement or in relation thereto at the request, order or
direction of any of the holders of Certificates, unless such holders of
Certificates have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
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CREDIT ENHANCEMENT
General
If specified in the related Prospectus Supplement for any Series, credit
enhancement may be provided with respect to one or more Classes thereof or the
related Mortgage Loans ("Credit Enhancement"). Credit Enhancement may be in the
form of a letter of credit, the subordination of one or more Classes of the
Certificates of such Series, the establishment of one or more reserve funds,
surety bonds, certificate guarantee insurance, the use of cross-support
features, limited guarantees or another method of Credit Enhancement described
in the related Prospectus Supplement, or any combination of the foregoing.
It is unlikely that Credit Enhancement will provide protection against all
risks of loss or guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur that exceed the amount
covered by Credit Enhancement or that are not covered by Credit Enhancement,
Certificateholders will bear their allocable share of deficiencies. See "RISK
FACTORS--Credit Enhancement Limitations."
If Credit Enhancement is provided with respect to a Series, or the related
Mortgage Loans, the applicable Prospectus Supplement will include a description
of (a) the amount payable under such Credit Enhancement, (b) any conditions to
payment thereunder not otherwise described herein, (c) the conditions (if any)
under which the amount payable under such Credit Enhancement may be reduced and
under which such Credit Enhancement may be terminated or replaced and (d) the
material provisions of any agreement relating to such Credit Enhancement.
Additionally, the applicable Prospectus Supplement will set forth certain
information with respect to the issuer of any third-party Credit Enhancement,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, the jurisdiction of organization and the
jurisdictions 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 such Prospectus Supplement. If the holders of any Certificates of any Series
will be materially dependent upon the issuer of any third party Credit
Enhancement for timely payment of interest and/or principal on their
Certificates, the Depositor will file a current report on Form 8-K within 15
days after the initial issuance of such Certificates, which will include any
material information regarding such issuer, including audited financial
statements to the extent required.
Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more Classes of a
Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the holders of subordinate Certificates
(the "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 (the "Senior
Certificates") to the extent specified in the related Prospectus Supplement. In
addition, subordination may be effected by the allocation of losses first to
Subordinate Certificates in reduction of the principal balance of such
Certificates until the principal balance thereof is reduced to zero before any
losses are allocated to Senior Certificates. The Agreement may require a trustee
that is not the Trustee to be appointed to act on behalf of holders of
Subordinate Certificates.
A Series may include one or more Classes of Subordinate Certificates entitled
to receive cash flows remaining after distributions are made to all other
Classes designated as being senior thereto. Such right to receive payments will
effectively be subordinate to the rights of holders of such senior designated
Classes of Certificates. A Series may also include one or more Classes of
Subordinate Certificates that will be allocated losses prior to any losses being
allocated to Classes of Subordinate Certificates designated as being senior
thereto. If so specified 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 not covered by insurance policies or other Credit Enhancement, such as
losses arising from damage to property securing a Mortgage Loan not covered by
standard hazard insurance policies.
The related Prospectus Supplement will describe any such subordination in
greater detail and set forth information concerning, among other things, to the
extent applicable, (i) the amount of subordination of a Class or Classes of
Subordinate Certificates in a Series, (ii) the circumstances in which such
subordination
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will be applicable, (iii) the manner, if any, in which the amount of
subordination will decrease over time, (iv) the manner of funding any related
reserve fund, (v) the conditions under which amounts in any applicable reserve
fund will be used to make distributions to holders of Senior Certificates and/or
to holders of Subordinate Certificates or be released from the applicable Trust
Fund and (vi) if one or more Classes of Subordinate Certificates of a Series are
Offered Certificates, the sensitivity of distributions on such Certificates
based on certain default assumptions. See "RISK FACTORS--Risks to Subordinated
Certificateholders" herein.
Reserve Funds
If specified in the related Prospectus Supplement, one or more reserve funds
(each, a "Reserve Fund") may be established with respect to one or more Classes
of the Certificates of a Series, in which cash, a letter of credit, Permitted
Investments or a combination thereof, in the amounts, if any, so specified in
the related Prospectus Supplement will be deposited. Such Reserve Funds may also
be funded over time by depositing therein a specified amount of the
distributions received on the applicable Mortgage Loans if specified in the
related Prospectus Supplement. The Depositor may pledge the Reserve Funds to a
separate collateral agent specified in the related Prospectus Supplement.
Amounts on deposit in any Reserve Fund for one or more Classes of Certificates
of a Series will be applied by the Trustee 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 payments of principal of and
interest on the Certificates, if required as a condition to the rating of such
Series by any Rating Agency. If so specified in the related Prospectus
Supplement, Reserve Funds may be established to provide limited protection, in
an amount satisfactory to a Rating Agency, against certain types of losses not
covered by insurance policies or other Credit Enhancement. Reserve Funds may
also be established for other purposes and in such amounts as will be specified
in the related Prospectus Supplement. Following each Distribution Date amounts
in any 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 by the Trustee.
Moneys deposited in any Reserve Fund generally will be permitted to be
invested in Permitted Investments. Generally, any reinvestment income or other
gain from such investments will be credited to the related Reserve Fund for such
Series, and any loss resulting from such investments will be charged to such
Reserve Fund. If specified in the related Prospectus Supplement, such income or
other gain may be payable to the Servicer as additional servicing compensation,
and any loss resulting from such investment will be borne by the Servicer. The
Reserve Fund, if any, for a Series will be a part of the Trust Fund only if the
related Prospectus Supplement so specifies. If the Reserve Fund is not a part of
the Trust Fund, the right of the Trustee to make draws on the Reserve Fund will
be an asset of the Trust Fund.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purpose for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings, if any,
from the Reserve Fund.
Cross-Support Features
If the Mortgage Pool for a Series is divided into separate Mortgage Loan
Groups, each securing a separate Class or Classes of a Series, Credit
Enhancement may be provided by a cross-support feature that requires that
distributions be made on Senior Certificates secured by one Mortgage Loan Group
prior to distributions on Subordinate Certificates secured by another Mortgage
Loan Group within the Trust Fund. The related Prospectus Supplement for a Series
that includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
Certificate Guarantee Insurance
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If so specified in the related Prospectus Supplement, certificate guarantee
insurance, if any, with respect to a Series of Certificates will be provided by
one or more insurance companies. Such certificate guarantee insurance will
guarantee, with respect to one or more Classes of Certificates of the applicable
Series, timely distributions of interest and 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. If so specified in
the related Prospectus Supplement, the certificate guarantee insurance will also
guarantee against any payment made to a Certificateholder that is subsequently
recovered as a "voidable preference" payment under the Bankruptcy Code. A copy
of the certificate guarantee insurance for a Series, if any, will be filed with
the Commission as an exhibit to the Form 8-K to be filed with the Commission
within 15 days of issuance of the Certificates of the applicable Series.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, Credit Enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Letter of Credit
Alternative Credit Enhancement with respect to one or more Classes of
Certificates of a Series of Certificates may be provided by the issuance of a
letter of credit by the bank or financial institution specified in the
applicable Prospectus Supplement. The coverage, amount and frequency of any
reduction in coverage provided by a letter of credit issued with respect to one
or more Classes of Certificates of a Series will be set forth in the Prospectus
Supplement relating to such Series.
Pool Insurance Policies; Special Hazard Insurance Policies
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will obtain a pool insurance policy for the Mortgage
Loans in the related Trust Fund. The pool insurance policy will cover any loss
(subject to the limitations described in a related Prospectus Supplement) by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, for each Series of
Certificates as to which a pool insurance policy is provided, the Depositor will
also obtain a special hazard insurance policy for the related Trust Fund in the
amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states in which the Mortgaged Properties are
located. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Surety Bonds
If so specified in the Prospectus Supplement relating to a Series of
Certificates, Credit Enhancement with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond issued
by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency or any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement, losses resulting from
fraud, dishonesty or misrepresentation in connection with the origination or
sale of the Mortgage Loans may be covered to a limited extent by (i)
representations and warranties to the effect that no such fraud, dishonesty or
misrepresentation had occurred, (ii) a Reserve Fund, (iii) a letter of credit or
(iv) some other method. The amount and terms of any such coverage will be set
forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
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If so specified in the applicable Prospectus Supplement, losses resulting from
a bankruptcy proceeding relating to a mortgagor or obligor affecting the
Mortgage Loans in a Trust Fund with respect to a Series of Certificates will be
covered under a mortgagor bankruptcy bond (or any other instrument that will not
result in a withdrawal, downgrading or qualification of the rating of the
Certificates of a Series by any of the Rating Agencies that rated any
Certificates of such Series). Any mortgagor bankruptcy bond or such other
instrument will provide for coverage in an amount and with such terms meeting
the criteria of the Rating Agencies rating any Certificates of the related
Series, which amount and terms will be set forth in the related Prospectus
Supplement.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because many of the legal aspects of
mortgage loans are governed by applicable state laws (which may vary
substantially), the following summaries do not purport to be complete, to
reflect the laws of any particular state, to reflect all the laws applicable to
any particular Mortgage Loan or to encompass the laws of all states in which the
properties securing the Mortgage Loans are situated. The summaries are qualified
in their entirety by reference to the applicable federal and state laws
governing the Mortgage Loans.
General
All of the Mortgage Loans are loans evidenced by (or, in the case of mortgage
pass-through certificates, supported by) a note or bond that is secured by a
lien and security interest in property created under related security
instruments, which may be mortgages, deeds of trust or deeds to secure debt,
depending upon the prevailing practice and law in the state in which the
Mortgaged Property is located. As used herein, unless the context otherwise
requires, the term "mortgage" includes mortgages, deeds of trust and deeds to
secure debt. Any of the foregoing mortgages will create a lien upon, or grant a
title interest in, the mortgaged property, the priority of which will depend on
the terms of the mortgage, the existence of any separate contractual
arrangements with others holding interests in the mortgaged property, the order
of recordation of the mortgage in the appropriate public recording office and
the actual or constructive knowledge of the mortgagee as to any unrecorded
liens, leases or other interests affecting the mortgaged property. Mortgages
typically do not possess priority over governmental claims for real estate
taxes, assessments and, in some states, for reimbursement of remediation costs
of certain environmental conditions. See "--Environmental Risks." In addition,
the Code provides priority to certain tax liens over the lien of the mortgage.
The mortgagor is generally responsible for maintaining the property in good
condition and for paying real estate taxes, assessments and hazard insurance
premiums associated with the property.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of an
interest in real property between two parties--a mortgagor (the borrower and
usually the owner of the subject property) and a mortgagee (the lender). A deed
of trust is a three-party instrument, wherein a trustor (the equivalent of a
mortgagor), grants the property to a trustee, in trust with a power of sale, for
the benefit of a beneficiary (the lender) as security for the payment of the
secured indebtedness. A deed to secure debt is a two party instrument wherein
the grantor (the equivalent of a mortgagor) conveys title to, as opposed to
merely creating a lien upon, the subject property to the grantee (the lender)
until such time as the underlying debt is repaid, generally with a power of sale
as security for the indebtedness evidenced by the related note. As used herein,
unless the context otherwise requires, the term "mortgagor" includes a mortgagor
under a mortgage, a trustor under a deed of trust and a grantor under a deed to
secure debt, and the term "mortgagee" includes a mortgagee under a mortgage, a
beneficiary under a deed of trust and a grantee under a deed to secure debt. 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 and, in some cases, in deed of trust
transactions, the directions of the beneficiary. The Mortgage Loans (other than
Installment Contracts) will consist of (or, in the case of mortgage pass-through
certificates, be supported by) loans secured by mortgages.
The real property covered by a mortgage is most often the fee estate in land
and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land,
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leasehold improvements or both, and the leasehold estate created by such lease.
A mortgage covering an interest in real property other than the fee estate
requires special provisions in the instrument creating such interest, in the
mortgage or in a separate agreement with the landlord or other party to such
instrument, to protect the mortgagee against termination of such interest before
the mortgage is paid.
Personalty
Certain types of mortgaged properties, such as nursing homes, hotels, motels
and industrial plants, are likely to derive a significant part of their value
from personal property that 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
mortgagee under the Uniform Commercial Code ("UCC"). In order to perfect its
security interest therein, the mortgagee generally must file UCC financing
statements and, to maintain perfection of such security interest, file
continuation statements generally every five years.
Installment Contracts
The Mortgage Loans may also consist of Installment Contracts (also sometimes
called contracts for deed). Under an Installment Contract, the seller (referred
to in this Section as the "mortgagee") retains legal title to the property and
enters into an agreement with the purchaser (referred to in this Section as the
"mortgagor") for the payment of the purchase price, plus interest, over the term
of such Installment Contract. Only after full performance by the mortgagor of
the Installment Contract is the mortgagee obligated to convey title to the
property to the mortgagor. As with mortgage or deed of trust financing, during
the effective period of the Installment Contract, the mortgagor is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the mortgagee under an Installment
Contract varies on a state-by- state basis depending upon the extent to which
state courts are willing or able to enforce the Installment Contract strictly
according to its terms. The terms of Installment Contracts generally provide
that upon a default by the mortgagor, the mortgagor loses his or her right to
occupy the property, the entire indebtedness is accelerated and the mortgagor's
equitable interest in the property is forfeited. The mortgagee in such a
situation does not have to foreclose in order to obtain title to the property,
although in some cases both a quiet title action to clear title to the property
(if the mortgagor has recorded notice of the Installment Contract) and an
ejectment action to recover possession may be necessary. In a few states,
particularly in cases of a default during the early years of an Installment
Contract, ejectment of the mortgagor and a forfeiture of his or her interest in
the property will be permitted. However, in most states, laws (analogous to
mortgage laws) have been enacted to protect mortgagors under Installment
Contracts from the harsh consequences of forfeiture. These laws may require the
mortgagee to pursue a judicial or nonjudicial foreclosure with respect to the
property, give the mortgagor a notice of default and some grace period during
which the Installment Contract may be reinstated upon full payment of the
default amount. Additionally, the mortgagor may have a post- foreclosure
statutory redemption right, and, in some states, a mortgagor with a significant
equity investment in the property may be permitted to share in the proceeds of
any sale of the property after the indebtedness is repaid or may otherwise be
entitled to a prohibition of the enforcement of the forfeiture clause.
Junior Mortgages; Rights of Senior Mortgagees or
Beneficiaries
Some of the Mortgage Loans may be secured by junior mortgages that are
subordinate to senior mortgages held by other lenders or institutional
investors. In such cases, the rights of the Trust Fund (and therefore the
Certificateholders), as mortgagee under a junior mortgage, will be subordinate
to those of the mortgagee under the senior mortgage, including the prior rights
of the senior mortgagee to: (i) receive rents, hazard insurance proceeds and
condemnation proceeds; and (ii) cause the property securing the Mortgage Loan to
be sold upon the occurrence of a default under the senior mortgage, thereby
extinguishing the lien of the junior mortgage, unless the Master Servicer or
Special Servicer, if applicable, either asserts such subordinate interest in the
related property in the foreclosure of the senior mortgage or satisfies the
defaulted senior loan. As discussed more fully below, in many states a junior
mortgagee may satisfy a defaulted senior loan in full, or may cure such default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. Absent a provision in the senior mortgage
or the existence of a recorded request for notice
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in compliance with applicable state law (if any), no notice of default is
typically required to be given to the junior mortgagee.
The form of the mortgage used by many institutional lenders confers on the
mortgagee the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by such mortgage in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property (or any part thereof) is taken by
condemnation, the mortgagee under the senior mortgage will have the prior right
to collect any applicable insurance proceeds and condemnation awards and to
apply the same to the indebtedness secured by the senior mortgage. However, the
laws of certain states may provide that, unless the security of the mortgagee
has been impaired, the mortgagor must be allowed to use any applicable insurance
proceeds or partial condemnation awards to restore the property.
The form of mortgage used by many institutional lenders also typically
contains a "future advance" clause that provides that additional amounts
advanced to or on behalf of the mortgagor by the mortgagee are to be secured by
the mortgage. Such a clause is valid under the laws of most states. In some
states, however, the priority of any advance made under the clause depends upon
whether the advance was an "obligatory" or "optional" advance. If the mortgagee
is obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage,
notwithstanding that other junior mortgages or other liens may have encumbered
the property between the date of recording of the senior mortgage and the date
of the future advance, and that the mortgagee had actual knowledge of such
intervening junior mortgages or other liens at the time of the advance. If the
mortgagee is not obligated to advance the additional amounts and has actual
knowledge of any such intervening junior mortgages or other liens, the advance
may be subordinate to such intervening junior mortgages or other liens. In many
other states, all advances under a "future advance" clause are given the same
priority as amounts initially made under the mortgage so long as such advances
do not exceed a specified "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage used by many
institutional lenders obligates the mortgagor: (i) to pay all taxes and
assessments affecting the property prior to delinquency; (ii) to pay, when due,
all other encumbrances, charges and liens affecting the property that may be
prior to the lien of the mortgage; (iii) to provide and maintain hazard
insurance on the property; (iv) to maintain and repair the property and not to
commit or permit any waste thereof; and (v) to appear in and defend any action
or proceeding purporting to affect the property or the rights of the mortgagee
under the mortgage. Upon a failure of the mortgagor to perform any of these
obligations, the mortgage typically provides the mortgagee the option to perform
the obligation itself, with the mortgagor agreeing to reimburse the mortgagee
for any sums expended by the mortgagee in connection therewith. All sums so
expended by the mortgagee also typically become part of the indebtedness secured
by the mortgage. The form of mortgage used by many institutional lenders also
typically requires the mortgagor to obtain the consent of the mortgagee as to
all actions affecting the mortgaged property, including, without limitation, all
leasing activities (including new leases and termination or modification of
existing leases), any alterations, modifications or improvements to the
buildings and other improvements forming a part of the mortgaged property and
all property management activities affecting the mortgaged property (including
new management or leasing agreements or any termination or modification of
existing management or leasing agreements). Tenants will often refuse to execute
a lease unless the mortgagee executes a written agreement with the tenant not to
disturb the tenant's possession of its premises in the event of a foreclosure. A
senior mortgagee may refuse to consent to matters approved by a junior mortgagee
with the result that the value of the security for the junior mortgage is
diminished. For example, a senior mortgagee may decide not to approve a lease or
refuse to grant to a tenant such a non-disturbance agreement. If, as a result,
the lease is not executed, the value of the mortgaged property may be
diminished.
Foreclosure
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 and, by reason thereof, the indebtedness has been
accelerated,
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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. Although there are other foreclosure procedures available in some states
that are either infrequently used or available only in certain limited
circumstances, the two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage. In either case, the actual foreclosure of the mortgage will be
accomplished pursuant to a public sale of the mortgaged property by a designated
official or by the trustee under a deed of trust. The purchaser at any such sale
acquires only the estate or interest in the mortgaged property encumbered by the
mortgage. For example, if the mortgage only encumbered a tenant's leasehold
interest in the property, such purchaser will only acquire such leasehold
interest, subject to the tenant's obligations under the lease to pay rent and
perform other covenants contained therein.
Judicial Foreclosure. A judicial foreclosure of a mortgage is a judicial
action initiated by the service of legal pleadings upon all necessary parties
having an interest in the real property. Delays in completion of foreclosure may
occasionally result from difficulties in locating the necessary parties to the
action. As a judicial foreclosure is a lawsuit, it is subject to all of
procedures, delays and expenses attendant to litigation, sometimes requiring up
to several years to complete if contested. At the completion of a judicial
foreclosure, if the mortgagee prevails, the court ordinarily issues a judgment
of foreclosure and appoints a referee or other designated official to conduct a
public sale of the property. Such sales are made in accordance with procedures
that vary from state to state.
Non-Judicial Foreclosure. In the majority of cases, foreclosure of a deed of
trust (and in some instances, other types of mortgage instruments) is
accomplished by a non-judicial trustee's sale pursuant to a provision in the
deed of trust that authorizes the trustee, generally following a request from
the beneficiary, to sell the mortgaged property at public sale upon any default
by the mortgagor under the terms of the note or deed of trust. In addition to
the specific contractual requirements set forth in the deed of trust, a
non-judicial trustee's sale is also typically subject to any applicable judicial
or statutory requirements imposed in the state where the mortgaged property is
located. The specific requirements that must be satisfied by a trustee prior to
the trustee's sale vary from state to state. Examples of the varied requirements
imposed by certain states are: (i) that notices of both the mortgagor's default
and the mortgagee's acceleration of the debt be provided to the mortgagor; (ii)
that the trustee record a notice of default and send a copy of such notice to
the mortgagor, any other person having an interest in the real property,
including any junior lienholders, any person who has recorded a request for a
copy of a notice of default and notice of sale, any successor in interest to the
mortgagor and to certain other persons; (iii) that the mortgagor, or any other
person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears,
plus, in certain states, certain allowed costs and expenses incurred by the
mortgagee in connection with the default; and (iv) the method (publication,
posting, recording, etc.), timing, content, location and other particulars as to
any required public notices of the trustee's sale. 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 mortgagee 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.
Limitations on Mortgagee's Rights. Because of the difficulty a potential buyer
at any foreclosure sale might have in determining the exact status of title to
the mortgaged property, the potential existence of redemption rights (see
"--Rights of Redemption" below) and because the physical condition and financial
performance of the mortgaged property may have deteriorated during the
foreclosure proceedings and/or for a variety of other reasons, a third party may
be unwilling to purchase the property at the foreclosure sale. Some states
require that the mortgagee disclose all known facts materially affecting the
value of the mortgaged property to potential bidders at a trustee's sale. Such
disclosure may have an adverse affect on the trustee's ability to sell the
mortgaged property or the sale price thereof. Potential buyers may be reluctant
to purchase property at a foreclosure sale as a result of the 1980 decision of
the United States Court of Appeals for the Fifth Circuit in Durrett v.
Washington National Insurance Company and other decisions that have followed its
reasoning. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under the federal
Bankruptcy Code, as amended from time to time (11 U.S.C.) (the "Bankruptcy
Code"), and, therefore, could be rescinded in favor of the bankrupt's estate,
if: (i) the foreclosure sale was held while the debtor was insolvent and not
more than one year prior to the filing of the bankruptcy petition; and (ii) the
price paid for the foreclosed property did not represent "fair consideration"
("reasonably
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equivalent value" under the Bankruptcy Code). Although the reasoning and result
of Durrett in respect of the Bankruptcy Code was rejected by the United States
Supreme Court in May 1994, the case could nonetheless be persuasive to a court
applying a state fraudulent conveyance law that has provisions similar to those
construed in Durrett. Furthermore, a bankruptcy trustee or debtor in possession
could possibly avoid a foreclosure sale by electing to proceed under state
fraudulent conveyance law, and the period of time for which a foreclosure sale
could be subject to avoidance under such law is often greater than one year. For
these reasons, it is common for the mortgagee to purchase the property from the
trustee, referee or other designated official for an amount equal to the
outstanding principal amount of the secured indebtedness, together with accrued
and unpaid interest and the expenses of foreclosure, in which event, if the
amount bid by the mortgagee equals the full amount of such debt, interest and
expenses, the secured debt would be extinguished. Thereafter, the mortgagee
assumes the burdens of ownership and management of the property (frequently,
through the employment of a third party management company), including third
party liability, paying operating expenses and real estate taxes and making
repairs, until a sale of the property to a third party can be arranged. The
costs of operating and maintaining commercial 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 that are hotels, motels
or 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 that 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 mortgagee 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 mortgagee's investment in the property. Moreover,
a mortgagee commonly incurs substantial legal fees and court costs in acquiring
a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. In addition, a mortgagee may be responsible under federal or state
law for the cost of cleaning up a mortgaged property that is environmentally
contaminated. See "--Environmental Risks" below. As a result, a mortgagee could
realize an overall loss on a mortgage loan even if the related mortgaged
property is sold at foreclosure or resold after it is acquired through
foreclosure for an amount equal to the full outstanding principal amount of the
mortgage loan, plus accrued interest.
Courts may also apply general equitable principles in connection with
foreclosure proceedings to limit a mortgagee's remedies. These equitable
principles are generally designed to relieve the mortgagor from the legal effect
of his defaults under the loan documents to the extent such effect is determined
to be harsh or unfair. Examples of judicial remedies that have been fashioned
include requiring mortgagees to undertake affirmative and expensive actions to
determine the causes of the mortgagor's default and the likelihood that the
mortgagor will be able to reinstate the loan, requiring the mortgagees to
reinstate loans or recast payment schedules in order to accommodate mortgagors
who are suffering from temporary financial disability, and limiting the rights
of mortgagees to foreclose if the default under the mortgage instrument is not
monetary, such as the mortgagor's failing to maintain the property adequately or
executing a second mortgage affecting the property. 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 mortgagors
under deeds of trust or mortgages receive notices in addition to the statutorily
prescribed minimum. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust, or under a mortgage having a power of sale, does not involve
sufficient state action to afford constitutional protections to the mortgagor.
Under the REMIC Regulations and the related Agreement, the Master Servicer or
Special Servicer, if any, may be permitted (and in some cases may be required)
to hire an independent contractor to operate any REO Property. The costs of such
operation may be significantly greater than the costs of direct operation by the
Master Servicer or Special Servicer, if any. See "SERVICING OF THE MORTGAGE
LOANS--Collections and Other Servicing Procedures."
Rights of Redemption. The purposes of a foreclosure 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 that is subordinate to the mortgage being
foreclosed, from any exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage has
been sold in accordance with a properly conducted foreclosure sale, those having
an interest that is subordinate to that of the foreclosing
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mortgagee have an equity of redemption and may redeem the property by paying the
entire debt with interest. In addition, in some states, when a foreclosure
action has been commenced, the redeeming party must pay certain costs of such
action. Those having an equity of redemption must generally be made parties and
joined in the foreclosure proceeding in order for their equity of redemption to
be cut off and terminated. Equity of redemption is generally a common-law
(non-statutory) right that only exists prior to completion of the foreclosure
sale, is not waivable by the mortgagor and must be exercised prior to
foreclosure sale.
In contrast to the doctrine of equity of redemption, in some states, the
mortgagor and foreclosed junior lienors are given a statutory period after the
completion of a foreclosure in which to redeem the property from the foreclosure
sale by payment of a redemption price. The required redemption price varies from
state to state. Some states require the payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure, others require the
payment of the foreclosure sale price, while other states require the payment of
only a portion of the sums due. The effect of a statutory right of redemption is
to diminish the ability of the mortgagee to sell the foreclosed property. The
exercise of a statutory right of redemption may defeat the title of any
purchaser at a foreclosure sale or any purchaser from the mortgagee subsequent
to a foreclosure sale. Consequently, the practical effect of the redemption
right is often to force the mortgagee to retain the property and pay the
expenses of ownership until the redemption period has run. Certain states permit
a mortgagee to invalidate an attempted exercise of a statutory redemption right
by waiving its right to any deficiency judgment. In some states, there is no
right to redeem property after a trustee's sale under a deed of trust.
Under the REMIC Regulations currently in effect, property acquired by
foreclosure generally must not be held for more than two years. With respect to
a Series of Certificates for which an election is made to qualify the Trust Fund
or a part thereof as a REMIC, the Agreement will permit foreclosed property to
be held for more than two years if the Trustee receives (i) an extension from
the IRS or (ii) an opinion of counsel to the effect that holding such property
for such period is permissible under the REMIC Regulations.
Mortgagors under Installment Contracts generally do not have the benefits of
redemption periods such as those that exist in the same jurisdiction for
mortgage loans. If redemption statutes do exist under state laws for Installment
Contracts, the redemption period may be shorter than for mortgages.
Anti-Deficiency Legislation. Some of the Mortgage Loans will be nonrecourse
loans as to which, in the event of default by a mortgagor, recourse may be had
only against the specific property pledged to secure the related Mortgage Loan
and not against the mortgagor's other assets. Even if a mortgage by its terms
provides for recourse against the mortgagor, certain states have imposed
prohibitions against or limitations upon such recourse. For example, some state
statutes limit the right of the mortgagee to obtain a deficiency judgment
against the mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former mortgagor equal in
most cases to the difference between the net amount realized upon the public
sale of the real property and the amount due to the mortgagee. Other statutes
require the mortgagee to exhaust the security afforded under a mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the mortgagor. In certain states, the mortgagee has the option of
bringing a personal action against the mortgagor on the debt without first
exhausting its security, however, in some of these states, a mortgagee choosing
to pursue such an action may be deemed to have elected its remedy and may be
precluded from exercising any remedies with respect to the security.
Consequently, the practical effect of the election requirement, when applicable,
is that mortgagees will usually proceed first against the security rather than
bringing personal action against the mortgagor. 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 mortgagee from obtaining a large deficiency judgment against the
former mortgagor as a result of low bids, or the absence of bids, at the
judicial sale.
Leasehold Risks. Certain of the Mortgage Loans may be secured by a mortgage
encumbering the mortgagor's leasehold interest under a ground lease. Leasehold
mortgages are subject to certain risks not associated with mortgages encumbering
a fee ownership interest in the mortgaged property. The most significant of
these risks is that the ground lease creating the leasehold estate could
terminate, thereby depriving the leasehold mortgagee of 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
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ground lessee or the ground lessor. Examples of protective provisions that may
be included in the related ground lease, or a separate agreement between the
ground lessee, the ground lessor and the mortgagee, in order to minimize such
risk are the right of the mortgagee to receive notices from the ground lessor of
any defaults by the mortgagor; the right to cure such defaults, with adequate
cure periods; if a default is not susceptible of cure by the mortgagee, the
right to acquire the leasehold estate through foreclosure or otherwise prior to
any termination of the ground lease; the ability of the ground lease to be
assigned to and by the mortgagee or a purchaser at a foreclosure sale and for a
release of the assigning ground lessee's liabilities thereunder; the right of
the mortgagee to enter into a ground lease with the ground lessor on the same
terms and conditions as the old ground lease in the event of a termination
thereof; and provisions for disposition of any insurance proceeds or
condemnation awards payable upon a casualty to, or condemnation of, the
mortgaged property. In addition to the foregoing protections, the leasehold
mortgage may 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, and may assign to the
mortgagee the debtor- ground lessee's right to reject a lease pursuant to
Section 365 of the Bankruptcy Code, although the enforceability of such
assignment has not been established. An additional manner in which to obtain
protection against the termination of the ground lease is to have the ground
lessor enter into a mortgage encumbering the fee estate in addition to the
mortgage encumbering the leasehold interest under the ground lease. Additional
protection is afforded to the mortgagee, because if the ground lease is
terminated, the mortgagee may nonetheless possess rights contained in the fee
mortgage. Without the protections described in this paragraph, a leasehold
mortgagee may be more likely to lose the collateral securing its leasehold
mortgage. No assurance can be given that any or all of the above described
provisions will be obtained in connection with any particular Mortgage Loan.
Bankruptcy Laws. Mortgagors often file bankruptcy to delay or prevent exercise
of remedies under loan documents. Numerous statutory and common law provisions,
including the Bankruptcy Code and state laws affording relief to debtors, may
interfere with and delay the ability of a mortgagee to obtain payment of the
loan, 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 often no interest or principal payments
are made during the course of the bankruptcy proceeding (although "adequate
protection" payments for anticipated diminution, if any, in the value of the
mortgaged property may be made). The delay and consequences thereof caused by
such automatic stay can be significant. A particular mortgagor may become
subject to the Bankruptcy Code either by a voluntary or involuntary petition
with respect to such mortgagor or, by virtue of the doctrine of "substantive
consolidation" by an affiliate of such mortgagor becoming a debtor under the
Bankruptcy Code. Additionally, the filing of a petition in bankruptcy by or on
behalf of a junior lienor or junior mortgagee may stay the senior mortgagee from
taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the mortgagee are met, the amount and terms of a mortgage or deed
of trust secured by property of the debtor may be modified under certain
circumstances. 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 the mortgagee's security interest), thus
leaving the mortgagee a general unsecured creditor for the difference between
such value and the outstanding balance of the loan. Other modifications may
include the reduction in the amount of each monthly payment, which reduction may
result from a reduction in the rate of interest and/or the alteration of the
repayment schedule (with or without affecting the unpaid principal balance of
the loan) and/or an extension (or acceleration) of the final maturity date. Some
bankruptcy courts have approved plans, based on the particular facts of the
reorganization case before them, that affected the curing of a mortgage loan
default by paying arrearages over a number of years. A bankruptcy court may also
permit a debtor to de-accelerate a secured loan and to reinstate the loan even
though the mortgagee had accelerated such 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, even if the full amount
due under the original loan is never repaid. Other types of significant
modifications to the terms of the mortgage may be acceptable to the bankruptcy
court, often depending on the particular facts and circumstances of the specific
case.
Federal bankruptcy law may also interfere with or affect the ability of a
mortgagee to enforce an assignment of rents and leases or a security interest in
hotel revenues related to the mortgaged property. In connection with a
bankruptcy proceeding involving a mortgagor, Section 362 of the Bankruptcy Code
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automatically stays any attempts by the mortgagee to enforce any such assignment
or security interest. The legal proceedings necessary to resolve such a
situation can be time-consuming and may result in significant delays in the
receipt of the rents or hotel revenues. Rents or hotel revenues may also be lost
(i) if the assignment or security interest is not fully documented or perfected
under state law prior to commencement of the bankruptcy proceeding; (ii) to the
extent such rents or hotel revenues are used by the mortgagor to maintain the
mortgaged property or for other court authorized expenses; (iii) to the extent
other collateral may be substituted therefor; and (iv) if the bankruptcy court
determines that it is necessary or appropriate "based on the equities of the
case."
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may be
impaired by the commencement of a bankruptcy proceeding relating to the lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in an automatic stay barring 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.
In addition, the Bankruptcy Code generally provides that a bankruptcy trustee
or debtor in possession may, subject to approval of the bankruptcy court, either
(i) assume the lease and retain it or assign it to a third party or (ii) reject
the lease. If the lease is assumed, the bankruptcy trustee or debtor in
possession (or 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. Furthermore,
there may be a significant period of time between the date that a lessee files a
bankruptcy petition and the date that the lease is assumed or rejected. Although
the lessee is obligated to make all lease payments currently with respect to the
post-petition period, there is a risk that such payments will not be made due to
the lessee's poor financial condition. If the lease is rejected, the lessor will
be treated as an unsecured creditor with respect to its claim for damages for
termination of the lease, and the lessor must relet the mortgaged property
before the flow of lease payments will recommence. In addition, pursuant to
Section 502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection
are limited.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery, as a preferential transfer, of certain payments made by the mortgagor
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. If a Mortgage Loan includes any
guaranty, and the guaranty waives any rights of subrogation or contribution,
then certain payments by the mortgagor to the Trust Fund also may be avoided and
recovered as fraudulent conveyances.
A trustee in bankruptcy or a debtor in possession or various creditors who
extend credit after a case is filed, in some cases, may be entitled to collect
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the mortgagee. In certain circumstances, a trustee in bankruptcy or
debtor in possession may have the power to grant liens senior to or pari passu
with 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 enforce a restructuring of a mortgage loan on terms a
mortgagee would not otherwise accept.
A trustee in bankruptcy or a debtor in possession, in some cases, also may be
entitled to subordinate the lien created by the mortgage loan to other liens or
the claims of general unsecured creditors. Generally, this requires proof of
"unequitable conduct" by the mortgagee. However, various courts have expanded
the grounds for equitable subordination to apply to various non-pecuniary claims
for such items as penalties and fines. A court may find that any prepayment
charge, various late payment charges and other claims by mortgagees may be
subject to equitable subordination on these grounds.
A trustee in bankruptcy or a debtor in possession, in some cases, also may be
entitled to avoid all or part of any claim or lien by the mortgagee if and to
the extent a judgment creditor, or a bona fide purchaser of
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real estate, could have done so outside of bankruptcy. Generally, this involves
some defect in the language, execution or recording of the mortgage loan
documents.
Environmental Risks
Real property pledged as security to a mortgagee may be subject to potential
environmental risks arising from the presence of hazardous or toxic substances
on, under, adjacent to, or in such property. The environmental condition of
mortgaged properties may be affected by the actions and operations of tenants
and occupants of such properties. Of particular concern may be those mortgaged
properties that are, or have been, the site of manufacturing, industrial or
disposal activity. In addition, current and future environmental laws,
ordinances or regulations, including new requirements developed by federal
agencies pursuant to the mandates of the Clean Air Act Amendments of 1990, may
impose additional compliance obligations on business operations that can be met
only by significant capital expenditures.
A mortgagee may be exposed to risks related to environmental conditions such
as the following: (i) a diminution in the value of a mortgaged property; (ii)
the potential that the mortgagor may default on a mortgage loan due to the
mortgagor's inability to pay high remediation costs or difficulty in bringing
its operations into compliance with environmental laws; 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 such mortgaged
property or the unpaid balance of the related mortgage loan. In certain
circumstances, a mortgagee may choose not to foreclose on contaminated property
rather than risk incurring liability for remedial actions.
In addition, a mortgagee may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the mortgagee to recoup its investment in a loan upon foreclosure.
In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination prior to transfer. In these cases, a mortgagee that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Under federal and certain states' laws, the owner's failure to perform
remedial actions required under environmental laws may in certain circumstances
give rise to a lien on the mortgaged property to ensure the reimbursement of
remedial costs incurred by federal and state regulatory agencies. In several
states such lien has priority over the lien of an existing mortgage against such
property. Since the costs of remedial action could be substantial, the value of
a mortgaged property as collateral for a mortgage loan could be adversely
affected by the existence of an environmental condition giving rise to a lien.
The state of the law is currently unclear as to whether and under what
circumstances cleanup costs, or the obligation to take remedial actions, can be
imposed on a mortgagee such as the Trust Fund with respect to each Series. Under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), strict
liability may be imposed on present and past "owners" and "operators" of
contaminated real property for the costs of clean-up. A mortgagee may be liable
as an "owner" or "operator" of a contaminated mortgaged property if agents or
employees of the mortgagee have participated in the management of such mortgaged
property or the operations of the mortgagor. Such liability may exist even if
the mortgagee did not cause or contribute to the contamination and regardless of
whether the mortgagee has actually taken possession of a mortgaged property
through foreclosure, deed in lieu of foreclosure or otherwise. Moreover, such
liability is not limited to the original or unamortized principal balance of a
loan or to the value of the property securing a loan. 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 is known as the "secured
creditor exemption."
In general, what constitutes sufficient management of a mortgaged property or
the business of a borrower to render the secured creditor exemption unavailable
to a mortgagee is based upon judicial interpretation of
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CERCLA's statutory language, and court decisions have been inconsistent in this
matter. In United States v. Fleet Factors, 901 F.2d 1550 (11th Cir. 1990), cert.
den. 498 U.S. 1046 (1991), the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the mortgagee to influence a mortgagor's
disposal of hazardous substances was sufficient participation in the management
of the mortgagor's business to deny the secured creditor exemption to the
mortgagee. However, in In re Bergsoe Metal Corp., 910 F.2d 668 (9th Cir. 1990),
the Court of Appeals for the Ninth Circuit disagreed with the Fleet Factors
decision and held that there must be some degree of "actual management" of a
facility on the part of a mortgagee in order to bar its reliance on the secured
creditor exemption. In addition, certain cases decided in the First Circuit and
the Fourth Circuit have held that mortgagees were entitled to the secured
creditor exemption, notwithstanding a mortgagee's taking title to a mortgaged
property through foreclosure or deed in lieu of foreclosure. Many states have
statutes similar to CERCLA, and not all of those statutes provide for a secured
creditor exemption.
CERCLA's "innocent landowner" defense to strict liability may be available to
a mortgagee that has taken title to a mortgaged property and has performed an
appropriate environmental site assessment that does not disclose existing
contamination and that meets other requirements of the defense. However, it is
unclear whether the environmental site assessment must be conducted upon loan
origination, prior to foreclosure or both, and uncertainty exists as to what
kind of environmental site assessment must be performed in order to qualify for
the defense.
In addition to the foregoing, mortgagees also could be potentially liable for
releases from underground storage tanks under the federal Resource Conservation
and Recovery Act. Beyond statute-based environmental liability, there exist
common law causes of action that can be asserted to redress hazardous
environmental conditions on a property (e.g., actions based on nuisance for so
called toxic torts resulting in death, personal injury or damage to property).
Although it may be more difficult to hold a mortgagee liable in such cases,
unanticipated or uninsured liabilities of the mortgagor may jeopardize the
mortgagor's ability to meet its loan obligations.
At the time the Mortgage Loans were originated, it is possible that no
environmental assessment or a very limited environmental assessment of the
Mortgaged Properties was conducted.
The related Agreement will provide that the Master Servicer or the Special
Servicer, if any, acting on behalf of the Trust Fund, may not acquire title to
any Mortgaged Property or take over its operation unless the Master Servicer or
the Special Servicer, if any, has previously determined, based upon a phase I or
other specified environmental assessment prepared by a person who regularly
conducts such environmental assessments, that (a) the Mortgaged Property is in
compliance with applicable environmental laws or that it would be in the best
economic interest of the Trust Fund to take the actions necessary to comply with
such laws and (b) there are no circumstances or conditions present at the
Mortgaged Property relating to hazardous substances for which some
investigation, remediation or clean-up action could be required or that it would
be in the best economic interest of the Trust Fund to take such actions with
respect to such Mortgaged Property. This requirement effectively precludes
enforcement of the security for the related Note until a satisfactory
environmental assessment is obtained and/or any required remedial action is
taken. This requirement will reduce the likelihood that a given Trust Fund will
become liable for any environmental conditions affecting a Mortgaged Property,
but will make it more difficult to realize on the security for the Mortgage
Loan. There can be no assurance that any environmental assessment obtained by
the Master Servicer or the Special Servicer, if any, will detect all possible
environmental conditions or that the other requirements of the Agreement, even
if fully observed by the Master Servicer or the Special Servicer, if any, will
in fact insulate a given Trust Fund from liability for environmental conditions.
"Hazardous Materials" are generally defined as any dangerous, toxic or
hazardous pollutants, chemicals, wastes or substances, including, without
limitation, those so identified pursuant to CERCLA or any other environmental
laws now existing, and specifically including, without limitation, asbestos and
asbestos-containing materials, polychlorinated biphenyls, radon gas, petroleum
and petroleum products, urea formaldehyde and any substances classified as being
"in inventory," "usable work in process" or similar classification that would,
if classified as unusable, be included in the foregoing definition.
If a mortgagee is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party
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who contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
mortgagor may be adversely affected by the limitations on recourse in the loan
documents. Similarly, in some states anti-deficiency legislation and other
statutes requiring the mortgagee to exhaust its security before bringing a
personal action against the mortgagor (see "--Anti-Deficiency Legislation"
above) may curtail the mortgagee's ability to recover from its mortgagor the
environmental clean-up and other related costs and liabilities incurred by the
mortgagee. Shortfalls occurring as the result of imposition of any clean-up
costs will be addressed in the Prospectus Supplement and Agreement for the
related Series.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACMs")
in the event of the remodeling, renovation or demolition of a building. Such
laws, as well as common law standards, may impose liability for releases of ACMs
and may allow third parties to seek recovery from owners or operators of real
properties for personal injuries associated with such releases. In addition,
federal law requires that building owners inspect their facilities for ACMs and
presumed ACMs (consisting of thermal system insulation, surfacing materials and
asphalt and vinyl flooring in buildings constructed prior to 1981) and transfer
all information regarding ACMs and presumed ACMs in their facilities to
successive owners.
The United States Environmental Protection Agency (the "EPA") has concluded
that radon gas, a naturally occurring substance, is linked to increased risks of
lung cancer. Although there are no current federal or state requirements
mandating radon gas testing, the EPA and the United States Surgeon General
recommend testing residences for the presence of radon and that abatement
measures be undertaken if radon concentrations in indoor air meet or exceed four
picocuries per liter.
The Residential Lead-Based Paint Hazard Reduction Act of 1992 (the "Lead Paint
Act") requires federal agencies to promulgate regulations that will require
owners of residential housing constructed prior to 1978 to disclose to potential
residents or purchasers any known lead-paint hazards. The Lead Paint Act creates
a private right of action with treble damages available for any failure to so
notify. Federal agencies have issued regulations delineating the scope of this
disclosure obligation to take effect in September of 1996 for owners of more
than four residential dwellings and December of 1996 for owners of one to four
residential dwellings. In addition, the ingestion of lead-based paint chips or
dust particles by children can result in lead poisoning, and the owner of a
property where such circumstances exist may be held liable for such injuries.
Finally, federal law mandates that detailed worker safety standards must be
complied with where construction, alteration, repair or renovation of structures
that contain lead, or materials that contain lead, is contemplated.
Underground storage tanks ("USTs") are, and in the past have been, frequently
located at properties used for industrial, retail and other business purposes.
Federal law, as well as the laws of most states, currently require USTs used for
the storage of fuel or hazardous substances and waste to meet certain standards
designed to prevent releases from the USTs into the environment. USTs installed
prior to the implementation of these standards, or that otherwise do not meet
these standards, are potential sources of contamination to the soil and
groundwater. Land owners may be liable for the costs of investigating and
remediating soil and groundwater contamination that may emanate from leaking
USTs.
Enforceability of Certain Provisions
Default Interest; Late Charges; and Prepayment Fees. Some of the Mortgage
Loans may contain provisions requiring the mortgagor to pay late charges or
additional interest if required payments are not timely made. In certain states
there may be limitations upon the enforceability of such provisions, and no
assurance can be given that any of such provisions related to any Mortgage Loan
will be enforceable. Some of the Mortgage Loans may also contain provisions
prohibiting any prepayment of the loan prior to maturity or requiring the
payment of a prepayment fee in connection with any such prepayment. Even if
enforceable, a requirement for such prepayment fees may not deter mortgagors
from prepaying their mortgage loans. Although certain states will allow the
enforcement of such provisions upon a voluntary prepayment of a mortgage loan,
in other states such provisions may be unenforceable after a mortgage loan has
been outstanding for a certain number of years or if enforcement would be
unconscionable, or the allowed amount of any prepayment fee may be limited
(i.e., to a specified percentage of the original principal amount of the
mortgage loan, to a specified percentage of the outstanding principal balance of
a mortgage loan or to a fixed
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number of months' interest on the prepaid amount). In certain states there may
be limitations upon the enforceability of prepayment fee provisions applicable
in connection with a default by the mortgagor or an involuntary acceleration of
the secured indebtedness, and no assurance can be given that any of such
provisions related to any mortgage loan will be enforceable under such
circumstances. The applicable laws of certain states may also treat certain
prepayment fees as usurious if in excess of statutory limits. See
"--Applicability of Usury Laws."
Due-on-Sale Provisions. The enforceability of due-on-sale provisions has been
the subject of legislation or litigation in many states, and in some cases,
typically involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits mortgagees to enforce these clauses in
accordance with their terms, subject to certain exceptions. As a result,
due-on-sale clauses have become generally enforceable except in those states
whose legislatures exercised their authority to regulate the enforceability of
such clauses with respect to mortgage loans that were: (i) originated or assumed
during the "window period" under the Garn-St Germain Act, which ended in all
cases not later than October 15, 1982; and (ii) originated by lenders other than
national banks, federal savings institutions or federal credit unions. The
Federal Home Loan Mortgage Corporation has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of loans that were originated or assumed during the "window period"
applicable to such state. Also, the Garn-St Germain Act does "encourage" lenders
to permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rates.
The Agreement for each Series generally will provide that if any Mortgage Loan
contains a provision in the nature of a "Due-on-Sale" clause, which by its terms
provides that: (i) such Mortgage Loan shall (or may at the mortgagee's option)
become due and payable upon the sale or other transfer of an interest in the
related Mortgaged Property or (ii) such Mortgage Loan may not be assumed without
the consent of the related mortgagee in connection with any such sale or other
transfer, then, for so long as such Mortgage Loan is included in the Trust Fund,
the Master Servicer or the Special Servicer, if any, on behalf of the Trustee,
shall take such actions as it deems to be in the best interest of the Trust Fund
in accordance with the servicing standard set forth in the Agreement, and may
waive or enforce any due-on-sale clause contained in the related Note or
Mortgage.
In addition, under the federal Bankruptcy Code, 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.
Acceleration on Default. It is expected that the Mortgage Loans will include a
"Debt-Acceleration" clause, which permits the mortgagee to accelerate the full
debt upon a monetary or nonmonetary default of the mortgagor. The courts of all
states will enforce such acceleration clauses in the event of a material payment
default if appropriate notices of default have been effectively given. However,
the equity courts of any state may refuse to foreclose a mortgage 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, in certain states, the costs and
attorneys' fees incurred by the mortgagee in collecting such defaulted payments.
State courts also are known to apply various legal and equitable principles to
avoid enforcement of the forfeiture provisions of Installment Contracts. For
example, a mortgagee's practice of accepting late payments from the mortgagor
may be deemed a waiver of the forfeiture clause. State courts also may impose
equitable grace periods for payment of arrearages or otherwise permit
reinstatement of the Installment Contract following a default. Not infrequently,
if a mortgagor under an Installment Contract has significant equity in the
property, equitable principles will be applied to reform or reinstate the
Installment Contract or to permit the mortgagor to share the proceeds upon a
foreclosure sale of the property if the sale price exceeds the debt.
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Soldiers' and Sailors' Relief Act
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service (including
the Army, Navy, Air Force, Marines, Coast Guard, members of the National Guard
or any Reserves who are called to active duty status after the origination of
their mortgage loan and officers of the U.S. Public Health Service assigned to
duty with the military) after the origination of such mortgagor's 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 mortgagee. Any shortfall in interest
collections resulting from the application of the Relief Act, to the extent not
covered by any applicable Credit Enhancement, could result in losses to the
holders of the Certificates. In addition, the Relief Act imposes limitations
that would impair the ability of the Master Servicer or the Special Servicer, if
any, to foreclose on an affected Mortgage Loan during the mortgagor's period of
active duty status and, under certain circumstances, during an additional three
months thereafter. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion. Because the Relief Act applies
to mortgagors who enter military service (including reservists who are later
called to active duty) after origination of their mortgage loan, no information
can be provided as to the number of Mortgage Loans that may be affected by the
Relief Act. The Relief Act may also be applicable if the mortgagor is an entity
owned or controlled by a person in a military service.
Applicability of Usury Laws
State and federal usury laws limit the interest that mortgagees are entitled
to receive on a mortgage loan. In determining whether a given transaction is
usurious, courts may include charges in the form of "points" and "fees" in the
determination of the "interest" charged in connection with a loan. If, however,
the amount charged for the use of the money loaned is found to exceed a
statutorily established maximum rate, the form employed and the degree of
overcharge are both immaterial. Statutes differ in their provision as to the
consequences of a usurious loan. One type of statute requires the mortgagee to
forfeit the interest above the applicable limit or imposes a specified penalty.
Under this statutory scheme, the mortgagor may have the recorded mortgage or
deed of trust cancelled upon paying its debt with lawful interest, or the
mortgagee may foreclose, but only for the debt plus lawful interest, in either
case, subject to any applicable credit for excessive interest collected from the
mortgagor and any penalty owed by the mortgagee. A second type of statute is
more severe. A violation of this type of usury law results in the invalidation
of the transaction, thereby permitting the mortgagor to have the recorded
mortgage or deed of trust cancelled without any payment and prohibiting the
mortgagee from foreclosing.
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, as amended ("Title V"), provides that state usury limitations do 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
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.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially with
respect to residential (including multifamily, but not other commercial)
mortgage loans as a result of the enactment of Title VIII of the Garn-St Germain
Act ("Title VIII"). Title VIII provides that, notwithstanding any state law to
the contrary: (i) state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; (ii) state-chartered credit unions may
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originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration (the "NCUA") with
respect to origination of alternative mortgage instruments by federal credit
unions; and (iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board
(now the Office of Thrift Supervision) with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII authorized any state to reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action. A mortgagee's failure to comply with the applicable federal
regulations in connection with the origination of an alternative mortgage
instrument could subject such mortgage loan to state restrictions that would not
otherwise be applicable.
Leases and Rents
Some of the Mortgage Loans may be secured by an assignment of leases and
rents, either through assignment provisions incorporated in the mortgage,
through a separate assignment document or both. Under an assignment of leases
and rents, the mortgagor typically assigns to the mortgagee the mortgagor's
right, title and interest as landlord under each lease and the income derived
therefrom, while retaining a revocable license to collect the rents for so long
as there is no default under the mortgage loan documentation. In the event of
such a default, the license terminates and the mortgagee may be entitled to
collect rents. A mortgagee's failure to perfect properly its interest in rents
may result in the loss of a substantial pool of funds that could otherwise serve
as a source of repayment for the loan. Some state laws may require that in
addition to recording properly the assignment of leases and rents, the mortgagee
must also take possession of the property and/or obtain judicial appointment of
a receiver before such mortgagee is entitled to collect rents. Although
mortgagees actually taking possession of the property may become entitled to
collect the rents therefrom, such mortgagees may also incur potentially
substantial risks attendant to such possession, including liability for
environmental clean-up costs and other risks inherent to property ownership and
operation. In addition, if a bankruptcy or similar proceeding is commenced by or
in respect of the mortgagor, the mortgagee's ability to collect the rents may
also be adversely affected.
Secondary Financing; Due-on-Encumbrance Provisions
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the mortgagor to use the Mortgaged Property as security for one or
more additional loans. Some of the Mortgage Loans may preclude secondary
financing (often by permitting the senior mortgagee to accelerate the maturity
of its loan if the mortgagor further encumbers the Mortgaged Property) or may
require the consent of the senior mortgagee; however, such provisions may be
unenforceable in certain jurisdictions under certain circumstances. The
Agreement for each Series will generally provide that if any Mortgage Loan
contains a provision in the nature of a "Due-on-Encumbrance" clause, which by
its terms: (i) provides that such Mortgage Loan will (or may at the mortgagee's
option) become due and payable upon the creation of any lien or other
encumbrance on the related Mortgaged Property; or (ii) requires the consent of
the related mortgagee to the creation of any such lien or other encumbrance on
the related Mortgaged Property; then for so long as such Mortgage Loan is
included in a given Trust Fund, the Master Servicer or, if such Mortgage Loan is
a Specially Serviced Mortgage Loan, the Special Servicer, if any, on behalf of
such Trust Fund, will exercise (or decline to exercise) any right it may have as
the mortgagee of record with respect to such Mortgage Loan to (x) accelerate the
payments thereon or (y) withhold its consent to the creation of any such lien or
other encumbrance, in a manner consistent with the servicing standard set forth
in the Agreement.
If a mortgagor encumbers a mortgaged property with one or more junior liens,
the senior mortgagee is subjected to additional risk, such as the following.
First, the mortgagor may have difficulty servicing and repaying multiple loans.
In addition, if the junior loan permits recourse to the mortgagor and the senior
loan does not, a mortgagor may be more likely to repay sums due on the junior
loan than those due on the senior loan. Second, acts of the senior mortgagee
that prejudice the junior mortgagee or impair the junior mortgagee's security
may create a superior equity in favor of the junior mortgagee. For example, if
the mortgagor and the senior mortgagee agree to an increase in the principal
amount of, or the interest rate payable on, the senior loan, the senior
mortgagee may lose its priority to the extent an existing junior mortgagee is
prejudiced or the mortgagor is additionally burdened. Third, if the mortgagor
defaults on the
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senior loan and/or any junior loan or loans, the existence of junior loans and
actions taken by junior mortgagees can impair the security available to the
senior mortgagee and can interfere with, delay and in certain circumstances even
prevent the taking of action by the senior mortgagee. Fourth, the bankruptcy of
a junior mortgagee may operate to stay foreclosure or similar proceedings by the
senior mortgagee.
Certain Laws and Regulations
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 and interest on the related Mortgage Loan.
Type of Mortgaged Property
A mortgagee may be subject to additional risk depending upon the type and use
of the mortgaged property in question. For instance, mortgaged properties that
are hospitals, nursing homes or convalescent homes may present special risks to
mortgagees in large part due to significant governmental regulation of the
ownership, operation, maintenance, control and financing of health care
institutions. Mortgages encumbering mortgaged properties that 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 that are hotels or motels may present additional risk to
the mortgagee in that: (i) hotels and motels are typically operated pursuant to
franchise, management and operating agreements that may be terminable by the
operator; and (ii) the transferability of the hotel's operating, liquor and
other licenses to the entity acquiring the hotel either through purchase or
foreclosure is subject to the vagaries of local law requirements. In addition,
mortgaged properties that are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control laws,
which could impact the future cash flows of such properties. See "RISK
FACTORS--Risks Associated with Lending on Income Producing Properties."
Criminal Forfeitures
Various federal and state laws (collectively, the "Forfeiture Laws") provide
for the civil or criminal forfeiture of certain property (including real estate)
used or intended to be used to commit or facilitate the commission of a
violation of certain laws (typically criminal laws), or purchased with the
proceeds of such violations. Even though the Forfeiture Laws were originally
intended as tools to fight organized crime and drug related crimes, the current
climate appears to be to expand the scope of such laws. Certain of the
Forfeiture Laws (i.e., the Racketeer Influenced and Corrupt Organizations law
and the Comprehensive Crime Control Act of 1984) provide for notice, opportunity
to be heard and for certain defenses for "innocent lienholders." However, given
the uncertain scope of the Forfeiture Laws and their relationship to existing
constitutional protections afforded property owners, no assurance can be made
that enforcement of a Forfeiture Law with respect to any Mortgaged Property
would not deprive the Trust Fund of its security for the related Mortgage Loan.
Americans With Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove structural, architectural and communication barriers
from existing places of public accommodation to the extent "readily achievable."
In addition, under the ADA, alterations to a place of public accommodation or a
commercial facility are to be made so that, to the maximum extent feasible, such
altered portions are readily accessible to and usable by disabled individuals.
The "readily achievable" standard takes into account, among other factors, the
financial resources of the affected site, owner, landlord or other applicable
person. In addition to imposing a possible financial burden on the mortgagor in
its capacity as owner or landlord, the ADA may also impose such requirements on
a foreclosing mortgagee who succeeds to the interest of the mortgagor as owner
or landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
mortgagee who is financially more capable
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than the mortgagor of complying with the requirements of the ADA may be subject
to more stringent requirements than those to which the mortgagor is subject.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of anticipated material federal income tax
consequences of the purchase, ownership and disposition of the Certificates, and
represents the opinion of Morrison & Hecker L.L.P. on the material matters
associated with such consequences. The summary is based upon the provisions of
the Code, the regulations promulgated thereunder, including, where applicable,
proposed regulations, and the judicial and administrative rulings and decisions
now in effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations and interpretations on
which this summary is based are subject to change, and such change could apply
retroactively.
Taxpayers and preparers of tax returns (including those filed by any REMIC or
other issuer) should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice (i) is given with respect to events that have
occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated actions, and (ii) is directly relevant to the
determination of an entry on a tax return. Accordingly, taxpayers should consult
their own tax advisors and tax return preparers regarding the preparation of any
item on a tax return, even where the anticipated tax treatment has been
discussed herein.
This summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances or status, nor with certain types of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily upon
investors who will hold Certificates as "capital assets" (generally, property
held for investment) within the meaning of Section 1221 of the Code, but much of
the discussion is applicable to other investors as well. Potential purchasers of
Certificates are advised to consult their own tax advisers concerning the state
or local tax consequences to them of the purchase, holding and disposition of
Certificates or the federal tax consequences to them resulting from their
individual circumstances or status or resulting from their being subject to
special treatment under the federal income tax laws.
Taxation of the REMIC and its Holders
General. If a REMIC election is made with respect to a Series of Certificates,
then the arrangement by which the Certificates of that Series are issued will be
treated as one or more REMICs as long as all of the provisions of the applicable
Agreement are complied with and the statutory and regulatory requirements
concerning REMICs are satisfied. In such a case, Morrison & Hecker L.L.P.,
counsel to the Depositor, will deliver its opinion to the effect that the
arrangement by which the Certificates of that Series are issued will be treated
as one or more REMICs as long as all of the provisions of the applicable
Agreement are complied with and the statutory and regulatory requirements
concerning REMICs are satisfied. Certificates will be designated as "Regular
Interests" or "Residual Interests" in the REMICs, as specified in the related
Prospectus Supplement.
Qualification as a REMIC
In order for a Series of Certificates to qualify as a REMIC, there must be
ongoing compliance on the part of the Trust Fund with the requirements set forth
in the Code. The Trust Fund must fulfill an asset test, which requires that no
more than a de minimis portion of its assets, as of the close of the third
calendar month beginning after the "Startup Day" (which for purposes of this
discussion is the date of issuance of the Certificates) and at all times
thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a "safe harbor" pursuant
to which the de minimis requirement is met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the REMIC's assets. An entity that fails to meet
the safe harbor may nevertheless demonstrate that it holds no more than a de
minimis amount of nonqualified assets. A REMIC also must provide "reasonable
arrangements" to prevent its residual interest from being held by "disqualified
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organizations" and applicable tax information to transferors or agents that
violate this requirement. Accordingly, the Pooling and Servicing Agreement will
contain provisions to assure that the asset and reasonable arrangements tests
will be met at all times that the Certificates are outstanding.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC on the
Startup Day or is purchased by the REMIC within a three-month period thereafter
pursuant to a fixed-price contract in effect on the Startup Day. Qualified
mortgages include whole mortgage loans, such as the Mortgage Loans, provided, in
general, the fair market value of the real property security (including
buildings and structural components thereof) is at least 80% of the principal
balance of the mortgage loan either at origination or as of the Startup Day (an
original loan-to-value ratio of not more than 125% with respect to the real
property security). A mortgage loan that was not in fact principally secured by
real property must be disposed of within 90 days of discovery, or otherwise
ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve assets,
and foreclosure property. A cash flow investment is any investment, earning a
return in the nature of interest, of amounts received on or with respect to
qualified mortgages for a temporary period, not exceed 13 months, until the next
scheduled distribution to holders of interests in the REMIC. Foreclosure
property is real property acquired by the REMIC in connection with default or
imminent default of a qualified mortgage and generally held for not more than
two years, with extensions granted by the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
also must meet certain requirements. All of the interests in a REMIC must be
either of the following: (i) one or more Classes of regular interests or (ii) a
single Class of residual interests on which distributions, if any, are made pro
rata. A regular interest is an interest in a REMIC that is issued on the Startup
Day with fixed terms, is designated as a regular interest, and unconditionally
entitles the holder to receive a specified principal amount (or other similar
amount), and provides that interest payments (or other similar amounts), if any,
at or before maturity either are payable based on a fixed rate or a qualified
variable rate or consist of a specified, nonvarying portion of the interest
payments on some or all of the qualified mortgages. A qualified variable rate
includes a rate based on a weighted average of rates on some or all of the
REMIC's qualified mortgages, which in turn bear a fixed rate or qualified
variable rate. A residual interest is an interest in a REMIC other than a
regular interest that is issued on the Startup Day and is designated as a
residual interest.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, 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 the REMIC will be borne by
the related Master Servicer, Special Servicer or Trustee in any case out of its
own funds, provided that such person has sufficient assets to do so, and
provided further that such tax arises out of a breach of such person's
obligations under the related Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by a Master Servicer,
Special Servicer or Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related Certificates may not be accorded the
status or given the tax treatment described below. Although the Code authorizes
the U.S. Department of the Treasury to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, no such regulations have
been issued. Any such relief, moreover, may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the Trust Fund's income
for the period in which the requirements for such status are not satisfied. The
related Agreement with respect to each REMIC will include provisions designed to
maintain the Trust Fund's status as a REMIC under the REMIC Regulations.
If a REMIC election is made with respect to a Series of Certificates, (i)
Certificates held by a mutual savings bank or domestic building and loan
association will represent interests in "qualifying real property loans" within
the meaning of Code Section 593(d) (assuming that at least 95% of the REMIC's
assets are "qualifying real property loans"); (ii) Certificates held by a
domestic building and loan association will
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constitute "a regular or a residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property" and other types of assets described in Code Section
7701(a)(19)(C) (except that if the underlying mortgage loans are not residential
mortgage loans, the Certificates will not so qualify)); and (iii) Certificates
held by a real estate investment trust will constitute "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and income with respect to the
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of the
REMIC's assets are qualifying assets). If less than 95% of the REMIC's assets
consist of assets described in (i), (ii) or (iii) above, then a Certificate will
qualify for the tax treatment described in (i), (ii) or (iii) in the proportion
that such REMIC assets are qualifying assets. The determination as to the
percentage of the REMIC's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The Trustee will report those
determinations to Certificateholders in the manner and at the times required by
applicable Treasury regulations.
It is possible that various reserves or funds will reduce the proportion of
REMIC assets that qualify under the standards described above.
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 ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such Series of Certificates, counsel to the Depositor will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Agreement, the Tiered REMICs will each qualify as a
REMIC and the Certificates issued by the Tiered REMICs, will be considered to
evidence ownership of Regular Certificates or Residual Certificates in the
related REMIC within the meaning of the REMIC Regulations of the Code.
Solely for purposes of determining whether the Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Regular Interests
Interest and Acquisition Discount. Certificates representing Regular Interests
in a REMIC ("Regular Certificates") are generally taxable to Certificateholders
in the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the Regular Certificates will be taxable as ordinary income and
taken into account using the accrual method of accounting, regardless of the
Certificateholder's normal accounting method. Reports will be made annually to
the Internal Revenue Service (the "IRS") and to holders of Regular Certificates
that are not excepted from the reporting requirements regarding amounts treated
as interest (including accrual of original issue discount) on Regular
Certificates.
Certificates on which interest is not paid currently ("Compound Interest
Certificates") will, and certain of the other Certificates constituting Regular
Interests may, be issued with original issue discount ("OID") within the meaning
of Code Section 1273. Rules governing OID are set forth in Sections 1271-1275 of
the Code and certain final regulations of the U.S. Department of the Treasury
issued in 1994 and 1996 (the "Final Regulations"). Although the Code contains
specific provisions governing the calculation of OID on securities, such as the
Certificates, on which principal is required to be prepaid based on prepayments
of the underlying assets, regulations interpreting those provisions have not yet
been issued.
A holder of a Regular Certificate must include OID in gross income as ordinary
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Regular
Certificate will be considered to be zero if it is less than a de minimis amount
determined under the Code.
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In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Regular Certificate and its issue price. The
issue price of a Regular Certificate of a Class will generally be the initial
offering price at which a substantial amount of the Certificates in the Class is
sold to the public, and will be treated by the Depositor as including, in
addition, the amount paid by the Certificateholder for accrued interest that
relates to a period prior to the issue date of such Regular Certificate. Under
the Final Regulations, the stated redemption price at maturity is the sum of all
payments on the Certificate other than any "Qualified Stated Interest" payments.
Qualified stated interest is interest that is unconditionally payable at least
annually during the entire term of the Certificate at either (a) a single fixed
rate that appropriately takes into account the length of the interval between
payments or (b) the current values of (i) a single "qualified floating rate" or
(ii) a single "objective rate" (each a "Single Variable Rate"). A "current
value" is the value of a variable rate on any day that is no earlier than three
months prior to the first day on which that value is in effect and no later than
one year following that day. A qualified floating rate is a rate the variations
in which reasonably can be expected to measure contemporaneous variations in the
cost of newly borrowed funds in the currency in which the Regular Certificate is
denominated (e.g., LIBOR). Such a rate remains qualified even though it is
multiplied by a fixed, positive multiple not exceeding 1.35, increased or
decreased by a fixed rate, or both. Certain combinations of rates constitute a
single qualified floating rate, including (a) interest stated at a fixed rate
for an initial period of less than one year followed by a qualified floating
rate, if the value of the qualified floating rate on the issue date is intended
to approximate the fixed rate, and (b) two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout the
term of the Regular Certificate. A combination of such rates is conclusively
presumed to be a single qualified floating rate if the values of all rates on
the issue date are within .25 percentage points of each other. A variable rate
that is subject to an interest rate cap, floor, "governor" or similar
restriction on rate adjustment may be a qualified floating rate only if such
restriction is fixed throughout the term of the instrument, or is not reasonably
expected as of the issue date to cause the yield on the debt instrument to
differ significantly from the expected yield absent the restriction. An
objective rate is a rate, other than a qualified floating rate, determined by a
single formula that is fixed throughout the term of the Regular Certificate and
is based on (i) one or more qualified floating rates (including a multiple or
inverse of a qualified floating rate); (ii) one or more rates each of which
would be a qualified floating rate for a debt instrument denominated in a
foreign currency; (iii) the yield or the changes in the price of one or more
items of "actively traded" personal property other than stock or debt of the
issuer or a related party, (iv) a combination of rates described in (i), (ii) or
(iii); or (iv) other rates designated by the IRS in the Internal Revenue
Bulletin. Each rate described in (i) through (iv) above will not be considered
an objective rate, however, if it is reasonably expected that the average value
of the rate during the first half of the Regular Certificate's term will differ
significantly from the average value of the rate during the final half of its
term. A combination of interest stated at a fixed rate for an initial period of
less than one year followed by an objective rate is treated as a single
objective rate if the value of the objective rate on the issue date is intended
to approximate the fixed rate; such a combination of rates is conclusively
presumed to be a single objective rate if the value of the objective rate on the
issue date does not differ from the value of the fixed rate by more than .25
percentage points. The rules for determining the qualified stated interest
payable with respect to certain variable rate Regular Certificates not bearing
interest at a Single Variable Rate are discussed below under "--Variable Rate
Regular Interests." In the case of the Compound Interest Certificates, Interest
Weighted Certificates (as defined below) and certain of the other Regular
Certificates, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will be
included in the stated redemption price at maturity. Because Certificateholders
are entitled to receive interest only to the extent that payments are made on
the Mortgage Loans, interest might not be considered to be "unconditionally
payable."
The holder of a Regular Certificate issued with OID must include in gross
income, for all days during its taxable year on which it holds such Regular
Certificate, the sum of the "daily portions" of such OID. Under Code Section
1272(a)(6), the amount of OID to be included in income by a holder of a debt
instrument, such as a Regular Certificate, that is subject to acceleration due
to prepayments on other debt obligations securing such instrument, is computed
by taking into account the anticipated rate of prepayments assumed in pricing
the debt instrument (the "Prepayment Assumption"). The IRS has not yet issued
regulations that address Prepayment Assumptions; however, the Conference
Committee Report to the Tax Reform Act of 1986 indicates that the assumed rate
of prepayments used in pricing can be used for purposes of OID calculations if
such assumption is reasonable for comparable transactions. The amount of OID
includible in income by a Certificateholder will be computed by allocating to
each day during a taxable year a pro-rata portion of the
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OID that accrued during the relevant accrual period. The amount of OID that will
accrue during an accrual period (generally the period between interest payments
or compounding dates) is the excess (if any) of the sum of (a) the present value
of all payments remaining to be made on the Regular Certificate as of the close
of the accrual period and (b) the payments during the accrual period of amounts
included in the stated redemption price of the Regular Certificate, over the
"adjusted issue price" of the Regular Certificate at the beginning of the
accrual period. The adjusted issue price of a Regular Certificate is the sum of
its issue price plus prior accruals of OID, reduced by the total payments, other
than qualified stated interest payments, made with respect to such Regular
Certificate in all prior periods. Code Section 1272(a)(6) requires the present
value of the remaining payments to be determined on the basis of three factors:
(i) the original yield to maturity of the Regular Certificate (determined on the
basis of compounding at the end of each accrual period and properly adjusted for
the length of the accrual period); (ii) events that have occurred before the end
of the accrual period; and (iii) the assumption that the remaining payments will
be made in accordance with the original Prepayment Assumption. The effect of
this method would be to increase the portion of OID required to be included in
income by a Certificateholder taking into account prepayments with respect to
the Mortgage Loans at a rate that exceeds the Prepayment Assumption, and to
decrease (but not below zero for any period) the portions of OID required to be
included in income by a Certificateholder taking into account prepayments with
respect to the Mortgage Loans at a rate that is slower than the Prepayment
Assumption. Although OID will be reported to Certificateholders based on the
Prepayment Assumption, there is no assurance that Mortgage Loans will be repaid
at that rate and no representation is made to Certificateholders that Mortgage
Loans will be prepaid at that rate or at any other rate.
Certain Classes of Certificates may represent more than one Class of Regular
Interests. The Trustee intends, based on the Final Regulations, to calculate OID
on such Certificates as if, solely for the purposes of computing OID, the
separate Regular Interests were a single debt instrument.
A subsequent holder of a Regular Certificate will also be required to include
OID in gross income. If such a holder purchases a Regular Certificate for an
amount that exceeds its adjusted issue price the holder will be entitled (as
will an initial holder who pays more than a Regular Certificate's issue price)
to offset such OID by comparable economic accruals of portions of such excess.
Interest Weighted Certificates. It is not clear how income should be accrued
with respect to Regular Certificates the payments on which consist solely or
primarily of a specified portion of the interest payments on qualified mortgages
held by the REMIC ("Interest Weighted Certificate"). The Depositor intends to
take the position that all of the income derived from an Interest Weighted
Certificate should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Certificate as a
Compound Interest Certificate. However, the IRS could assert that income derived
from an Interest Weighted Certificate should be calculated as if the Interest
Weighted Certificate were a Certificate purchased at a premium equal to the
excess of the price paid by such Certificateholder for the Interest Weighted
Certificate over its stated principal amount, if any. Under this approach, a
Certificateholder would be entitled to amortize such premium only if it has in
effect an election under Section 171 of the Code with respect to all taxable
debt instruments held by such holder, as described below. Alternatively, the IRS
could assert that the Interest Weighted Certificate should be taxable under the
final regulations under Section 1275 governing debt issued with contingent
principal payments, in which case a Certificateholder might recognize income at
a slower rate than if the Interest Weighted Certificate were treated as a
Compound Interest Certificate. If the contingent payment rules were applicable
to Interest Weighted Securities (which, as 1272(a)(6) instruments, are
specifically excluded from the scope of the contingent payment regulations)
income on certain Certificates would be computed under the "noncontingent bond
method." The noncontingent bond method would generally apply in a manner similar
to the method prescribed by the Code under Section 1272(a)(6). See "--Variable
Rate Regular Securities." Because of uncertainty in the law, counsel to the
Depositor will not render any opinion on these issues.
Variable Rate Regular Interests. Regular Certificates bearing interest at one
or more variable rates are subject to certain special rules. The qualified
stated interest payable with respect to certain variable rate debt instruments
not bearing interest at a Single Variable Rate generally is determined under the
Final Regulations by converting such instruments into fixed rate debt
instruments. Instruments qualifying for such treatment generally include those
providing for stated interest at (i) more than one qualified floating rates or
(ii) a single fixed rate and (a) one or more qualified floating rates or (b) a
single "qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced
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by a qualified floating rate, the variations in which can reasonably be expected
to inversely reflect contemporaneous variations in the cost of newly borrowed
funds (disregarding permissible rate caps, floors, governors and similar
restrictions such as are described above).
Purchasers of Regular Certificates bearing a variable rate of interest should
be aware that there is uncertainty concerning the application of Code Section
1272(a)(6) and the Final Regulations to such Certificates. In the absence of
other authority, the Depositor intends to be guided by the provisions of the
Final Regulations governing variable rate debt instruments in adapting the
provisions of Code Section 1272(a)(6) to such Certificates for the purpose of
preparing tax reports furnished to the IRS and Certificateholders. In that
regard, in determining OID with respect to Regular Certificates bearing interest
at a Single Variable Rate, (a) all stated interest with respect to a Regular
Certificate is treated as qualified stated interest and (b) the amount and
accrual of OID, if any, is determined under the OID rules applicable to fixed
rate debt instruments discussed above by assuming that the Single Variable Rate
is a fixed rate equal to (i) in the case of a qualified floating rate or
qualified inverse floating rate, the issue date value of the rate or (ii) in the
case of any other objective rate, a fixed rate that reflects the yield that is
reasonably expected for the Regular Certificate. Interest and OID attributable
to the Regular Certificates bearing interest at a Multiple Variable Rate
similarly will be taken into account under a methodology that converts the
Certificate into an equivalent fixed rate debt instrument. However, in
determining the amount and accrual of OID, the assumed fixed rates are (a) for
each qualified floating rate, the value of each such rate as of the issue date
(with appropriate adjustment for any differences in intervals between interest
adjustment dates); (b) for a qualified inverse floating rate, the value of the
rate as of the issue date; and (c) for any other objective rate, the fixed rate
that reflects the yield that is reasonably expected for the Certificate. In the
case of a Certificate that provides for stated interest at a fixed rate in one
or more accrual periods and either one or more qualified floating rates or a
qualified inverse floating rate in other accrual periods, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Certificate provides for a qualified inverse floating
rate). The qualified floating rate or qualified inverse floating rate that
replaces the fixed rate must be such that the fair market value of the Regular
Certificate as of its issue date is approximately the same as the fair market
value of an otherwise identical debt-instrument that provides for either the
qualified floating rate or the qualified inverse floating rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Regular Certificate is then treated as converted into
an equivalent fixed rate debt instrument in the manner described above. If the
interest paid or accrued with respect to a Single Variable Rate or Multiple
Variable Rate Certificate during an accrual period differs from the assumed
fixed interest rate, such difference will be an adjustment (to interest or OID,
as applicable) to the Certificateholder's taxable income for the taxable period
or periods to which such difference relates.
Purchasers of Certificates bearing a variable rate of interest should be aware
that the provisions of the Final Regulations governing variable rate debt
instruments are limited in scope and may not apply to some Regular Certificates
having variable rates. If such a Certificate is not subject to the provisions of
the Final Regulations governing variable rate debt instruments, it may be
subject to the provisions of the Final Regulations applicable to debt
instruments having contingent payments. Prospective purchasers of variable rate
Regular Certificates should consult their tax advisers concerning the
appropriate tax treatment of such Certificates.
Market Discount and Premium. A purchaser of a Regular Certificate may also be
subject to the market discount rules of Code Section 1276 if the stated
redemption price at maturity (or the revised issue price where OID has accrued
on such Certificate) exceeds the basis of the Certificate in the hands of the
purchaser. Such purchaser generally will be required to recognize accrued market
discount as ordinary income as payments of principal are received on such
Regular Certificate, or upon the sale or exchange of the Regular Certificate. In
general terms, until regulations are promulgated, market discount may be treated
as accruing, at the election of the Certificateholder, either (i) under a
constant yield method, taking into account the Prepayment Assumption, or (ii) in
proportion to accruals of OID (or, if there is no OID, in proportion to accruals
of stated interest). A holder of a Regular Certificate having market discount
may also be required to defer a portion of the interest deductions attributable
to any indebtedness incurred or continued to purchase or carry the Regular
Certificate. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Certificateholder may elect to include such market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. Such election will apply to all taxable
debt instruments (including all Regular Interests) held by the Certificateholder
at the beginning of the taxable year in which the election is made, and
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to all taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the IRS. Purchasers who purchase Regular
Certificates at a market discount should consult their tax advisors regarding
the elections for recognition of such discount.
A Certificateholder who purchases a Regular Certificate (other than an
Interest Weighted Certificate, to the extent described above) at a cost greater
than its stated redemption price at maturity, generally will be considered to
have purchased the Certificate at a premium, which it may elect under Code
Section 171 to amortize as an offset to interest income on such Certificate (and
not as a separate deduction item) on a constant yield method. Although no
regulations addressing the computation of premium accrual on collateralized
mortgage obligations or Regular Interests have been issued, the legislative
history of the Tax Reform Act of 1986 (the "1986 Act") indicates that premium is
to be accrued in the same manner as market discount. Accordingly, it appears
that the accrual of premium on a Regular Certificate will be calculated using
the Prepayment Assumption. If a Certificateholder makes an election to amortize
premium on a Certificate, such election will apply to all taxable debt
instruments (including all Regular Interests) held by the holder at the
beginning of the taxable year in which the election is made, and to all taxable
debt instruments acquired thereafter by such holder, and will be irrevocable
without the consent of the IRS. Purchasers who pay a premium for Regular
Certificates should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Interest Election. Under the Final Regulations, holders of Regular
Certificates generally may elect to include all accrued interest on a Regular
Certificate in gross income using the constant yield to maturity method. For
purposes of this election, interest includes stated interest, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest, as adjusted by any premium. If a holder of a
Regular Certificate makes such an election and (i) the Regular Certificate has
amortizable bond premium, the holder is 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 or (ii) the Regular
Certificate has market discount, the holder is deemed to have made an election
to include market discount in income currently for all debt instruments having
market discount acquired during the year of the election or thereafter. See
"--Market Discount and Premium" above. A holder of a Regular Certificate should
consult its tax adviser before making this election.
Treatment of Subordinate Certificates. As described above under "CREDIT
ENHANCEMENT--Subordinate Certificates," certain Series of Certificates may
contain one or more Classes of Subordinate Certificates. Holders of Subordinate
Certificates will be required to accrue interest and original issue discount
with respect to such Certificates on the accrual method without giving effect to
delays and reductions in distributions attributable to defaults or delinquencies
on any Mortgage Loans, except possibly to the extent that it can be established
that such amounts are uncollectible. As a result, the amount of income reported
by a holder of a Subordinate Certificate in any period could significantly
exceed the amount of cash distributed to such holder in that period.
Although not entirely clear, it appears that a corporate Certificateholder
generally should be allowed to deduct as an ordinary loss any loss sustained on
account of partial or complete worthlessness of a Subordinate Certificate.
Although similarly unclear, a noncorporate Certificateholder generally should be
allowed to deduct as a short-term capital loss any loss sustained on account of
complete worthlessness of a Subordinate Certificate. A noncorporate
Certificateholder alternatively, depending on the factual circumstances, may be
allowed such a loss deduction as the principal balance of a Subordinate
Certificate is reduced by reason of realized losses resulting from liquidated
Mortgage Loans; however, the IRS could contend that a noncorporate
Certificateholder should be allowed such losses only after all Mortgage Loans in
the Trust Fund have been liquidated or the Subordinate Certificates otherwise
have been retired. Special rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Holders of
Subordinate Certificates should consult their own tax advisers regarding the
appropriate timing, character and amount of any loss sustained with respect to
Subordinate Certificates.
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REMIC Expenses
As a general rule, all of the expenses of a REMIC will be taken into account
by holders of the Residual Certificates. In the case of a "Single-Class REMIC,"
however, the expenses will be allocated, under temporary Treasury regulations,
among the holders of the Regular Certificates and the holders of the Residual
Certificates on a daily basis in proportion to the relative amounts of income
accruing to each Certificateholder on that day. In the case of a Regular
Interest Certificateholder who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the
Certificateholder, exceed 2% of such Certificateholder's adjusted gross income.
In addition, Code Section 68 provides that the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds the applicable amount (for 1996, estimated to be $117,950, or
$58,975, in the case of a separate return of a married individual within the
meaning of Code Section 7703, which amounts will be adjusted annually for
inflation) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The partial or total
disallowance of this deduction may have a significant impact on the yield of the
Regular Certificate to such a holder. In general terms, a single-class REMIC is
one that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single-class REMIC rules.
Sale or Exchange of Regular Certificates
A Regular Interest Certificateholder's tax basis in its Regular Certificate is
the price such holder pays for a Certificate, plus amounts of OID or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange or redemption of a Regular Certificate, measured
by the difference between the amount realized and the Regular Certificate's
basis as so adjusted, will generally be capital gain or loss, assuming that the
Regular Certificate is held as a capital asset. If, however, a Certificateholder
is a bank, thrift or similar institution described in Section 582 of the Code,
gain or loss realized on the sale or exchange of a Certificate will be taxable
as ordinary income or loss. In addition, gain from the disposition of a Regular
Certificate that might otherwise be capital gain will be treated as ordinary
income to the extent of the excess, if any, of (i) the amount that would have
been includible in the holder's income if the yield on such Regular Certificate
had equaled 110% of the applicable federal rate as of the beginning of such
holder's holding period, over (ii) the amount of ordinary income actually
recognized by the holder with respect to such Regular Certificate prior to its
sale. As of date of this Prospectus the maximum marginal tax rate on ordinary
income for individual taxpayers is 39.6% and the maximum marginal tax rate on
long-term capital gains for non-corporate taxpayers is 28%. The maximum tax rate
on both ordinary income and long-term capital gains of corporate taxpayers is
35% (subject to higher rates of up to 39% on certain ranges of marginal taxable
income which phase out the benefits of the graduated rate structure).
In addition, all or a portion of any gain from the sale of a Certificate that
might otherwise be capital gain may be treated as ordinary income (i) if such
Certificate is held as part of a "Conversion Transaction" as defined in Code
Section 1258(c), in an amount equal to the interest that would have accrued on
the holder'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 reduced by any amount treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, or (ii) if, in the case of a noncorporate taxpayer,
election is made under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates for purposes of the rule that limits
the deduction of interest on indebtedness incurred to purchase or carry property
held for investment to a taxpayer's net investment income.
Taxation of the REMIC
General. Although a REMIC is a separate entity for
federal income tax purposes, a REMIC is not generally
subject to entity-level taxation. Rather, except in the
case of a "Single-Class REMIC," the taxable
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income or net loss of a REMIC is taken into account by the holders of Residual
Interests. The Regular Interests are generally treated as debt of the REMIC and
taxed accordingly. See "--Taxation of Regular Interests" above.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual having the calendar year as a taxable year, with
certain adjustments as required under Code Section 860C(b). In general, the
taxable income or net loss will be the difference between (i) the gross income
produced by the REMIC's assets, including stated interest and any OID or market
discount on loans and other assets, plus any cancellation of indebtedness income
due to the allocation of realized losses to the Regular Certificates, and (ii)
deductions, including stated interest and OID accrued on Regular Certificates,
amortization of any premium with respect to loans and servicing fees and other
expenses of the REMIC. A holder of a Residual Certificate that is an individual
or a "Pass-Through Interest Holder" (including certain pass-through entities,
but not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year to the extent that such expenses, when aggregated
with the Residual Interest Certificateholder's other miscellaneous itemized
deductions for that year, do not exceed 2% of such holder's adjusted gross
income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (for 1996, estimated to be
$117,950, or $58,975 in the case of a separate return of a married individual
within the meaning of Code Section 7703, which amounts will be adjusted annually
for inflation) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The amount of additional
taxable income reportable by Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
Certificateholder that is an individual, estate or trust, or a "pass-through
entity" beneficially owned by one or more individuals, estates or trusts, no
deduction will be allowed for such holder's allocable portion of servicing fees
and other miscellaneous itemized deductions of the REMIC, even though an amount
equal to the amount of such fees and other deductions will be included in such
holder's gross income. Accordingly, such Certificates may not be appropriate
investments for individuals, estates or trusts, or pass-through entities
beneficially owned by one or more individuals, estates or trusts. Such
prospective investors should consult with their tax advisors prior to making an
investment in such Certificates.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the Regular Interests and the Residual Interests on the "Startup
Day" (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on or
after March 2, 1984, and the market discount provisions apply to all loans.
Subject to possible application of the de minimis rules, the method of accrual
by the REMIC of OID or market discount income on such loans will be equivalent
to the method under which holders of Regular Certificates accrue OID (i.e.,
under the constant yield method taking into account the Prepayment Assumption).
The REMIC will deduct OID on the Regular Certificates in the same manner that
the holders of the Certificates include such discount in income, but without
regard to the de minimis rules. See "--Taxation of Regular Interests" above.
To the extent that the REMIC's basis allocable to loans that it holds exceeds
their principal amounts, the resulting premium, if attributable to mortgages
originated after September 27, 1985, will be amortized over the life of the
loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding the recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions Tax and Other Taxes. The REMIC will be subject to a
100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions include
(i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC pursuant
to the Code; or (iv) the receipt of any fees or other
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compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of limited
exceptions for cash contributions, a tax is imposed at the rate of 100% on
amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. It is not anticipated that any such contributions
will occur or that any such tax will be imposed.
REMICs also are 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 gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to federal income tax.
Taxation of Holders of Residual Certificates
The holder of a Certificate representing a residual interest (a "Residual
Certificate") will take into account the "daily portion" of the taxable income
or net loss of the REMIC for each day during the taxable year on which such
holder held the Residual Certificate. The daily portion is determined by
allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Certificates in
proportion to their respective holdings on such day. For this purpose, the
taxable income or net loss of the REMIC, in general, will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention. The related Prospectus Supplement will
indicate whether a different allocation method will be used. Ordinary income
derived from Residual Certificates will be "portfolio income" for taxpayers
subject to Code Section 469 limitation on the deductibility of "passive losses."
The holder of a Residual Certificate must report its proportionate share of
the taxable income of the REMIC whether it receives cash distributions from the
REMIC attributable to such income or loss. The reporting of taxable income
without corresponding distributions could occur, for example, in certain REMICs
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on Regular Interests issued without any discount or at
an insubstantial discount. (If this occurs, it is likely that cash distributions
to holders of Residual Certificates will exceed taxable income in later years.)
Taxable income may also be greater in the earlier years of certain REMICs as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal of Regular Certificates, will typically increase over time
as lower yielding Certificates are paid, whereas interest income with respect to
loans will generally remain constant over time as a percentage of outstanding
loan principal.
In any event, because the holder of a Residual Interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Certificate in a
given taxable year will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Certificate will most likely be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a
Certificateholder may take into account currently is limited to the holder's
adjusted basis at the end of the calendar quarter in which such loss arises. A
holder's basis in a Residual Certificate will initially equal such holder's
purchase price, and will subsequently be increased by the amount of the REMIC's
taxable income allocated to the holder, and decreased (but not below zero) by
the amount of distributions made and the amount of the REMIC's net loss
allocated to the holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Residual Interest Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
such holders should consult their tax advisers.
Distributions. Distributions on a Residual
Certificate, if any, will generally not result in any
additional taxable income or loss to a holder of a
Residual Certificate. If the amount of such distribution
exceeds a
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holder's adjusted basis in the Residual Certificate, however, the holder will
recognize gain (treated as gain from the sale of the Residual Certificate) to
the extent of such excess. If the Residual Certificate is property held for
investment, such gain will generally be capital in nature.
Sale or Exchange. A holder of a Residual Certificate will recognize gain or
loss on the sale or exchange of a Residual Certificate equal to the difference,
if any, between the amount realized and such Certificateholder's adjusted basis
in the Residual Certificate at the time of such sale or exchange. Any such loss
may be a capital loss subject to limitation; gain which might otherwise be
capital may be treated as ordinary income under certain circumstances. See
"--Sale or Exchange of Regular Certificates" above. Except to the extent
provided in regulations, which have not yet been issued, the "wash sale" rules
of Code Section 1091 will disallow any loss upon disposition or a Residual
Certificate if the selling Certificateholder acquires any Residual Interest in a
REMIC or similar mortgage pool within six months before or after such
disposition. Any such disallowed loss would be added to the Residual Interest
Certificateholder's adjusted basis in the newly acquired Residual Interest.
Excess Inclusions
The portion of a Residual Interest Certificateholder's REMIC taxable income
consisting of "excess inclusion" income may not be offset by other deductions or
losses, including net operating losses, on such Certificateholder's federal
income tax return. An exception applies to organizations to which Code Section
593 applies (generally, certain thrift institutions); however, such exception
will not apply if the aggregate value of the Residual Certificates is not
considered to be "significant," as described below. Further, if the holder of a
Residual Certificate is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Residual Interest Certificateholder's
excess inclusion income will be treated as unrelated business taxable income of
such Certificateholder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund or certain cooperatives were to own a Residual Certificate, a
portion of dividends (or other distributions) paid by the real estate investment
trust (or other entity) would be treated as excess inclusion income. If a
Residual Certificate is owned by a foreign person, excess inclusion income is
subject to tax at a rate of 30%, which rate may not be reduced by treaty and is
not eligible for treatment as "portfolio interest." Treasury regulations under
the REMIC provisions of the Code (the "REMIC Regulations") provide that a
Residual Certificate has significant value only if (i) the aggregate issue price
of the Residual Certificates is at least 2% of the aggregate of the issue prices
of all Regular Certificates and Residual Certificates in the REMIC and (ii) the
anticipated weighted average life (determined as specified in the REMIC
Regulations) of the Residual Certificates is at least 20% of the anticipated
weighted average life of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Certificate, over the daily accruals for such quarterly period of (i)
120% of the long term applicable federal rate on the Startup Day multiplied by
(ii) the adjusted issue price of such Residual Certificate at the beginning of
such quarterly period. The adjusted issue price of a Residual Interest at the
beginning of each calendar quarter will equal its issue price (calculated in a
manner analogous to the determination of the issue price of a Regular Interest),
increased by the aggregate of the daily accruals for prior calendar quarters,
and decreased (but not below zero) by the amount of loss allocated to a holder
and the amount of distributions made on the Residual Certificate before the
beginning of the quarter. The long-term applicable federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances,
transfers of Residual Certificates may be disregarded.
See "--Restrictions on Ownership and Transfer of Residual
Certificates" and "--Tax Treatment of Foreign Investors."
Restrictions on Ownership and Transfer of Residual
Certificates
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a Residual Interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any state
or political subdivision thereof, any foreign government, any international
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organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Certificate. In addition, no transfer of a Residual
Certificate will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Certificate is transferred to a Disqualified Organization (in
violation of the restrictions set forth above), a tax will be imposed on the
transferor of such Residual Certificate at the time of the transfer pursuant to
Code Section 860E(e)(2) equal to the product of (i) the present value
(discounted using the "applicable federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the Residual Certificate) of the total anticipated excess
inclusions with respect to such Residual Certificate for periods after the
transfer and (ii) the highest marginal federal income tax rate applicable to
corporations. In addition, if a Disqualified Organization is the record holder
of an interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company or any person
holding as nominee) that owns a Residual Certificate, the pass-through entity
will be required to pay tax equal to its product of (i) the amount of excess
inclusion income of the REMIC for such taxable year allocable to the interest
held by such Disqualified Organization; multiplied by (ii) the highest marginal
federal income tax rate imposed on corporations by Code Section 11(b)(1).
Under the REMIC Regulations, if a Residual Certificate is a "noneconomic
residual interest," as described below, a transfer of a Residual Certificate to
a United States person will be disregarded for all federal tax purposes if a
significant purpose of the transfer was to impede the assessment or collection
of tax. A Residual Certificate is a "noneconomic residual interest" unless, at
the time of the transfer (i) the present value of the expected future
distributions on the Residual Certificate at least equals the product of the
present value of the anticipated excess inclusions and the highest rate of tax
imposed on corporations for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. The
present value is calculated based on the Prepayment Assumption, using a discount
rate equal to the applicable federal rate under Code Section 1274(d)(1) that
would apply to a debt instrument issued on the date the noneconomic residual
interest was transferred and whose term ended on the close of the last quarter
in which excess inclusions were expected to accrue with respect to the Residual
Interest at the time of transfer. If a transfer of a Residual Interest is
disregarded, the transferor would be liable for any federal income tax imposed
upon the taxable income derived by the transferee from the REMIC. A significant
purpose to impede the assessment or collection of tax exists if the transferor,
at the time of transfer, knew or should have known that the transferee would be
unwilling or unable to pay taxes on its share of the taxable income of the
REMIC. A similar type of limitation exists with respect to certain transfers of
Residual Interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark-to-Market Rules
A "negative value" Residual Interest (and any Residual Interest or arrangement
that the IRS deems to have substantially the same economic effect) is not
treated as a security and thus may not be marked to market under the temporary
Treasury regulations under Section 475 of the Code that generally require a
securities dealer to mark to market securities held for sale to customers. In
general, a Residual Interest has negative value if, as of the date a payer
acquires the Residual Interest, the present value of the tax liabilities
associated with holding the Residual Interest exceeds the sum of (i) the present
value of the expected future distributions on the Residual Interest, and (ii)
the present value of the anticipated tax savings associated with holding the
Residual Interest as the REMIC generates losses. In addition, in the Preamble to
the temporary Treasury regulations, the IRS requested comments regarding whether
additional rules are needed to carry out the purposes of Section 475 of the
Code. Consequently, the IRS may further limit, prospectively or retroactively,
the definition of "security" for purposes of Section 475 of the Code by carving
out of such definition all Residual Interests.
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Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction or credit by the IRS in a unified
administrative proceeding.
In general, the Trustee will, to the extent permitted by applicable law, act
as agent of the REMIC, and will file REMIC federal income tax returns on behalf
of the related REMIC. The holder of the largest percentage interest of the
Residual Certificates will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
In general, the Trustee will act as attorney in fact and agent for the tax
matters person and, subject to certain notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the Residual Interest Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. Residual Interest
Certificateholders generally will be required to report such REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the Trustee as
attorney in fact and agent for tax matters person, and the IRS concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a Residual
Interest Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a Residual Interest Certificateholder's
return. No REMIC will be registered as a tax shelter pursuant to Section 6111 of
the Code because it is not anticipated that any REMIC will have a net loss for
any of the first five taxable years of its existence. Any person that holds a
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Tax Status as a Grantor Trust
General. If the applicable Prospectus Supplement so specifies with respect to
a Series of Certificates, the Certificates of such Series will not be treated as
regular or residual interests in a REMIC for federal income tax purposes but
instead will be treated as an undivided beneficial ownership interest in the
Mortgage Loans and the arrangement pursuant to which the Mortgage Loans will be
held and the Certificates will be issued, will be classified for federal income
tax purposes as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code and not as an association taxable as a corporation. In such a case,
Morrison & Hecker L.L.P., counsel to the Depositor, will deliver its opinion to
the effect that the arrangement by which the Certificates of that Series are
issued will be treated as a grantor trust as long as all of the provisions of
the applicable Trust Agreement are complied with and the statutory and
regulatory requirements are satisfied. In some Series ("Pass-Through
Certificates"), there will be no separation of the principal and interest
payments on the Mortgage Loans. In such circumstances, a Certificateholder will
be considered to have purchased an undivided interest in each of the Mortgage
Loans. In other cases ("Stripped Certificates"), sale of the Certificates will
produce a separation in the ownership of the principal payments and interest
payments on the Mortgage Loans.
Each Certificateholder must report on its federal income tax return its pro
rata share of the gross income derived from the Mortgage Loans (not reduced by
the amount payable as fees to the Trustee, the Master Servicer and the Special
Servicer, if any, and similar fees (collectively, the "Servicing Fee")), at the
same time and in the same manner as such items would have been reported under
the Certificateholder's tax accounting method had it held its interest in the
Mortgage Loans directly, received directly its share of the amounts received
with respect to the Mortgage Loans and paid directly its share of the Servicing
Fees. In the case of Pass-Through Certificates, such gross income will consist
of a pro rata share of all of the income derived from all of the Mortgage Loans
and, in the case of Stripped Certificates, such income will consist of a pro
rata share of the income derived from each stripped bond or stripped coupon in
which the Certificateholder owns an interest. The holder of a Certificate will
generally be entitled to deduct such Servicing Fees under Section 162 or Section
212 of the Code to the extent that such Servicing Fees represent "reasonable"
compensation for the services rendered by the Trustee, the Master Servicer and
the Special
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Servicer, if any. In the case of a noncorporate holder, however, Servicing Fees
(to the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, Section 68 of the Code provides that the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (for 1996, $117,950,
or $58,975 in the case of a separate return by a married individual within the
meaning of Code Section 7703, which amounts will be adjusted annually for
inflation) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Certificates. The holder's purchase price
of a Pass-Through Certificate is to be allocated among the Mortgage Loans in
proportion to their fair market values, determined as of the time of purchase of
the Certificates. In the typical case, the Depositor believes it is reasonable
for this purpose to treat each Mortgage Loan as having a fair market value
proportional to the share of the aggregate principal balances of all of the
Mortgage Loans that it represents, since the Mortgage Loans will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Certificate allocated to a Mortgage
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Mortgage Loan allocable to the Certificate, the
interest in the Mortgage Loan allocable to the Certificate will be deemed to
have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount represents
original issue discount or market discount. In the case of a Mortgage Loan with
original issue discount in excess of a prescribed de minimus amount, a holder of
a Certificate will be required to report as interest income in each taxable year
its share of the amount of original issue discount that accrues during that
year, determined under a constant yield method by reference to the initial yield
to maturity of the Mortgage Loan, in advance of receipt of the cash attributable
to such income and regardless of the method of federal income tax accounting
employed by that holder. Original issue discount with respect to a Mortgage Loan
could arise for example by virtue of the financing of points by the originator
of the Mortgage Loan, or by virtue of the charging of points by the originator
of the Mortgage Loan in an amount greater than a statutory de minimus exception,
in circumstances under which the points are not currently deductible pursuant to
applicable Code provisions. However, the OID Regulations provide that if a
holder acquires an obligation at a price that exceeds its stated redemption
price, the holder will not include any original issue discount in gross income.
In addition, if a subsequent holder acquires an obligation for an amount that
exceeds its adjusted issue price the subsequent holder will be entitled to
offset the original issue discount with economic accruals of portions of such
excess. Accordingly, if the Mortgage Loans acquired by a Certificateholder are
purchased at a price that exceeds the adjusted issue price of such Mortgage
Loans, any original issue discount will be reduced or eliminated.
Certificateholders also may be subject to the market discount rules of
Sections 1276-1278 of the Code. A Certificateholder that acquires an interest in
Mortgage Loans with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Mortgage Loans
over the purchaser's purchase price) will be required under Section 1276 of the
Code to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the
Mortgage Loans received in that month and, if the Certificates are sold, the
gain realized. Such market discount would accrue in a manner to be provided in
Treasury regulations. The legislative history of the 1986 Act indicates that,
until such regulations are issued, such market discount would in general accrue
either (i) on the basis of a constant interest rate or (ii) in the ratio of (a)
in the case of Mortgage Loans not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Mortgage Loans originally issued at a discount, original issue discount in
the relevant period to total original issue discount remaining to be paid.
Section 1277 of the Code provides that the excess of interest paid or accrued
to purchase or carry a loan with market discount over interest received on such
loan is allowed as a current deduction only to the extent such excess is greater
than the market discount that accrued during the taxable year in which such
interest expense was incurred. In general, the deferred portion of any interest
expense will be deductible when such
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market discount is included in income, including upon the sale, disposition or
repayment of the loan. A holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by such
holder during the taxable year such election is made and thereafter, in which
case the interest deferral rule discussed above will not apply.
A Certificateholder who purchases a Certificate at a premium generally will be
deemed to have purchased its interest in the underlying Mortgage Loans at a
premium. A Certificateholder who holds a Certificate as a capital asset may
generally elect under Section 171 of the Code to amortize such premium as an
offset to interest income on the Mortgage Loans (and not as a separate deduction
item) on a constant yield method. The legislative history of the 1986 Act
suggests that the same rules that will apply to the accrual of market discount
(described above) will generally also apply in amortizing premium with respect
to Mortgage Loans originated after September 27, 1985. If a holder makes an
election to amortize premium, such election will apply to all taxable debt
instruments held by such holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the Certificates should consult their tax advisers
regarding the election to amortize premium and the method to be employed.
Although the law is somewhat unclear regarding recovery of premium allocable to
Mortgage Loans originated before September 28, 1985, it is possible that such
premium may be recovered in proportion to payments of Mortgage Loan principal.
Discount or Premium on Stripped Certificates. A Stripped Certificate may
represent a right to receive only a portion of the interest payments on the
Mortgage Loans, a right to receive only principal payments on the Mortgage
Loans, or a right to receive certain payments of both interest and principal.
Certain Stripped Certificates ("Ratio Strip Certificates") may represent a right
to receive differing percentages of both the interest and principal on each
Mortgage Loan. Pursuant to Section 1286 of the Code, 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. Section 1286 of the
Code applies the original issue discount rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest. The Code, the OID
Regulations and judicial decisions provide no direct guidance as to how the
interest and original issue discount rules are to apply to Stripped
Certificates. Under the method described above for REMIC Regular Interest
Certificates (the "Cash Flow Bond Method"), a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during such period. The 1986 Act
prescribed the same method for debt instruments "secured by" other debt
instruments, the maturity of which may be affected by prepayments on the
underlying debt instruments. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Certificates which technically represent ownership interests in the underlying
Mortgage Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Certificates, and it is expected that
original issue discount will be reported on that basis. In applying the
calculation to such Certificates, the Trustee will treat all payments to be
received with respect to the Certificates, whether attributable to principal or
interest on the loans, as payments on a single installment obligation and as
includible in the stated redemption price at maturity. The IRS could, however,
assert that original issue discount must be calculated separately for each
Mortgage Loan underlying a Certificate. In addition, in the case of Ratio Strip
Certificates, the IRS could assert that original issue discount must be
calculated separately for each stripped coupon or stripped bond underlying a
Certificate.
Under certain circumstances, if the Mortgage Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Certificateholder's recognition of income. If, however, the
Mortgage Loans prepay at a rate slower than the Prepayment Assumption, in some
circumstances the use of this method may decelerate a Certificateholder's
recognition of income.
In the case of a Stripped Certificate which either embodies only interest
payments on the underlying loans or (if it embodies some principal payments on
the Mortgage Loans) is issued at a price that exceeds the
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principal payments (an "Interest Weighted Certificate"), additional uncertainty
exists because of the enhanced potential for applicability of the contingent
payment debt instrument provisions of the Final Regulations.
Under the contingent payment debt instrument provisions, the contingent
instrument is treated as if it were a debt with no contingent payments (the
"noncontingent bond method"). Under this method the issue price is the amount
paid for the instrument and the Certificateholder is in effect put on the cash
method with respect to interest income at a comparable yield of a fixed rate
debt instrument with similar terms. The comparable yield must be a reasonable
yield for the issuer and must not be less than the applicable federal rate. A
projected payment schedule and daily portions of interest accrual is determined
based on the comparable yield. The interest for any accrual period, other than
an initial short period, is the product of the comparable yield and the adjusted
issue price at the beginning of the accrual period (the sum of the purchase
price of the instrument plus accrued interest for all prior accrual periods
reduced by any noncontingent or contingent payments on the debt instrument). If
the amount payable for a period were, however, greater or less than the amount
projected the income included for the period would be increased or decreased
accordingly. Any reduction in the income accrual for a period to an amount below
zero (a "Negative Adjustment") would be treated by a Certificateholder as an
ordinary loss to the extent of prior income accruals and may be carried forward
to offset future interest accruals. At maturity, any remaining Negative
Adjustment or any loss attributable to the Certificateholder's basis would be
treated as a loss from a sale or exchange of the Certificate. If the loss
generating Mortgage Loan or Mortgage Loans was issued by a natural person, such
loss may be an ordinary loss because loss recognized on retirement of a debt
instrument issued by a natural person is not a loss from a sale or exchange.
However, the IRS might contend that such loss should be a capital loss if the
Certificateholder held its Certificate as a capital asset. A loss resulting from
total interest inclusions exceeding total net Negative Adjustments taken into
account would be an ordinary loss. If a gain were recognized on sale or exchange
of the Certificate it would be capital in nature if the Certificate were a
capital asset in the hands of the Certificateholder.
Possible Alternative Characterizations. The characterizations of the Stripped
Certificates described above are not the only possible interpretations of the
applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Certificate is composed
of an unstripped undivided ownership interest in Mortgage Loans and an
installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Certificates are subject to the contingent payment Final
Regulations; (iii) each Interest Weighted Certificate is composed of an
unstripped undivided ownership interest in the Mortgage Loans and an installment
obligation consisting of stripped interest payments; or (iv) there are as many
stripped bonds or stripped coupons as there are scheduled payments of principal
and/or interest on each Mortgage Loan.
Character as Qualifying Mortgage Loans. In the case of Stripped Certificates
there is no specific legal authority existing regarding whether the character of
the Certificates, for federal income tax purposes, will be the same as the
Mortgage Loans. The IRS could take the position that the Mortgage Loans'
character is not carried over to the Certificates in such circumstances.
Pass-Through Certificates will be, and, although the matter is not free from
doubt, Stripped Certificates should be considered to represent "qualifying real
property loans" within the meaning of Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(6)(B) of the Code, and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Certificates should be considered to represent "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Section 856(c)(3)(B) of the Code. However, Mortgage Loans secured by
non-residential real property will not constitute "loans secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C) of the Code. In
addition, it is possible that various reserves or funds underlying the
Certificates may cause a proportionate reduction in the above-described
qualifying status categories of Certificates.
Sale of Certificates. As a general rule, if a Certificate is sold, gain or
loss will be recognized by the holder thereof in an amount equal to the
difference between the amount realized on the sale and the Certificateholder's
adjusted tax basis in the Certificate. Such gain or loss will generally be
capital gain or loss if the Certificate is held as a capital asset. In the case
of Pass-Through Certificates, such tax basis will generally equal the holder's
cost of the Certificate increased by any discount income with respect to the
loans represented by such Certificate previously included in income, and
decreased by the amount of any
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distributions of principal previously received with respect to the Certificate.
Such gain, to the extent not otherwise treated as ordinary income, will be
treated as ordinary income to the extent of any accrued market discount not
previously reported as income. In the case of Stripped Certificates, the tax
basis will generally equal the Certificateholder's cost for the Certificate,
increased by any discount income with respect to the Certificate previously
included in income, and decreased by the amount of all payments previously
received with respect to such Certificate.
Miscellaneous Tax Aspects
Backup Withholding. A Certificateholder, other than a Residual Interest
Certificateholder, may, under certain circumstances, be subject to "backup
withholding" at the rate of 31% with respect to distributions or the proceeds of
a sale of Certificates to or through brokers that represent interest or original
issue discount on the Certificates. This withholding generally applies if the
holder of a Certificate (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
TIN and that the holder is not subject to backup withholding. Backup withholding
will not apply, however, with respect to certain payments made to
Certificateholders, including payments to certain exempt recipients (such as
exempt organizations) and to certain Nonresidents. Holders of the Certificates
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The Trustee will report to the Certificateholders and to the Master Servicer
for each calendar year the amount of any "reportable payments" during such year
and the amount of tax withheld, if any, with respect to payments on the
Certificates.
Tax Treatment of Foreign Investors
Under the Code, unless interest (including OID) paid on a Certificate (other
than a Residual Certificate) is considered to be "effectively connected" with a
trade or business conducted in the United States by a nonresident alien
individual, foreign partnership or foreign corporation ("Nonresidents"), such
interest will normally qualify as portfolio interest (except if (i) the
recipient is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer or (ii) the recipient is a controlled foreign
corporation as to which the issuer is a related person) and will be exempt from
federal income tax. Upon receipt of appropriate ownership statements, the issuer
normally will be relieved of obligations to withhold tax from such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Nonresidents. Holders of Certificates, including "stripped certificates"
(i.e., Certificates that separate ownership of principal payments and interest
payments on the Mortgage Loans), however, may be subject to withholding to the
extent that the Mortgage Loans were originated on or before July 18, 1984.
Interest and OID of Certificateholders who are foreign persons are not subject
to withholding if they are effectively connected with a United States business
conducted by the Certificateholder. They will, however, generally be subject to
the regular United States income tax.
Payments to holders of Residual Certificates who are foreign persons will
generally be treated as interest and be subject to United States withholding tax
at 30% or any lower applicable treaty rate. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
portfolio interest. It is clear that, to the extent that a payment represents a
portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a Residual Certificate will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax. If the payments are
subject to United States withholding tax, they generally will be taken into
account for withholding tax purposes only when paid or distributed (or when the
Residual Certificate is disposed of). The Treasury has statutory authority,
however, to promulgate regulations that would require such amounts to be taken
into account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution of
cash in the case of Residual Certificates that do not have significant value. If
a Residual
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Certificate has tax avoidance potential, a transfer of a Residual Certificate to
a Nonresident will be disregarded for all federal tax purposes. A Residual
Certificate has tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
Residual Interest holder amounts that will equal at least 30% of each excess
inclusion, and that such amounts will be distributed at or after the time at
which the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual. If a Nonresident transfers a
Residual Certificate to a United States person, and if the transfer has the
effect of allowing the transferor to avoid tax on accrued excess inclusions,
then the transfer is disregarded and the transferor continues to be treated as
the owner of the Residual Certificate for purposes of the withholding tax
provisions of the Code. See "--Excess Inclusions."
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state
income tax consequences of the acquisition, ownership and disposition of the
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 advisers with respect to the various state tax
consequences of an investment in the Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans subject to ERISA ("ERISA
Plans") and prohibits certain transactions between ERISA Plans and persons who
are "parties in interest" (as defined under ERISA) with respect to assets of
such Plans. Section 4975 of the Code prohibits a similar set of transactions
between certain plans ("Code Plans," and together with ERISA Plans, "Plans") and
persons who are "disqualified persons" (as defined in the Code) with respect to
Code 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 requirements of ERISA or Section 4975 of the Code, and
assets of such plans may be invested in Certificates, subject to the provisions
of other applicable federal and state law. Any such plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is, however, subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that investments be made in accordance with
the documents governing the ERISA Plan. Before investing in a Certificate, an
ERISA Plan fiduciary should consider, among other factors, whether to do so is
appropriate in view of the overall investment policy and liquidity needs of the
ERISA Plan. Such fiduciary should especially consider the sensitivity of the
investments to the rate of principal payments (including prepayments) on the
Mortgage Loans, as discussed in the Prospectus Supplement related to a Series.
Prohibited Transactions
Section 406 of ERISA and Section 4975 of the Code prohibit parties in interest
and disqualified persons with respect to ERISA Plans and Code Plans from
engaging in certain transactions involving such Plans or "plan assets" of such
Plans, unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code and Sections 502(i) and 502(l) of ERISA
provide for the imposition of certain excise taxes and civil penalties on
certain persons that engage or participate in such prohibited transactions. The
Depositor, the Underwriter, the Master Servicer, the Special Servicer, if any,
or the Trustee or certain affiliates thereof may be considered or may become
parties in interest or disqualified persons with respect to a Plan. If so, the
acquisition or holding of Certificates by, on behalf of or with "plan assets" of
such Plan may be considered to give rise to a "prohibited transaction" within
the meaning of ERISA and/or Section 4975 of the Code, unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before "plan assets" of a Plan are used to
purchase a Certificate if, with respect to such assets, the Depositor, the
Underwriter, the Master Servicer, the Special Servicer, if any, or the Trustee
or an affiliate thereof either (a) has discretionary authority or control with
respect to the
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investment or management of such assets or (b) has authority or responsibility
to give, or regularly gives, investment advice with respect to such assets
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets and that such
advice will be based on the particular needs of the Plan.
Further, if the underlying assets included in a Trust Fund were deemed to
constitute "plan assets," certain transactions involved in the operation of the
Trust Fund may be deemed to constitute prohibited transactions under ERISA
and/or the Code. Neither ERISA nor Section 4975 of the Code defines the term
"plan assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether a Plan's assets would be deemed to include an
undivided interest in each of the underlying assets of an entity (such as the
Trust Fund), for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing Plan's
assets would be considered merely to include its interest in the Certificates
instead of being deemed to include an undivided interest in each of the
underlying assets of the Trust Fund. However, it cannot be predicted in advance,
nor can there be a continuing assurance whether such exceptions may be met,
because of the factual nature of certain of the rules set forth in the
Regulations. For example, one of the exceptions in the Regulations states that
the underlying assets of an entity will not be considered "plan assets" if less
than 25% of the value of each class of equity interests is held by "Benefit Plan
Investors," which are defined as ERISA Plans, Code Plans, individual retirement
accounts and employee benefit plans not subject to ERISA (for example,
governmental plans), but this exemption is tested immediately after each
acquisition of an equity interest in the entity whether upon initial issuance or
in the secondary market.
Pursuant to the Regulations, if the assets of the Trust Fund were deemed to be
"plan assets" by reason of the investment of assets of a Plan in any
Certificates, the "plan assets" of such Plan would include an undivided interest
in the Mortgage Loans, the mortgages underlying the Mortgage Loans and any other
assets held in the Trust Fund. Therefore, because the Mortgage Loans and other
assets held in the Trust Fund may be deemed to be "plan assets" of each Plan
that purchases Certificates, in the absence of an exemption, the purchase, sale
or holding of Certificates of any Series or Class by or with "plan assets" of a
Plan may result in a prohibited transaction and the imposition of civil
penalties or excise taxes. Depending on the relevant facts and circumstances,
certain prohibited transaction exemptions may apply to the purchase, sale or
holding of Certificates of any Series or Class by a Plan--for example,
Prohibited Transaction Class Exemption ("PTCE") 95-60, which exempts certain
transactions between insurance company general accounts and parties in interest;
PTCE 91-38, which exempts certain transactions between bank collective
investment funds and parties in interest; PTCE 90-1, which exempts certain
transactions between insurance company pooled separate accounts and parties in
interest; or PTCE 84-14, which exempts certain transactions effected on behalf
of a plan by a "qualified professional asset manager." There can be no assurance
that any of these exemptions will apply with respect to any Plan's investment in
any Certificates or, even if an exemption were deemed to apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with such investment. Also, the Department has issued individual
administrative exemptions from application of certain prohibited transaction
restrictions of ERISA and the Code to most underwriters of mortgage-backed
securities (each, an "Underwriter's Exemption"). Such an Underwriter's Exemption
can only apply to mortgage-backed securities which, among other conditions, are
sold in an offering with respect to which such an underwriter serves as the sole
or a managing underwriter, or as a selling or placement agent. If such an
Underwriter's Exemption might be applicable to a Series of Certificates, the
related Prospectus Supplement will refer to such possibility. Further, the
related Prospectus Supplement may provide that certain Classes or Series of
Certificates may not be purchased by, or transferred to, Plans or may only be
purchased by, or transferred to, an insurance company for its general account
under circumstances that would not result in a prohibited transaction.
Any fiduciary or other Plan investor who proposes to invest "plan assets" of a
Plan in Certificates of any Series or Class should consult with its counsel with
respect to the potential consequences under ERISA and Section 4975 of the Code
of any such acquisition and ownership of such Certificates.
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Unrelated Business Taxable Income -- Residual Interests
The purchase of a Certificate evidencing an interest in the Residual Interest
in a Series that is treated as a REMIC by any employee benefit or other plan
that is exempt from taxation under Code Section 501(a), including most varieties
of Plans, may give rise to "unrelated business taxable income" as described in
Code Sections 511-515 and 860E. Further, prior to the purchase of an interest in
a Residual Interest, a prospective transferee may be required to provide an
affidavit to a transferor that it is not, nor is it purchasing an interest in a
Residual Interest on behalf of, a "Disqualified Organization," which term as
defined above includes certain tax-exempt entities not subject to Code Section
511, such as certain governmental plans, as discussed above under "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES --Taxation of Holders of Residual Certificates"
and "--Restrictions on Ownership and Transfer of Residual Certificates."
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that
individuals responsible for investment decisions with respect to ERISA Plans and
Code Plans consult with their counsel regarding the consequences under ERISA
and/or the Code of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by the
Depositor, the applicable underwriter or any other service provider with respect
to the Certificates, such as the Trustee, the Master Servicer and the Special
Servicer, if any, that this investment meets all relevant legal requirements
with respect to investments by Plans generally or any particular Plan or that
this investment is appropriate for Plans generally or any particular Plan.
LEGAL INVESTMENT
The related Prospectus Supplement will indicate whether the Offered
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 (the "Enhancement Act"). It is
anticipated that the Offered Certificates generally will not constitute
"mortgage related securities" for purposes of the Enhancement Act.
All depository institutions considering an investment in the Certificates
should review the Supervisory Policy Statement on Securities Activities dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council (to the extent adopted by their respective regulators),
which in relevant part prohibits depository institutions from investing in
certain "high-risk" mortgage securities, except under limited circumstances, and
sets forth certain investment practices deemed to be unsuitable for regulated
institutions.
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, provisions that may
restrict or prohibit investment in securities that are not "interest bearing" or
"income-paying," and provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
The appropriate characterization of the Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisers to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
68
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If the sale of any Certificates is made pursuant to an underwriting agreement
pursuant to which one or more underwriters agree to act in such capacity, such
Certificates will be acquired by such underwriters for their own account and may
be resold 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. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the offer
and sale of a particular Series of Certificates will be set forth on the cover
of the Prospectus Supplement related to such Series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement. The
Prospectus Supplement will describe any discounts and commissions to be allowed
or paid by the Depositor to the underwriters, any other items constituting
underwriting compensation and any discounts and commissions to be allowed or
paid to the dealers. The obligations of the underwriters will be subject to
certain conditions precedent. The underwriters with respect to a sale of any
Class of Certificates will generally be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnify the related underwriters against certain civil
liabilities, including liabilities under the 1933 Act.
If any Certificates are offered other than through underwriters pursuant to
such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in
connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the 1933 Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer and sale.
LEGAL MATTERS
Certain legal matters relating to the Certificates offered hereby will be
passed upon for the Depositor by Morrison & Hecker L.L.P., Kansas City,
Missouri, and for the Underwriters as specified in the related Prospectus
Supplement.
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 be
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 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.
69
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INDEX OF SIGNIFICANT DEFINITIONS
Definitions Page
1933 Act..................................................2
1986 Act.................................................55
ACMs.....................................................44
ADA......................................................48
Agreement.............................................6, 15
Bankruptcy Code......................................37, 40
Cash Flow Bond Method....................................63
CERCLA...............................................13, 42
Certificateholders.......................................16
Certificates...........................................1, 4
Classes...................................................1
Closing Date.............................................21
Code......................................................7
Code Plans...............................................66
Collection Account....................................5, 17
Commission................................................2
Compound Interest Certificates...........................51
Credit Enhancement....................................5, 31
Cut-off Date..........................................6, 16
Department...............................................67
Depositor.................................................1
Disqualified Organization................................59
Distribution Account..................................5, 17
Distribution Date.....................................6, 16
Enhancement Act..........................................68
EPA......................................................44
ERISA.................................................7, 66
ERISA Plans..............................................66
Escrow Account...........................................25
Escrow Payments..........................................25
Event of Default.........................................29
Fannie Mae...............................................16
FHA......................................................23
FHLMC....................................................16
Final Regulations........................................51
Forfeiture Laws..........................................48
Form 8-K.................................................21
Garn-St Germain Act......................................45
GNMA.....................................................16
Hazardous Materials......................................43
HUD......................................................23
Installment Contracts.................................4, 20
Interest Weighted Certificate........................53, 64
IRS......................................................51
Lead Paint Act...........................................44
Master Servicer.......................................4, 24
Master Servicer Remittance Date..........................17
Mortgage..........................................4, 20, 34
Mortgage Loan.........................................4, 20
Mortgage Loan File.......................................22
Mortgage Loan Groups.....................................21
Mortgage Loan Schedule...................................22
Mortgage Loan Seller.....................................23
Mortgage Loans............................................1
70
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Definitions Page
Mortgage Pool..........................................1, 4
Mortgaged Property....................................4, 20
Mortgagee................................................34
Mortgagor................................................34
Multiple Variable Rate...................................53
NCUA.....................................................47
Negative Adjustment......................................64
Nonresidents.............................................65
Note.....................................................21
Offered Certificates......................................1
OID......................................................51
Pass-Through Certificates................................61
Pass-Through Rate.........................................2
Permitted Investments....................................18
Plans....................................................66
Policy Statement.........................................68
Prepayment Assumption....................................52
Property Protection Expenses.............................17
PTCE.....................................................67
Rating Agency.........................................7, 15
Ratio Strip Certificates.................................63
Registration Statement....................................2
Regular Certificates..................................7, 51
Regular Interests.....................................7, 49
Regulations..............................................67
Relief Act...............................................46
REMIC.....................................................1
REMIC Regulations........................................59
REO Account..............................................17
Reserve Account..........................................15
Reserve Fund.............................................32
Residual Certificate.....................................58
Residual Certificates.....................................7
Residual Interests....................................7, 49
S&P......................................................18
Senior Certificates......................................31
Series....................................................1
Servicing Fee........................................27, 61
Simple Interest Loans....................................21
Single Variable Rate.....................................52
Special Servicer..........................................4
Special Servicing Fee....................................27
Specially Serviced Mortgage Loans........................24
Startup Day..........................................49, 57
Stripped Certificates....................................61
Subordinate Certificates.................................31
Tiered REMICs............................................51
TIN......................................................65
Title V..................................................46
Title VIII...............................................46
Trust Fund............................................1, 15
Trustee...............................................4, 20
UCC......................................................35
71
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Definitions Page
Underwriter's Exemption..................................67
USTs.....................................................44
Voting Rights............................................14
72
November 8, 1996
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the proposed issuance of
Mortgage Pass-Through Certificates (the "Certificates") pursuant to the
Registration Statement on Form S-3 (Registration No. 333-_____) (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by Midland Realty Acceptance Corp. ("Seller") in one
or more series (each, a "Series") of Certificates. Each Series of Certificates
will be issued under a pooling and servicing agreement ("Pooling and Servicing
Agreement") between the Seller, a servicer, a trustee and possibly a special
servicer and a fiscal agent to be identified in the Prospectus Supplement for
such Series of Certificates. A form of a Pooling and Servicing Agreement is
included as an exhibit to the Registration Statement. Capitalized terms used and
not otherwise defined herein have the respective meanings given them in the
Registration Statement.
In rendering the opinion set forth below, we have examined and relied on
the following: (1) the Registration Statement and the Prospectus and the form of
Prospectus Supplement included therein; (2) the form of the Pooling and
Servicing Agreement included as an exhibit to the Registration Statement; and
(3) such other documents, materials, and authorities as we have deemed necessary
in order to enable us to render our opinion set forth below.
As your counsel, we have advised you with respect to certain federal
income tax aspects of the proposed issuance of the Certificates of each Series.
Such advice has formed the basis for the description of material federal income
tax consequences for holders of the Certificates that appears under the heading
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. Such descriptions
do not purport to discuss all possible federal income tax ramifications of the
proposed issuance of the Certificates, but, with respect to those federal income
tax consequences that are discussed, in our opinion, the description is accurate
in all material respects.
This opinion is based on the facts and circumstances set forth in the
Prospectus and the form of Prospectus Supplement and in the other documents
reviewed by us. Our opinion as to the matters set forth herein could change with
respect to a particular Series of Certificates as a result of changes in facts
and circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Consequently, we express no
such opinion with respect to any particular Series of Certificates. As the
Registration Statement contemplates multiple Series of Certificates with
numerous different characteristics, the particular characteristics of a Series
of Certificates must be considered in evaluating whether such opinion would be
relevant under the circumstances.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to our firm under the heading
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus and the Prospectus
Supplement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
<PAGE>
November 8, 1996
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3 (Registration No. 333-________) (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by Midland Realty Acceptance Corp. ("Seller") in one
or more series (each, a "Series") of Certificates. Each Series of Certificates
will be issued under a pooling and servicing agreement ("Pooling and Servicing
Agreement") between Seller and a servicer (the "Servicer"), a trustee (the
"Trustee") and possibly a special servicer (the "Special Servicer") and a fiscal
agent (the "Fiscal Agent") to be identified in the Prospectus Supplement for
such Series of Certificates. A form of Pooling and Servicing Agreement is
included as an exhibit to the Registration Statement. Capitalized terms used and
not otherwise defined herein have the respective meanings given them in the
Registration Statement or the Accord identified in the following paragraph.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The opinions expressed herein are given only with
respect to the present status of the substantive laws of the state of Missouri
(not including the choice-of-law rules under Missouri law). We express no
opinion as to any matter arising under the laws of any other jurisdiction.
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement and the Prospectus and the form of
ProspectusSupplement included therein; (2) the form of the Pooling and Servicing
Agreement included as an exhibit to the Registration Statement; and (3) such
other
<PAGE>
Commercial Mortgage Acceptance Corp.
November 6, 1996
Page 2
documents, materials, and authorities as we have deemed necessary in order to
enable us to render our opinions set forth below.
Based on and subject to the foregoing and other qualifications set forth
below, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates has
been duly and validly authorized, executed and delivered by the Seller, the
Servicer, the Trustee and, if applicable, the Special Servicer and the Fiscal
Agent, such Pooling and Servicing Agreement will constitute a valid and legally
binding agreement of Seller, enforceable against Seller in accordance with its
terms.
2. When (a) a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the Seller, the
Servicer, the Trustee and, if applicable, the Special Servicer and the Fiscal
Agent, (b) the Mortgage Loans and other consideration constituting the Trust
Fund for the Series have been deposited with the Trustee, (c) the Certificates
of such Series have been duly executed, authenticated, delivered and sold as
contemplated in the Registration Statement and (d) the consideration for the
sale of such Certificates has been fully paid to the Seller, such Certificates
will be legally and validly issued, fully paid and nonassessable, and the duly
registered holders of such Certificates will be entitled to the benefits of such
Pooling and Servicing Agreement.
The General Qualifications apply to the opinions set forth in paragraphs 1
and 2 above, and in addition, such opinions are subject to the qualification
that certain remedial, waiver and other similar provisions of a Pooling and
Servicing Agreement for a Series of Certificates or of the Certificates of such
Series may be rendered unenforceable or limited by applicable laws, regulations
or judicial decisions, but such laws, regulations and judicial decisions will
not render such Pooling and Servicing Agreement or such Certificates invalid as
a whole and will not make the remedies available thereunder inadequate for the
practical realization of the principal benefits intended to be provided thereby,
except for the economic consequences of any judicial, administrative or other
delay or procedure which may be imposed by applicable law.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
<PAGE>
Commercial Mortgage Acceptance Corp.
November 8, 1996
Page 3
Very truly yours,
MORRISON & HECKER L.L.P.
<PAGE>
